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NOTES TO ACCOUNTS

Federal Bank Ltd.

You can view the entire text of Notes to accounts of the company for the latest year
Market Cap. (₹) 19575.36 Cr. P/BV 1.60 Book Value (₹) 61.49
52 Week High/Low (₹) 103/67 FV/ML 2/1 P/E(X) 15.74
Bookclosure 10/08/2018 EPS (₹) 6.27 Div Yield (%) 1.42
Year End :2018-03 

1. Disclosures requirement as per RBI's Master Circular on Disclosure in Financial Statements

Amounts in notes forming part of the financial statements for the year ended March 31, 2018 are denominated in Rupees Crore to conform to extant RBi guidelines.

1.1. Capital Adequacy Ratio

The Bank computes Capital Adequacy Ratio as per Basel iii Capital Regulations issued by RBi, which became applicable to the Bank with effect from April 1, 2013.

Under Basel iii Capital Regulations, on an on-going basis, the Bank has to maintain a Minimum Total Capital (MTC) of 10.875 % (Previous Year 10.25 %) including Capital Conversion Buffer (CCB) at 1.875% (Previous Year 1.25%), of the total risk weighted assets (RWA). Out of the MTC, at least 7.375% (Previous Year 6.75%), shall be from Common Equity Tier 1 (CET1) capital and at least 8.875% (Previous Year 8.25%) from Tier 1 capital, including 1.875% (Previous Year 1.25%) towards CCB.

*Adjusted for proposed dividend of ' 1 per share (Previous year: ' 0.90 per share) and applicable taxes.

in accordance with RBi Guidelines, banks are required to make Pillar 3 disclosures under Basel iii capital regulations. The Bank has made these disclosures which are available on its website at the following link: http://www.federalbank.co.in/regulatory-disclosures. The Pillar

3 disclosures have not been subjected to audit.

Movement in provisions held towards depreciation on investments have been reckoned on a yearly basis

1.2.2. a) Investments under HTM (excluding specified investments as per RBI norms) account for 19.33% (Previous year 19.78%) of demand and time liabilities as at the end of March 2018 as against permitted ceiling of 19.50 % (Previous Year: 20.50%) stipulated by RBi.

b) in respect of securities held under HTM category premium of ' 58.21 Crore (Previous year: ' 47.65 Crore) has been amortized during the year and debited under interest received on Government securities.

c) Profit on sale of securities from HTM category amounting to Rs, 54.71 Crore (Previous year: Rs, 134.26 Crore) has been taken to Profit and Loss Account. During the year, the Bank had appropriated Rs, 26.83 Crore (Previous year Rs, 65.85 Crore), [net of taxes and transfer to statutory reserve] to the Capital Reserve, being the gain on sale of HTM investments in accordance with RBi guidelines.

d) During the year ended 31st March, 2018 the bank had withdrawn Rs, 23.57 Crore (Previous year: Rs, 14.49 Crore) [net of applicable taxes and transfer to statutory reserve] from investment Reserve Account on provision for depreciation on investments, debited to Profit and Loss account.

e) RBi circular DBR.No.BP.BC.102/21.04.048/2017-18 dated April 2, 2018 grants banks an option to spread provisioning for

mark to market losses on investments held in AFS and HFT for the quarters ended December 31, 2017 and March 31, 2018. The circular states that the provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss was incurred. The Bank has recognized the entire mark to market loss on investments in the respective quarters and has not availed the said option.

The bank has not undertaken any transactions in Credit Default Swaps (CDS) during the year ended March 31, 2018 and March 31,

2017.

1.3.3. Disclosure on Risk exposure in Derivatives Qualitative disclosures:

(a) Structure and organization for management of risk in derivatives trading, the scope and nature of risk measurement, risk reporting and risk monitoring systems, policies for hedging and/or Mitigating risk and strategies and processes for monitoring the continuing effectiveness of Hedges/ mitigants:

Derivatives are financial instruments whose characteristics are derived from an underlying asset like interest rates, exchange rates or indices. The Bank undertakes over the counter and exchange traded derivative transactions for Balance Sheet management and also for proprietary trading/market making. Bank offers derivative products to the customers to enable them to hedge their exposure within the prevalent regulatory guidelines.

Proprietary trading includes interest Rate Futures, Currency Futures and Rupee interest Rate Swaps under different benchmarks (viz. MiBOR, MiFOR etc) in over the counter/exchange traded derivatives. The Bank also undertakes transactions in Long Term Forex Contracts (LTFX) for hedging its Balance Sheet and also offers them to its customers. These transactions expose the Bank to various risks primarily credit, market, operational, legal, and reputation. The Bank has adopted the following mechanism for managing risks arising out of the derivative transactions.

The derivative transactions are governed by the investment, forex and derivative policy and market risk management policy of the Bank as well as by the extant RBi guidelines. Various operational/risk limits are set up and actual exposures are monitored vis-a-vis the limits allocated. These limits are set up taking into account market volatility, risk appetite, business strategy and management experience. Risk limits are in place for risk parameters viz. Value at Risk (VaR), Stop Loss, PVBP. Actual positions are monitored against these limits on a

daily basis and breaches, if any, are reported promptly. Risk assessment of the portfolio is undertaken periodically.

The Treasury front office enters into derivative transaction with customers and interbank counterparties. The Bank has an independent back office and mid office as per regulatory guidelines. The MTM position of the derivative portfolio is monitored on a regular basis. The impact on derivative portfolio on account of the probable market movements are assessed on regular basis. The risk profile of the outstanding portfolio is reviewed by the Board at regular intervals. The current outstanding under the derivatives portfolio were executed for trading purposes.

(b) Accounting policy for recording hedge and non-hedge transactions, recognition of income, Premiums and discounts, valuation of outstanding contracts

Bank deals in derivatives for hedging G-Sec or foreign currency assets/liabilities subject to the prevailing regulatory guidelines. Transactions for hedging and trading are recorded separately. For hedge transactions, the Bank identifies the hedged item (asset or liability) at the inception of the transaction itself. The effectiveness is ascertained at the time of inception of the hedge and periodically thereafter. Transactions related to foreign exchange forward, interest rate Future/iRS/Currency future are marked to market every month and the MTM is accounted in the books.

(c) Collateral Security

We have provided Sufficient Collateral Security to Central counter Parties and Exchanges wherever Applicable.

As per market practice, no collateral security is insisted on for the contracts with counter parties like Banks/Primary Dealers (PDs) etc. For deals with Corporate Clients, appropriate collateral security/margin etc. is stipulated wherever considered necessary.

* excludes forward exchange contract.

- The notional principal amount of forward exchange contracts classified as Hedging and Trading outstanding as on March 31, 2018 amounted to Rs, 4,364.45 Crore (Previous year Rs, 3,003.98 Crore) and Rs, 13,967.17 Crore (Previous year Rs, 13,452.78 Crore) respectively. For the hedging contract, as at March 31, 2018 the marked to market position was asset Rs, 53.26crores and liability of Rs, 111.07crores (Previous year asset Rs, 54.81 crores and liability of Rs, 110.23 crores). For the trading contract, as at March 31, 2018 the marked to market position was asset Rs, 245.60crores and liability of Rs, 193.18crores (Previous year asset Rs, 360.06 crores and liability of Rs, 292.43 crores). Credit exposure on forward exchange contracts at March 31, 2018 was Rs, 718.51 Crore (Previous year Rs, 893.33 Crore).

- The notional principal amounts of derivatives reflect the volume of transactions outstanding as at the Balance Sheet date and do not represent the amounts at risk.

- Interest rate derivative represents interest rate swaps.

- The bank has computed the maximum and minimum of PV01 for the year based on the balances as at the end of every month.

- In respect of derivative contracts, the bank evaluates the credit exposure arising therefrom, in line with RBI guidelines. Credit exposure has been computed using the current exposure method which is the sum of :

a) The current replacement cost (Marked to Market value including accruals of the contract) or zero whichever is higher.

b) The Potential Future Exposure (PFE) is a product of the notional principal amount of the contract and a factor that is based on the grid of credit conversion factor prescribed in RBi Guidelines, which is applied on the basis of the residual maturity and the type of contract.

1.4.5 Divergence in Asset classification and Provisioning for NPAs

The divergence observed by RBI for the Financial year 2016-17 in respect of the Bank's asset classification and provisioning under the extant prudential norms on income recognition, asset classification and provisioning is below the regulatory requirement for disclosure and hence the disclosure as required under RBi Circular DBR.BP.BC.No.63/21.04.018/2016-17 dated April 18, 2017 on 'Divergence in the asset classification and provisioning', is not required to be made.

@ Represents balance as on 31-03-2016

2 Amount reported here represents outstanding as on March 31, 2017.

3 Accounts which were not attracting higher provisioning and/or additional risk weight at the beginning of the financial year.

4 Other Facility include investment in Bond/Debentures amounting to Rs, 216.04 Crore.

5 There are no SME cases which have been restructured during the year ended March 31, 2017.

the employee and the Bank contribute a specified percentage of the salary to the Federal Bank Employees 'Provident Fund. The Bank has no obligation other than the monthly contribution.

The Bank recognized Rs, 0.48 Crore (Previous Year: Rs, 0.47 Crore) for provident fund contribution in the Profit and Loss Account.

New Pension Scheme

As per the industry level settlement dated April 27, 2010, employees who joined the services of the Bank on or after April 01, 2010 are not eligible for the existing pension scheme whereas they will be eligible for Defined Contributory Pension Scheme (DCPS) in line with the New Pension Scheme introduced for employees of Central Government. Employee shall contribute 10% of their Basic Pay and Dearness Allowance towards DCPS and the Bank will also make a matching contribution. There is no separate Provident Fund for employees joining on or after April 01, 2010.

The Bank recognized Rs, 25.34 Crore (Previous year: Rs, 21.64 Crore) for DCPS contribution in the Profit and Loss Account.

b) Defined benefit plan

Gratuity

The Bank provides for Gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering the eligible employees. The Gratuity Plan provides a lump sum payment to vested employees on retirement, death, incapacitation or termination of employment, of an amount based on the respective employees' salary and the tenure of employment. Vesting occurs upon completion of five years of service as per Payment of Gratuity Act, 1972 and its amendment with effect from May 24, 2010 or as per the provisions of the Federal Bank Employees' Gratuity Trust Fund Rules / Bi-partite Award provisions. Liabilities with regard to the Gratuity Plan are determined by Actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank Employees' Gratuity Trust Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

Superannuation / Pension

The Bank provides for monthly pension, a defined benefit retirement plan (the "pension plan") covering eligible employees. The pension plan provides a monthly pension after retirement of the employees till death and to the family after the death of the pensioner. The monthly pension is based on the respective employees' salary and the tenure of employment. Vesting occurs upon completion of ten years of service. The Bank pays the monthly pension by purchasing annuities from Life insurance Corporation of India (LiC). Liabilities with regard to the pension plan are determined by actuarial valuation as on the Balance Sheet date, based upon which, the Bank contributes all the ascertained liabilities to the Federal Bank (Employees') Pension Fund (the "Trust"). Trustees administer contributions made to the Trust and contributions are invested in specific investments as permitted by law.

The following table as furnished by Actuary sets out the funded status of gratuity / pension plan and the amount recognized in the Bank's financial statements as at March 31, 2018.

The estimates of future salary increases considered in actuarial valuation take account of inflation, seniority, promotion and other relevant factors.

The expected rate of return on plan assets is based on the average long-term rate of return expected on investments of the Fund during the estimated term of the obligations.

As the contribution expected to be paid to the defined benefit plans during the annual period beginning after the balance sheet date is based on various internal / external factors, a best estimate of the contribution is not determinable.

(c) Leave Encashment/Sick Leave / Leave Travel Concession / Unavailed Casual Leave

The employees of the Bank are entitled to compensated absence. The employees can carry forward a portion of the unutilized accrued compensated absence and utilise it in future periods or receive cash compensation at retirement or termination of employment for the unutilized accrued compensated absence for a maximum of 240 days. The Bank records an obligation for compensated absences in the period in which the employee renders the services that increase this entitlement. The Bank measures the expected cost of compensated absence as the additional amount that the Bank expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date based on actuarial valuations.

A sum of Rs, 15.17 Crore has been reversed to profit and loss account due to reduction of the above liabilities in accordance with AS 15 based on actuarial valuation. During the Previous year as sum of Rs, 24.64 Crore was charged to profit and loss account due to increase in the liabilities.

The discount rate is based on the prevailing market yields of Government of India securities as at the Balance Sheet date for the estimated term of the obligations.

The estimate of future salary increases considered, takes into account the inflation, seniority, promotion, increments and other relevant factors. The above information is as certified by the actuary and relied upon by the auditors.

2.2. Segment Reporting (AS 17)

A. Business Segments

Business of the Bank is divided into four segments viz. Treasury, Corporate or Wholesale Banking, Retail Banking and other banking operations. The principal activities of these segments and income and expenses structure are as follows:

Treasury

Treasury operations include trading and investments in Government and corporate debt instruments, equity and mutual funds, derivative trading and foreign exchange operations on proprietary account and for customers.

The income of this segment primarily consists of earnings from the investment portfolio of the bank, gains and losses on trading operations. The principal expense of the segment consists of interest expense on funds borrowed/utilized and other allocated overheads.

Corporate/ Wholesale Banking

This segment provides loans and other banking services to Corporate and other clients where value of individual exposure to the Clients exceeds Rs, 5 Crore as defined by RBI. Revenue of this segment consists of interest and fees earned on loans to such customers and charges and fees earned from other banking services. Expenses of this segment primarily consist of interest expense on funds utilized and allocated overheads.

Retail banking

Retail banking constitutes lending and other banking services to individuals/small business customers, other than corporate/wholesale banking customers, identified on the basis of RBI guidelines.

Revenue of this segment consists of interest earned on loans made to such customers and charges /fees carried from other banking services to them. The principal expenses of the segment consist of interest expenses on funds borrowed and other expenses.

Other Banking Operations

This segment includes parabanking activities like third party product distribution and otherbanking transactions, not covered under any of the above segments. The income from such services and associated costs are disclosed in this segment.

The following table sets forth, for the periods indicated, the business segment results:

Geographical Segment Information

The Business operations of the Bank are largely concentrated in India and for purpose of Segmental reporting, the bank considered to operate only in domestic segment, though the bank has its operation in international Finance Service Centre (iFSC) Banking Unit in Gujarat international Finance Tec-city (GiFT). The business conducted from the same is considered as a part of Indian operations. Segment information is provided as per the MiS available for internal reporting purposes, which include certain estimates/ assumptions. The methodology adopted in compiling and reporting the above information has been relied upon by the auditors.

2.3. Related Party Disclosures (AS 18)

a) Details of Related Parties:

Name of the Party Nature of Relationship

iDBi Federal Life insurance Company Limited Associate

FedBank Financial Services Limited Subsidiary

Sri. Shyam Srinivasan, Managing Director & CEO Key Management Personnel

Sri. Ashutosh Khajuria, Executive Director & CFO Key Management Personnel

Sri Ganesh Sankaran, Executive Director (From 04-07-2016) Key Management Personnel

FedBank Hormis Memorial Foundation Entity in which KMPs can exercise significant influence in accordance with RBi guidelines, details pertaining to the related party transactions, have not been provided where there is only one related party

Note: Exposure is computed as per the definition of Credit and Investment Exposure in RBI Master Circular on Exposure Norms DBOD. No. Dir.BC.12/13.03.00/ 2015-16 dated July 1, 2015.

The bank has compiled the data for the purpose of disclosure in Note No. 3.8.1 to 3.8.3 from its internal MiS system and has been furnished by the management, which has been relied upon by the auditors.

3.12. Sponsored SPVs

The Bank has not sponsored any special purpose vehicle which is required to be consolidated in the consolidated financial statements as per accounting norms as at March 31, 2018 and March 31, 2017.

3.13 Disclosures on Remuneration

i) Qualitative disclosures

a) Information relating to the composition and mandate of the Nomination, Remuneration, Compensation and Ethics Committee (or Remuneration Committee in short):

The Remuneration Committee of the Board oversees the framing, review and implementation of the compensation policy of the Bank, on behalf of the Board. This committee works in coordination with Risk Management Committee of the Bank, in order to achieve effective alignment between risk and remuneration.

As on March 31, 2018, the remuneration committee of the Board comprises of the following independent Directors:

- Mr. Dilip G Sadarangani

- Mr. Nilesh Shivji Vikamsey

- Ms. Grace Koshie

The above committee of the Board functions with the following objectives:

a) To review the Compensation package for the MD and CEO and Executive Directors and recommend revisions for Board approval

b) To consider and approve issuance and allotment of ESOS shares to MD/EDs and employees of the Bank.

c) To develop and implement an effective compensation policy, as per RBi guidelines

b) Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy.

The compensation payable to MD & CEO, EDs and Senior Executives is divided into fixed and variable components. The fixed compensation is determined based on the industry standards, the exposure, skill sets, talent and qualification attained by the official over his/her career span etc. Approval from RBI is obtained to decide fixed compensation for MD & CEO and EDs.

The variable compensation for MD & CEO and Senior executives (Non - IBA package i.e. ED, CCO, CFO etc and above) are determined based on Bank's performance and Key Performance Areas (KPA) set for the official. KPAs contain targets on risk adjusted metrics such as Risk Adjusted Return on Capital (RAROC), Risk Adjusted Return on Risk Adjusted Capital (RARORAC), in addition to target on NPAs. The objectives of the remuneration policy are four fold:

- To align compensation with prudent risk taken

- To drive sustainable performance in the Bank

- To ensure financial stability of the Bank; and

- To attract and retain talent

c) Description of the ways in which current and future risks are taken into account in the remuneration processes.

For the purpose of effectively aligning compensation structure with risk outcomes, the functionaries in the Bank are arranged under the following four categories

- MD & CEO / ED

- Senior Executives (Non-Grander Compensation Package)

- Executives (On Grander Compensation Package)

- Other members of staff (on IBA package)

Limit on variable pay

The variable compensation offered to an official would not exceed 70% of the total fixed compensation.

Severance pay and guaranteed bonus

Severance pay (other than gratuity or terminal entitlements or as entitled by statute) is not paid to any official of the Bank.

Sign on bonus or joining bonus is limited to the first year and is paid only as Employee stock options.

Hedging

No compensation scheme or insurance facility would be provided by the Bank to employees to hedge their compensation structure to offset the risk alignment mechanism (deferral pay and claw back arrangements) embedded in their compensation arrangement.

Compensation Recovery policy

A claw back arrangement or a compensation recovery policy is provided, which will entail the Bank to recover proportionate amount of variable compensation paid to the above functionaries on account of an actor decision taken by the official which has brought forth a negative contribution to the bank at a prospective stage. The claw back arrangement would be valid for a period of three years from the date of payment of variable compensation.

Committee to mitigate risks caused by an individual decision

in order to further balance the impact of market or credit risks caused to the Bank by an individual decision taken by a senior level executive, MD & CEO or ED, the bank has constituted various committee's to take decisions on various aspects:

- Credit limits are sanctioned by committee's at different levels.

- Investment decisions of the Bank are taken and monitored by Investment committee and there is an upper limit in treasury dealings where individual decisions can be taken.

- Interest rates on asset and liability products for different buckets are decided and monitored by the Asset Liability Committee of the Board (ALCO). Banks' exposure to liquidity risk are also monitored by ALCO.

Integrated Risk Management Department (IRMD)

in order to effectively govern the compensation structure, iRMD would assist the Remuneration Committee of the Board to monitor, review and control various risks and balance prudent risk taking with the compensation paid out to top executives and other employees.

Compensation of risk control staff

The total fixed and variable compensation paid out to the employees of IRMD are independent of business parameters and rendering of effective support to the Remuneration Committee of the Board. The variable compensation component (Performance Linked incentive or PLI) will be subjected to a minimum and greater proportion of compensation will be fixed in nature to ensure autonomy and independence from business goals.

d) Linkage of performance during a performance measurement period with levels of remuneration.

The Bank's performance is charted based on the revenue point index / performance scorecard which takes into account various financial indicators like revenue earned, cost deployed, and profit earned, NPA position and other intangible factors like leadership and employee development. Variable pay is paid purely based on performance and is measured through Score cards for MD& CEO / EDs. The score card provides a mix of financial and non-financial, quantitative and qualitative metrics.

Compensation paid to Senior executives and other staff members on IBA package

The compensation paid to other officials that include Award Staff, Officers coming under Scale I to III is fixed based on the periodic industry level settlements with Indian Banks Association. The compensation package applicable to Executives in Level 4 to 7 was fixed and governed based on the periodical industry level settlements under iBA pattern. To make the Compensation Structure market driven and competitive, a new performance based compensation package called "Grander Compensation Package" has been introduced for Executives in Level 4 (Assistant Vice President) and above with effect from 01.05.2017.

e) Bank's policy on deferral and vesting of variable remuneration and criteria for adjusting deferred remuneration before vesting and after vesting.

Deferred compensation and Performance Linkage

In the event variable compensation paid to MD & CEO, ED and Senior Executives (Non-IBA) exceeds more than 50% of the fixed compensation for the year on account of high level of Bank's performance, 60% of the variable pay so entitled to the official will be deferred for payment over a period of 3 years. The amount is parked in an escrow account and the payment will be made in the ratio of 20:30:50 over a period of three years, i.e.

- 20% of the deferred compensation will be paid in the first year

- 30% of the deferred compensation in the second year; and

- 50% of the deferred compensation in the third year

Claw back and deferral arrangements

The provisions of claw back and deferral arrangements are applicable to the referred functionaries and all employees in the event their variable compensation exceeds 50 % of their fixed emoluments

f) Description of the different forms of variable remuneration

Bank uses an optimum mix of cash, ESOPs and variable PLi to decide the compensation of employees in all categories. The distribution of ESOPS and variable PLi are higher in top levels and is linked with their performance measurements taken from Scorecards. This is done to align the compensation of senior staff with their performance, risk and responsibility taken in higher assignments. The Officers in Scale i-iii as well as Award staff come under the purview of iBA package that is as per the industry wide settlements. Variable compensation, ESOP, is linked with seniority in these levels.

3.17 Unhedged Foreign Currency Exposure

The Bank has in place a policy on managing credit risk arising out of unhedged foreign currency exposures of its borrowers. The objective of this policy is to maximize the hedging on foreign currency exposures of borrowers by reviewing their foreign currency exposures and encouraging them to hedge the unheeded portion. The policy framework also articulates the methodologies for ascertaining the amount of unhedged foreign currency exposures, estimating the extent of likely loss, estimating the riskiness of the unhedged position and making appropriate provisions and capital charge as per extant RBi guidelines. in line with the policy, assessment of unhedged foreign currency exposure is a part of credit appraisal while proposing limits or at the review stage. Further, the bank reviews the unhedged foreign currency exposure across its portfolio on a periodic basis. The Bank maintains incremental provisions and additional capital for the unhedged foreign currency exposures of its borrowers in line with the extant RBi guidelines. The Bank has maintained Rs, 5.26 Crore (Previous year Rs, 5.27 Crore) as provision and Rs, 4.39 Crore (Previous year Rs, 2.21 Crore) as additional capital for computation of capital adequacy ratio on account of the unhedged foreign currency exposures of borrowers as at March 31, 2018.

3.18 Liquidity Coverage Ratio (LCR)

a) Quantitative Disclosure

The following table sets forth, the daily average of unweighted and weighted values for all the quarters in FY 2017-18

computed LCR separately for any foreign currency since the aggregate liabilities denominated in any foreign currency doesn't amount to 5 percent or more of the Bank's total liabilities. Bank has consistently maintained LCR above 100% during Fiscal 2018, as against the regulatory minimum of 80% (till December 2017)/ 90% (from January 2018).

On an average, 90% of the HQLA maintained by the Bank comprises of Level 1 assets which is the most liquid asset category. Cash in hand, excess CRR and SLR, G-Sec within mandatory SLR requirement permitted by RBi under MSF (presently 2% of NDTL) and facility to avail liquidity ratio (9% of NDTL) constitutes Level 1 HQLA. Level 2 Assets maintained by the Bank comprises of (a) marketable securities representing claims on or claims guaranteed by sovereigns, Public Sector Entities (PSEs) or multilateral development banks that are assigned a 20% risk weight under the Basel III Standardized Approach for credit risk and that are not issued by a bank/financial institu-tion/NBFC or any of its affiliated entities and (b) Corporate bonds, not issued by a bank/financial institution/NBFC or any of its affiliated entities, which have been rated BBB- or above by an Eligible Credit Rating Agency. HQLA is also well diversified across various instruments and liquid asset types and should provide the Bank with adequate and timely liquidity.

Bank has a well-diversified funding portfolio. Retail deposits, considered as stable from a liquidity perspective is the major funding source of the Bank, indicating lower dependence of the Bank on wholesale funds.

The liquidity risk management in the Bank is guided by the ALM Policy. Asset Liability Management Committee (ALCO) is the executive level committee responsible for ALM process in the Bank. Bank's liquidity management is actively done by the Treasury department as per the directions of ALCO. integrated Risk Management Department actively monitors the liquidity position of the Bank and apprises ALCO on a continuous basis to initiate appropriate actions to ensure that the liquidity position is well within the Risk Appetite set by the Board of Directors.

4.2 A. Equity Issue

During the year ended March 31, 2018, the Bank has issued 215,517,241 equity shares of ' 2 each for cash pursuant to a Qualified Institution Placement (QiP) as per the relevant provisions of SEBi (Listing Obligations and Disclosure Requirements) Regulations at ' 116.00 per share aggregating to ' 2,500.00 Crore (including share premium). This resulted in an increase of ' 43.10 Crore in Share Capital and ' 2,420.78Crore (net of issue expenses) in Share premium account.

Further the Bank allotted during the year 32,577,034 equity shares consequent to exercise of ESOS and 4,750 equity shares pertaining to Rights issue of 2007, which resultedin an increase of Rs, 6.52 Crore in Share Capital and Rs, 129.03 Crore in Share premium account.

B. Subscribed and paid up capital includes:

(i) 16,590 shares of Rs, 2/- each (Previous Year 16,590 shares of Rs, 2/- each) issued for consideration other than cash.

(ii) 32,925,590 underlying equity shares of Rs, 2/- each (Previous Year 31,205,861 equity shares of Rs, 2/- each) held by custodian on behalf of holders of Global Depository Receipts (GDRs).

(iii) 32,577,034 ESOS shares of Rs, 2/- per share (Previous Year 5,098,570 shares of Rs, 2/- Per share) allotted under ESOS 2010.

(iv) 857,945,206 bonus shares were issued in the ratio of 1:1 during Financial Year 2015-16

C. The following allotments are kept pending following orders from various courts

(i) Allotment of 6,530 shares of Rs, 2/- each (Previous year 6,530 shares of Rs, 2/- each) pertaining to the Right issue of 1993 issued at premium of Rs, 5/- per share

(ii) 262,100 shares of Rs, 2/- each (Previous year 262,100 shares of Rs, 2/- per share) pertaining to the Rights issue of 1996 issued at a premium of Rs, 28/- per Share

(iii) 1,075,665 equity shares of Rs, 2/- each (Previous year 1,080,415 shares of Rs, 2/- per share), at a premium of Rs, 48/- per share pertaining to Rights issue of 2007

Issue of certificates/credit in demat account in respect of the following Bonus issues are kept in abeyance consequent to injunction orders from various courts.

a) 409,170 shares of Rs, 2/- each (Previous year 409,170 shares of Rs, 2/- each) out of the Bonus issue of 2004 and

b) 613,505 bonus shares of Rs, 2/- each (Previous year 615,755 bonus shares of Rs, 2/- each), out of the Bonus issue of 2015.

D. Employee Stock Option Scheme ("ESOS"):

(i) Employee Stock Option Scheme 2010 (ESOS 2010)

Shareholders of the bank had approved Employee Stock Option Scheme 2010 (ESOS 2010) through postal ballot, the result of which was announced on December 24, 2010, enabling the Board and/or the "Compensation Committee" to grant such number of equity shares, including options, of the Bank not exceeding 5% of the aggregate number of paid up equity shares of the Bank, in line with the guidelines of SEBi. Pursuant thereto, the Compensation Committee of the bank granted the following options:

* ESOS granted on May 20, 2017 with vesting period of 1,2,3 and 4 years. Exercise period of 5 years and exercise price of Rs, 112.35 per share.

As per SEBi guidelines the accounting for ESOS can be done either under the 'intrinsic value basis' or 'Fair value basis'. The Compensation Committee in their meeting dated May 10, 2012 decided to adopt 'intrinsic value method' for accounting of ESOS, in terms of the power vested on them as per the resolution of EGM dated December 24, 2010.

in accordance with the SEBi Guidelines and the guidance note on "Accounting for Employee Share based payments" issued by the iCAi, the excess, if any, of the market price of the share preceding the date of grant of the option under ESOS over the exercise price of the option is amortized on a straight line basis over the vesting period.

ii) Employee Stock Option Scheme 2017 (ESOS 2017)

Shareholders of the bank had approved The Federal Bank Limited Employee Stock Option Scheme 2017 (ESOS 2017) AGM held on July

14, 2017, as a Special Resolution, enabling the Board and/or the "Compensation Committee" to grant such number of equity shares, including options, of the Bank not exceeding 5% of the aggregate number of paid up equity shares of the Bank, in line with the guidelines of SEBi. Pursuant thereto, the Compensation Committee of the bank granted the following options:

As per SEBi guidelines the accounting for ESOS can be done either under the 'intrinsic value basis' or 'Fair value basis'. As per the approval of shareholders, the Bank has adopted 'intrinsic value method' for accounting of ESOS.

in accordance with the SEBi Guidelines and the guidance note on "Accounting for Employee Share based payments" issued by the iCAi, the excess, if any, of the market price of the share preceding the date of grant of the option under ESOS over the exercise price of the option is amortized on a straight line basis over the vesting period.

iii) Effect of Fair value method of accounting ESOP:

If "Fair Value Method" had been adopted based on "Black-Scholes pricing model" for pricing and accounting of options, net profit would be lower by Rs, 25.79 Crore (Previous Year: Rs, 9.12 Crore). The modified basic and diluted earnings per share for the year, had the Bank followed Fair Value Method of accounting for ESOS compensation cost would be Rs, 4.48 and Rs, 4.43 (Previous Year: Rs, 4.78 and Rs, 4.72) respectively

E. Proposed Dividend and Tax on Proposed Dividend

In terms of revised Accounting Standard (AS) 4 "Contingencies and Events occurring after the Balance sheet date" as notified by the Ministry of Corporate affairs through amendments to Companies (Accounting Standards) Amendment Rules, 2016, the Bank has not appropriated proposed dividend (including tax) aggregating to Rs, 237.75 Crore from the Profit and loss account for the year ended March 31, 2018, also the same has not been shown as an Other Liabilities. (Schedule 5)

4.7 Description of contingent liabilities:

a) Claims against the Bank not acknowledged as debts

These represent claims filed against the Bank in the normal course of business relating to various legal cases currently in progress. These also include demands raised by income tax and other statutory authorities and disputed by the Bank.

b) Liability on account of forward exchange and derivative contracts

The Bank presently enters into foreign exchange contracts and interest rate swaps with interbank Counterparties and Customers. Forward exchange contracts are commitments to buy or sell foreign currency at a future date at the contracted rate. interest rate swaps are commitments to exchange fixed and floating interest rate cash flows in the same currency based on fixed rates or benchmark reference. The notional amounts of such foreign exchange contracts and derivatives provide a basis for comparison with instruments recognized on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank's exposure to credit or price risks. The fluctuation of market rates and prices cause fluctuations in the value of these contracts and the contracted exposure become favorable (assets) or unfavorable (liabilities). The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly as the aggregate contractual or notional amount of derivative financial instruments on hand can vary and the market rate fluctuations can decide the extent to which instruments are favorable or unfavorable.

c) Guarantees given on behalf of constituents

As a part of its banking activities, the Bank issues guarantees on behalf of its customers to enhance their credit standing. Guarantees represent irrevocable assurances that the Bank will make payments in the event of the customer failing to fulfill its financial or performance obligations.

d) Acceptances, endorsements and other obligations

These include documentary credit issued by the Bank on behalf of its customers and bills drawn by the Bank's customers that are accepted or endorsed by the Bank.

e) Other items for which the bank is contingently liableincludes Capital commitments and amount transferred to RBi under the Depositor Education and Awareness Fund (DEAF).

(Refer schedule 12 for amounts relating to contingent liability.)

4.8 Provisioning Pertaining to Fraud Accounts

The Bank has reported 44 cases (Previous year: 68 cases) of fraud in the Financial year ended March 31, 2018 amounting to Rs, 5.34 Crore (Previous Year: Rs, 259.19 Crore) and has provided for the same in the books of account. Bank does not have any unamortised loss in this regard as of March 31, 2018.

4.9 Inter-bank participation with risk sharing

The aggregate amount of participation purchased by the Bank, shown as advances as per regulatory guidelines, outstanding as of March

31, 2018 was Rs, 1,444.50 Crore (Previous Year: Rs, 1,981.27).

The aggregate amount of the participation issued by the Bank, reduced from advances as per regulatory guidelines, outstanding as of March 31, 2018 was Rs, Nil. (Previous Year: Rs, 150.00 Crore).

4.10 Factoring Exposure

The factoring exposure of the Bank as on March 31, 2018 is Rs, 805.63 Crore (Previous Year: Rs, 1,055.67 Crore)

4.12 Provision for Long Term contracts

The Bank has a process whereby periodically all long term contracts (including derivative contracts) are assessed for material foreseeable losses. At the year end, the bank has reviewed and recorded adequate provision as required under any Law/Accounting Standards for material foreseeable losses on such long term contracts (including derivative contracts) in the books of account and disclosed the same under the relevant notes in the financial statements.

The Bank has spent of 1.19 % of its average net profit for the last three financial years as part of its CSR activities for the year ended March 31, 2018. As a responsible Bank, it has approached the mandatory requirements of CSR spend positively by utilising the reporting year to lay a foundation on which to build and scale future projects and partnerships. The Bank is currently in the process of evaluating strategic avenues for CSR expenditure in order to deliver maximum impact. in the years to come, the Bank will further strengthen its processes as per requirement.

4.14 Investor education and protection fund

There has been no delay in transferring amounts, required to be transferred to the investor Education and Protection Fund by the Bank.

4.15 Disclosure on Specified Bank Notes

The Bank believes that the MCA notification G.S.R. 308(E) dated March 30, 2017 regarding holdings as well as dealings in Specified Bank Notes during the period from November 08, 2016 to December 30, 2016 is not applicable to banking companies.

4.16 Small and Micro Industries

Under the Micro, Small and Medium Enterprises Development Act, 2006 which came into force from October 02, 2006, certain disclosures are required to be made relating to Micro, Small and Medium enterprises. There have been no reported cases of delays in payments to micro and small enterprises or of interest payments due to delays in such payments. The above is based on the information available with the Bank which has been relied upon by the auditors.

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