Syndicate Bank's Risk Assessment and Inspection Reports by RBI

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RESERVE BANK OF INDIA
cO.DOS.DSD.NO.S 3&8 10'1-72-00112822-2023 September 02, 2022
By EmaillSpeed Post
Shri Abhinav Agganwal

I775 Mucha Lattushah,
Dariba, Chandni Chowk,
Delhi Pin:110006.
Dear Sir, -
Riqht to Information Act, 2005
-
Our Reference RIA No. RBfNDIR1E121108169- Shri Abhinav Aqqarwal
'1 ,
Please refer to our letter CO.BOS.DSD.No,S3423101.12.00?~2022-23dated August 23,
I.'
2022 on the captioned subject advising you to make payment towards photocopying
charges and to furnish a copy of receipt to us.
In this connection, Risk Assessment Reports (RARs) for FYs 2014-15 , 2015-16,2016-A 7
and 2017-18 and Risk Assessment Report and Inspection Report for FY 2018-19 of
erstwhile Syndicate Bank are enclosed after redacting the information exempt from
disclosure under Section 8(l)(k) of the RTI Act, 2005.
Yours faithfully,
XYI? gZ7.7.
Q
h,
; ,.-
-
--a . %\ "" (Abhay Kumar)
' Central Public Information Officer
% 022-22 1 8 0 131-39hi
:022-22 1 60932 -
;
Department of Supervision, Central Office, World Trade Centre 1, Cuffe Parade, Colaba, Mumbai - 400 OD5
. ..
Tel: 022-2218 0?31-39Fax. 022-22160932
Mm3,mSFdhm
Syndicate Bank
Risk Assessment Report

(Financial position as on March 31, 2015)
Table of Contents
Introduction.....................................................................................
2
PartI:RiskAssessmentReport .........................................................
3
Summary of Aggregate Risk at Bank bevel...........................................3
Supervisory Evaluation of Risks and Control Gaps............................. 3
Governance & Oversight...............................................................
3
Credit Risk.................................................................................7
Market Risk.............................................................................
Liquidity Risk ..............................................................................
Operational (Non-IT) Risk ...............................................................
Operational (IT) Risk .....................................................................
Other Pillar {I Risks ......................................................................
Part 11: Major Areas of Financial Divergence......................................
Part Ill: Assessment of Capibl and Earnings ............................,..
. . . . . . .
Pillar
.
I. Capital
.
& CRAR ..................................................................
. . . . . . . . . ....
Capital Management, ICAAP and Stress Tests ......................................

Assessment of Internal Generation of Capital .................................... 24
Scope & Ability to Infuse Capital ...................................................... 24

Assessment of Leverage Ratio .........................................................25
Part IV: Major Areas of Non-Compliance.......................................... 26
!W%
PartV: Annex .................................................................................
I-1-l
C> I
Annex-I : Major Areas of Financial Divergence.................8................. 1

Annex-2: Computation of Outside Liabilities...................................... 4
Annex-3: Assessed Net Worth........................................................ 5
Annex-4: Computation of Assessed Capital .................................... 6
Annexd: Assessment of Internal Generation of Capital........................ 8
Annex-6: beverage Ratio...............................................................11
Note :AIl3gures in the report refer to position of the b 2015 or for the period April 2. 2014 to
March 31. 2015 and $gurer; in parefithesis refer to corr ar position unless otherwise specified .
Confidential Page I of 27
- INTRODUCTION
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., ,- /--'
A,.. ,
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. , , , / ~ k e ~ i s kAssessment of Syndicate Bank for 2014-15 under the Supervisory Program
for Assessment of Risk and Capital (SPARC) was completed with March 31, 2015 as
the reference date. The assessment has been made based on the off-site analysis of
the data and information furnished by the bank as welt as the results of the on-site
Inspection for Supelvissry Evaluation (ISE) undertaken from November 16, 201 5 to
December 31, 2015 and various explanations offered by the bank in course of
inspection.
A separate exercise of Asset Quality Review (AQR), 201 5 was also conducted during
the current supervisory cycle with specific focus on compliance with regulatory
guidelines on IRACP norms. The review covered, inter alia, deficiencies in the systems
and processes in the bank which led to improperlincorrect classification of assets. The
C
'I: report containing findings of the AQR were shared with the bank and, after discussion,
:{!
2
the bank has been advised to take a review of the accounts covered under AQR by
following a proactive approach with regard to classification and provisioning by strictly
applying the I M C P norms in letter and spirit, by March 31, 2816. Further, with a view
to putting the viable assets back on track in ease of failed CDR restructuring cases, the
bank was given time up to March 31, 2017' to take a review of these eases. However, in
the interregnum, the bank will be required to build up prudential provision of 15%
(including 5% segulatoq provision for restructured standard assets as on March 31,
2016) for failed CBR restrucfuring cases by March 31, 2817.1n view of the above, the
full impact of AQR on the bank's profitability, capita!, earnings, risk scores, etc., is not
, determinable in the current supervisory cycle. The impact of AQR, therefore, has not
'
1- been included while presenting the assessment in this Inspection report.
As per the SPARC process, the aggregate Risk Score of the bank is arrived at
which is indicative of High Risk. On applying the assessed CRAR (10.43%) to the
=
aggregate risk score,the Risk sf Failure score of the bank is arrived at m
Confidential Page 2 of 27
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PART I: RISK ASSESSMENT REPORT
Summary of Aggregate Risk at Bank Level

Inherent Risk Control Gap Aggregate Risk
Risk Category
A (I-4) BI14 [A + 81 (1-4)
Board
Senior Management
Risk Governance
Internal Audit
Governance & Oversight Rjsk

Credit Risk
Market Risk
Liquidity Risk
Operational (Non-IT) Risk
Operational (IT) Risk
Other Pillar II Risk
Business Risk
SUPERVISORY EVALUATION OF RISKS AND CONTROL GAPS
1 . Governance & Oversight - Aggregate score:=

I Major observations I
Board Composition and its Functioning: The current MD 8 CEO took over in
I
May 2015. The policy documents were routinely ratified by the Board and
dissent or disc~lssionsfor value addition if any, were not minutised. There was
lack bf deliberations in Board meetings over various risk areas, such as
additional risk emerging from an aggressive business strategy in the face of
already distressed capital position of the bank, increasing trend of NPA, failed
restructuring, manual MIS, compliance with regulatory prescriptions, Pillar II
risks, etc. Further, the Board was simpty affirming risk appetite and risk limits as
suggested by the Risk Management Department (RMD) without much
discussion. There was also no evidence of valuable insight ar direction on such
important issues impacting the bank.
Conduct of Board Level Committees: (a) Audit Committee of the Board
(ACB) oversight over control functions was found to be inadequate in view of
persistent irregularities in KYC, delay in conduct of management audit, delay in
remittance of TDS to Income Tax authorities and open items in audit reports.
I 1 (b) The role of Risk Management Committee (RMC) was limited to the vetting of 1
1 1 the Internal Capital Adequacy Assessment Process (ICAAP) document and it 1
iI 1 did not discuss in detail the risks associated with the credit and investment 1
I functions. I
1.1.3 Board Oversight of Risk Functions: (a) There was no Enterprise wide Risk
Management Framework for the bank and the exercise was left to the individual
functional heads. (b) The Vision 2020 has been put in place and subjected to
1 I half yearly variance analysis. Several key performance targets could not be I
achieved and despite that the bank did not deem it necessary to review and
revise the future strategy. (c) Risk appetite set by the bank was equivalent to
the regulatory CCRAR and not based on the banks strategy and business plan.
(d) The oversight on performance of Senior Management was restricted only to
the agenda papers and action taken report submitted. (e) There was no
framework for reviewing of KPls 0% senior management by the Board. The
1 1 bank's performance on quarterly targets was reviewed region-wise and the 1

,
same was accepted as the performance of the respective Field General

Managers (FGMs). (f) Pending action Paras sf earlier AFI 2014 (out of 79
I 1 action paras, 17 are pending) and MAP (out of 7 points, 3 are pending), 1
1 indicated lack of proper oversight of compliance function.
I
1 I
1
1.1.4 ( Board's Oversight of Overseas Operations: The Board had inadequate
1 I oversight over functioning of London Branch. In the absence of CBS and robust I
I I MIS and being completely dependent on manual information submitted by the I
I I branch, several reporting errors like non-reporting of SMA I & II in CRlLC and 1
I I non-disclosure of unsecured exposure of the overseas branch, were observed. 1
I 1 There were many deficiencies in the functioning of overseas branch, such as 1
1 I non-integration of treasury with domestic treasury, audit deficiencies, etc. which 1
I I uointed to the lack of oversight of the Board.
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f.2 1 Senior Management
1.2.1 1 Involvement of Senior Executives: Senior Management roles were limited to
I 1
1 1 iheir assigned functional responsibilities. 1

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Effectiveness of Senior Management: (a) All functjsnal departments submit
notes at prescribed intervals to the Board, The same was, however, taken up
only in the next Board meeting as and when scheduled, rendering information
irrelevant, as the same was not updated. Further, delays ranging from two fo
three months were observed in putting up important review notes to the Board
(e.g. Compliance, Risk Management, etc.).Besides, Board notes generally were
status reperfs put up for information onsy, leaving little scope for the Board to
give meaningful directions in the absence of vital data and information (e.g,
stress test policy, IGAAP exercise, market risk policy, etc.). (b) Instances of
submission of incorrect information to the Board were observed, e.g. the bank
had disclosed 'Nil' unsecured advances which was not correct. The capital
market exposure reported to the Board was understated ta the extent of 71665
mn. Though the KYC compliance was incomplete as evident from the
incomplete risk categorization, risk profiling and non-implementation of Unique
Customer ldentificati~nCode (UCIC), the Board had been informed about
'180% KYC compliance. (c) The role sf s e n i ~ rmanagement was found to be
ineffective as evident from the continued deterioration in credit quality, poor
MIS, delay in implementation of 1T projects and poor succession planning.
Succession Planning
The bank may face issues in succession planning in the next two to three years
as the promotion process was stalled for the current year and key senior
officials are due to retire in the said period. There was also no successian
planning for business heads.
Formulation of Plan & Fixation of Targets
The bank has framed a long term strategic plan in 2814 aiming to cross 710
lakh crore business by 2020 which is highly ambitious considering the fact that
the bank's capital was already stressed at the business level of 74.8 lakh crore
as on March 31, 2815. Further, the bank's share in domestic business has
reduced from 2.62% in 2008-09to 2.28% in 2014-15.The bank did not achieve
the targets under GNPA, NNPA, cost of deposits, yield on advances, NIM and
RoA for FY 14-15.
Risk Governance
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Enterprise-wide Risk Appetite: There was no enterprise-wide risk
assessment framework for the bank. In the absence sf risk awareness culture,
risk did not guide the dusi&ss dei2i3ions. Risk monitoring was simply dane as
CnnfidnnfiaI Page 5 of 27
ru 1 Complian~eto regulatory requirements. There was absence of a targeted or (
specific resource planning for the risk management function as well as absence
of specific training programmes for risk officers. The bank did not reckon the
risks involved in its aggressive business plan and consequently assumed the
regulatory CRAR as its risk appetite.
Adequacy of Risk Management Functions: (a) There was a need to review
the mapping of internal and external rating. (b) The bank was lagging behind in
the process of moving towards advanced approaches under Basel Ill [e.g, still
in the process of data cetdedion regarding Probability of Default (PD), Loss
Given Default (LGD), MIS, Gap study, model validation]. (c) The capital
calculati~ncontinued to be done rnanuaIly, as the required software was yet to
be implemented. (d) ICAAP was a theoretical exercise and not subject to
review by any ICAAP assessment committee. Further, residual risks like
Pension Obligation Risk, Group Risk, Strategic Risk, Reputations! Risk, etc.
were not addressed properly.
Effectiveness of Risk Management Functions: The functioning of
Operational Risk Management Committee (ORMC) was inadequate as
evidenced by delay in reporting of frauds, ineffective MIS and inordinate delay
in completion of 1% projects. The mechanism put in place by CMRD for
monitoring of SMA 0 accounts exceeding 750 rnn was inadequate, as it was
observed that while 'Nil' statistics had been reported in SMA statement of
causative factors, only 7 accounts were reported in SMA 0 by the ROs, which
appeared incorrect.
Compensation Policy: The variable compensation for the senior management
was linked to the performance of the bank an achievement of targets, which led
to greater emphasis on business parameters than on risk parameters. Further,
the compensation of Whole Time Directors was also linked to the performance
of the bank in terms of achievement of Statement of Intent (Sol) targets. The
dependence of compensation purely on the performance of the bank in terms of
the Sol targets achieved, may lead to emphasis on business rather than on
stronger controls.
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Information
~ana~emsn t System: The bank does not have a robust MIS to
ensure availability of accurate and timely reporting to senior management. The
information is manually collected from the ROs and compiled by the respective
HO units who are in turn responsible for the correctness of the data reported
I which afforded scope for errors and omission's as seen during the course of I
I 1 data validation wherein almost 55% of the data had to be corrected. Sirnilarty. I
1 the MIS for exposures was collected manually which resulted in overstatement
I
1 of exposure to 20 largest borrowers. On the other hand, the CME was
I overstated in annual rep~rtand understated to the Board.
I
I
InfernalAudif
1 1.4.1 Implementation of Audit Policy: Annual Audit Plan is approved by the GM
Inspection and not by the AGB. The system of regular Risk and Control Self-
Assessment Audit (RCSA) was not in place. Only a one time exercise was
1 / dona with the help of a consultant fin but the same was then not taken (
I+-I1.4.2 Quality of Internal Audit: (a) Given the size of business and complexity of its
/ I
operations, the inspection department of the bank was not adequately staffed.
1 Lack of in-house trained personnel to carry out audit of specialised areas, e.g.
forex, IT, Treasury, credit, RMB, etc., increased the dependence of the bank on
I
retired officialsfor conduct of audits. (b) The Internal Audit was inadequate in
I , 1 detecting non-compliance ~f KYC/ AML guidelines and failed to detect the I

1 I irregularities observed in advance irnpolt remittances in some of its branches. I
I ( (c) Generally structured format based audits were conducted. Achievement of I
annual a-udit plan was given priority over quality. (d) 54 penalties amounting to
7169 mn was levied by the Income Tax department due to delayed TDS
remittance which indicates inadequacy in the current audit process. (e) 1
Random perusal of audit reports and their compliance reports revealed that
routine compliances like 'noted'; 'will be done shortly' etc. were accepted.
2. Credit Risk -Aggregate score:-

I Major ohsewations
1 2.1 1 Inherent Rlsk I Score
1 2.1.1 1 Default Risk: Restructured standard exposure constituted 4.95% of its credit I
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1 I portfolio. There was fresh slippage of 2.39% from the restructured standard I
1 (exposure at the beginning of the year, Incremental gross NPAs plus write off I
from slippage during the period at 0.81% of total standard exposure ake
pointed to elevated default risk The &xposureidentified as §MA-1 and SMA-2
stood at 3.12% of total,standard portfolio as on DPI. The unrated e
Confidsntial Paue 7 of 27
65,93% Could further pose a downside risk. The down-graded rated exposure
and exposures not rated for more than 42 months as at the end of the period as
against total standard rated exposure at the beginning of the period at 21 33%
accentuated the risk further. During last three years, the exposure to stressed
sectors, particularly mining, infrastructure, power, textiles and iron and steel
had increased substantiatly. Advances to mining sector increased exponentially
by 295.98%, telecommunication by 109.0?%, iron and steel by 98.79%,
infrastructure sector by 82.04%, power by 49.97%, and textiles by 48.29%.
Concentration Risk: The credit exposure and RWAs of top 20 borrowers
formed 11-72% of total credit exposure and 10.36% sftotal RWAs respectively.
The exposure to single borrowers who were enjoying facilities of 11%(or more)
of previous net worth constituted 45.02% of total exposure. Infrastructure was
having'individual exposure of mere than 8% of total exposure.
( 2.1.3 1 Exposure 8r Tenor Risk: Of the total exposure to top 20 borrowers, 16.75% of I
( 1 the exposure was to borrowers rated below the hurdle rate and 6 accounts
I
were in the tist of accounts causing concern. Total exposure of the bank was
leveraged to the extent of 23 times its net worth. Ratio of incremental
exposures to stressed sectors, sensitive sectors and infrastructure to total
incremental exposure during the period stood at 18.54%, 9.64% and 41.79%,
respectively. The ratis of projects under implementation to total exposure stood
at 5.42%. Elongated residual maturity upon restructuring as well as large scale
I 1 deviation from loan policy in adhering ta tenor discipline resulted in substantial I

1 1 increase in weighted average residual maturity to 4.03 years and added to the
1
1 1 tenor risk. I
2.1.4 1 Recovery Risk: The time lag in charge creation after assuming the exposure,
I
I I added to potential recovery risk. High amounts of sacrifice (31.32%)1 waivers I

( 1 (18.06%) in case of OTSi compromise proposals indicated poor record of 1
1 ( recovery. Infrastructure and textiles which formed 25.77% of the gross 1
I
I
1 wholesale advances, accounted far 30.42% of the NPAs in wholesale 1
sector.
1
While advances to infrastructure sector grew by 82.04% during the period 2013
to 2015,the NPAs in this sector increased substantially by 662.75%.
2.2- I Control Gaps , .
, :
w ~ ~ o l Environment:
i c ~ (a) The bank had noi incorporated RBI instructions 1
1 1 regarding Gold Metal Loans in its policy and as a result these aspects were not 1
I 1 examined while appraising sanction. of SBLC facilities to borrowers, for the I
.-A.m,
purpose of buying gold/ obtaining gold (metal) loans. (b) The bank had not gut
in place a Board approved policy for stipulating a limit on UFCE of corporates
and no mechanism was there to price UFCE in the credit risk premium while
extending fund based and nsn-fund based credit facilities to corporates. (c)
The assessment of exposures put up to RMC did not include derivatives
I 1 exposure. (d) The collateral management policy of the bank was sketchy as it
I 1 dwelt upon only p r ~ c e d ~ r aaspects
l of collateral management. Collateral
concentration was not assessed and the details sf collateral were not captured
in CBS or Integrated Treasury Management System (ITMS). (e) The credit
I I policy for sale of assets did not specify the procedure1method for valuation of
I I the asset on sale, scientific methodology for arriving at the reserve price, and
1 ( t h e validity period of valuation report obtained from the bank's approved
I valuers. Further, initial valuation of Security Receipts (SRs)was not done within
I ( the internally prescribed periodicity of six months of acquisition of asset and the
I 1 rating of the S R s was not available. (n For non-SLR investments, the bank has
i 1 not prescribed any desired rating-wise portfolio. (g) In t e n s of its credit risk
I I policy, ALCO was required to review the desirable residual maturity of loan
I
1 book, which was not done during 2014-15.

was no mechanism to obtain
from Treasury and International Banking Division (T&lBD)I branch, UFCE
exposure 0%t h e appraisee at 2he time of credit appraisal. (b) As on date,
internal rating of 2065 (46.23%) eligible domestic accounts, out of 4467 eligible
( ( accounts and three overseas acc~untswere yet to be reviewed / reassessed

I I on the basis of audited financials of 2014. Besides, the rating review was
( I undertaken only at the time of review1 renewal of the account and not on the
occurrence of a risk event. (c) There was a need to review mapping of internal
and external rating. As on March 31,2015, 291 borrowers having internal rating
I I at or above hurdle rate were rated below investment grade externally. Of the 47
I I corporate bormwers classified as NPA by the bank during March 1, 2014 to

I ) September 30, 2015. 27 borrowers were rated at or above the hurdle rate
I I internally. (d) The rating migration was not being monitcred at Corporate level
in respect of overseas accounts. (e) Valuation of collateral properties
xisting NPAS were observed.
,
I '
. ) " ' ?
Confidentiel Page 9 of 27
1 not done and fresh DCCO not fixed; (ii) Major terms and conditions of 1
1 restructuring not fuMlled for
I
asset classification benefit; (iii) Promoters' 1
personal/ corporate guarantee not given; (iv) Security perfection n d completed I
in terms of package-conditions, (v) Promoters' contribution not brought upfront;
(vi) Creation of pledge on unencumbered shares of the company held by
1 promoters not carried out; (vii) Performance of the company was below CDR 1
1 projections; (viii) Repeated restructuring; (ix) Ever greening of accounts; (x)
Round tripping of funds from other banks; (xi) Value-dating of credit
transactions. (b) System-driven NPA ~Iassiflcsttionwas lacking: (i) The statutory
auditors had issued MOCs for additional provision of ?208 mn for
I reclassification of 1257 accounts as NPA, short provisioning of 72718 rnn in
existing 172 NPA accounts and reversal of provision of ?355 mn for
I reclassification af 49 accounts as performing. (ii) It did not capture (
1 devclvemenU invocation of LCsl BGs, thus understating the NPA position of the I
bank. (iii) It had a functionality of excluding accounts from auto classification.
(iv) There was no system based NPA identification in overseas branch which
was not cavered under CBS. (c) JLF mechanism had some shortcomings: (i)
Fresh loans released in the TRA accounts maintained with the lead bank were
used for servicing of existing debt of the borrowers, rather than using the loans
for the purpose for which they were intended; (ii) All collections were not routed
through the TfiA accounts as directed by JLF; (iii) In some cases, re-
sckedulemant of ECBI conversion of ECB into rupee term loan and sanction of
the EPBG facility for repayment of existing debt as part of the approved CAP
( pre-dated the necessary regulatory approval. (d) Refinance under 5/25 scheme I
1 had some deficiencies: (i) A common feature observed was that moratorium I
( was sanctioned for periods ranging between three and four years. (ii) The I
1 amortization schedule sanctioned to the borrowers was ballooned with major (
I
portion repayable towards the end of the approved schedule.
(a) Deviations from policy benchmarks
1 sanctioning process were not monitored at the level of the Boardl RMC. I
Significant policy deviations atlowed in an overseas account, sanctioned for the
purpose of acquiring a company, had resulted in quick mortality. (b) Credit
Monitoring and Revkw Department (CMRD) was not monitoring in respect of
I
breaches, if any, in the tenor of S8LCs as prescribed in its own credit policy.
(c)The first status report on legal audit of 410 eligible accounts as on DPI, was
placed before the Board by CMw,.on June 2, 2045.The audit was pending 'in
1
251 accounts as on that date. (d) As on DPI, 5101 process notes1 review notes
1 were pending in respect of various ROs.(e) Ensuring adherence to sanction
1 I
1 terms of restructuring was poor in respect of restructured advances. (0 The I
I
controls in place for monitoring end use of project and infrastructure loans were
f ~ u n dto be deficient, Instances of debt raised being used for equity investment
I 1 in SPVs were observed. (g) Diversion of short term funds for long term I
I 1 purposes and vice versa, allowing borrowers to undertake unplanned
II
I ( expansion1 capacity enhancement without adhering to financial discipline/
I 1 financial covenants agreed to at he time of sandion of credit facility, I

I I repayment of existing debt by fresh borrowings from the bank as well as other
I
I ( banks were also observed. (h) lnstances of unit visits not being conducted, I
I 1 non-sharing of information with member banks of the consortium, non- 1
I ( fulfillment of pre and post disbursal sanction conditions, drawing power not I
I 1 being updated in the system, non-renewal of insurance etc. were also I
I 1 observed. (i) An affidavit-cum-undertaking from the housing loan applicants that (
I I he shall not violate the sanctioned plan, construction shall be strictly as per the 1
I
sanctioned plan or the built up property has been constructed as per the
sanctioned plan andl or buijding bye-laws was not obtained.
Reporting: (a) The capital market exposure reported in the annual report and
to the Board was overstatedl understated to the extent of 7674 mn and 41665
rnn respectiveiy. (b) The SMA accounts of London branch (45517 mn under
SMA-1 and 34835 mn under SMA-2) were not reported in CRILC. (c) The bank
was not able to extract MIS of undrawn limits from CBS.
3. Market Risk Aggregate Score:

1
r~ssessmentand Major observations
3.f Inherent Risk
m-~ooic Risk: The average level oftop th!ee PVOl in the Trading Book
I ( was significant in relation to the Tier I capital. The proportion of unlisted equity i
-4
I
was high at 37% ofthe equity porkfolio.
3.1.2 ank kin^ Book Risk: The impact due to 200 bps parallel shift in the yield curve I
was high at. 18.3% of NI I far the period and the corresponding impact on MVE
stood at 14% of net worth. The bank faced substantial risk due to embedded
710 mn was 20% and
al of t & h toanAwka28%
~ during the period.
. .-
Page f .1 o f 27
3.2.1 1 Policy Environment: (a) he policies were mainly concerned with the 1
1 operational guidelines end the risk limits - objectives of operations and the 1
I action I strategy far achievement of the same were not dealt witk in detail. It I
I
stated profit maximisation goal in very general terms and no views

for the
ensuing one year period, such as probable trends I scenario and the
corresponding respsnses, etc. were not specified. In the absence sf articulation
sf strategy, the same was left to treasury management to determine on day-to-
day basis. Similarly, strategic direction for the overseas unit's activities was
entrusted to the branch management. (b) The revision of limits were arrived at
based on a historical trajectov of parameters witk Iitile analysis an record. The
I revised values were arrived at by a markup over the exlsting value. The limits
adopted were therefore likely to' lose efiectiveness as control measures, sften
1 being far above the prevailing values. Significant spikes in the values were (
possible without causing breaches. For instance, revision of the VaR limit for
HFT G-secsl SDLs undertaken in December 2014, from 788 mn to ?I
000 mn
(1567%) was not adequaiely justified. {c) Though the set of risk limits would be
I1 considered adequate for the level of the market activity of bank, certain specific
deficiencies in the same included the following: (i) The VaR limit had been
I prescribed only for Central and State Government Securities under HFT )
1 category (ii) The stop loss limit in forex dealing had been specified in terms of 1
I lass per deal ticket, which would permit proportionately larger less in smailer
deal size.
3.2.2 Risk Identification B Assessment: (a) Given the fact that the
/ set with large allowance of margins, the absence of clear strategy formulation I
( could result in enhanced risk taking in market operations. (b) The multifactor I
I stress testing was very rudjrnentary (two factor), and scenarios have not been
I
I defined; reverse stress testing was yet to be initiated. The forex shocks were
I
( calibrated as markup of 15% of the maximum variation in rates in the past one I
) month period instead of absolute shock of 15%. No specific triggers were I
/ activated by market risk factors as these were not defined - only overall risk i
1 triggers in terms of capital floors are defined. Thus no specific action relevant to (
1 this area may be iniaated despite the contribution to overall risk. I
3.2.3 1 Controls: {a) The breaches of delegated limits by front office were routinely I
L
1 accorded post-facto approval without effective deterrents for breaches of bank 1 I
( level risk limits. (b)The bank was yet to undertake rate scans for transactions in 1
domestic securities. (GI The ITMS platform was not equipped to monitor stop
loss in forex deals on real time basis. (d) The broker deals in forex trading were
an the basis of unauthenticated plain text fax
authorized by the back office,
from brokers pending final confirmation. (e) The domestic and the forex
modules of the new platform ITMS which had both achieved "go live" during
this period had not: been subjected to comprehensive audit to assess
performance in prodllction environment. If) The farex transactions were
updated in CBS through an input file which required manual uploading thereby
permitting manual internention.
3.2.4 Reporting: Some of the limits stipulated in the market risk policy were not
reported except in case of breaches, such as the AGUlGb and the INR NOOP.
The computation of forex VaR and equity VaR were carried out on
spreadsheets/ other packagss. No remedial action, other than approval was
indicated for breaches sf risk limits. Further, all inputs from London office,
however, have to be manually incorporated in the MtS.
4, Liquidity Risk "Aggregatescore:-

) Major observations 1
1 4.1 1 Inherent Risk I
score: 1
4.1,1 Structural Liquidity: The bank had negative cumulative mismatch almost
I ( during all fortnights in FY 15 beyond 28 days bucket, which was, however, I

( 1 within the banks prescribed limit. It was further observed that the bank's I
I I approximately 42% of t h e long term assets were funded by short-term liabilities. I
( I The bank had high ratio of loans other than demand loans to total advances. I
1 Further, repayment from
1I
1 in 3-5year and over Syear bucket and as the asset quality remained under II
demand and term loans formed a major palt of inflow
1 1 duress, in all possibility the bank's liquidity gaps would bemrne more prominent
I
going forward.
4.1.2 Stress Liquidity: The fortnightly average of bulk deposits to total deposits was
1 1 on a higher side indicating the banks dependence on costlier and mare volatile I I
funds. The bank had a high reliance on unstable liabilities to its earning assets.
4.1.3 Concentration of funding sources: The bank was net lender during FY2015.
Also the major source of funding was deposits (84% approximately), wherein
the bulk deposits formed 55%, ,:which
: y was "concentrated in one to three years'
- ;>.>
0,deg'osito'rs.washighly concentrated
< ,
, -
' I A
Confidential Paue 13 of 27
1 4.1.4 1 Market Liquidity: During FY15, the bank raised deposits from the market on I
higher rates for short term buckets ( I D to 120D) in retail as well as bulk
deposits where the average cost sf bulk deposits stood at 8.9. The market
I 1 borrowings to total assets of the bank showed an increasing trend. I

1 Control Gap
I
4.2 Score:
I
was yet to implement its ~undTrensfer1

1 I Policy (FTP)and product pricing. (b) The bank needed to define tolerance level 1
1I I and remedial action to be taken on stress test results which were being put up
I to the Board and appropriate triggers to make its liquidity risk management 1
1 (effective.
I
I
1 4.2.2 Risk Identification & Assessment: (a) The bank was not factoring different
types of commitments I.@. revocable, nun- revocabte, eonditionality, roll over/
extension/ pre-closure of fixed maturity product, etc., while conducting
behavioural analysis of non-maturity products. Further, there is no distinction
made among different products/ customersf facilities, etc. (b) The bank was not
measuring the Liquidity Risk using what if swnariosl market wide disruptions,
and back testing of its liquidity sfress tests to determine the efficacy of liquidity
I I risk management was not condudad. The stress test results were not used for (
I 1 decision making process and na triggers, limits were established! revised in the
I
I I light of stress test results for taking any remedial action. The stress testing I
carried out by the bank did not incorporate any intraday disruption scenario. (c)
The bank has set a very high limit sf 55% and 65% cumulative mismatch for
I
3m-6m and 6m-ly buckets in DLS statement, and no clear rationale was laid
out to keep such a high limit. The limit was last reviewed in the year 2013 and
I 1 no justification was given for continuing with such a high limit. 1

1 1 e b a n l c d s to review its contingency Funding1-
11 ( mare frequent intervals, wnsidering the stress test results: however, no note I
1 was prepared and put up to Me Board for showing the interdependence 1
( I between CFP and stress test results. Central bank funding was considered as I
1 I one d the available resources in liquidity crisis mntary la extant instructions (
1 1 risk management systems in banks. The bank had also notidentified the
an
1 kinds of capital instruments to be issued in case of contingency and had not 1
I
I I prescribed the flow of information, hierarchy and reporting mechanism during I

1
1 1 severe liquidity stress conditions.
I
1
4.2.4 I Monitoring & Review: There was no process to monitor concentration of
funding from a particular source, tenure or instrument. The bank was not
I conducting any exercise lo examine the illiquidity embedded in its investment
portfolio. The bank had also not assessed haircut in case it had to dispose of
illiquid assets in the psrtfslica.
I
4.2.5 Reporting: The agenda items put up to ALCO were handled in routine manner
without l ~ ~ k i natgthe utilization of limits and analysis of liquidity profile of the
bank. The reporis were part up to the Board with considerable delay. Most of
the MIS and regulatory reporting for liquidity was manually prepared and
reported to different stakeholders,
-
5. Operational (Non- IT) Risk Aggregate score:- ,/'
A-
Assessment and Major observations

5.1 inherentRisk Score:
I internal frauds, large number of employee behaviour related customer1

5.1. I People Risk:(a) Lack of adequate I appropriate training, amount involved in
complaints, )
I I number of employee termination due to unethical behavior and vigilance cases I
1 I involving executives heightened banks people risk. (b) The bank had huge I
i 1 shortfall in employee strength vis-a-vis its own stated requirement. The people I
a
1 risk was further aggravated by increase in ernptoyee turnover and large scale
retirement during FY 2015-18 at senior management level exposing the bank to
I
1 I key man risk. 1
Risk: There were high number of Treasury deals /--\
> !
during the period due to errors (including those that have been ratified by
I _
1 1 senior management), and increased instances of KYC non-compliances 1

I 1 identified as a ratio to incremental customers. 1
5.1.3 1 External Risk: The external risk in the bank was reflected in (a) High amount
I
involved in external frauds by customers and non-customers as a proportion of

bank's profits. ($1 The bank had high number of instances of damage to
I I physical assets due to external events like burglary, etc. I

5.1.4 1 Compliance Risk: The compliance risk in the bank was reflected in the huge
I
number (54) of penalties amounting to 7169 mn levied by the Income tax

authorities for delayed TDS remitlance. However no proactive step was taken
, ,
Confidentiai Page 15 of 27
5.2.1 1 Policy Environment: (a) There was no policy for new product approval a n q
I
the same was not anajyzed far legal and reputational risk, The decision
regarding approval authority matrix, the product's risk assessment and review1
stop triggers, expected breakeven point and milestones, target customers and
markets, requirement sf adequately trained staff, etc. were not articulated. (b)
1 The bank had no policy on mandatoly leave and exit/ .separation. (c) No I
I enterprise wide policy on BCP was put in place during 2014-15.(d) The bank I
1 did not have a Board approved policy for enterprise wide insurance (
1 requirements. (e) The policy on complaints/ grievance redressal was isst (
updated In June 204 I.Quarterly notes on complaints were put: up to the
Customer Service Committee of the Board with delay ranging from two to three
I months. (9 KRI policy was approved in 2008 and has not been reviewed since I
and is not being monitored by the Board. (g) There was no mechanism to
report near misses. No threshold for reporting losses was prescribed. (h) There
was no system of doing reconciliation of Loss Data with accounting and .
financial data. (i) The review of policies (e.g. KYC policy, Complaints policy, all
policies emanating from RMB) was done with delay of two to three months. 0) I
1 No framework was put in place to condud exit interviews. ( k ) Job rotation was 1
1 not implemented even for sensitive desks. I
-1 Identification & Assessment: @)Thecomplaints related to deficiency in I
service, loans disbursement, locker operations, bank guarantees, updation of
KYC, etc. have increased Y-o-Y and root cause analysis done did not lead to
I identification of any gaps, {b) No framework for simulation of external events
II
1 and quantification of losses and consequently na scenario analysis was
1 observed. (c) No inter-linkage between the stress analysis and review of I
test
,I policies1 proceduresf business plans existed. (d) In the absence of external loss I
I data, the operational risk framework was inadequate in creating scenarios, I
reporting of results, back testing and monitoring of corrective actions. (e) Risk
profiling and risk caiegofization was incomplete. (f) Persistent delay observed
in detection and reporting sf frauds (166 out sf 237 frauds reported after with
delay. (g) Beneficiary1 Remitter details were not recorded in respect of 15049
inward *remittances.The A.B. branches were using csllectionl parking accounts
for crediting/ routing the forex inwardloutward remittances. (h) Manpower
1I planning was not a forward looking exercise to identify skill gaps and with the
1 promotions being stalled the need for manpower in middle and senior 1 ,
1
r ..
F,
) managerial levels got accentuated.
5.2,3 Controls: (a) No compliance risk assessment framework and no inter linkage
/ I existed between legal and compliance risk with Compliance Department being I
severely understaffed. (b) The note on manpower planning was put up annually
to the Board, albeit, with less emphasis an identifying gaps in skills. No
I 1 comprehensive planning for human capital existed. (c) No periodic assessment 1

of the training needs of the employees was done. (d) barge scale KYC
violations like absence sf risk categorization of accounts, non-filing of STRs,
I / non-conduct of due-diligence on importer and overseas supplier, etc. were 1

I 1 observed in advance import remittance transactions handled by some 1
branches. Such importers had structured these transactions (below the
threshold of USD 100,000) deliberately to take advantage of the regulatory
I I relaxation and the bank had permitted such remittances without verifying their I
I ( genuineness. Even the controls had failed, as neither the abnormal spurt in I
( I these transactions in the current year vis-a-vis the previous one generated any I
alerts, nor did the concurrent audit of these branches report/ detect the
irregularities. (e) The quarterly review notes on KYC I AML issues put up to the
ACB did not contain information regarding periodical updation sf KYC. (f) The
I I bank has implemented 18 out of 22 transactions based alert scenarios for I

monitoring of alerts. The remaining four ate pending for more than a year. (g)
The bank identified KRls which were not aligned to the business plan. (h) The
1 1 incidents of frauds, particularly those with staff involvement, had increased. (i) (
1 1 The responsibility of adherence lo regulatory guidelines was decentralized. The 1
1 1 delay in submission of compliance and closure of reports by branches/ ROs 1
1 pertaining to various audits and closure of reports despite several items
1 remaining open, reflected inadequate oversight by/ over the ROs. 0) 76 staff
vigilance cases were pending of whieh many were against officers in Scale IV
and above. (k) Officers in lower grades were heading as many as 181
branches. (I) Occurrence of frauds particularly those related to credit had
increased. Police complaints were not been filed in 78 out sf 239 fraud cases
5.2.4 Monitoring & Review: There was no framework to assess the insurance cover
requirement to cover against operational losses and same was Jeft to individual
Confidenfiat Page f 7 of 27
manual intervention for generating of internal reports was observed in many
areas. (c) There was no policy/ framework for reviewing extraction logic of the
reports to ensure integrity of data. (d) The bank's framew~rkfor MIS reporting
was inadequate in ensuring timeliness and integrity of information provided to
Board and senior management. (e) In the absence of a dedicated RBS cell,
collection of data/ information was hindered. Delay in submission of data
pertaining to all the three tranches was observed. (f) There was no mechanism
in place to ensure correctness of the regulatory returns and the same was left
to the operational functionaries.
6. Operational (IT) Risk - Aggregate Score:

I Assessment and Major observations
I
6.1 .I IT Financial Risk: The percentage sf IT expenses had increased from 3.45%
1 1 to 4.44% of total operating expenses on account of requirement of hardware 1

1 1 and software for increase in number of branches.
I
I
6.A.2 IT Operational Risk: The bank had not completed the process of reconciliation
1 1 in two out of nine systems having upstream and downstream interfaces to a 1

1 1 core system. The number of bugs (programming and database related) or 1
1 1 identified during the period in the bank's IT systems and applications was high 1
I I indicating the susceptibility of the systems to process lapses. I
1 6.2.1 1 Policy Environment: Though the bank had enumerated in their Vision 2020 to I
I 1 improve IT related services and products, the same was not reflected in IT I
'C? I 1 policies and no roadmap was drawn up in the form of IT strategy. There were
I1 I pending issues for compliance in IT strategy implementation in respect of I

Iregulatoly changes such as addressing Gopalakrishna Committee)
1 1 recommendations, automated vulnerability assessment tools, etc. Certain

II
1 I software which had become obsolete had not been removed from the inventoty.
1 1 Few deficiencies in IT operations were not documented, such as steps of I

1 1 problem escalation/ resolution/ monitoring for all IT applications. The bank was I
1 1 not taking any formal feedback after updating new OS patches in the semen. IT I
1 1 Steering Committee had not been functioning throughout the year though it was 1
I I supposed to meet every quarter. i
/ 6.2.2 1 Risk Identification & Assessment: (a) The bank did not have a patch 1
I
* .I.
1 management policy. T k procedurefor updating IT security related and1
critical
patches were given in 'Information Technology Security procedure' document.
(b) During the financial year, 566 bugs were found which is relatively on a
higher side. The process of handling bug and further reporting and feedback
was net documented anywhere. (c) Of the 118 employees working in DIT, only
22 were trained in IT areas.
Controls: (a) Only 169 out sf 229 recommendations of Gopalakrishna
1 1 Committee recommendations were complied. 34 reports on these /

1 I recommendations were said to be not applicable/ feasible to the bank. (b) T h e I1
strategy meeting did not review the progress of various IT projects under I
progress at different stages, (6)Insident reporting and management was non-
functional. The bank had not undertaken any financial impact analysis of the
bugs identified.
Monitoring d Review: (a) Capacities between DC and DR are not similar. The
system of backup and archival was not reviewed by bank's officials during the
year. (b) Compliance to the Vulnerability Assessment and Penetration Testing
(VAPT) conducted by an external agency in the month of June 2014,required
I 1 be completed within a month was completed only by December 2015,even I

10
/ / though there were 54 'High risk' paras. As the bank did not have automated I
1 1 vulnerability scanning tools, it was done manually. The report on results of I
1 / BCP/DR Drill1VAPT was furnished RBI on half-yearly basis and not quarterly I
to
basis. (e) A few IT related outsourced egencies were not audited as per extant
instructions.
Reporting: There were no well-defined MIS for bug
issues at branches, progress of IT projects,.etc., generated and pert up to the
( / higher authorities. Repoding about breaches and data submission was done in 1
I
an informal way.
I
7. Pillar I1 Risk - Aggregate score:-
I Assessment and Maior observations
1 7.1.1 1 Strategy Risk: The bank's strategic risk was driven mainly by a high deviation 1
I
.* .' / 1 of 21.90% from projected PAT as also-a very low contribution of Commission 1
Confidentid Page f9 of27

with high number of 60 cases awarded against it carried reputation risk for the
bank.
Control @ap
I
I
score:
Policy Environment: The ambitious long term strategy was limited to only
achieving a particular business target by the year 2020 and did not specify
targets far market share, customer profile and product profile. The half yearly
variance analysis put up to the Board failed to capture and assess the pressure
on capital positi~nin achieving an ambitious strategy. There is no policy for
group risk, pension obligation risk and model risk. The same is not covered
under stress testing framework. There is no capital assessment based on these
risks.
Risk Identification & Assessment: There was no system in place for updatiz
of the strategy according to business and ee~narnieenvironment outlook. The
business pian was not updated in view of the non-achievement of the key
targets of the long term business plan. Other PillarBI risks like pension obligation
risk, group risk and model risk have been adopted only in theory and no
framework for assessment of the same has been articulated by the bank. There
was no MIS to assess the strategic risk and reputatisnal risk in the bank. A score
card method has been developed to capture the two risks, however, the same is
designed on ad-hoc basis. The bank did not take into account possible loss
events, peer group comparison and risk management for assessing reputafional
risk.
Controls: (a] The bank had not established limits1 triggers to identify problem
situations and corrective action to be taken for managing reputation /strategic
risk. There was no crisis management and response plan for managing adverse
reputation events and the same was left to the concerned ROs I functional units.
(c) Other than putling up newspaper reports, there was no mechanism to track
social media.
Monitoring & Review: No mechanism was in place to monitor reputation risk
and strategy risk. Other than the financial performance review, no system, of
reviewing the risk arising out of an ambitiaus plan was in place.
Part [I: MAJOR AREAS OF FINANCIAL DIVERGENCE
The summary of major areas of financial divergence, including assessed risk weighted
assets, which determined assessed capital of the bank, is given below. Details are in
Annex1 .
'I, Divergences (shortfall) in Provisioning
No. of Outstanding Shortfall or Remarks*
borrowers amounts Additional
provision
required
(In Tmn)
Failed nstructcrring.
Standard Loans as 1 572 Para 12.2.4 of M C on
Performing Loans 2 907 880

Non Performing
Investments 0 0 0
Sub-total (NPAs)
provisions I accounts1 3 1419 1192
oufstahding
Shortfall in Standard 1
Asset Provisioning
0 I
Overstatement Over statement of
Income % Other Assets 1 605 profit pertaining t o
sale ofloan accoun
Understaiernent of
Expenses I Liabilities
Others (to be
specified)
Total additional
provisions I accounts/ 4
outstanding
2. Divergence in Risk Weighted Assets JRWAs)

I I As per As per I Shortfallf 1 I
SSM adjustment 1 Remark
1
] Risk weight w.r.t Future Retail Ltd
wrongly applied for unrated shod
1 Credit Risk - 361943 1381450
term cla~rn(7148 mn) and after
I
(493) adjusting m e change in risk rsimt
1 on account of NPAs identified by
RwA
---L I SSMF641 mn)
I
Operational
109108
Risk - RWA
*.; ,
c Part Ill: ASSESSMENT OF CAPITAL AND EARNINGS
Pillar I Capital & CRAR
I.
The summary of reported and assessed capital position of the bank as on March 31,
2015 is given below. Details are in Annex 4.
Basel Ill Capital under Basel Ill (In 7 mn)
Reported Assessed Divergence Reasons for

divergence
Total capital (TC) 168912 167115 1797 TC reduced on account of
(I) additianal loan loss
Common Equity Tier 1 provirion of 1192
120703 118906 !797
million, {ii) wrong
(CET1) capital appropriation of proflt of
Tier 1(TI) capital 125606 123809 1797 T 605 mn pertaining to
sale to ARC,
Tier 2 (T2) capital 43306 43306 0
Basel Ill CRAR under Basel Ill (in %)
Particulars Reported Assessed Divergence Reasons for

divergence
Totat capital (TC) 10.54% i0.43% 0.11% 1. TC reduced on
account of (i) loan loss
provision , (II) over
Common Equity Tier 1 7.53% 7.42% 0.11yo appropriation of profit
(CETI) capital due to sate of ane loan
Tier I(T1)capital 7.84% 7.73% 0.19% account to ARC
2. RWAs Change on
account of
Tier 2 (T2) capital 2.70% 2.70% 0% mlsclassification and
revised risk weight an
NPA identified by SSM
2, Capital Management, ICR, ICAAP and Stress Tests
(a) Bank's Capital Planning and Business Projections

(i) The business strategy was not aligned with the risk capacity, risk appetite and capital
7 p -
planning. Board while approving the long term business strategy did not analyze the
impact of the increase in business on the already distressed capital scenario of the
bank. Although the board note articulated the capital projections fill 2019-20, the same
was not updatedl reviewed given the fact that the CRAR had reduced fmm 11-41% in
2013 -14ta 10.64% in 2014-15.
(ii) The business projections were made from FY 201 5 to FY 201 9 with around 18-19,%
growth in balance sheet site each year. The bank aimed at deposit growth of 16-17%
and advances grawkk of 19-28% during FY 2015.
(jii) There were no projections made under different scenarios like opfirnjstic, :,,-,.
(iv) The bank had not undertaken an exercise to determine capital requirements of
various business segments considering the business goals for FY 201 5.
(b) Assessment of Pillar I & I1 Capital and Internal Capital Ratio
The reported and assessed CRAR as on March 31, 201 5 were 18.54% and 10.43%
respectively. In addition to this Regulatory Capital Ratio (covering pillar I risk), the bank
had calculated the additional risk weight of 54QQ110rnn for pillar I1 risks and capital of
T 36010 mn. The residual credit risks were not considered under pillar il risks. The ICR
of the bank stood at 12 % including Pillar 11 (9% for pillar I and 3% for pillar II risks).
With G M R as on March 2815 being at 10,54% (although above the minimum
regulatory requirement of 9%), the bank was in the immediate need to raise capital to
meet its risk appetite.
(c) ICAAP
Gaps found in ICAAP were: (i) ICAAP was not subject to any ICAAP assessment
committee. (ii) ICAAP validation exercise was merely a theoretical exercise instead of
being a value addition. (iii) The risk appetite tolerance limit was linked to regulatory
prescriptions and not on the basis of any scientific methadology. (iv) though the stress
best results indicated sharp increase in capital charge for IWRBB and credit
concentration risk in severe scenario, the need for prcavidihg additional capital was not
examined, as part of I C m P (v) There was no mechanism to review ICAAP outcomes to
evaluate the sensitivity sf the key assumptions and to assess the validity of the bank's
estimated future capital requirements. It became an annual compliance exercise
instead of acting as an integral part sf the management and decision-making culture of
the bank. (vi) ICAAP did n ~take
t into account the compliance risk, country risk, legal
risk, etc. (vii) Risk appetite was defined only in terms of C M R and Tier 1 ratio. (viii)
For defining risk appetite of the bank, the bank had set targets such as C W R as 12%
for the last two years, witkt h e non-achievement of targets, no revision of the same was
done. (ix) The validation exercise of the I C M P was limited to obtaining a validation
certificate from Inspection Department. (x) No additional capital charge was articulated
for Reputational Risk, Strategic Risk, Pension Obligation Risk, Country Risk, Legal
Risk, Residual Risk, Model Risk, Compliance Risk, etc. (xi) Long term Strategic Plan
2020 was not factored while making ICAAP assessment. (xiit There is no board
approved framework for assessment of strategic and reputational risk.
m
(d) Stress Testing 7 .
r
(i)The bank had revised the stress'& guidelink 2015 with a delay of
more than a year.
-
<
_.I .
(ii) Stress test policy did not cover pension obligation risks.
(iii) Other than concentration risk, the additional capital requirement for Pillar II was not
identified.
(iv) The Gross NPA increased by 40% during 2814-15; however stress tests did not
articulate the impact of the same.
(v) Stress test did not lead to any further analysis of business decision.
3. Assessment sf Internal Generation of Capital

The details of the components of income contributing to the internal generation of
capital are given in Annex 5 :
The gross stable income and net stable income saw an increasing trend over the past 3
years. The gross stable incame grew by 16.30% and net stable income grew by
24.80% over last year. The gross votatile income increased by 127.05% an account of
;T.. increase of 316.09% in income from trading. Provisions exceeded the gross volafile
income; however, the gap between the two is decreasing in the last three years. The
assessed net volatite income reduced by 19.57% due to increased credit provision
suggested. The reported profit of the bank was T 1 5229 mn which registered a decline
of 11.02% over last year. The notional surplus (pending full realization sf SR
redemption proceeds) of 7 605 mn arising out of sale to ARCS was inappropriately
taken as income to P 8 L N c .
4. Scope & ability to infuse capital

As per BASEL Ill guidelines, the bank has to maintain a minimum of 11.SO% CRAR by
the year 2019 including Capital Conservation Buffer (CCB) of 2.50%. As per the ICAAP
the bank has targeted to attain a C W R of 12%. The shortfall is T 55,500 mn. Based on
the projected business level at March 31, 2016,the bank needs Tier I capital of f
49,000 rnn to attain leverage ratio of 4.50016, The bank has obtained approval for 7
18008 mn of AT I bonds and S20,000mn of equity. The bank in 2814-15 had raised 7
10,000rnn Tier II bonds. The bank had obtained permission for raising AT1 bonds up to
Pl0,000 mn; however, the bank could n d raise the same due unfavorable market
condition. The bank had received capital infusion amounting to 7 4600 mn from Gol.
The bank is not in a comfortable position as far as raising ~f Tier I capital is concerned.
The bank has a credit rating of AA- which may also hinder the prospects of raising
market equity, particularly institutional investors. The bank is expecting 7 50QO mn from
Gol in 2015-16. t$w4>:.
5. Assessment of Leverage Ratio
The bank reported a leverage ratio of 3.88% as on March 31, 2015 as against the
leverage ratio of 3.92 % repoded in the previous year. The deterioration was on
account sf 20% growlh in exposure as against a Iesser improvement in Tier I capital.
The document on I C M P did not discuss the leverage ratio, indicating the bank's slow
pace towards achievement of Basel Ill requirements. Incidentally, the leverage ratio
maintained was less than the minimum transitional requirement of 4.5% as prescribed
under Basel Ill. The assessed leverage ratio as on March 31,2015 is 3.83%.
h". .
Confidenfial Page 25 of27

PARTIV: MAJOR AREAS OF NOM-COMPLIANCE (REGULATORY GUIDELINES)
I Regulation Area I Subject of Nature 2% Description of Non-
Reference (Para Non-Compliance Compliance
&Circular no.)
Section V para 1 Foreign investment in In respect sf some FDI transactions for
(i) (ii)and (iii),and lndia issuance of shares, equity instruments
para 2 (iii) of RBI, were not issued i.e., not within 180 days
FED, MC on from the date of receipt of the inward
Foreign remitlance; Farm FC-GPR was not fiIed
Investment in through the bank; The sale consideration
lndia dated July in respect of equity instruments purchased
1, 2074 by a person resident outside lndia and
remitted into lndia was not subjected to
KYC check by the bank at the time of
receipt of funds from the non-resident
bank.
Para B.8 of Advance payment Proof of export was not obtained in
Master Circular against exports respect of advance remittances sent for
on Exports sf exports (this observation is based on
Goods and checking a sample size of 3780
Services dated remittances made in tYvs months i,e. April
July I, 2014 and May 2014 of which exports were not
made in 14.38%). Similar observations
were reported during branch inspection of
some A.D. branches.
Para 2.3 (a)(ii) Know Your Customer The bank has not completed risk
and 2.3(b) of (KYC) Norms / Anti- categorization in nearly 10% of accounts
DB0D.AML.BC.N Money Laundering in all its accounts.
0.22114.01.0oii20 (AML) Standards I
14-15 dated July Combating of Deviations observed as risk profiling was
I, 2014 Financing of not complete and nearly 10 % of the
Terrorism (CFP) I accounts were pending for risk profiling.
Para 2.4 (e) of Obligation of banks Dummy entries in the system pertaining to
circular ibid under PMLA, 2002- passport number
Customer
Dummy PAM in system , address not
Para 2.4 (b) of available, customer identification not
circular ibid complete
Para I.(v) af Master Circular on

RPCD.CO.Plan.B Lending to Priority misclassification details in table XI
C.10/04.09.81120 Sector-Priority sector
14-15 dated July lending
Regulation ~rea-1Subject of Nature & Description of Non-
Reference (Para Non-Compliance Compliance
&Ci rc ular no.)
16113.03.00/2014 resped of lending
-1 5 dated July 01, under consortium
2014 arrangements for
1
multiple banking
arrangement
Para 6 of Frauds - Police complaint not filed in 78 out of 237
DBS.FrMC.BC.No Classification and 1 cases in 2014-15
.7/23.04.001/2614 Reporting-Guidelines
-15 dated July I, Far Reporting Frauds
2015 To Police/CBI
Para B.14 (i) and Direct investment by Instances of delay in reporting ! non-
para 2, 3 (d), 10 & residents in JVI WOS reporting of the initial OD1 remittances, to
<--j
I 1 of Pad II of ' abroad RBI and non-obtention of proof of >-.
MC on Direct investment in the overseas JV/ WOS, non-

Investment by filing of APR were observed.
Residents in JV /
Wholly Owned
Subsidiary (WOS)
Abroad dated July
I,2014).
Para 3 {d) part II Direct investment by The repod of disinvestment
of MC on Direct residents in JV/ WOS overseas JV was not filed in OD1 Part IV.
Investment by abroad
Residents in JV I
WOS Abroad
dated July I,
2014).
Para 4 and 4.6 of Guidelines issued Foreign currency donations received by
DB0D.AML.BC.N under Section 36 (7 a) some trusts! religious organisations were
0.23114.08.001120 of the Banking not reporled to Government of India,
t4-15 dated July Ministry of Home Affairs.
Regulation Act, 1949
I , 2014. - Implementation of
One of the trusts was not having valid
the registration as required, vide, Section 11
provisions of
of F E W 2010, while in few other cases,
Foreign Contribution
(Regulation) even though the transaction amount was
Ad,
2010. one crore and above, the same was not
reported within 30 days as required vide
para 4.6 of the circular ibid.
Para 2 of A.P. External Commercial: FEMA provisions applicable to re-
(DIR Series) Borrowings Policy : sckedulement sf ECB limit parked at
Circular Reschedulement of London branch, in respect of a borrower
No.128 dated EGB were nut examined at the time of appraisal
May 9,2014 of the restructuring proposal as required.
Coplfidential Page 27 of 27
Syndicate Bank - Annex to RAR
PART V: ANNEX to RAR

(All figures in the Annex are in T mn)
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A - Re-classification of Standard Assets (Fresh NPA)

, -
Borrower . , Date -,(,Facility
Type -NetOut Classification ' 1SecbrityIaIri Provision Remarks
Name of (indicate as Standin ation details
Last either Fund g ( Net ..< . .
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Sanct ;.. -of
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Claims)
-- - .I Bank :] , . , ,,
29- 512 I NIL I 03-Jul- The installment due on

Mar- October 3, 2014 was wt paid
14 till March 31, 2015 (DPI) and
was subsequently paid on
April 16, 2075 when SBLC
was released and which was
not permitted in view of para 4
and 5 of RBI circular no.
DBOD.No,BP.BC.I 07121,04.0
4812013-14 dated April 22,
2014, Since the account was
restructured earlier, it's a case
of Failed restructuring as
per Para 12.2.4 of MC on
IRAC norms.
Total
Page X of 11
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Syndicate Bank Annex to RAR -
Table-11: Divergence in RWA
'As per As per

bank SSM Shortfall . Remark
Risk weight w.r.t Future Retail Ltd
wrongly applied for unrated short
term elairn(P148 mn) and after
Credit Risk - RWA 1361943 1361450 (493) adjusting the change in risk weight
on account of NPAs identified by
Market Risk - RWA

--- SSM (?641 mn)
0 131434
131434
Operational Risk - RWA -109108 -1891Q8
Totat RWA 1602486 1601992 (493)
Table-Ill: Priority Sector Classification
SI Parameter Amount reported..by .. M'tsclassiflca Actual Shortfa Reasons for ,
. - s bank
. -
-- tion Ac hieveme II dedassificati
N Target Achieve$ . , :
Identifiodby ,. ntas on
o SSM:-, . assessed
, . by SSM .- - ... ., -
- . . .- >.
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C^
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.:-. - . .. , >: :
.Staff loans
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Total 56694T!,':-,;,4 572814 5727 12 .:, .
!,.,
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,+:r,,,:k:b-were
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1 Priority 102 :.\n@rporated

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(48.41%) (40.41%) 1, : .v+:~:.;:!:.,~~,nfirioriw
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;sector
Total 255120 262054 ' . , .
., .
,
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Agriculture ;-(18%) j - . (1 8.49%)

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(3.32%)
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As per Bank , ,
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Adjusted Net Bank Credit (~reiious Year) 1417367 1417367

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Page 3 of 11
Syndicate Bank -Annex to RAR
Page 4 of 11
, < - . < .- ' .-

..
<
" - %
.
I
1
Sr.
No. Particulars Amount
A Paid up capital [including ESOP outstanding & interest.
free funds from H.O. (foreign banks)] 6621
B Reserves and Surplus I14331
Statutory Reserve 33830
Share Premium 16801
Capital Reserve (excluding revaluation reserve) 1416
Special Reserve 13636
Revenue Reserve 42836
General Reserve 581 2
Investment Allowance Reserve 0
Remittable surplus retained in Indian books [Foreign
banks] 0
Credit Balance in P&L A/c 0
Any other free reserve (to be specified) 0
Intangible assets (including net deferred tax assets) &
accumulated losses /- 0
D Reported net worth [A+B-C] 120952
E Adjustments following inspection findings 1797
Investment Reserve Account 0
Additional Loan Loss Provision 1192
Shortfall in Standard Asset Provisioning 0
Net Deferred Tax Asset 0
Understatement of Liabilities 0
Any other Item to be specified(over appropriation to P&L
on account of sale of loan account of Hotel Leela Ventures
to ARC 605
Assessed net worth or reallexchangeable value of paid
up capital and reserves [D-E] 119155
Page 5 of 11
Sr. Particulars I Items e Eligible

No. amount
Computation of Common Equity Tier 1 capital (CETI)

A Common Equity Tier 1 capital (CETI): instruments and reserves 120952
before regulatory 1supervisory adjustments
I
I I
B 1 Total reaulatorv adiustments Ideductions 1 249
D Adjustments 1deductions applied on CET Ifollowing Inspection for 1797 ""

Supervisory Evaluation (ISE) findings under RBS
1 Additional Loan Loss Provision 1192 -

2 Shortfall in Standard Asset Provisioning
3 Understatement of Liabilities
4 Net Deferred Tax Asset
5 Investment Reserve Account
I I risk weight misclassification and inflating of profit due to over

appropriation of profit
Computation of Additional Tier 1 capital (ATI)

F Additional Tier Icapital (ATI) : instruments before regulatory 5411 -
+
/
adjustments
G Total regulatory adjustments to Additional Tier 1 capital 508
1 Net Deferred Tax Assets

2 Anv other item to be s~ecified
I: j... . . Comeutation of Tier 1 Caeital (TI1 .I . . I
Computation of Tier 2 Capital (T2)

M Tier 2 capital: instruments and provisions . 42- 44760
N Tier 2 capital: regulatory adjustments z.q*] 1454
L\D.OF,k?) $1
t Syndicate -Bank-Annex to RAR
2
upervisory Evaluation (ISE) findings under RBS
Page 7 of 11
..
Z
;
Syndicate Bank- Annex t o RAR
. . .
. .. . ... ... . .. . ..
..................... ;,: . . . ... .... . . . . . . . . . . . . . . . . . . . . . . . . . " . . .:./. . . . . .. . . . . . . . . . . . .
_
:.% :
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"7.::
:..,.., :
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.......
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.l.:.< . ... . ..'.. ..,'. . .;
. ?':. . ..... ...........
. ,,; ... .r <.. ..
Sr. No Break-up
.. . ofincome
. and expenditure ... . . :: Current FY w
FY T-1.; iFY T-2
. .
T ( ~ a r - 1 4 ) "(~ar-13)
. . . . ... . .. . . . . . :. . . . . . . .
.... : .
.:... ..
.....
(Mar 15) . . .....
.., ' , :.
1 Total lnterestldiscount Income 216152 I86203 " 171207

(2+3+4+5)
2 Interestldiscount on advancelbills 161200 144196 135245
3 Income on investments 48897 37814 32312
4 Interest on balances with RBI 235 52 35
5 Interest on market lending1 Income on 5820 4141 3616
I I other interest earning asiets I I I -.I*.
1
I
6 Fee based & stable misc. income

[6(a)+6(b) 10252 8473 8112
6a Fee based income 8825 5668 5457
I 6b 1 Misc. income from stable sources 1 1427 1 2805 1 2654 1
7 Gross stable income 226404 194676 179319
e (1+6)
8 Interest Expended (9+10) 160949 130805 116666
9 Interest on deposits1all other interest 152849 126142 112670
1 I expense I 1 I
I
10 Interest on borrowings 8100 4663 3996

I1 NetStablelncome(7-8) 65455 63871 62652
12 Income from trading 6570 1579 1252
13 Realised gains on derivatives 2 3 6 -q:
14 Gains on sale of asset (11 10 0
15 Recovery from wloffs 3302 2134 1500
16 Extra-ordinary income1 Dividend income & 971 ,1050 873
other miscellaneous income
17 Gross volatile income 10844 4776 3632
(12+13+14+15+16)
1 18 1 ~ r o v i s o n and
s contingencies 1 19673 1 18799 1 18853 1
(excluding tax) (19+20+21)
19 Provisions for Loan losses 16216 9767 11091
20 Provisions for depreciation in (161) 2028 (1711
investments1NPI
21 Other provisions 3617 7003 7933
22 Extra-ordinary expenses,, .r~ - .i. 0 0 0
23 Write-offs 441 397 8
Syndicate Bank -Annex t o RAR
Earnings Stability I Volati!ity Assessment , .
Sr. No Earnings I Profit Ratios Current FY FY T-1 FY T-2

T (Mar-I 4) (Mar-?3)
(Mar 15)
47 Net Interest l n e ~ m e[I
-81 (NII Growth
Rate) . .. 55203 55398 54542
48 Share of Interest, Fee and Vesatile
Income [I :$:I71 91:04:05 93:04:02 94:04:02
49 Gross Stable Income / Interest Expended
-
50
- [718*1QO%]
Nel Sfable Income I Assessed Profit
j48.83% 553.70%
[I 1/43*1OO%] 487.91% 415.85% 335.19%

51 Gross Volatile Income / (Provisions &
Contingencies + Extraordinary Expenses
1- Write-offs) 117f(18+22+23)"1DO%] 53.92% 24.88% 19.25%
52 Assessed Net Volatile Income I Assessed
-
53
- Profit [34/43*1DO%]
Reported Retained earnings I Reported
(82.391% (88.71)
Profit [45/42*100%]
79,57% 79.93% 79.88%
54 Assessed Retained earnings I Assessed
Profit [46!43*7 68%]
55 Actual vs budgeted income [expressed as
+ve / -ve percentage]
56 Actua! vs budgeted profit [expressed as
tve / -ve percentage] 11.43% 7.23%
Page 10 of 11
I Annex 6: Levprage Ratio pnnder Basel 11%

I L*
,, :<
- .,
:> - :-
-
B Leverage Ratio Exposures 3233604
- 3231807
On balance sheet (excluding 3831353 3031353
derivatives and Securities Financing
Transactions
Derivatives 28891 28891
Securities Financing Transactions 0 0
Off-balance sheet exposures 173360 173360
Any other csrnponent(Divergence
identified by SSM)
LC Leverage Ratio (AIB*100%) 3.88% 3.83%
Page 11 of 11
SYNDICATE BANK
(Financial position as on March 31, 20f6)
. .,;
! I , -
Confirfential , ,, Page 1 of 36
Table of Contents
Introduction........................................................................................ 3
Part I: Risk Assessment ............................................... 3-28
Summary of Aggregate Risk at Bank Level ................................ 3
Supemisory Evaluation of Risks and Control Gaps....................... .. 4
Governance & Oversight...............................,....................... 4-72.
~7.
' ?
Credit Risk ......................................................................... 12-17
Market Risk........................................................................
Liquidity Risk ......................................................................
Operational Risk ......................................................
- - .
Other Pillar L I Risks..............................................................
- -. ...... . . , - .
Part 11: Capital Assessment ( including Earnings)

Pillar I Capital & CRAR ..........................................................
Cap2al Management, IGAAP and Stress Tests ...............................
Assessment of Internal Generation of Capital.............................
Scope & Ability to Infuse Capital ...............................................
Assessment of Leverage Ratio................................................
Supervisou Capital Prescription., ...........................................
Part Ill: Compliance Assessment
... . . .....................
A. Compliance Culture .............
B, Major Areas of Financial Divergence..............................
C. Major Areas of Non-Compliance.........................................
Annexures
Annex-1: Major Areas of Financial Divergence ...........................
.*-*I '"
Annex-2: Computation of Outside Liabilities. ...................

Annex-3: Assessed Net Worth.. .......................................
Annex-4: Computation of Assessed Capital........................
Annex-5: Assessment of Internal Generation sf Capital..
Annex-6: Leverage Ratio........................................................
i
Note : All figuresin the rwort referto pasition ofthebank as on March 31, 2016 or for the period April 7, 2075
60 Mefch 37, 20 T6 and figures in parenthesis refer to carresponding previous year position U ~ ~ athenvise
S S
s~ecified.
r IMTROOlsCPlON
The Preliminary Risk Assessment of Syndicate Bank for 204 5-4 6 under the Supervisory
Program f ~ Assessment
r of Risk and Capital (SPARC) was completed with March 31,
2016 as the reference date. The assessment has been made based on the off-site
analysis af the data and information furnished by the bank as well as the findings of the
on-site Inspectian far Supewisory E~valation(ISE) undertaken from August 40, 2016 to
October 13, 2816 and various explanations offered by the bank during the course of
inspection. The critical observations emanating from the inspection of Branches B Head
Office under Section 35 of the Banking Regulation Act, 1949, are also incorporated in the
report,
qi
'- " As per t h e SPARC process, the Aggregate Risk Score of the bank is arrived a m
which is indicative sf High risk. On applying the assessed CRAR 10.907% to the
aggregate risk score, the Risk of Failure Score of the bank is arrived at-
PART I: RISK ASSESSMENT

..
Risk Category Aggregate Risk

SUPERVISORY EVALUATION OF RISKS AND CONTROL GAPS
1. Governance and Oversight: Aggregate score=
v
Major oboervatians
I
7. I Board Score:
Promoters' Sharehotding:
Pursuant to capital infusion to the extent of ?74QO million and T7760 million in
May & September 2016 respectively, the Government of India" stake had
increased from 65.17% as on March 37, 2016 to 72.92% of total paid-up equity
capital as at September 2016.
-
Board Composition and its ~ u n c t h i n ~ :

(a) There were four vacancies in the Board, including the position of directors
with special knowledge or practical experience (under Section 9(3) (h) of
Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970),
affecting t h e composition of Board level Sub-Committees.
(b) There was no mechanism in place to assess the skilllknowledge gaps of its
Board members. N ~ n eof the directors were provided training in risk
management area.
(c) The Board was ratifying various policies, which not only contained broad
policy objectives and risk limits but also process and procedural documents. Any
amendment to the existing processlprocedure, therefore, necessitated Board
approval. Such a practice not only impinged upon t h e Board's time but ahso
resulted in delay in changing the procedural guidelines.
(d)The Board's involvement was found to be inadequate as evidenced from- (i)
Various policies (Operational Risk Management Policy not reviewed since
2008/2009, mark& risk policy not reviewed in 2015, credit risk policy nOf
reviewed in 2014, etc.) were not reviewed by the Board at annual rests, thus
denying the benefit of incorporation of changes in macro-economicsituation and
changes in business strategy/ohjectives, etc. ( i i ) The compliance to the Board
directions was not satisfactow (compliance to 40-50% of 'the action points
indicated that the Board Motes would be placed in the nexl Board Meeting and
it was @onsidered a8 action taken and complied with). (iii) The roles and
.- . .-a --
I responsibilities of Chief Risk Officer (CRO),were n o t clearly defined and 1
I I1 documented
,any powers and and the risk policies approved by the Board also did not delegate
responsibilities to senior management for implementation of 1
1 1 policies. (iv) In spite of probable adverse impact on bank's CRAR position arising i
1 from the output results of ICAAP and Stress Testing, there was no direction from
the Board or the Sub-Committees on this issue.
I 1 The frequency of re-constitution of all Baard level Committees,including Risk 1

(a)
I 1 Management Committee (RMC), was six In the absence of

months. 1
effective
I 1 sensitization of the RMC and the Board in the area of risk management, more 1
consistency was required in terms of tenure and skill build up.
(b) The roles and responsibilities of the Board level committees, ather than
RMC, Audit Committee of the Board (ACB) and IT Strategy Committee, were
I 1 not clearly delineated affecting assessment of functioning of these committees. 1

1 1 (c) The extant RBI guidelines prescribed that only Executive Director-in-Charge 1
1 1 of Internal Inspection and Audit should be the member of ACB and other EDs /
could be invitees to the meeting in case sf any agenda items pertaining to them,
However, both the EDs of the bank were members of AC8 and this guideline
I 1 was not brought to the notice of ACB/Board. I

1.1.4 1 Conductof Board LevelCommittees:
I
1 (a) The Agenda Notes were placed to the Sub-Committees and the Board an I
fl-!I ;; I the same day. In certain cases such practices could undermine the effectiveness
1 1 (b) The roles of Board, RMC and ACB were limited to approval of various I
I 1 policies and Review Notes and suggestions/diredions were not evidenced. I
( 1 (s)The oversight function of the ACB was inadequate in view of persistentdelay 1
1 1 in placing Review Notes and closure audit reports, non-review of parameters I
of
1 1 of risk categorization of branches, shartcomings in functioning of internal 1

I 1 auditlconcurrent audit, etc. I
(d) The Notes on Auditlinspection were invariably signed by the MB 8r CEO
without sending the advance copy to the Chairman of ACB, which could
-
undermine the operational independence of the Committee.

Board Oversight of Risk & Compliance Functions:
(a) The Board oversight over credit, liquidity and market risks was not adequate
as if was simply affirming risk appetite and risk limits as suggested by the Risk
Management Department (RMD) without much discussion. The Review Notes
and MIS reports placed before Board and its Sub-Committees were observed to
be in t h e nature of routine exercise and did not bring out major highlights and
areas ~f concern along with building up of inherent risks in the bank's porffolis.
No concrete suggestions for impwvernentl strengthening of existing control
mechanism or introduction of new controls to mitigate such risks were being
made.
(b) The MCLR benchmark rates were approved by AbCO rather than by the
Board or any other Committee with Board delegated power, in contravention of
extant RBI guidelines.
(c) The functioning of Compliance Department was restricted to monit~ring
compliance of RBI guidelines and not those issued by other regulators. The
C~mpliance Department's role in ensuring implementation of regulatory
guidelines was limited to receiving confirmation from functional wings without
verifying whether the internal guidelines issued were in compliant with the
regulatory guidelines, issues in adherence to timelines and accuracy of
regulatory returns were obsewed.
Boafd's Oversight of Overseas Operations:
The overseas business of the bank constituted 13.86% sf its total business. The
Board oversight over London branch was inadequate as o b s e ~ e dfrom lack of
robust MIS, manual computation of risk limits, poor monitoring due to absence
of system interface with domestic operations, etc.
Senior Management
Involvement of Senior Management:
Score; =
(a) Role of senior management in promoting risk awareness culture was lacking
as evidenced from increase in number of frauds, increasing cases of KYC
violations, lack of focus on training on risk managemenf, non- implementation sf
Risk Control Self Assessment (RCSA) and Key Risk Indicator tools, etc.
(b) Instances of frauds increased substantially (79% increase in amount to 7
14,320.94 mn) in 2015-16,There were lapses in effective monitoring of
branches at Regional Mfice levels, unauthorized access permitted to outsiders
to bank1s.C6S,and failure of the Off-siteMonitoring Cell and audit system in
providing early warning signals, as evident from fraud eases unearthed in some
of its branches. Scrutiny conducted at the branches revealed deficiencies, i.e.
cheque Ibill discounting allowed to non-constituent borrowers without genuine
underlying transactisnslsanetion of regular limits, nsn-use of SFMS for issuing/
advising LCs, discounting sf fake cheques/ LCsl LIC policies and non-
c.4 1 adherence to internal guidelines of the bank. In spite of increased instances of 1

1 frauds, no proactive approach was visible for strengthening of existing control 1
I'
1 1 rnechanismlintroducing new controls to plug the gaps. lncidenially, the bank had 1
not implemented many af the requirements of operational risk management
framework of 200812009.
Delegation of Oversight Functions:
1 1 There was no institutionalized framework to communicate feedback on the risk I

1 1 perception and buildup of inherent risks in the bank by RMDllnternal 1
AudiWCampliance to the business functions.
of Senior Management Functions:
I 1 (a) Oversight and implementation of Board approved policies was found to be I

1
1 assessment of key man risk; non-periodic rotation of staff, etc.; improper II
#?I
lacking, such as - Gap analysis in staff requirement not done periodically: non-
,>
0 :,
1 1 monitoring of IT projects, non-implementation of scientific Fund Transfer Pricing I

1 (FTP) and Enterprise-wide Fraud Monitoring mechanisms.
(b) Monitoring mechanism - (i) Delays ranging between three to six months
1 1 were obselved in almost all Review Notes. (ii) Quality of compliance of RMP 1
2015 (7 out of 11) was not found satisfactory. (iii) Infirmities obsewed in NPA
classification indicated that adherence to IRAC norms was not monitored. (iv) in
I 1I spite of several lapses observed in adherence to KYC norms and existing 1

1 1 systems and procedures (as pointed out in Special
.r.r.l. . Investigation Reports), no 1
action was taken to plug the loapholes.
Performance Evaluation & controls
(a) The performance evaluation of Sersi~rManagement was assessed based on
common KRAs irrespective of roles and responsibilities.
(b) The Annual Performance Appraisal Report (APAR) did not give due
weightage to qualitative improvements by certain departments, especially the
control functions.
(c) The performance evaiuation of senior management did not provide any
linkage to assessment of skills set or talent mapping of empfuyees in the bank.
Succession Planning:
---
(a) Poor succession planning, especially in senior management, could expose
the bank to operational disruptions arising from frequent changes in key
personnel (given that 285 out of E09 officers in Ssak IV and above expected to
retire within one year).
(b) The bank did not cahduct regular resource allocation and succession
planning in the control functions, including RMD, Compljzrnce and Inspection
Departments.
-- +
ForrnuIation of plan 8 Fixation of Targets:

(a) The role of senior management in articulating the Business and Strategic
Plan and fixation of targets was limited to 'As-Is' basis rather 'To-Be' basis and
not well thought out keeping in view the overall business objectives, target
market share, revenue, customer profile, macro-economic environment, risk
appetite and capital planning.
(b) The bank did not review the business strategic plan (prepared for 5 years)
though it could not ashieve targets in any of the parameters like global business,
deposits, advances and total income, with achievements in the range of 62% to
86% of targets during the FY 2075-16.
--
Risk Governance
Enterprise-wide Risk Appetite:
(ajThe bank's Risk Appetite Statement (WAS) was largely based on regulatory
=, r prescriptions and was not guided and oriented W a r d s its own requirements
1 dictated by risk philosophy, business strategy and objectives.
I
(b) The bank had n d allocated Re risk appetite to its business units in a
quantifiable manner and accordingly its business objective and risk limits were
not driven by the overall risk appetite in consonance with capital plan.
Risk Governance Framework:
( a ) Even though mandated, the Asset Liability Management Committee (ALCO)
was not monitoring market risk profile as evident: from Review Notes having
market risk implications not being put up to it.
(b) Country risk was being monitored by the Treasuy rather than by the Risk
Management Department.
' ' I I (c) The ownership of business policies and risk policies were not segregated I
appropriately among the business departments and risk management
departments respectively (outsourcing policy was with Internal Audit
Department, business policies and precesslprocedural guidelines relating to
credit and market risk areas were with Risk Management Department (RMD)).
(d) The Chief Risk Officer (CRQ) was not independent as he was a member of
various Credit Approval Committees and Investment Committee, GM,
Inspection Department was a member sf Operational Risk Management
Committee (ORMC).
(e) Functioning of Front OfFicelBack OfficelMid Office was not separate in terms
of operational mandate and reporting lines, which was evident in practice of
placing proposal notes by B 0 for investment in corporate bonds, as well as
1 I1 officers being transferred interchangeably. 1

/eqAdequacy d Risk ~anagernentFunctions:
1
(a) The approach for integrated risk management was lacking as could be seen
from new producflsysterns in%roduction. The features of new
products/activitiesIsystems or modification of existing ones were not examined
from the angle of various potential risks and controls. In addition, there was na
board approved policy for introductionlmodification of newlexisting
producVactivitylprocess/systern.The noies were not placed before RMC and in
some cases, prior Board and ORMC approval was not taken for introduction of
new products.
(b) Though the bank had formulated pdicies relating to various risks, the
processes and prscedures adopted to identify, assess, measure, monitor and
mitigate various types of risks: were not adequately documented.
( c )The bank's risk management framework, ~ndudingthe statistical models
such as Risk Assessment Model, models for calculatian sf VaR, efc. had not
been validated in order to assess whether the framework met organizational
needs and supervisory expsciation. Sack testing was not undertaken for any of
the results, including VaR, credit rating scores, etc.
Effectiveness of Rlsk Management Functions:
( a ) Operational Risk Management Framework: (i) The bank had not
implemented the operational risk management framework and related policies
(RCSA, KRI, Business Line Mapping), thus lacking identification, assessment
a l management in its activities. [ii)No steps were
ad monitoring ~ f ' o ~ e r a t i o nrisk
taken to identify leadinglgreventive indicators in the form of KRls for various
activities so as to throw information on existing1 potential risk in the system. (iii)
The loss data management policy did not provide any mechanism to report near
miss events including incentives for repading, ensuring its accuracy, integrity
and completeness, definition of aperational risk events, accounting mechanism
of operational risk losses, gain events, etc. The same was lacking in practice
and the loss reporting mechanismwas rather adhoc m nature and were collected
from functional departments. Loss data events were just added as an item
without any root cause analysis, to be noted by t h e ORMC.
(b) The Management audit of RMB did not assess effectiveness of its
functioning in terms of managing and monitoring of risk, adequacy of resources
and skills, etc,
...
. *'.
,,
A
,
( c )The bank had not put In place any mechanism to assess enterprise-wide risk
in the form of dashboard for use sf Boardlseniar management on a periodic
basis.
' 1.4.1
internal Audit
Implementation of Audit Policy:
(a)The Annual Audit Plan did not inelude/cover the I
I Score.{ F -
S Audit of all IT
{b) The Internal Audit policy provided for snap audit of new branches within six
months from the date of opening. In spite of 251 branches opened during the
year 201 5-16, snap audits of only 139 branches had been planhed in the Annual
Audit Plan 21316-17.
Quallty of Internal Audit:
(a) Considering the number of branches and other units to be audited, the
1 nspection Department was under-staffed.
(b) Delay of more than three months was observed in closure sf audit reports
(Ofthe audits conducted during 20?5-16, reports of 454 RBIA, 434 credit audit
and 714 concurrent audit were pending for ctosure); and in 14 RBIA, nine credit
audits and one concurrent audit cases, the delay was more than one year.
(c) Them was no system for aggregation sf audit risk scores of all audited units
so as to get an overall view af bank's risk profile.
(d) While framing the risk appetite statement or during the Risk and Control Self-
Assessment (RCSA) exercise there was no role for internal audit in terms of
giving feedback or for validating the output of the risk management framework.
(e) There was no system in place to analyze the 'High Frequency - Low Severity'
as well as low Frequency - High Severity' audit observations, conduct root
cause analysis of such events, and make improvements in existing controls or
introduction of new controls.
(f) Internal audit framework failed to highlight : (i)gaps in NPA identification as
seen from significant increase in number of memorandum of changes (MoCs)
passed by statutory auditors; (ii) lapses in trade finance transactions, (iii)
collateral management inadequacies, etc.
of Internal Audit Function:
The bank's internal audit function had rated only two branches as high risk
I
I
/ during the year though small and large value frauds were unearthed in various 1
>dtW' t
There was na review of the parameters for risk rating of branches, or7
the review of RBlA I concurrent audit formats. I
i
2. Credit Risk
1 Major observations 1
12.1
I
1 Inherent Risk
-
I
Default Risk:
(a) Though restructured standard exposure had reduced from 4.95% to 4.03%
of total exposure, the fresh slippages of 78.43% (PY 2.39%) from the
restructured standard exposure and fresh NPAs sf 5.20% (PY 2.39%) of total
standard exposures contributed to elevated default risk.
(b) The exposure identified as SMA-1 and SMA-2 was high at 5.95% (PY 3.12)
of total standard exposures.
(c) The exposures not rated for mare than 12 months at Ij% of total standard
rated exposure and down-graded rated exposure to the extent of 4%
accentuated the risk further.
(d) The unrated exposures at 37.48% (PY: 20.05%) and high concentration of
exposures around the hurdle rate at 75.84% (PY 65.93%)could futaher pose a
downside risk. The bank had estimated additional RWAs by 717880 mn and
resultant decline of 11 bps in CRAR on account of regulatory guideline on risk
weights on unrated corporate, which were rated earlier.
Exposure & Tenor Risk:
( a )Total exposure of the bank was leveraged to the extent of 25.27(PY 23.56)
net worth. Leverage had increased primarily due to decline in the net
times i%s
worth.
(b) Elongated residual maturity upon restructuring1 refinancing/ flexible
structuring of loans has resulted in increasing trend in weighted average
residual maturity to 4.23 years ahd added to the tenor risk.
Recovery Risk:
I 1 (a) Amounts of sacrifice (CY: 44.27%: PY: 31.32%)/ waivers (CY: 44.99%: PY: (
18.26%) in case of OTSl compromise prtap~sa~s
were high.
1
(b) Recovery risk accentuated further due to unsecured exposure at 29.63%
(PY: 18.67%), and under-collateralized exposure being at 11.22% of total
callateralized exposure,
I -
2.1.4 Concentration Risk:
(a) The credit exposure and W A S of top 20 borrowers formed 10.52% (PY
f 1.72%) of total credit exposure and 7.83% (PY 10.36%) of total RWAs
respectively. Of the total exposure to top 28 borrowers, two borrowem each
were under NPA category and below hurdle rate.
(b) The exposure to single borrowers who were enjoying facieities of 1% (or
more) of previous FY net worth constit~ted41.49% (PY 45.82%) of total
exposure.
(c) While exposure to sensitive sectors constituted 3.80% of total exposure,
exposure to Power industry was mare than 8% of total exposure.
2.2 Control Gap Risk
2.2.1 Policy Environment:
(a) Some of the exposure limits (Single Borrower, Group borrower, single
NBFC, etc.) were IargeIy fixed and reviewed on the basis of regulatory
prescriptions and past history rather than macroeconomic factors, business
strategy or risk assessment.
(b) Necessary covenants were not incorporated in all loan agreements,
supported by necessary approvalslauthorizations (including special resolution
by the shareholders) from the borrower company, to enable invocatian of SDR
in applicable cases, as and when required. $I
(c) For non-SLW investments risk appetite in terms of desired rating of the
portFalio was not laid dawn,
(d) Computation of MCLR was not done as per extant regulatory guidelines, as
operating cost was inflated with the inclusion of entire operating expenses
(except legal expenses recovered from suit filed accounts), rather than only
those associated with providing loans and raising of funds. Deficiencies in
allocation of operating expenses towards raising of fund and granting pf
Confidential %&a .' Page 13 of36

-
advances, resulted in overstating of MCLR benchmark rate. Fudher, the bank
followed a practice sf resetting the sending rates based on the one year MCLR
benchmark rate irrespective of the agreed reset date.
Risk Identification & Assessment:
(a) While analyzing/monitoring various internallregulatoty exposure h i t s ,
ne~therentire exposure (loans as well as investments and Nan-fund based
(NFB)) was considered nos individual exposures below 750 rn were not
mnsidered which could result in understatement of sectorallindustry
exposures.
(b} No system was in place to identify exposure to ca-related segments and
assess the impact: thereof on its portfalio.
(c) Monitoring of Unhedged Frsre~gnCurrency Exposure (UFCE)of corporate
borrowers was not: satisfactoty as the bank did not ensure receipt of annual
audited certificates on UFCE from the eligible borrowers. This could undermine
the adequacy of provisioning and incremental capital requirements on account
of UFCE. The bank did not recover higher price from borrowers having
unhedged UFCE, as directed by the Board.
(d) Rating: Deficiencies were observed in the rating framework. (i) Many of the
externasly rated accaunts'which were below investment grade were rated at or
above hurdle rate internally. (ii) No mid-term review of rating was conducted on
the basis of id!osyneratic events like restructuring, borrower undergoing
reconstruction, directors leaving the compafiy, litigation, etc. Despite these
mfirmities, no independent revjewIvalidation of rating m ~ d including
d mapping
efficacy was undertaken.
(e) Issues with SDR: SDR invocation in various accounts (9 borrowal
accounts) was observed to have been done mainly to postpone asset
mpairment, rather than to effect change in management or capital structure,
wst at the juncture when t h e JbF w a s unsure of further regular servicing of debt
Jue to, the lendem. Present 18E has ~dentifiedtwo divergences in SDR
accounts, while one aceolant was downgraded by the bank in June 2016.In one
~orTowaIaccount, t h e investment and ECB expasure was aleo rbad,e part of the
w n a c k a g e , r e s u l t a n t l y coupon repayments have not been forthcoming for
the NCDs since April 1, 2016 but the bank continued to classify the same as
performing.
(a) Collateral Management -The bank's collateral management system

exhibited several deficiencies: (i) The margin requirements on collaterals did
not take into account the experience of actual recovery at the time of liquidation
of such collaterals. Tkough sig nifieant difference in assessed and realized
value of collaterals especially in NPAs and OTS accounts was observed, no
review was undertaken to assess the shortcomings in valuations done by t h e
assessors, (ii) The details and value of collateral were nut updated in CBS but
collated manually in a web-baseel application. A sample check of manually
collated data of six branches revealed that the type of collaterals were not
recorded or recorded as Nil in 56.15% cases. Errors were observed in recorded
value of cullaterais (overstated by 71571 16 mn in 60 accounts) which did not
rule out under provisioning in NPAs.
(b) Sample check of valuation reports of housing loans for amounts exceeding
710 mn sanctioned revealed that valuation reports were not obtained from two
valuers as per policy prescription,
(c) Repeated extensions were given for charge creation beyond timelines laid
down at t h e time of sanction, especially in large borrowal accounts under
consortiuml multiple banking and J kF arrangement.
(d) There was no monit~ringsf the sacrifice assessed in respect of One Time
Settlement (0TS)I Compromise cases, recovery from pending OTS cases,as
well as timely closure of OTS cases at the level ~f Regional Offices (RQ).
(e) Pre-disbursal terms and conditions were not adhered in 33 out of a total
sample of 48 cases sanctioned by ROs, in contravention with internal
guidelines.
1 2.2.4 1 Monitoring 8 Review: I
1 1 (a) Post disbursal supervision: Deficiencies obsewed in post-disbursement 1'
1 monitoring included (i)instances ofwaiver of penalty for delay in perfection of 1:
security, delay in conducting review of risk rating of.
achievement of various importan! financial ratios, waiver for conducting unit
visitrrEV study, were observed. (ii)Stock audit was not done in 15.54% of the
eligible accounts, while 50.53% of the reports received were pending for
closure, 684 credit audit reports were pending far closure as on March 31,
2Q16.
r"\
(b) Credit Monitoring and Review Oepartment (CMRB) monitoring of NFB
exposures was inadequate as: many bills discounted under LCs (878
amounting to T I 840 mn) were pending for squaring off in the system, and did
not monitor the recovery in respect of devolved/ invoked LC31 BGs.
(c) The half-yearly consolidated note on serious observations noticed from
Monthly Monitoring Report (MMR) submiffed by RQs in respect of accounts
exceeding 7 I 8 rnn did not mention about adherence to the critical pre and post
disbursement sanction terms and conditions, pending cases for perfection of
security, ebc.
Id) Monitoring of restructured accounts was unsatisfactory, as if was observed
I that the data of restructured accounts was c~llectedmanually from ROs and
provision on account of FlTL, if any, in such accounts was made at CO.Present
inspection found an instance of non-reporting of restructured accounts by one
of the ROs, which led ta nsn-provisioning of FlTL in that case. Moreover,
quarterly status reports in respect of CDR restructured accounts sent by the
branches to CO, were very brief and sketchy, details such as progress on
implementation of package, reason for showing stress even after
implementation, developments in latest consortium meetings, etc. were not
(e) Though the bank claimed that the NPA classification was system driven
.. . . subjectivity was required (agricultural bans affected by natural
except where
,, .
..
calamities, SBR, etc.), several infirmities were obsewed viz. (i) Statutory
auditors had recjassified 2697 accounts (523414 n?n) from standard to NPA
, mainly on account of
valuation, absence of
-
stock statement, etc. (ii) l nstances of incorrect classification of failed
restructuring eases Were observed. (iii) The present ISE has identified four
fresh NPAs amounting to 79850 mn (provision suggested 72605 mnJ and
found instances of under-provisioning in respect of existing NPAs to the tune
of 72113 mn. (iv) As Integrated Treasury Management System (ITMS) did not
have interface with CBS, there was no system to leverage NPA data for
classification as NPI. Two SRs were not classified as loss assets,
(f) The quarterly review notes on NPA put up to the Board did not contain any
analysis on industry-level NPA exposure,to enable it to make an informed
decision.
Reporting:
(a) The MIS put in place for RBS reporting was not supportive for review and
revalidation of the information submitted. Various elements of exposure data
viz. industv, sensitive sector and undrawn limits were not retrievable directiy
from CBS but compiled manually.
(b) Proper reporting of CRlLC data was not being done by the bank such as,
investment exposure was not rep~rted,SDR accounts though under SMA 2
category were exduded, one NPA account continued to be reported as
performing in 6RlLC.
(c) Disclosure on account of exposures covered solely by intangible collateral
was understat4 to the extent of 75839 nn in the Annual Report.
(d) The acquisition of shares under SDR scheme was not disclosed in the notes
to accounts in Annual Reporl for March S f , 2018.
(e) The Bank- had not taken audited figures for bank credit for ~alculationof
ANBC and priorify sector lending targetdsub-targets. Based on audited figure
and after factoring rnisolassificatian in PSA and agricultural advances (115347
-,
mn and t6627 mn respe&i~eiy),the achievement of priority sector lending and
agricultural lending targets were revised downward to 39.51 % and 17.94%
respectively. Accordingly, additional standard assets provision of ?23 mn has
been suggested on account of mis-dassification of priority sector advances.
---
3. Market Risk Aggregate score:-
Major Observafions /
3.1 inherent Risk I
I
3.1.1 Trading Book: Interest rate risk in trading book was

1 net PVOl in last quarter due to increased investment in G-sec portfolio. The I
1 trading book dso exhibited tenor risk an account of high PVO1 in 1-3.6 year I
( tenor, primarily due to concentration of portfolio in t h e said bucket. The bank's I
( resorting to borrowing in foreign currencies for onward lending to its London I
I branch well as for lending to its d~mesticcustomers (Foreign Currency Loan I
as
I I and Packing Credit - Foreign Currency), increased the utilization of NOOP I

I / limits (average oftop three NOOP at 72.42% of limit) on a few occasions in last I
I
3-12 Banking Book: Interest rate risk in the banking book was driven by risk in
( 1 earnings and embedded optionality risk. The impact of 200 bps change in I
I 1 interest rate was substantial on NII at 68.12%, as rate sensitive assets were I
1 higher than rate sensitive liabilities on a cumulative basis up to one year. I
( Similarly, risk of erosion in net worth was at 12.38% for 200 bps rise in interest I
rates as the modified duration (MD)sf assets were more than that sf liabilities.
Significant level of premature withdrawals in case of term deposits at 33,07%
II and non-institutional term deposits at 22.91%, and prepayment of term bans

I
I
at 22.52% lad to high embedded oplionality risk: - 1
Confro1Gap Risk
1 (a) The Market Risk policy had not been reviewed or updated since 2014 in line I
I wih changes in business strategyfobjectives. The policy also did not prescribe
I
any methodology for valuation of unlisted equity shares and illiquid portfolio.
{b)The risk limits were not derived or revised from any underlying objective or
<. ..
risk apdetite buton the basis of historical utilization for each parameter with
only intuitive reasoning.
Risk ldenfification-a-
(a) Bucketing of assets and liabilities for assessment sf interest rate risk was
deficient as it did not factor behavioral pattern in the context of embedded
optionality.
(b) There was no sanctity in respect of certain risk limits such as stop loss limit
for equity investments had breached and the bank was holding the same limit
since 2009 in spite of huge MTM losses of 7671 mn as on March 31, 2016.
Further, such breaches were not being used for realigning the trading
strategylpssitionslbusiness decisions.
-.
Controls:
(a) The bank did not follow any rational and scientific methodology in fixing its
various risk limits in ~rdE?r
to monitor the market risk exposure of the bank. For
instance, AGh limit was revised from USD 4000 mn to USD 5500 mn, out of
which London branch was allocated USD 3500 mn (raised from USD 3000 mn),
which was stated as justified by the proposed borrowing of only USD 340 mn
and referring to possible future borrowings in foreign currency.
(b) VaR, MD and PVOI were the primary measure of-risk for trading book.
However, VaR limit did not cover the entire porkfollo and was prescribed only
for Central and State Government Securities under HFT category and not for
other fixed income instruments including bonds and debentures, etc. or for AFS
porkfolio. Forex VaR exceeded in March, and Stop loss limits were triggered for
many securities,which were approved by lnvastment Committee despite huge
losses,
(c) Sensitivity analysis was not done before taking any trading position of its
investment portfolio.
(d) FTP mechanism adopted by the bank was used to evaluate
profitability/losses of business unitdbranckes, but it neither captured the
liquidity cost nap the interest rate risk in the banking book for the purpose of
evaluating the profitability of branches.
3.2,4 Monitoring and Review: pp
(a) The ITMS system only captured the final changes in deal and did not track
intermediate changes/ modifications affecting the completeness of MlSlaudit
trail.
(b) Forex and Equity VaR was computed on spreadsheets and was not
subjected to any checks or validation,
(c) The monitoring of stop-loss limits was through manual process without any
report to track the changes in the prices and MTMlosses. All risk limits for
London operations were manually computed. Back testing of investment VaR
was not being done by the bank.
(d) Tracking of Intra-day breaches in limits was not done on real-time basis.
There were no evidences of revision in trading strategy on account of any
breach of limits.
(e) Though it was stated that limits are calculated by ITMS, manipulation was
possible. For instance, N O W limits had exceeded continuously during May
and June 2Q16 clue to accumulation of interest on FCNR (0) deposits up to
December 37,2015,which had been credited to the depositors by the branch,
and continued to be shown in the NOOP report generated by the ITMS.
Hawever, while reporting N 8 0 P limits in GBP to RBI, bank had been removing
the interest component on FCNR (6)deposit, understating the NOOP.
(f)The valuation models had been validated only at the time of implementation
involving checking the calculations of Prices, MTM values, Appreciation and
Depreciation based on the prevailing rates. However, subsequent validation of
models had not been carried out.
I
3.2.5 ( Reporting: MIS reports were routinely submitted, which were either a mere
statistical statement without any critical analysis or its implications on the
Overall business ofthe bank. Also MIS repofls generated from the ITMS system
were not utilized'by R m i r l ~ / ~ iOffice
d for monitoring ~f limits.
- 4. Liquidity Risk Aggregate score:-
/ Major Observations 1
4.1.1 1 Concentrationoffundingsources:
I
1
[a) The funding concentration was high as the bank's reliance on bulk deposits
stood at 38% of total deposits and 80% of which was concentrated in top 100
depositors. Low proportion of CASA at 25.97% of total deposits and bank's
increased reliance on CDs (increased by 49.6% over the PY) contributed to
funding concentration.
I (b) Share of loans other than demand loans at 76.90% (PY: 79.49%) and
1 limited recourse to liquidity through unencumbered G-sec and T-bills (44%) led
I 1 to the funding risk from the asset side. I
1
I
4.1.2 ) Stress Liquidity: Though the bank continued to m a i n t a m 1

1 1 2.64% LCR abave regulatory requirements, areas of stress could be from: 1
and
1 1 (i)pre-mature withdrawal deposits; (ii) Since the bank had

of bulk the 1
swapped
I ( entire foreign currency funds, t h e availability of the same for meeting liquidity 1
4.1.3
1
requirements under farex positions was limited.
--I
Structural Liquidity: The bank had negative cumulative mismatches of (-
1 I
113.96% and (-)25.93%for buckets up to 6 months and one year respectively,
i(
I mainly on account of 58.60% term deposits maturing within one year. 60% of
1 the term loans were having maturity beyond One year and MD of investments
1 had increased to 4.52 (PY: 4.02).43% of long term assets were funded by
--I
I
short term avenues.
4.1-4 Market Liquidity: The bank's average cost of bulk deposits at 8.47% was on
I 1 a higher side as per market average (7.38%), which suggested limited scope 1
1 1 for raising additional liabilities at competitive costs. 1
4.2.1 Risk Identification and assessment:
I 1 (a) Behavioral Analysis for preparation of Structural Liquidity Statement (SLS) 1

1 1 was deficient as renewal of loans and
Confidental Page 2 I af 38
withdrawals of term loans/depasits, expected drawdowns of commitments, ,
and actual devolvemenf of contingent liabilities were not considered. This
impinged upon accuracy of SLS statement and adversely affected monitoring
and management of liquidity risk by the bank.
(b) Stress Testing: The bank was not measuring liquidity risk using what if
scenarios! market-wide disruptions. The characteristics considered by the bank
for sensitivity analysis were same for idiosyncratic, market-wide and
combination stress scenarios, thus not correctly factoring the liquidity position
in a crisis situation, Market-wide stress scenarios like market liquidity squeeze,
contraction in avai!ability of securedlunsecured funding sources, counterparty
defaults, increase in call money rates, etc., were not considered.
(c) The bank had excess SLR sf 7182306 mn. Quantum of excess SLR to be
maintained was left to be decided by Treasury instead of ALCO, which could
impact NIM and liquidity risk profile.
Controls: Central bank funding was
resources under CFP in liquidity crisis contrary to extant instructions. No back-
testing or reliance on any particular identified source of funding was done in
case of contingency,
Monitoring and Review: (a) Though the bank had defined illiquidity in its
policy, it was not conducting any exercise to examine the extent and impact of 1
illiquidity embedded in its investment portfolio,
(b) The process for day-to-day funds management was not automated and
I
sourced manually from branches.
Reporting: The agenda items put up to
manner without looking at t h e utilization of limits and analysis of liquidity profile 1
of the bank. Though the ITMS was introduced in 2013-14, MIS and regulatory
reports for liquidity were prepared manually.
5. Operational Risk Aggregate score:=
I Major observations II
5"1 Inherent Risk I
shortage of manpower at Scale tV and onwards (285 vacancies identified in

next one year), less investment in capacity building (training expense 0.1396
of operating expense). Instances of increased KYC violations, high number of
I i vigilance cases in top five internal grades and high number of employee I
terminations further heightened people risk.
The,bank's systems were vulnerable to external risk as
cp-; 1 reflected in alarming rise in the frauds (299 frauds amounting to t14320.94
mn in CY vis-a vis 237 frauds amounting to T7967 mn in PY).
51.3 IT-Operational Risk: The bank was exposed to operational risk in IT on
I
I 1 account of (i) lack of proper access control as reflected in outsiders having I
1 1 access ta bank's CBS systems leading to occurrence of frauds, (ii) High
I(
I ( number of bugs exposing the critical systems to produce an incorrect or
I I unexpected result, (iii) Non implementation of Straight Through processing 1

I / (STP) in 15% of the critical systems and independent reconciliation outside 1
CBS was required in 20% (4 out of 21) of interfacing systems.
5.1.4 Process Risk: Process and transaction risk in the bank was heightened due
to high number of KYC non-compliances (CY:232614; PY:I382541, and high
fi-l
LA
1 number ofmodified treasury deals (CY: 1518; PY: 2216).
I
I
5.2.1
I
I
PoIicy Environment:
1
1 (a) In the absence of identification of key person risk and proper succession
planning, bank was prone to planned and unplanned exits.
I
(b) IT Policy: The bank's IT policy statements fell short of assuring a safe,
I I1 management policyfiramework for effective monitoring of progress (

secure and rebust IT infrastructure, (i) The bank did not have Project
1 the of
I
1 implementation of projects. Delay in project implementation was observed 1

IT
--
as only four out of eight projects were completed in 201 5-76.It also did not
have any mechanism for identification and review of ~bsolete
systemslsolutions/semices.(ii) IT security pposicy was inadequate as reflected
in non-spelling sf framework for creation of Change Management Requests
(CMRs), absence of hierarchy of approvers for respective key changes and
lack of System Development Life Cycle (SDLC), and testing standards to be
adkeredlfollowed in development of in-house applications by internal
development team. (iii) Roles and responsibilities of various desk's profiles in
the stimulated IT business environment were not documented. (iv) The bank
did not have Data migration policy. (v) Policy on inf~rmationclassification was
found to be inadequate, as it did not provide detailed classfication of
information categories based an criticality and sensitivity.
-
Risk Identification & Assessment:

1 There was no system of assessment of risks associated with non-compliance
1 of key regulatory and statutory prescriptions.
Controls:
(a) Given the significant increase in vigilance cases, coverage of preventive
vigilance exercise (only 177 out of 3766 branches covered in 2015-16)was
inadequate.
(b)There was no evidence of integration of staff appraisal results with that of
the training needs, succession planning, promotions, compensation and
placement of employees.
-
(c) KYCIAML norms The bank's KYCIAML adherence was not robust as
evident from cases sf breaches in the advance import remittances in 2015-18
(penalty was imposed on the bank), UCfC implementation pending for 0,35
mn accounts, review of risk categorizatiofl not'earsied out for 28 mn accounts
constituting 79% of the active accounts, incomplete risk profiling, non-
monitorin$ of 'transa~tionvelocity baaed on customer profile, rampant
alteration of date of opening of accounts and of date of application of request
for advance fmport remittance, nqn-filing of CTRISTR in these accounts, non-
monitoring done for high value transactions in newly opened current accounts,
etc.
(d) Fraud Management System - Lack of effective and sound
implementation of policies/pracesseslproeedures and non-ad herence of
systems and controls had led to increased perpetration of internal and
external frauds in the bank. (i) Negligence of staff In adherence to laid down
systems and procedures and laxity an fixing staff accountability for delay in
detection and reporting of fraud, proved to be one of the main factors
contributing to perpetration of fraud; (ii) In spite of grant of Board approval for
procuring and implementing the Enterprise Fraud Risk Management Solution,
no concrete steps have been taken to implement the same; (iii) There were
enornous delays ranging between three to six months in putting up quarterly
notes on frauds as we%Ias special notes for frauds of 710 rnn and above to
the ACB and the Special Committee on Monitoring of High Value Frauds
respectively and regulatory reporting to RBI. (iv) The Annual Board note on
frauds provided only numerical data on IT related frauds, with no empirical
analysis. (v) There was delay ranging up to one year in detection of frauds
(1031, delay in reporting of frauds to RBI (85) and nsn-filing of police
complaints (68).
(e) IT Issues: (i) Regular reporting framework for information security
incidents was largely absent, (ii)IT bugs were not monitored and reported to
top management in spite of significant number ofbugs rep~rted(506and 187)
during 2014-15 and 2015-46 respectively. No framework was in place to
identifyjassess the financial impact of various errors 6 exceptions due to
technical IT bugs. (iii) The bank was no%using any security software
taolltechnique like Privilege Identity Management (PIMVI)to restrict access to
application systems, databases, network and communication software.
Monitoring & Review:
(a) There was no mechanism in place for assessment of IT, cyber fraud
vulnerabilities as also no forensic audit mechanism to analyze the issues
reported under information security.
(b) Monitoring of compliance position of VAPT was unsatisfactory with large
number of open observations pending for compliance. No network audit had
been eand ueted .
(c) SWIFT - Deficiencies were observed in SWlFT system operated by the
bank, as evident in - No firewall was installed between Web Access server
and SWIFT senrer through which. information flow took place, absence of STP
between bank's CBS and Swift Server, no user creation or message creation
and transmissian policy set by the bank, periodic user review was not done,
DR Drills of SWIFT server not undertaken, lack of mechanism to verify
number sequer~cingin case of messages senvreceived fromlto SWIFT.
(d) Customer Complaints - ( i ) The bank's customer complaint redressal
I I system was not robust enough to ensure that all customer complaints were
acknowledged 'and redressed. Delay of one to three months was obsenred in
closure of 29% of complaints. There was no mechanism in place to prevent
mis-selling sf third party products. (ii) A quarterly note on complaints is put up
to the customer sewice committee of the Board generally with a delay ranging
from two to three months and in some cases beyond this period. Clubbing of
notes was also obsewed as the notes for the quarter ended December 2015
and March, 2Q16 were put up together on June 23,2016. For the quarter
nded June and September, 2015, the same were put up on September 30,
ary 29,2016 respectively.
System - (i) MIS did not prescribe any targets and
timelines for achieving complete data integrity and its stated mission. The MIS
system did not provide data assurance and data integrity as evident from: (ii)
The Enterpris~!Data Warehouse of the bank was not mapped with other
systems viz, ITMS, LAPS, HRMS, e-THICs, CRISIL, card centre data and the
RAM package etc., requiring manual intervention in compilation. The MIS
flowing from ,London
-
was inadequate and was neither linked to MIS nor CBS
or the ITMS. (iii) Standard Operating Procedure (SOP) for report generation
was not defin~sdand no review was undertaken to verify the integrity of
extraction logic in MIS. (iv) Capital computation was being done manually as
t h e data on risk weights and exposures for regulatory retail portfolio were also
being obtained manually (v) There was no mechanism af MIS audit as against
the stated policy and the customer profiles were not updated in t h e CBS, (vi)
The bank had implemented only 148 out of 204 Automatic Data Flow (ADF)
requirements and Senior Management was neither reviewing the progress.
nor undertaking any gap analysis.
6. Pillar II Risk Aggregate score:=

[Major observations
6.1 1 inherent Risk
6.1.1 Reputation Risk: The revenue growth and client growth of t h e bank were 1
%,I 1 8.35% (PY: 18.94%) and 6.50% (PY: 38%) respectively. The increasing 1
..I-.' I 1 number of banking ombudsman cases (CY: 14%, PY: 11%) awarded against 1
the bank posed a significant reputation risk. The decline in the share price of
the bank was much higher than decline in Bank NIFTY Index (I
I.34%),
6.1.2 Strategy Risk: The Strategic risk of the bank increased primarily due to: (i)
1 1 significant deviation from projected PAT as the bank suffered losses an 1

account of increase in provisioning requirements due t~ high value frauds and
asset impairment, (ii) decline in market share in CASA by 6.7% as against
1 1 growth of 24% registered in previous year, meager commission and fee (

income in the total income of the bank at 2.88% (PY: 33%).
Risk, etc: Success in re-possession, sale and
~ ~1 1 realization/recovery proceeds of collateral as per-valuationdone in NPA cases 1

" 1 1 continued to remain poor. 1
62
I
Control Gap Risk 1
/ 6.2.1 1 Policy Environment:
I
1 1 The bank did not have any documented framework for management of (
I1 1 strategic risk and reputational risk, model risk, group risk, pension obligation 1
I
1 risk, collateral management and securitization. 1
6.2.2 Risk Identification & Assessment:
(a) Repuiational risk assessment as part oflCAAP did not consider peer group 1
-
comparison, corporate culture, risk management and control environment,
customer. satisfaction, legallregulatory compliance, share price movements,
transparency, accountability.
(b) Pension Obiigation: (i) The sysfem followed by the bank for assessment
1 and quantification of pension obligation was not prudent. The bank assumed
1 discount rate of 8.40% in calculation of pension obligation (being the rate at
which plan fund was invested), instead of yield of G-Secs, with corresponding
maturity linked to average remaining service of employees (which was 10
years with discount rate as 7.56%) as per 1BA guidelines. Further, the bank
continued to use a mortality table published by LIC (7 996) in place of !ALM
(2006-88)provided by IRDA. (ii) The critical assumptitrns such as, discount
rate and modality table were not reviewed by the bank for adequacy of
pension obligation provision.
No IimitsAriggew were fixed
I 1 management of reputational risk events and consequent evolvement of 1

1 , 1 effective response plan to tide over the crisis situation.
-
6.2.4 Monitoring & Review:
(a) Strategic Risk- (i) The Strategic Risk Score card was not based on any
scientific methodology and did not consider profitability for the purpose. (ii)
The strategic risk management framework was not in sync with the overall
business strategy and other factors like statutory and regulat~rychanges {risk
score was zero due to such changes).
(b) Reputational Risk - The score card method, developed as a part of
ICAAP for assessment of reputation risk, had following deficiencies: (i)
Weightage given to financial performance and employee satisfaction was
inappropriafe. (ii) Mapping of rnetrics to the corresponding factors was not
done correctly. (iii) No triggers were identified for management of reputation
risk. (iv) No actioti plan was formulated to reduce the risk arising due to the
individual factors within each contributing index (e.g. incidents of internal
fraud, profitability, etc.) in spite sf high reputatiohal risk score -.
Part 11: CAPITAL ASSESSMENT (INCLUDING EARNINGS)
1. Pillar I capital & CRAR

The summary of reported and assessed capital position of the bank as on March 31,2016
is given below. Details are in Annex 4.
,r Basel !I! Capital under Basel ill (in ? mn)

-
2 .
Particulars Reported Assessed Divergence for
divergences
Total capital (TC) 1931 35 188394 4741 Additional
provisioning on
Common Equity Tier 121396 416657 4741 account af
I(CET1)capital additional NPA
Tier I(Tl) capital q34174 129433 4741 identified.
Tier 2 (T2)capital 1 58961 58061 Nl b
I
Basel Ill.CRAR under Basel Ill (in %)
I
Particulars Reported Assessed Divergence
la.16~h 10.91% 0.28% Additional RWA

on account of
7.01% 6.75%
I(CET1)capitaI identified
7.75Opb 7.49%
Annex- I.
3.41% 3.41% NIL
cr L
2, CAPlTAL MANAGEMENT, ICAR, ICAAP AND STRESS TESTING

2.1 Bank's Capital Planning and Business Projections
Though the increase in global deposits, global advances and global business of the bank
were only 2.49%, 0.34% and 1.09% respedively during the FY 2015-46,the projections
in ICAAP were far too ambitious at 14%. Moreover, detailed analysis of the impact of
lower business growth and enhanced leve! sf GNPNNMPA on the profit and capital as
welf as challenges in raising mote capital, was not carried out, Infirmities observed were-
(i) Gross NPA ratio increased from 3. t3% as at March 201 5 to 6.70% as at March 201 6
and Net NPA ratio also increased from 1.90% to 4.48% during the same period. (ii)CASA.
#,+*t r
was projected to grow at 15.00%, whereas t h e actual growth remained at 6.8%. The
bank's capital management is deficient in terms of risk capacity setting as the risk limits
were first set and then capital availability was considered.
2.2 Assessment of Pillar I and Pillar II capital and Internal Capital Ratios.
The reported and assessed CRAR as on March 31, 2018 were la.16% and 10.91%
I?
respectively. The bank's reported CRAR is below t h e peer group CRAR (14.89%). In -
addition to this Regulatory Capita! Ratio (covering Pillar 1 risk), the bank had calculated
the additi~nalrisk weight of 7696550 rnn %orPillar I1 risks and capital of 11 1940 mn. The
additional capital requirement as per the I C M P assessment was 710945 mn. The
Internal Capital Ratio (ICR) of the bank stood at 12.00% including Pillar II (8.50%for Pillar
1 and 3.50% for Pillar II risks). With assessed CRAR as an March 2816 being at 10.91%
(although above the minimum regulatory requirement of 9.625%),fhe bank was in the
immediate need to raise capital to meet its ICR.
2.3 lCAAP
(a) ICAAP document did not articulate options available far raising capital and the cost of iT I
raising through suck options. (b)Though there is improvement in the formulation of RAS,
the same were largely based Qn regulatory prescriptions and was net formulated in a
scientific manner by taking into account all types ~f material inherent risks and the 0
relevant key risk indicators. (c) There is no Board approved framework for assessment of
strategic and reputational risk. (dl Criticality sf ICAAP in risk assessment process, product
design, as well as business decision making was not visible. (e) The lCAAP did not
articulate trigger threshold for management action other than Pillar I risks. (f) NQ
management action was taken despite the fact that the trigger threshold for the
profitability and CRAR parameters were breached on account of net loss in 2015-16.
Further, although the stressed CRAR under baseline scenario fell to 5.25%, no
management action was triggered.
2.4 Stress Testing
(a) Stress testing methodology was deficient to the extent that in spite of falling under
Group 8 category, the bank was conducting single factor stress testing as against the
requirement of multifactor sensitivity analysis and simple scenario analysis of the
portfolios with respect to simultaneous movements in multiple risk factors caused by an
event. (bj The bank did not consider the impact ~f Brexk as a scenario under stress
testing. (c) The risk indicators (fraud and non-fraud losses) considered for stress testing
of operational risk losses were not sufficient to capture all potential losses. (d) The market
stress test did not cover loss threshold and risk containment strategy (e) The stress
testing framework was not reviewed qualitatively end quantitatively to determine its
q, efficacy, integration of output with risk management processes, assumptions made, etc.
(f) The stress testing was being done with delay ranging f r ~ mthree to four months. (g)
The bank had c~nsidereda correlation of 8.3 between various risks without any rationale,
which could be much higher in case of severe stress scenarios.
3. Assessment of Internal Generation of Capita1

3.1 Retained earnings
.The bank had not paid a n y dividend during 2015-16.The retained earnings was impacted
due to decline in net total income (27.70%),increase in operating expenses (40.33%) and
increase in provision for tax (34.45%). The staff expenses, Director's fees and Board
member's fees were major components of operating expenses.
0^3.2 Quality of earnings

The gross stable income saw an increasing trend over the previous three FYs, however
the growth in the income foltcswed a dedine by 7.27% (PY: 18.30%). over last year. The
gross volatile income increased by 31% (PY: 127.05%) on account of lesser increase in
income from trading and recovery from written off accounts as compared to PY.
Pravisions exceeded the gross volatile income mainly on account of 124.37% increase in
provision for loan losses. The assessed net vcllatile income decreased due to increased
credit provision. The assessed loss is 721176 mn as against a reported loss of T I 6435
4. Scope and ability to infuse capital
As per Basel Ill guidelines, bank has to maintain a minimum of 'I 1.50% CRAR by the year
2019, including Capital Conservation 8uffer (CCB) of 2.50%. The projected shortfall to
reach minimum CRAR (including CCB) by March 31, 2019 would be approximately 7
72200 mn.The shortfall to attain the Internal Capital Ratio of 12.00% set by the bank will
be 984800 mn for 20j8-19.The sharkfall is on the assumption that no capital infusion is
expected other than by way of retained profits. Given the fact that t h e share prices have n
..>
moved adversely, it will be difficult to achieve the required capital raising.
0
5. ASSESSMENT OF LEVERAGE RATIO
As on March 37, 2816, the reported Leverage Ratio sf the bank stood at 4.08%. Based
on the projected business level as an March 31, 2019, the requirement of Tier I capital
would be ?I00000 mn for achieving Basel I11 prescribed Leverage ratio of 4.50%. The
assessed leverage ratio was 3.94% a6 on March 31,2016.
6. SUPERVISORY CAPITAL PRESCRl PTlOM

The required capital for the assessed aggregate risk is a model driven process. The add-
,-
on capital is the difference between the required capital (by t h e model) and assessed -
capitai available with the bank. However, supehrisory capital prescription is based on
supervisory judgment of other elements like quality of earnings, ability of t h e bank to raise Q
capital, sources of capital infusion, level of leverage ratio, etc. Accordingly, based on the
holistic supervisory assessment of risk and the capital position ~f the bank, your
bank's supervisory capital is assessed as 'VlNADEQUA"I"9.
In view of the extant transitional arrangements for augmenting of the Regulatory Capital
as per the requirements of Basel 111 norms till March 31, 2819,the Supewisory Capital
Prescriptions, as of now, will only indicate the adequacy or otherwise, of Supervisory
g foward, the decision for implementing quantitative prescription of supervisory
.,. ".al wit1 be communicated to the banks as and when taken.

"
I.
.
b e ea&+
Part III- COMPLIANCE ASSESSMENT
A. compliance culture: (a) The compliance culture in the bank was not robust and
effective. Compliance Department did not monitor compliance of guidelines issued by
regulators other than RBI. There was no system to analyze the types of non-compliance
reported by Compliance Audits, as well as deriving any linkage between the compliance
audit reports and compliance test cheek reports. (b)There was no centralized mechanism
to ensure timely dissemination of internal guidelines in line with regulatory
guidelines/instructions with correct interpretation, authenticity and accuracy in filing of
regulatory returns, and ensuring timely identification of exceptisns/vlolatisns with suitable
escalation matrices. (c) The quality and scope of compliance audit was inadequate as it
covered only 447 branches during 2015-16, out of a total of 3766 branches. Id) The
bank's compiiance to the RMP action points 2015 was poor and far from satisfactory,
particularly in areas pertaining to governance and oversight function, credit risk, market
and liquidity risk. There was no oversight by the compliance department on the
submission sf RMP compliance as well as the observations of the ISE 2815 findings and
the same was left to the RBS cell of the bank. (e) The ~versightof senior management
over the entire compliance function was inadequate. This was reflected in large number
of parkial compliances to the RMP 2015, instances of nan-adherence of regulatory
guidelines, shortcomings in internal control function leading to enhanced instances of
frauds, and regulatary penalties being levied due to KYC non-compliances, Major areas
of non-compliances pertained to KYC, priority sector guidelines, RMP 207 5,interest rates
fJ 'i,on advances, etc. The bank was generally compliant to the AQW findings.
B. MAJOR AREAS OF FINANCIAL DIVERGENCE
assets, which determined assessed capital sf the bank, is given below. Detai[s are in
Confidenfiaf Page 33 of 36
1. Divergences (shortfall) in Provisioning
No. of Outstanding I Shortfall or Remarks
borrowsr amounts Additional
sl provfsion
accounts required
Reclassification of
Standard Loans as
4 '
In 7 nin)
2605 Details given in Table
7A
Non-Performing
Existing Non- 15 g55{'
18544 21j3 Details given in Table
PerForming Loans 1B
Valuation of 3 284 0 Details given in Table
Sf
22 20378 4718
provisions I
23 Details given in Table

priority sector XI
advances
I
4741 -
2. Divewence in Risk Weighted Assets (RWAs)
FrTw 1 Assessed 1
-
RWAS {in mn)

Divergence
7
Remarks 1
I
Change of risk w e i g z,
,
Credit on accsuni of change in

Risk asset classifications as
su ested b SSM
I Market
131945
al Risk
1730706
C. MAJOR AREAS OF NONCOMPLIANCE (REGULATORY GUIDELINES)
S. Regulation Area I Subject of Nature
No Reference (Para & Non-Compliance
I I Circular no.) I Compliance compliant
e was there
in the
previous
RAR
Master Circular an Deviations observed Yes
Lending to Priority priority sector
04.09.01R015- Sector-Priority rnis~laasificatisn
16 dated July 'l,2015 sector details in table XI
Lending
Know Your The bank has not Yes
Master Direction Customer (KMC) completed risk
DBR.AML.BC.No.8lI Norms I Anti-Money categorization in all
14.01.0011201 5-j6 Laundering (AML) its accounts.
Standards I
Cornbating of Deviations Q bserved
Financing of as risk profiling was
Terrorism (CFT) I not complete
Obligation of banks customer
under PMLA, 2082- identification net
I
I Customer complete
Para 6 sfI Frauds - Delay in reporting of Yes
DBS.FsMC.BC.No.182 Classification and frauds and filing of
3.04.00112014-1 5 Reporting- petice complaints
Para 2 (a) (v) and (fi [Interest rate on Deviations ohsewed

of 1 advances in MCLR
DBW.No.Dir.BC.B7/13 computation
.03.0012015-
78 dated December
17,2015
5. DBS.No.QSMOS.986 Central Repository
2133.01.01812013-
14 dated
2014
of Information on
Large
In Reporting
Credits
,
February 73, (CRILC) - Revision

in reporting of SMA 2
exposures in CRlLC ?
Deviations observed Yes
6. Para 5.4 (d) Master Circular - ~ i s c l o s u r e ~ e ~ a r d i nNo

g
DBR.No.BP,BC,2121. Prudential norms on the total amount of
04.04812015- Income ReeagnWon, advances for which
Asset Classification intangible securities
ty, etc. has

,. .'
been taken under a
separate head in
"Notest~ Accounts"
Para 7 of Strategic Debt Acquisition of shares
DBR.BP.BC.No.4 0112 Restructuring under SDR-
1,O.Q. 13212014-15 Scheme disclosure by banks
June 8,2015 in the Notes to
Accounts in Annual
Financial
Statements
DBOD.No,BP.BC. 85. Capital and Incremental capital

21.06.20(9/2013- Provisioning and provisioning fur
74 and Requirements for UFCE was done on
OBOD.No.BP.BC. 7 16 Exposures to the basis sf
/21.06.20812073-14 entities with certification of
dated January 15, Unhedged Foreign concurrent auditors
2014 and June 3, Currency Exposure of R 6 s
2014 -
Para 3 (vii) Strategic Debt The bank was not
of DBR.BP.BC.NO;I~ Restr~lcturing incorporating
1121.04.13212814- Scheme necessary
15 dated June 8, covenants in all loan
201 5. agreements,
including
restructuring,
supported by
necessary
approvals/
authorizations
(including special
resolution by the
shareholders) from
the borrower
company, as
required under
exfant
lawstregulations, to
enable invocation of
SDR in applicable
cases
- - - -77
Syndlcade Bank- Annex to RAR + ,
PART V: ANNEX to RAR

(All figures in the Annex are in mn)
Note: All figures except percentage may be rounded OK Percentage may be shown in decimal (2digits)
1: Majar Areas of Finandal Divergence #
TabBe-I: Divergence in Provisioning
A - Re-classificationof Standard Assets (Fresh NPA)

Facility Typo Net But Date of NPA 1 Classification Remarks
@ndiillcas Standing details
{ Net of
1 :El
,
-- -
kper Aspr Asper Asper Held
Bank 8SM Bank SSY
t
h s a m Company 30-06-
India Limited 2015
I
( 376 8 2 I
I
"ntla" "1 Piimarj and
wllaleml
security-
bank's share:
159.43
159
-
0 Wde instrudins mnteined In para
21.2. 12j2,j222. 15.2.3 of Ihe
YC on IRAC norms daled July 1.
2014, read h t h para 4 (b) and 5 d
Circular DBR.Na0P.BC.W
21.a4.0481201415 dated Apd B,
-1 -
Shndard Sub- DBR mail h clarilica!ion dated
/
) 2015 1 and NFB 3009 08-01-
2016 standard
31.916.
Apn: 20,2016. @@
u s share:
Syndicate Bank - Annex to BAR
+ ..
1 --
4241
Alok Industries 05-12- Fund based 3816 25-06. Shndard Sub- Pmay and 5199 0 572 572 para 4 (b] (ii) d C~rrxllar
Lim~kd 2015 and Non-Fund 2015 standard cdateral DBR.No.BP.BC.~21.04.04812014-
bad security as per (5 dated April 6. 2015 and para
ABS dated 20.23 of MC on IR4C noms dated
31.3.16- July 1,20t5.@a@
bank's share-
-
ABG
Limited
Shipyard r-
2014
--
Fund baaed
(h;lusiye of
CCPS of 317
2609
I 01-08-
2013 I
Stmdard 0-2
519927
Primary and
cdlatwal
secruity-
bank's share:
I
145 1698 I553
-
para 15.2 of MC on IRAC nonns
dated July 1, 2014 and Para 3 (vii)
of drndar
OBRBP.BC.No.101121.W.13212014
1518.85 5p@@@
-15 d a k d h e 8,20 t
Total 9550 1 145 275U 2605" J
* Difference in heM and required provisioning is on acmunt of ABG Shipyard Limited: ds inclusive of FITL of 145 mn- 100% Prwision held For FITL.
@ The account has been classified as NPA, vide instructions contained in para 2.4.2of MC on [RAG norms, w.e.f. February 28, 2015, as h e instalms
i~~ 20014, was not paid till that date. The dispensation of upgrading the account as standard, post-restructuring, m u l d not accrue as the restrvctGng was not approved
within 120.days as required vide para 15.2.1 (ii) ol IRAC norms and will continue to be in non-performing category in terms of para 12.1.2, 12.2.2, 15.2.3 of the MC ibid and
para 4 {b) and 5 of Cirwhr DBR.No.BP.BC.85/21.04.048/2014-15 dated April 6,201 5.
@@The amount has beemtreated as 'restructured' andconsequently NPA, Sub-standard by present inspection as the lenderst bank havelhas given an unduly additional
moratorium till Septembar 25,2018 to h e borrower. even after achievement of DCCO (DBR mail box clarification dated April 20.201 6 on the subject), and hence has been
treated as 'restructured' by present inspection, w.e.f. January 8, 20'16, i.e, the disbursement of the facility. Granting of a fresh moratorium till September 45,2018 for a
pmject. in which W C O was already achieved in September 2014 and k b m a i y 2015 and repayment had atready commenced as per the original schedule from
Spternber 15,20f5, is against the spirit of the extant regulatory guidelines on flexjbIe structuring of exist7ng pmject loans, that has also been clarified, in the stated mail
box clarificatim issued by DDBW. Momwer the repayment schedule was highly back ended with only 30.38% of the repayment envisaged to be received as per the revised
schedule till June Is 2025 i.e. the end date of the original schedule of repayment.
- - - The borrower availed EPBG facility of USD 7.94 rnio ('50.78 crore), the bank had issarad Counter Guarantee to Sol, under EPBG facility on June 25,2015 for US0
@@@
7.94 rnio, as per the agreed terms under CAP. The EPBG prnceeds were received from beneficiary Company Cargill International Trading Pte. htd. on June 29,2015 by
SBI, and on July 2,2015 from SB! by the bank. The bank had however, not classified the account as 'restructured' and cansequentially MPA, vide instructions contained in
para 4 (6) (ii) of Circular DBR.No,BP.BC.85121.04.048R0~4-15 dated Apil 6, 2075-Prudential norms on IRAC pertaining to advances-Refinancing of Exposures to
borrowers read with para 20.23 of MC on IRAC norms dated July 1, 2015. which requires that ' it the foreign currency borrowings Iexport advances am obtained with
support (where permitted) from the Indian banking system in the form of Guarantees IStandby Letters of Credit I Letters of Comfort, ~ t c .then.
; in addition to any applicable
Syndicate Bank - Annex to RAR .
guidelines issued under the Foreign Exchange Management Act, 1999 (42of 71999). the refinance shall be treated as 'restructuring' (and classifled I provided for as per
extant prudential norms on income wagnition, asset dassificati~nand provisioning), if the above borrowings I export advances are extended foe borrower who is under
financial difficulty and invoIve concessions that the bank would otherwise nat consider. In view of foregoing, the account has been classified as NPA w.e.f. June 25, 2015
i.e. the date of release of EPBG by the bank, by present inspection.
@a@@ The amount has been dassified as NPA, a 2 by pwsent inspection, w.e.f. August 1, 2013,i.e. the reference date of CDR package, on account of failed
restructuring, vide instructions contained in para 15.2 of MC on IRAC norms dated duIy 1. 2014 and as the lenders had not even approved the SDR package as on the
dale of present inspectian, as required vide instructions contained in Para 3 (viii) of circular DBR.BP.BC.No.lQ'l/2.I .Q4.132/20?4-15 dded June 8, 2016. The bank had oniy
postponed the applicati~nof recognition of a loan turning NPA fill date, under the guise of invocation of SDW.
- Re-classificatkn I Short Provisions of NPAs (Existing NPA)

Barmwr Date of Facility Net f i t Date of NPA Classification
" - Remarks
Mama hd Typ@ Standing dehlls
Sanction fidfa6e ( Net of
as eilher ECGC
Fund CUms)
B a d I
Nan-
Fu'slecl
Baaed )
s bla per As per As per As pEr As p e r b n k As Hdd Required Sbottfadf;rll
Bank 88M Bank 8SM Per
S%M
Mumd Holdlng 23-11- Fund 101.52 0846- 09-06- 0-1 Dl 68.28 68.28 25.38 50.32 24.94 Shod provlslon
Fie L?d. 2009 based 2014 2014
-
Syndicate 6an k - ane ex to RA
Supreme lnfra 19.04- Fund 812.04 31-03- 3 D-I D-1 Pari-passu 55025 269.45 399.35 129.90 Short provlsbn on
Indi Ltd. 2014 based 2015 2IH5 charge over account of shorifall
primary and . in sewrity
collaleral
sewrif~s
bank's share:
550.25
Gujarat NRE 21-09- Fund 506.81 20-02- 014& Sub D-2 Pari-pssu 487.62 131.81 214.24 82.43 Short provision,
Coke Lfd. 2010 based 2016 2013 standard charge wer failed cased d
primary and restructuring, NPA '
collakral dab was taken

securitie~ I n c o ~ l y , less
bank's share: security
550.25
Jyati 26-12- Fund 822.1 31-03- (H-04- Sub- I 0-1 Parri passu 309.79 120.9 589.78 468.9 Shot provision,
Slructures Ltd. 20f4 based 2016 20?4 standard charge on failed cased af
currents and reshctudng, NPA
fixed assets- date was taken
bank's share: inmrr@ctly, less
3W.79 secuw
K I P Metallics 19-11. Fund 626.B6 30-03- 01-09- Sub- 0-1 Primary and 626.69 133.04 156.72 23.68 Short provision,
lirniled 2012 based 2016 2044 standard mllateml failed cased of
security- resbuctuing, NPA
bank's share: date was h h
626.69 incorrectly
Moser Bser 29-03- Fund 402 0 - 0511- 0-2 D-2 F l ~ e d assets- 159.57 169 m.24 137.2 Short provision
India Ltd. 2910 bas& 2012 2012 AFS dated
31.12.13,
banks share:
159.57
lndu Prnjects 2343- Fund 808.42 29-12- 29-12- 0-2 D-2 Fixed assets- 554.8 342.95 475.54 , 132.6 Short provision
ttd. 2012 based 2012 2012 val. Dated
O~tlDec 14-
bank's share:
554.80
Syndicate Bank -Annex to RI
The bank had

ARClL AKAR 35 - Mil NiI 35 35 'IL though provided fully
did not classified as
25.06.206 '1 Std Loss NPl
ARClL SPlC 142 - 21.04.2014 Std Loss Nil Nil 142 142 NIL
Total 284 284 284 NIL
-
Syndicate Bank Annex t o RAR
Table-VII: Standard Asset Prevision
Provision Remarks
ShortlaP
Priority Sscfar
Misclassiflcation
. -- --
1 Total J 15347
Table-X: Divergence in RWA
As per bank Remark-

Credit Risk - RWA 1475458 change of
risk weight on
amount of
changa in
asset
classifications
as suggested
by SSM
Market Risk - RWA 1 123311
Operational Risk - RWA 131945
Total RWA 173070c
e-XI: Priority Sector Classification

Parameter
s
Amount reported Mlsdassificatio
by bank G i n t i f f e d by 1 Actual
Achievemen /I Shortfa1
'
Rdeclasslfleatio
11
rniselassification
Tota 1 644103 under various
Priority
64834 859450
'I5347 7944 sector was not
5 (48.89%) (39.51%)* . as per exlmi
Sector
*. . priority sector I
uiddlnes.
I
T~fal 29175 298989 292362
6827 1050
Agriculture 5 (38.45%) (17.94%)* I
Direct 277228
, , -
Indirect
21761
Agriculture .
Micro.
~rnail' and 1 1 241802 1 3795 1 238007 1
MSME
Othw
6 Priority 14865Q 4825 1 13734
sector L
I I As per Bank 1 As per SSM I

Adjusted Net Bank
Cwdlt (Previous
Year)
1628862 1830117
I
The figure taken by the bank to calculate ANBC was not audited. The audited figure of ANBC is
Rs, 16301q7 mn as given in table abwe. Accordingly, the target stands revised to Rs 652047 mn
-
(40% of revised ANBC), resultantly the revised PSA stood at 39.51% (Ra 652047 rnn Rs 644'103
mn).
Syndicate Bank - Annex t o RAR
Annex 2: C~mputationof Outside Liabilities
Sr.
No.
Particulars Amount
A Total Liabilities excluding capit%! & reserves as 3002624
on March 31,2016
Upper Tier I! Instruments 8197
Subordinated debt 60430
Deposits 2617353
Borrowings 186385
Other liabilities and provisions 130259
71200
Provision for standard assets 13767
Provision for diminution in fair value a?
restructured accounts
2635
Provision for NPAs 45682
Floating provision 1022
Provision for NPI
- Provision for depreciation in investments

Administrative office
FIT1prow for resbuctures accaunts
Provision for sold assets 607
-
C Total outside liabilities [A-B] 2931424
Syndicate Bank - Annex t o RAR
-
Particulars Amount
No.
A Paid up capital [including ESOP outstanding & interest 7984
free funds from H.O. (foreign banks)]
B Resewes and Surplus 106105
Statutory Reserve 43830
Share Premium 25006
Capifal Reserve (excluding revaluation resew@) 1897
Special Resenre 13638
General Resenre 5812
C Intangible assets (including net deferred tax assets) &
accumuIated ksses
D 1 Reportednetworth [A+B-CI 114089

E Adjustments following inspection findings 4741
AdditionaI Loan Loss Provision 4718
On account of misclassificati~nsf PSA 23
F ~ssessed net worth or reallexchangeable value of paid
09348
up capital and resewes [D-E]
7 4: Computation of Assessed Capital
Particulars I Items I Eligible I

amount
Computation sf Common Equity Tier 1 capital ICETI)
Cornmon Equity Tier 1 capital

before regulntov I supervisory adjustments (including ifems
such as DTA, revaluation reserve and Foreign currency transiation
reserve as per DBR.No.BP.BC.83/21.06.20I/ZOld16 dated March
7, 2016)
Total regulatory adjustments I deductions
D Adjustments I deductions applied on CET 4 following 4741

(Inspectionfor Supervisory Evaiuation (ISE) findings under RBS
I l~dditionalLoan toss Provisian 4718
1 2 1 Shortfall in provisioning on account of misclassificationaf PSA 1 23 I
I
E ~ s s e s s e dCommon Equity Tier 1 capital (CET1) [C D l - -116657
Computation of Additional Tier 1 capital (ATt)
I Tier 1 capital QAT'I) : instruments before regulatory

F I~ddr'tiona~ 1 13338 -1
1 adjustments - ?
I
G Total regulatory adjustments to Additional Tier Icapital 562 .
i
-
. --
$$ftt&I(&@fj~~$&4a
?I
pM-
[C:G$I;
V.+Y$-, -- b7i--;!.? s$i=.
-?, y . .!
$?;@
' !$:j
I I I ~djustments!deductions applied on AT1 following f S E findings I 0 I
1 J 1 ~ssessedAT11 capital [H - I] 12776 c)
I Cornputatiorl of Tier 'ICapital (TI)
I
Computation of f isr 2 Capital (T2)
IM l ~ i e r2 capital: instruments and provisions 1 60572

I
1
I I
N 1 Tier 2 capital: resulatow adiustments 1611
Computation of Total Capital [TC)

Syndicate Bank- Annex to K A R
S _ / ~ s s e s s e dTotal capital.(TCj + . . . , 1 ;~ 8 8 3 9 4 -
.'
Risk Weighted Assets (RWAs)
-
W Adjustments I addxons applied on RWAs f o i l o ~ &lnspe%sn
~
-for Supervisory Evaluation (ISE] findings under RBS
-
1 AdditionalRWAs
2 Additional W A S on account of NPAs identifled by SSM (3370)
X Assessed RWAs [V + W] 1727333
capital Ratios I Svmmay
I
Syndicate Bank -Annex t o RAR
Annex 5: Assessment of lkernal Generation of Capital

I
I
of income and expenditure Current
FYT
(Mar 16)
1 FYT-? IFYT-2
(Mar-
j 5)
1
(Mar-
i4)
1 I Total Interestldiscsunt lncorne (2*3+4*5) 231978 296152 186203
2 1 lnterestldiscourrt on aduancelbills 4 731 85 1 161200 144196
3 Income on investments -
52846 48897 37814
'
4 Interest on balances with RBI 52
Interest on market 5820 4141
B
- 90252 ,8473
6a Fee based income 7415 8825 5668
6b Misc. income from stable
-- sources 3467 1427 2805
7 Gross stable income I1+6I 242860 226404 194676
172131 160949 130805
152849 126142
10353 8100 1 4863
70729 65455 63871
Income from trading 8985 6570 1579
(? 1 2 3
Realised gains on derivatives I
14 Gains on sale of asset 1 (8) (1) 16
f7
3871 -
3302 -
21 34
,,
I
Extra-ordinary income1Dividend income & other 1359 971 I a50

IV
I miscellaneous income I I I I
17 1 Gross volatile income ('I24 3+14+15+16) 1 14206 10844 4776
Provisions and contingencies (excluding tax) 43481 ' 19673 18799
0
18
- (19*20*24 )
19 Provisions for Loan losses 1 38384 46216 9767
26 ' Provisions for depreciation in investm~ntsihl~l 2247
4850
(161)
3617
2028
7003
21 Other orovisions
23 1 Write-offs 1 834
24 1 Net Volatile Income (17-18-22-23) I ~"-'--
25
26
1 Assessed provision by s~lpewisor 7 4
(26+27+28*29+30+31?32+33)
Additional Provisialls for frauds
7 4 7
0
,
, ~ddifional~Tovisionsfor understatement of 4718- 1'192 1567
1
for Understatement of 0 25
--
-
29
35
36
- 6
-Additional Previsions for Understatement of
Liabilities
Reported net total income (1?a241

+ 3 4 ]
Syndicate Bank- Annex to RAR
-
37 p36226 33018
Staff expenses, Director's feesf Board Members' 27164 22307 22289
38 fees & expenses
39 Depreciationand repairs
- 1993 1868 1181
40
- -ses 21679 12653 9538
41 Provisions for tax 621 9 4731 (687)
42 Reportedprofit(35-37-41) (16435) 15229 17115
Earnings Stability I Volatility Assessment
Sr, Earnings I Profit Ratios Current FY.T FY T-l FY T-2

No (Mar 16) (Mar-I 5) (Mar4 4)
47 Net Interest Income [?-81 @I%Growth Rate) 59847 55203 55398
-
48 Share sf Interest, Fee and Volafiie Income 90:04:06 91:04:05 93:04:02
[1:6:17]
49 Gross Stable Income / Interest Expended 141.09% 140.67% 148.83%
[718*1OD%]
50 Net Stable Incame / Assessed Profit (334.01) 487.91 % 41 1.04%
[11143*1OO%]
51 Gross Volatile Income I (Provisions & 32.06 53.92 24.88
Contingencies + Extre~rdinaryExpenses 9
Write-0%) 1171(18+22+23)*1099'01
52 Assessed Net Volatile Income I Assessed Profit 164.57 (82.36) (105.31)
[34143*1OQ%J
53 Reporled Retained earnings I Reported Profit 0% 79.57% 79.93%
45142*188%
54 kssessed Ritained earnings / Assessed Profit 0% 36.83% 73.64%
[46143*t OB%]
55 Actual vs budgeted income [expressed as +ve 1 79.91 3-34 3.68%
-ve percentage]
56 Actual us budgeted profit [expressed as +ve !- (52.33) 13.52% 11.43%
ve percentage]
Annex 6: Leverage Ratio under Base I Ill
Sr. Particulars Reported by Assessed by

No. Bank SSM
A Base1 Ill Tier ICapital (TI) 134174 129433
'B Leverage Ratio Exposures 3286898 32821 57
On balance skeet (excluding derivatives 3078740 3073999
and Securities Financing Transactions
Derivatives 12608 1 15308
SecuritiGs Financing Transactions
24400 24488
Off-balance sheet exp~sures 171'158 131150
C Leverage Ratio (AIBX400%) 4.08% 3.94%
-
Syndicate Bank

(Financial position as on March 34, 2017)
Table of Contents
. . Introduction
. ........, .. ....,...
. ..* , 3
Part I: Risk Assessment
Summary of Aggregate Risk at Bank Level....... . ........... , ......... ,................. 3
Supervisory Evaluation of Risks and Control Gaps.................... .........,....... .. 4
Governance & Oversight......... ....,.......................... . .............. ....,........... 4
Credit Risk.. ........ . . ...... ..... ..... . . ..... .. ...............,....... ...... ,,,,,,.,... 2 *, F-i1
a>
Market Risk.......,. ....... . ....... ............. . , ...................... ..... . ,..... ......,-..,. .... 16
C. A
b.C --
Liquidity Risk.. ........... . ........,............. : .......... . ..........,... .......... .........L..... 20

Operational Risk ..................... ...., .......,........... .,............,..........,...........,,... 23
Other Pillar 11 Risks.. , ...,......... ... .. . . . .. ..,..................,,. ..........., ..........,.,.,.. 26
C1
Part 11: Capifal Assessment ( including Earnings)
- - -. - . . .. - . . . -, L.-- -
Pillar 1 Capital & CRAR.. .. . .. .... .............. ...
............ ... .:.. ... , .... ,.... ,. .. ---'29'
: ,- . --, --. -- -. ---.
Capital Management, ICAAP and Stress Tests ....................,....... ... .....,. ........ 29
Assessment of Internal Generation of Capital ....... ..........: ...,.... ............ 31
..,..&.
Scope & Ability to Infuse Capital.,.. ,......... . . ............ 34 ..

Assessment of Leverage Ratio,. ,.. ... ....,,, , ,.. .........,w,.~..,.,.,,.. 32
,.,..w...a....
Supervisory Capital Prescription.. ....., ........... . ..:.. . ....... .. .............. ............ 32 *

:%< *%
,
.-...
Part Ill: Compliance Assessment
Compliance Culture.. .......... , ..... .
. . ....... ... .... .-., ., ... ......., ..... ........
a + r , a ,, m..
33
Major Areas of Financial Divergence.. ....... ......................... . ............ ......... 34
Major Areas of Non-Compliance.. .... ..,...,..... ....... ,.... ........,..,............ 36 C,
Annexures
.. .
Annex-I: Major Areas of Financial Divergence.>............... .... .........,.. ..... . 2
. . . . .. . .
Annex-2: Computation of Outside Liabilities., , ........ .. :.. ., ... . .... , ...... .. ... 21
Annex-3: Assessed Net Worth.. ... . .... . ..... .. .. . . ... ..
........ ... .... ........ . ........ .. .. 22
.. . . . .. .
Annex-4: Computation of Assessed Capital.. .... ,, , .,, ,.......,,... .,... . ,, 23
~nnex-5:Assessment of Internal Generation of Capital.,.. ... , .. .... .... ... ...... ,,,. 25
Annex-& Leverage Ratio .... .,................
. ....... . . . . 28
,? '
Note : AII figures in the repoff refer to position of the period April I,
, 201 7 or for the
2016 to March 37;-20f7 end figures in parenthesis' previous year position U ~ I ~ S S
otherwise specified.
Confidential
INTRODUCTION
The Risk Assessment of Syndicate Bank for 201 6-1 7 under the Supewisary Program for
Assessment of Risk and Capital [SPAR@)was completed with March 31, 2017 as the
reference date. The assessment has been made based on the off-site analysis sf the data
and information furnished by the bank as well as the findings of the on-site Inspection for
Supervisory Evaluation (ISE) undertaken from-September 9 8 to November 3,201 7 and
various explanations Mered by the bank during the course sf inspection. The critica!
observations emanating from the inspection of few branches under Section 35 of the
> :
Banking Regulation Act, 1949, are also incorporated in the report.
As per the SPARC process, the Aggregate Risk Score of the bank is arrived at-
which is indicative of High Risk. On applying the assessed CRAR of 11.56% to the
PART 1: RISK ASSESSMENT
Risk Category Aggregate Risk

-
Board 0
-
Senior Management -- m
Risk Governance - m
Internal Audit 0
Governance-- & Oversight Risk 0
Credit Risk 0
Market Risk 0
Liquidity Risk
Operational Risk
Other Pillar I I Risk - 0
Business Risk 0
BANK LEVEL AGGREGATE RISK ! -. 0
Su~errisoryEvaluation of R i s k s and Control G a ~ s
1. Governance and Oversight: Aggregate score:-
Major observations
1.f 1 Board I score: 7
Promoters' Sharehsiding: The Government of India (GO]),being the only
promoter, had 7'2.92% shareholding as on March 31 ,2017 as against 65.1 7%
as on March 31,2016- This increase was on account of 7 7760 mn additional
capital infused by the GO1 on July 25, 2016. The major non-promoter
shareholders was LIC with i7.66% shareholding.
Board Composition and its Functioning: The bank's Board had four
vacancies in terms of section 9 (3) (e) ( f ) & (h) of The Banking companies
(Acquisition and Transfer ~f Undertakings) Act, 1970 and also under section
9 (3) (c) as regards the nominee director from Resesve Bank of India. The
functioning of the Board was deficient as: (a) The composition of the Board
did not havc representation sf members having skills in agriculture, SSI, risk
management, strategic ptanning, etc., even as the overall risk increased on
account of impairment of assets, near stagnating NI M, flon-ad herence to
regulatory guidelines etc. Further, the Chairman of the 17 Strategy Committee
did not have commensurate quaiificatiaa and experience, (6)it failed to give
guidance and active directions to address issues such as compliance to
various regulatory guidelines as reflected in provisioning against UDAY Bond
scheme, blocking of system driven NPA classification, issues relating to
sensitive Gl heads, RCSA, etc.
Conduct of Board Level Committees: a) Risk Management Committee
(RMC) failed to review and fix the risk limits such as AGL, IGE, Stop loss limits
commensurate with size and complexity of the bank as observed in tolerance
Fevel set for these limits which were not in line with the banking industry and
. - +-..
did nof factor in c i u a l utilization or business growth projectiohs. b) RMC failed

,the infirmities ih behavioral study, LCR computatibn, MTM
to take, riqte:<@f+
depreciatiofi sf; the investment portfolio, loss data, provisioning, etc. to assess
_ I _ . . . ,
Coflfideniial Page 4 of 38
and quantify the risk ~ r e v a z gini the bank%) ACB did not take note and give
active direction to address the deficiencies in the risk rating framework of the
branches as 99% of branches were rated l o w ' despite occurrence of frauds
and accounts slipping into NPAs in those branches. Weakness in functioning
of compliance department, disclosure issues in balance sheet, etc., were not
adequately reviewed by the cemmittee.d) The Investment Committee (IC)of
the bank was not meeting on frequent basis causing undesirable delay in
taking investment decisions, resulting in an opportunity cost for the bank. The
tC was not giving any active directions regarding investment strategy, fund
management, product ranges, optimum utilization of N O W , AGL, type of
positions ete. The IC also did not define permissible products, markets, types
sfpositions etc. within its investment policy.
Business Process Re-engineering Project 'Ananya' : did not achieve its
objectives reflected in tepid credit growth, burgeoning provisioning
requirements, inept human resources in critical positions/departments, etc.
'No cost benefit analysis was done by the bank for this project along with
comparison of performance with nsn-Ananya branches. No tangible
improvement was observed in the areas 0%ccstomer satisfaction, business
I growth, etc., in the branches where the project was rolled out.
1.I. 5 T ~ h Board
e failed to monitor and provide active direction for implementation of
1 Enterprise Data Warehouse and Business Intelligence (EDWBI) to meet all
1 internal MIS requirements as well as the information needs of the regulator as
1 the project (started in 2008)became dysfunctional due to, ineRcient project
1 management, lack of governance over IT platforms, etc. On account of this
I the MIS data flow in the bank was not fully automated and required manual
I
reconciliations from different sources. In the absence of an efficient MIS, the
data points submitted by t h e bank far WBS purpose underwent corrections
even though the bank was in the third cycle of RBS. Further, instances sf
1 wrong reporting, lack of granular analysis were observed in most of the reports
1 submitted to the Board senior management due to lack of consistency,
and
I integrity and availability sf data.
1.I .6 I Action points related to RAR (12) and RMP (1) of last two RBS cycles were I
still pending for cornplance. The sustainability of the compliance was not
observed in 46 RAR points (out of 163) and four (out of eight) RMP points.
-
The bank projected a business growth

12% and average deposit rate of 109'0-1 2%) for the next five years. However,
in actuals, the growth was only 0.3% in advances y-o-y and in case of deposits
II 1 there was a decline of 0.45% y-o-y. Thus, the business projections reflected I ,/?
- .3
in ICAAP were unrealistic and there was no review of the same.
1.1.8 Board Oversight of 6yber Security Functions: Action points were pending
for compliance (18 stat of 112 points) w.r.t compliance to cyber security
0
framework of RBI and 19 out of 96 actions points were pending for compliance
I I from the IT examination conducted by RBI during FY There was no
I2016-17.
I
I I review and direction by on these points keeping in view
the Board action
I the
/ was delay in floating RFP as well I
1 vulnerability afthe bank. Further, there of
I I
I as procurement of critical IT infrastructure to ward off risks on account of
Advance Persistent Threat (APT), Firewall Management, Enterprise mobility,
Packet capturing, ATM security.
I.I.9 Board Oversight of Consumer Protection
functioning of Internal Ombudsman (18) did not capture the position of the
i 1 complaints received by the bank during the quarter or half yearly basis based I
IT+- on the extant RBI guidelines including the reasons %orthe rejections.
Senior Management
m l l n v o l v e r n e n t of Senior
s
~anagernent: ~ h =involvement of senior
v
0
I ( management in the functioning of the bank was not satisfactory as observed I

from the following instances: a) automated NPA identification process could
be blocked at GM level in terms of order dated September 5, 2014 of the
erstwhile ED. However, the implementation of the stated directions in the ED'S
order were not ensured. Moreover, in some instances, these directions were
used fo.( thei,bclrposeof blocking the accounts from slipping in the lRAC status
* i ; $ $ : ' r i - , : -, ,
based4n"'$poid
,.-. of recovery. These accounts were blocked from the system
.,
,
* ..- .'
" .>,
<
. -.
-',,
"E-A. :!, 5
Confideniial
--. , - Page 6 of 38
r-] driven NPA classification for 'rea'sons such as expectation of payment at a1
I 1 later date which was beyond the day from the due Also, this practice 1
90" date.
I I was not in the notice of Top management of the bank. During current IS€,1
I I some of these blocked accounts were downgraded on account of insipient I I
I I weakness, overdrawing in ODICC accounts, failed resiructuring, etc. Further, I

1 1 ever-greening of accounts were observed wherein, competent authority I
I 1 sanctioned adhoc limits and allowed full inter-changeability between FB and I
I ( NFB just before the 90th day in QDICC accounts to regularize such accounts. (
1 I b) Of the total vigilance cases, 42.06% during 2015-16 and 46.04 % during 1
1 2016-1 7 were against the top five internally graded senior officers (Scale Ill- 1
1.2.2
VI1).
i
Delegation of Oversight Functions: During recruitment process through
IBPS (2016-1 7) the bank indented 2025 Probationary oficer (PO) vacancies,
out of which 1688 candidates joined the bank leaving 305 unfilled vacancies.
I 1 The bank did not fir/ up the vacancies through the selected candidates in the 1
I 1 waitlist category citing reason that the envisaged branch expansion plan did 1
I 1 not materialize. Though the approval for the recruitment process was taken 1
from the Board, the decision for not fitling up the identified number of
vacancies from the waittist category was taken by G M , HRDD without
informing to the ED1MDtBsard. The issue was challenged by the concerned
candidates in the Hon'ble High Court of Murnbai leading to reputation risk for
the bank.
7.2.3 Conflict of interest was observed as same ED had credit sanctioning,
i 1 monitoring, NPA management and Inspection, responsibility including RMD 1

I
which was against sound governance practices.
The bank had neither
- - -identified
- key persons nor
I I had a key-person risk policy, (b)The bank had during the cwrse of inspection 1
I 1 prepared an adhoc document indicating the names of alternate General 1 ,
I 1 Managers who will act as second line in case of absence of t h e former even I >
1 1 without looking in b the conflict of interest.
I
Effectiveness of Senior Management Functions: The bank identified a series
of frauds happened (during 2011-2916) in few Jaipur branches of the bank
involving an amount of i10558mn during February 2016. The bank had not
shown it as fund based exposure (even fhough there were cases of bill
discounting, ODIC6 limits etc.) and instead treated it as fictitious exposure.
The bank did not provide for these frauds but disclosed it under 'Other
Expenditure (T 8820mn) under operating expenses as an exceptional item in
its P & k of the year 2015-20 16 in contravention to the provisions of extant
IRAC and fraud MCs, Incidentally, an office note dated April 28, 2016
approved by erstwhile WID directed to treat these frauds as loss assets
suggesting provision of Z 9548 mn. This led to under-reportingof the critical
indicators Iike movement of NPA, provisions, GNPA, NNPA, .etc. Also, it
violated listing obligations and disclosure requirements of SEBI leading to
breach irr market conduct. Further, the transaction was done ostensibly for
availing the tax benefit,
1 1.2.6 1 ms control over the branches and the HOs control over the 20s was slack (
1 I
I farmers under corporate tie-up arrangements which was being grossly mis- II
- as evident frorn:(a) nan-availability of data in regard to finincing of sugar
I 1 utilised at branch level and some of cases were also being pointed I
( the these
out in the coficurren%audit and RBIA reports. (b)instances wherein the branch
and the concerned RB had reported the case in FMR-1 as fraud, but, the HO
had not agreed to the same (c) the branched renewed/ enhanced the limit of
the borrower before obtaining RO sanetion (d) no record of visits of Regional
1 I Managen (RM) even to the branches which were fraud prone (e) frauds w.r.t
I
pisci-culture accounts were confirmed in one of the ROs by the Regional
Inspectorate as well the vigilance department, yet, HO did not classify it as
fraud but advised the RO to re-examihe the case. (f) Multiple cases of frauds
were reported as single instahca to RBI.
--
The b. d
. k had 4285 GLs out of wMch only 85 were recon GLs i.e. which had
either exact or multiple matching for reconciliation purpose. The rest were
non-recon GLs where manual entry was permitted irrespective of the nature
, . . . , . . L " . > . ., .,. . . -,
~onfidenli~l '
I . . . _ L . , , "
Page 8 of 38
of the GLs (i.e. even h/thout checking'underlyingdebit or credit). No functional
ownership was assigned far the GLs, and large number of GLs had zero
balance for a long period, but, no review and rationalization exercise was
undertaken by the bank. Further, the offsite monitoring cel! (OMC) was
monitoring only 10 GLs which the bank classified as sensitive, thus, rendering
it ineffective. In view of the above, GL rationalization along with defining of
functional ownership and strengthening the monitoring by Qfi-site Monitoring
Cell was required.
1.2.8 Monitoring of the compliance function by the C60 was not eficient and timely
as evident from: (a) pendency in RAR and RMP points of last RBS, (b)
inadequate sample testing, (c)cases of wrsnglfalse compliance, etc.
1.3 Risk Governance score: -A
1.3.1 Adequacy of Risk Management Functions: There was no review and
periodic feedback from Board, Senior Management and Internal Audit which
got incorporated into the risk management policies and practices. RCSA
framework of the bank was inadequate due to the following: (a)the policy did
not define what was inherent risk for the bank and focused only on residual
risk such as Incident management and reporting, KRI exercise etc. (b) the
templates did not capture effectiveness sf eontrot by measuring quantum of
risk before and after the control was in place (c) no KWls were defined for staff
frauds, non-credit frauds, loss quantification due to frauds, etc.(d)it failed to
dl' capture attempted frauds, password compromise, near miss incidents, etc.,(e)
linkage between RCSA findings and internal audit was not obsewed, no
functional separation of policy formulation and monitoing in RMB itself, f ) No
forward looking stress test scenarios and analysis were designed to find out
the p~tentialrisk exposures far bank specific, market specifie and macro-
economic wide adverse movements
1.3.2 The risk management function (a) lacked strong MIS for reporting, monitoring
and control, (b) d ~ dnot review lending beyond delegated powers at branch
level even though there was increase in instances of quick mortality leading
to rising NPAs, frauds, etc., (c)risk rating and credit proposal preparation by
the same person at branch level providing incentive for subjectivity in rating
1 1 which was seen in most d advances slipping at least a notch lower in terms (
of internal rating within a year sf Sanction.
1 1 risk perspective as member of Credit Approval Committee (CAC). He also (

needed specific training keeping in view the complexity of functions handled
C)
by him. The risk management function was not adequately manned with
necessary skill, expe~iseand experience required, given the complex nature
of the risk funetlon. Further, necessary trainings in areas like risk-modelling,
I 1 analytics,etc., were not imparted to hone the skills of the existing staff. 1
1.3.4
I
Mid-office at Treasury was only staffed with one junior level executive. )
Further, independence of RMD at Treasury Mid-office was c~mpromisedas
the Mid-office was functioning at; back-offtce in terms of its day to day
functions. RMD at HO as well as ALCQ, IC, etc., failed to take note of the P
:"
weaknesses in the Mid-nffics functioning even f hough deficiencies relating to
I I monitoring and reporting of stoplloss limits, rate scan. VaR, etc., were 1
observed.
1,4 I# krna C Audit score:-
1.4.1 Internal Audit Policy: The monitoring and follow-up of t h e RBlA reports was
I 1 deficient as observed from: (a) pendency in compliance to RBS-2016 I
( ( observations, (b)delay in closure of RBlA reports of the branches (2months I
I 1 to 10 months), (c) closure of audit reports without compliance to all 1 the
,__- 1 ( observations (some reports were even closed on closure of only 53% of (
observatiohs), (d) in all cases 10%of the observations were left to branches
without any follow-up from the Z61CO level, ( e ) failure jn tirneb
identification of frauds (as obsesved in Jaipur branch).
Confidenfial
- 2
Page .IO of 38
1.4.2 1 Implementation of Audit Policy: The annbal audit plan of the bank did not
factor (a) representative sample size, (b) manpower available ( c ) no. of
warking days (d) previous years' rating of the branches etc. Hence, with less
number of inspecting officers available to conduct RBtAs, the bank had
1 1 utilized empaneled retired officers (EROs) for carrying out internal audit. I
1I ( Further, the use of EROs for internal audit purpose was not considered as an I
1 outsourced activity even though EROs were attending to spot rectification by (
I
1 1 signing the same. Also, the bank did not ensure that the retired personnel so 1
I 1 engaged were not assigned branches where they had worked earlier, in I
fly violation of extant guidelines.
1.4.3 Quality of Internal Audit: The credit audit system was deficient (a) overseas
1 1 branch (London) accounts were not included in its punriew, (b) credit 1
I 1 monitoring division was not empowered to schedule credit audits even though I
I there was an increase in incidence of quick mortality accourrts, (c) credit audit
was not c~nductedfor all eligible accounts above 750 mn.
1.4.4 The rat-ing was done on business performance basis without giving any
I 1 weightage to the control parameters whlch constituted 60% of the total score. I
I 1 The branches were not commensurately rated during the RBlA exercise
II
I 1 despite increase in number of frauds and asset delinquencies, thus, defeating
I
1 the very purpose of internal audit. The internal audit did not take into I
consideration while finalizing the risk rating, inputs from functional wings, off-
site monitoring cell, compliance given 4s the regulators, etc. The bank's rating
1I I methodology pertaining to the scoring band various risks (esp. 'Low I

used for
I Risk'), faulty as the for slippage in rating branch to notch I
was range of a one
below was t a broad.
~
The internal audit framework failed to highlight gaps on account of: (a) large
number (2987)of memorandum of changes (MoCs) amounting T186547 mn
passed by statutory auditors, (b) recognition in asset impairment due to
blocking of system driven classification of NPA in CBS (c)inadequacies in
collateral management, (d) significant pendency in bills due for collection for
1
I
1 periods exceeding two years, (e)devolvement in mntlngent liabilities, etc. 1
I
a A
I t
Confidential
There was no review of compliance risk framework under RBlA as branches 1
having higher compliance risk were rated low. I
The Management Audit was mare reiteration of RBlA findings and did not
encompass critical analysis of risk concerns, decision making in the functional
departments, etc. The reports of management audit were not put up to the
iI
ACB for review.
IS Audit: The IS Audit set-up of the bank was deficient as (a) significant
number of deficiencies in application audit reports were pending for closure,
(b) no audit for standalone balance sheet and recovery package (Return to /
BCD) having substantial Pnancjal implications in terms of reported provisions (
and profit, (c) no plan to include periodic audit of all standalone systems and
applications, (d) non-rotation of IS auditors in critical areas such as DC, DRC
and Treasury, (e)the strength of IS Audit was grossly inadequate in terms of
number, skill and relevant experience, (f) no adequate specialized trainings to
IS Auditors in areas like Cyber Security, VAPT, Network Security ete.
2. Credit Risk Aggregate score:=

1 Major observations 7 ''"l
I )
Inherent Risk
Default Risk: The default risk sf the bank continued to be high on account of
increase in incremental gross MPAs and write off from slippage w.r.t total
exposure and increase in slippages in restructured standard exposure.
Further, SMA 1 86 SMA 2 exposure had increased. Continued high level of
unrated exposure accentuated this risk. -Law quality standard exposure (at
and below hurdle rate as also unrated for more than 12 months) continued to
be high. The bank reported GNPA of 8.5%, however, after assessment the
GNPA was arrived at 9.62%. Similarly, the reported NNPA for the bank stood
at 5.27% which incr@asedto 6.37% after assessment. The bank had breached
risk threshold I for indicators like asset quality viz. assessed NNPA CY(6.37
%) and profitability viz. negative return oh assets (ROA) for two consecutive
Confider?fiat Page 7 2 Of 38
years ( CY Assessed : -0.1 7% , PY : -0.56%), under the revised PCA
framework as assessed during ISE.
2.1.2 Exposure and tenor risk: The bank continued to be highly leveraged as ratio
I 1 of its aggregate exposure to net worih was 22.57.The incremental exposure 1

1 1 to stressed sector increased by as the exposure to project had /
24% loans
I
1 increased by 38% (primarilypower, weighted average
roads, etc.) The
1 residual maturity (WARM) of the bank's exposure stood high at 3.77 years
and remained high compared to peer banks thereby elevating the tenor risk
for the bank.
2.7.3 Recovery Risk: The share of exposure secured by financial collateral as a
I 1 percentage of total secured exposure was low at 5.74% which heightened the 1
I 1 recovery risk. The share of unsecured exposure at 25.37% of the total 1
I 1 exposure continued to be high in the backdrop of increase in impaired assets. 1
The recovery risk of the bank remained high on account of large number of
unsecured SMA-1 and SMA-2 exposures. The proportion of sacrificelwaiver
in case of OTSlGsmpromise proposals continued to be high at 42.46%.
2,1.4 Concentration Risk: The exposure to top 3 industries (Agriculture,
1 Infrastructure 8 Services), stood at 38.64% (CY). The loan impairment in
1 these industries was T61569 rnn (6% of the total outstanding balance in these
I 1 industries as on March 31, 2017). The exposure of the bank -to sensitive 1
sectors was 4.31 % sf the total exposure as against 3.88 % in PY.
2.2.1 Policy Environment: a) No functional separation was observed between the
I 1 policy formulations and monitoring division as both these functions were 1

I 1 carried out by Credit monitoring and Review Department b) There was no 1
I 1 policy on extending finer rates to the borrowers and no plausible reason was 1
I 1 given for extending the same to t h e borrower. There was no analysis put 1 Up
I 1 to the Board on the same (c) In some instances,bank had sanctioned loans 1
1 1 below internaltexternai hurdle rate both at iniiiation of loan and after 1
1 subsequent downgrade at the time of review. It does not incorporate additional 1
due diligence, carporate guarantees etc., required to mitigate the additio&
risk d) the bank did not define the stress sector in its credit policy.
B Assessment: (a) The bank had not assessed the risk
on account of increase in quick mortality cases by 704 % (by accounts) and
57'1% (by amount) during 6 Y over the position during PY. The same during
I 201616 was 46.05 % (byaccauilb) and 163% (by amount). CBS was unable
to capture the restructuring details viz. changes in moratorium period, fixation
I
of elongated repayment schedule and reset of installment due to coneessional
interest rates. CMRD was manually segregating al! such accounts for
reporting purpose including balance sheet disclosures, (b) CBS could not
identify the correct NPA date in case multiple facilities were availed by the
same borrower and in case of out of order accounk. In same instances bank
had different NPA dates in CBS, standalone system and MIS generated data
for the same NPA accounts. Thus, the bank's asset classification, NPA
movement and provisioning was not system driven. In view the above, the
reported data pertaining to fresh slippage, ageing sf NPAs, provisions, GNPA,
etc., was not reliable. (c) CBS could not identify account slipping into NPA due
to non-renewal of limits, continuously overdrawn beyond DP limits more than
90 days, non-obtention of stock statements, etc. In some cases the sanctioned
DP was inflated by permitting inclusion of receivables beyond 180 days,
including receivables in the form of the sundry debtors not related to the
project, inflating stock statements, etc. (d) there was n~ integration1 STP
between CBS and Integr~ted Treasury Management System (ITMS) to
categorize the credit exposures as NPAs when the investment turns in to NPI
and vice-versa, (e) a standdone database captured t h e restructuring details
till 2015, post which, the newly restructured accounts were added to this data
manually, thus prone to omissions, (f) instances of non-adherence to JLF
decisions under CAP by non-release of agreed sanctioned amounts even
beyond twQ years in contravention to extant regulatory guidelines, (g) no
mechanism to capture ~ d ; / 8 6devolvemefit crystallizing into fund based
liabilities, thus, leading to over-drawl of sanctioned OD/Cc limits and
,, > ., , .
, ., .
Confidsnlial Page 14 of 38
subsequently some of these accounts slipped in to NPA, (h) the total RWA
computed by the bank was under reported on account of incorrect application
of risk weights in case of un-availed credit limits I undrawn exposure to an
extent of T2168 mn as cancellable clause was not part of t h e sanction.1814
accounts under priority sector aggregating to T181 mn have been
downgraded during ISE entailing additional provision of 794 mn.
Controls: (a) Manual identification of group companies and computation of
group exposure was prone to errors, (b) Finer Rates were sanctioned on
adhoc basis in majority accounts without sufficient justifications. Concessions
in RQI, processing charges, commission, etc., were sanctioned to sensitive
sectors, CRE, NBFC accounts and borrowers below hurdle rate (Synd-5 and
below) as a matter of routine, (c) Collateral Management was deficient on
account of; (i) inadequate capture sf collaterals against the facilities in CBS
thereby branches entering the collateral details in adhoc manner in a separate
shared standalone system maintained at respective ROs, (ii) no
standardization of the list sf v a h s was done in CBS which was permissible
under financial csllaterals,(iii) the bank considered the market value of the
collaterals for provision purpose in case sf NqA accounts, thus, prone to
under-provisioning, (d) Valuation Reports: Branches were required to obtain
minimum two vatuation reports for properties valued at ? 100 rnn and above
as per internaj policy. However, it was observed that valuation reports were
obtained only from one value (e) Delays in review of internal risk rating of
accounts for more than two years even though review of loans were
conducted yearly (f) In aceeunts with ODflrVCDL, branch exercised its power
to allow multiple number of debit balanceslexceeding in sanctioned amounts
in a routine manner. In some cases, exceeding was allowed to borrowers
between 6-1 1 times in the year without adequate justification, (g) many
instances of waiving of LClBG e;smmissions by the sanctioning authority on
recommendation from the branches which affected other income of the bank.
BG with maturity period sf more than ?O years were issued by the branches
without approval of competent authority in vidatirar'of bank's credit policy,(h)
I --
nu ca-relation between risk rating and pricing (one internal rating mapped to
1 multiple external ratings b ~ t hhigh and low), (i) in some instances the limits I
I 1 were renewed or enhanced by the branches in CBS without obtaining sanction /
I
I 1 from the RO.

I I
2.2.4 / Monitoring B Review: Deficiencies such as (a) deviation from w i t 4
I 1 covenants prescribed in the internal credit policy was seen such as (i) higher I
1 quantum of loan and repayment period allowed without adequate receivables I
I
I I />
. , ,
in lease rental discount accounts ( i i ) deviation in financial benchmark ratios,

( i i i ) Delays in obtaining due diligence and search and status report (iv)
Additional limits sanctioned without sufficient collaterals (v) Waiverldelay for
conducting TEV study, (vi) Waiver of penally for delay in perfection of security
I / eic. were observed, (b) !n some CC accounts, the bank had permitted 1
I I deviations in margin requirements beyond internai thresholds and in others (
( I repayment obligations of borrowers was not being assessed, (c)permissions I
II I for deviation/relaxations were treated aspart of routine review policy andnot
I
I given based on merivadequate justification on case to case basis, (d) the bank I
I II did not have any monitoring of the sensitive as well as the stressed sectors-
Further, no sector wise exposure ceiling was defined and it dld net have any
I
linkage with the capital allocatior!
3. Market Risk Aggregate Score-

Major Observafions
In heren t Risk
1 I I i Banking Book: (@Thebase rate linked advances of &e bank &ere to the tunel
1 I of 41 3 1 % comprising of the sectors such as housing, education, MSME, etc.,
I
making MI1 of the bank vulnerable to interest rate shock when they get switched
to MCLR. 34.20% of the total amourit of loans over T 10 mn were prepaid
posing an embedded aptionaiity risk and the bank did not have a mechanism
to monitor. it, .(b)
, . . oh account of premature withdrawal of term deposits up to an
extent of 54.25% as compared to the total matured d e p ~ s i t sexposing the bailk I
oni id en tiat Page 76 of 38

to ALM mismatches in 6 months to 1 year bucket,(c) the impact of 200 bps
change in the interest rate could lead to erosion of net worth to an extent of
12.20% on account of mismatch between Rate Sensitive Assets and Rate
Sensitive Liabilities across durations. The duratian mismatch was primarily
driven by the more RSAs being in the 29 days to three months bucket. This
would also have substantial impact to an extent of C 9850 mn on NII when the
advances would be re-priced in falling interest rate.
3.1.2 Trading Book: The bank was exposed to interest rats risk in trading book on
account of :(a) significant impact of general market risk on the Tier I capital
(13.08%) wing to high basis and tenor risk as there was substantial increase
in horizontal and vertical disallowance (securities with residual maturities up to
26.14 years in AFS book), (b) High PVO1 due to l ~ n g e rduration of the
government securities thereby exposing the portfolio to large variability (MTM)
as well as interest rate risk when the market would be under strain. This could
also lead to an erosion of capital %othe tune of 5.89% of Tier I capital, (c)
utilization of PVOl was highly volatile on account of investments in short
duration instruments primarily in cash management bills (CMBs) to the tune of
mn,Id) Market value of
?1,07,458 mn out of total trading book of 7 2,70,000
equity in the trading pestfolio was to an extent of 14.22%of the total investments
in the trading book. 44.34% of equity pcprtfolis was in unlisted equities. There
Pr- would be an impact of 3 7280 mn an the P&h of the bank on account af fire-
sale of this illiquid porifolio. Thus, bank did not have a clearly defined strategy
for investment in equity instrumenrs by taking into consideration the earning
volatility and liquidity.
3.2.1 Risk Identification and Assessment: (a) Though the investment in mutual
fund (MF) portfolio in one of the quarters during the year crossed the prudential
limit of 10% of last year's net worth in contravention to extant guidelines the
committees like IC,ALCO failed to take note of t h e same (b) The bank
purchased short-term MFs and parked the same in its AFS book. These were
sold closer to the 90thday indicating the intention of the bank to avoid capital
, '
charge on the same. The bank also exposed itself to interest rate risk in case
of adverse market movements, by sellin$ such instruments as Iiquid
investments though these instruments had a longer tenor for its redemption, {c)
The bank was doing MTM of investment p s r t f d i ~on month end an notional
basis and reversing the depreciation, if any, in the trading book. Hence, it was
not crystallizing the losses (including equity investments) in the trading book.
Thus, the reported trading income did not factor in this trading loss thereby r\
inflating the same, (d)The strategy for fund management did not cover funding,
time and call risk arising out of unanticipated withdrawals of bulk deposits or
non-renewal of TDs, rise in impairment of assets, crystallizatian sf contingent
' 0
liabilities etc.
Controls: (a) Tenor risk was not captured correctly on account of fixing a
uniform liquidity premium (0.25%) far the advances irrespective their tenor, (b)
no mechanism to monitor the cancellation of foward contracts which were not
utilized within the due date as per FEDAl guidelines exposing the bank to
market volatilities in case sf adverse movements, (c)No mechanism to monitor
outstanding forward contracts at any point in time exceeding the customer's
eligible limit. Also, the eligible limit was sanctioned on adhoc basis in
contravention to extant guidelines (i.e. either the average of the previous three
financial years' actual export turnover OF previous year's actual turnover
whichever is higher). Fudhemora, manual monitoring of overdue forward
contracts by the branches, as a result the bank could not track receivables due
on account of the outstanding cohtracts and no co-ordination was observed
between the treasury and the branches on the same, (d) In case the customer
failed to submit the documents within 15 days on more than three occasions
during a year, the bank did not insist on booking new contracts with the same
customer on production of underlying documents only,(e) For cancelled
contracts, before passing the gains to the customer, the bank was fiat taking
any undertakhg
..
,, that, the same will hot be re-booked or ensure the caficeliation
of uflderlying exposure in contravention to extant guidelines. An exception was
observed where gains were passed to a particular customer (forward contracts
to an extent of 9% of total volume) ilmmediately, whereas, losses were realized
from the customers on the due date, (f) the bank did not have a 'Turnaround
Time (TAT)' between the deal done and dea! punched, thus, even deals struck
in the morning hours around 10:OO a.m. were punched at around 500 p.m,(g)
The fund management desk of the bank focused on CRR maintenance, yet,
treasufy was not even aware of large outfIows on account of disbursements of
big ticket loans or maturity of large deposits. It resorted to borrowing under
MSF three times and call money 37 times (for the period under review) during
late hours of the,day just to maintain CRR.
Monitoring and Review: (a)There was no separation between front, mid and
back office as observed from the roles assigned to the users in the concerned
sections in Integrated Treasury Management System(lTMS) e.g. back office
user had access to deal entries, configuration sf CRR parameters, entering
market rates., ebc.,(b) The rate
scan mechanism ta track the interbank deals
which had substantial variations w.r.t prevailing market rates was run on an
adhoc basis and no rationale was observed for t h e tolerance limit set to capture
the deals under rate scan, (c)The mid office failed to monitor various limits like
stop lass, deal wise limits, counter party limits, AGL, lGL in real time basis as
these risk limits were monitored manually only at the day end thus exposing
the bank to substantial market risk. Further, there was no monitoring
mechanism to capture off-market deals, thus, rendering the mid-office
ineffective, (d) The cancessional rates given to the customers were not
configured in the system and were monitored manually in the front office, (e)
The correct computation of N O W was not ensured an account of receiving
data from London branch with a lag of two days, (f) Since the bank did not back
test its VaR model, the correctness of the model to capture volatility and
potential ! Q S S ~ Sof its investment portfolio was not ensured, (g) The stress
testing mechanism of the bank did not consider all the scenarios encompassing
t h e bank specific, market specific as well as the combined scenario to factor in
all the significant macro-economic events. like Brexit. maturing FCNR (B)
deposits as well as more frequent events like Fed rate hike, macro-economic
policy review, etc.
4. Liquidity Risk Aggregate Score :=

1 Major Observations I
Inherent Risk
Concentration of funding sDurces was visible on account of: (a) unencumbered
securities constituting only 40.32% of liquid assets, (b) liquidity to an extent of
25.19% only was available to the bank on account of higher proportion of loans
other than demand loans, (c) top 20 depositars contributed 209.28% of liquid
assets up to 14 days which exposed the bank to higher risk of funding
concentration (d) CASA constituted only 29.12% of total deposits, (e) inability to
fund the loan b s ~ kthrough stable deposits leading to over dependence on
outside liabilities (f) bulk deposits to an extent of 27.1 1% of total outside liabilities
at a rate higher than the median rate indicating liquidity stress due to higher cost
of such deposits.
Stress Liquidity was enhanced on account of: (a) higher reliance on bulk deposits
(33.09% sf total deposits), (b) volatile liabilities funding earning assets to an
extent of 41.77% indicating dependence on shod term interest sensitive funds,
( c ) net outflows in buckets up to 14 days was to an extent of 36.04% for the top
20 depositors, which exposed the bank to risk arising out of high funding
concentration. Fusther, the bank was also exposed to withdrawal risk on account
of any rating downgrade of these depositors since most of them were institutional
deposits,(d) non-availability of liquidity buffer through unswapped foreign
currency funds exposed the bank to liquidity risk from f~reign currency
operations, ( e ) behavioral study failed to capture the sweep in I sweep out from
the CASA deposits for creation of term deposits thus making bank unaware of
liquidity mismatch in short term buckets,(f) LCR computation was incorrect on
.. of: (i) t h e bank did not have a definition of retail and small business
accqunt I
customers, (ii) operational deposits were not being captured, (iii)outflows due to
_L' .
1 unsecured wholesale funding incorrectly captured since na behavioral study was 1
I 1 done, (iv) run-off in undrawn committed credit and liquidity facilities for small and 1
I 1 retail business clients noi captured correctly. I
I
I
4.1.3 Structural Liquidity: The position of the bank w.r.t. Structural Liquidity indicated
vulnerability in the balance skeet on account sf : (a) higher proportion of stable
long term funds (64.50%) utilized to finance illiquid assets and embedded
I 1 illiquidity to an extent of 88.08% in the balance sheet, (b) negative cumulative I

i 1 mismatches (in both domestic and foreign currency) in the buckets beyond 30 1
1 days indicating higher cash outfiows as compared to inflows, (c) The behavioral 1
I
I 1 study of the bank suffered from deficiencies e.g. lack of consistency in setting up 1
I confidence intewal, capturing of quarter end data spikes, etc. Though the bank
had significant liquidity buffer in the form of excess SLR, no visible evidence was
I 1 seen to transform the ALM structure and composition of the balance sheet 1
1 1 through utilization of the same.
I
4.2 1 Control Gap Risk
I
p
1 4,2.1 1 Policy Environment: The liquidity management of the bank had the following 1
deficiencies: (a) higher tolerance limits set for the liquidity ratios (stock ratios)
and no analysis of the positive cumulative mismatches observed in SLS buckets
1 1 indicating non-monitoring of fund deployrnent,(b) no calculation of cost of 1

carrying excess liquidity through internal pricing leading to unawareness of
opportunity cost involved, (c)no definition of illiquidity in the investment portfolio,
(d) intraday liquidity(1DL) having primary focus on maintaining CRR rather than
managing payment and settlement obligations thereby resoding to higher cost
borrowing windows, [ e ) AhM policy silent on intraday liquidity indicators and
rollover of overnight exposure for IDL availed by customers.
4.2.2 Risk Identification and Assessment: Behavioml Study conducted by the bank
was deficient on account of :(a) inconsistent data with regard to premature
withdrawals and rollover of term deposits, (b) unable to compute expected Ievel
of LCs I BGs devolvement as the bank was not taking into consideration net
- . , <, ,
L
I
. . -i. .
. .- ,
worth and past experience of the borrower, etc., Qc)spikes obsemed in CASA
component were not factored in, (d) un-availed CCIOD was not captured.
Controls: (i) lntraday liquidity ( D L ) monitoring had several shortcomings: (a)
non-coverage of foreign branches under IDL, (b) no stress scenario designed for
IDL, (c>no mechanism for flow of information w.r.t to IDL facility from Treasury
to other wings of the bank, (ii) CFP didn't outline the remedial action to be taken
in stress s~enariolike: a) reduction of risk limits, b) reduce risk by enhancing
collateral, c)increasing capital, d) change in pricing policies etc. The
effectiveness of certain key parameters such as contingency funding lines
including rep0 mechanism, the speed with which funds can be raised etc. hadn't
been evaluated. She CFP lacked important information such as names,
designations and contact details of members as well as alternate designates.
The bank had not mentioned the following in the CFP (i) Time needed to tap the
amount to be raised during crisis jii) inputs from stress tests (iii)testing the CFP.
Monitoring and Review: (a) Due to inadequate implementation of Fund
Transfer Pricing (FTP) the bank was unable to monitor: (i) deployment of funds
between Treasury and London branch, (ii) csmpufation of product wise
profitability,(b) There was no clear direction from ALCO in regard to optimum
level of liquidity buffer, the Treasury was taking the decision in this regard on
adhoc; basis, (c) Dynamic Liquidiw Statement (DLS) - (i) lack of realistic
projections due ta wide variations between actuals and projected figures given
by the functional wings, (ii) back testing of DLS served very limited purpose as it
did not factor in off balance sheet items, investmentsetc., fd)MCLR computation:
The deficiencies from the last W R on MCLR continued to remain in the bank
such as: inflating operating cost (by inclusion of donation, prize money, tour
expenditure, etc.) and return on net worth. Further, there was no mechanism to
factor in liquidity premium based on the tenor of the advances. Again, the spread
computation was deficient an account of: (i) fixing of concessisnal business
strategy premium
-
.5..
for borrower who are rated below the hurdle rate, (ii) no
'
correlation between internal rating and spread components, (iii) inclusion of

unallocated cost in spread to match the base rate, etc., ( e ) Inaccurate capturing
Confidential Page 22 o f 38
of implementation as well as funding risk in project loans, was evident from many
pawqand road projects becoming unviable on account of: (i)multiple extension
of DCCO (ii) revenue generated from operations not slrfficient to serve the debt
obiigations,(iii) projects not reaching the full implementation capacity even
though DCCO was declared to be achieved, (ivj non-obtention of necessary
regulatory clearances, e tc.
5. Operational Risk Aggregate score:.

I Major obsewations I
)TT Operational risk: a) The number of bugs (programming and database )
I
related) detected or identified in the bank's IT systems and applications had
increased rubrlar6aliy fmrn 187 in PY to 474 in the C Y , b) There were long
spells of unscheduled CBS downtime of 249 minutes out of the total
I I unscheduled downtime of 363 minutes in CY (PY: 105 mins). I

b.1.2 People risk: i) increase in number of employee terminations due to unethical I
behavior (CY:6.67%; PY: 4,65%), ii) Many vigilance cases against employees
(139 cases during CY), iii)Amount involved in internal frauds was I,94% of Profit
After Tax for CY. Further, 10.99% of the total frauds during CY were committed
I ( by bank's employees, iv) The haining expense of the bank was only 0.12% of I ,
1 1 the total operating expenses indicating very less investment in capacity building.
1
I
v) The number sf existing vacancies (and due f ~ retirement
r in one year) for
senior management l key employees war still high at 21 25% in CY (PY: 46.8%)*
Manpower in scale IV onwards was short by 6.1 1 % in the CY (PY 8.06%). 1
External Risk: The bank was vulnerable to external risk as
I rise in the amount of external frauds by customers which was 164% of the PAT
during CY (PY: 86% of the PAT); reflecting infirmities in bank's internal'systems.
Compliance risk: The bank had paid 730 mn penalty imposed by RBI on I
account of nan-adherence to guidelines on KYC and Import of Goods &
Semices.
Process Risk: Non-compliance with KYC requirements had increased
substantially, Further, the bank had categorized 2.5mn customers as high risk,
out of which E-KYC was pending for 52.5% customers. Since the Automated
Risk Review of customers by linking KYC with CBS was not in place, the bank
was not maintaining %hedetails of movement of accounts from medium to high
risk and also the status of updation of KYC.
Control Gap Risk
Policy Environment: a) The bank's succession policy did not idenfify key man
risk in critical areas like Front Office and Mid Office, b ) The bank was yet to
implement the exit policy formulated for officers and workmen employees, c)
The Returns Governance Group formed for setting up entire automation process
and to ensure timely submission of returns ta RBI was not convened since June
09, 2814 as against bank's MIS poticy, even though the automation process in
the bank had not been completed, st) Despite being pointed out in last year's
ISE, bank had not yet formulated palicy for ensuring adequate insurance cover
against external events, e) Quarterly structured meeting of the CVO with MD
and CEO of the bank was held only once in CY, f) During CY, 88.49% of frauds
were reported to RBI with a delay of 22 days to two yw. from the date of
detection.
1 5.2.2 ) Risk Identification Assessment: I
1
-5.2.2.1 IT Area: a) The following cyber security gaps assessed by the CSlTE were hot I
I I bridged- i) Providing Enterprise wide Mobility Solutions that was encrypted and I
1 1 separated from other smartphone datalapplications (li) measures to initiate a 1
I I remote on wipe rendering
the containerized app 1
the data unreadable. iii)
I I Application level whitelisting software that specified the list of approved /

I 1 applications permitted to be present and active on a computer system 1
,#+". - I applications, iv) Risk Based Authentication for delivery channels like Internet I
Banking, Mobile BarBking, IMPS and UPI, v) The action on the CERT-In
, advisories were not fully complied within timelifies such as securing patches
I'
f r 'Wannaery"
~ ~ malwsre, providing robust control measures to prevent
, .-
rhalware attack on ATMs, etc., b) The security at the Security Operation Centre
A, , , -- I
ConEdenflat page 24 of 3:
(SBC) of the bank was lax i) as the access was not restricted through biornetric
or card based system, no baggage scanner or ingress register, ii) No bank
officials were present beyond the working hours, leaving the maintenance and
monitoring to be done by the vendors, c) The Data Leakage Prevention System,
Data Encryption solution and Data base access Management systems to ensure
confidentiality, integrity and availability af data was not in place. There was no
system ta evaluate the financial loss caused by the CBS downtime and recover
liquidated damage, from the system integratorlprovider, for the downtime. d)
The change management far the applications, log of changes made to
application source code and secure coding practice for the 34 in-house
developed applications based on threat modelling was also not in place, e) The
audit by an external agency in respect of adoption of new technologies to
evaluate existinglev~lvingsecurity threats was not done before introducing to
critical systems of the bank, f) The assessment of obsolescence of the hardware
based on end of life, end of SUPPOI? and develop a suitable replacement strategy
was not being done by the bank, g) VNPT for several customer facing critical'
web-applications like National Electronic Toll C~llection(FASTAG), Aadhaar
authentication System, Ges tagging mobile applications, etc., were not done by
the bank.
5.2.2.2 Non IT area: a) There was no mechanism to ensure completion of the targeted
preventive vigilance exercise (PVEs), (during PY: 777 completed against 208
branches target and during CY: 618 against 870 branches), b) Total number of
customer complaints had increased by 87.68% during CY as compared to PY;
As on March 31, 2017 there were total 404 pending complaints, c ) There was
no centralized system to maintain %herecord of the complaints which were
monitored, tracked and closed manually, d) The process of AM1 alerl generation
for analysis and reporting to Flu-INB was through manual intervention exposing
the bank to compliance risk.
5.2.3 Control: a) The red team exercise was net done to identify the vulnerabilities,
business risk, assess the efficacy sf defenses and check the mitigating controls
already in place by simulating the objectives and actions of an attack
-
Confidential
packet analysis for enhanced visibility of traffic fordetection and prevention of
various threats and f~rensicanalysis, was not implemented in the bank's
network as against the RBI guidelines on cyber security framework. c) Network
Automation Tool (NAT), Anti Advances Persistent threat (APT) solution and
Network Access Control (NAC) to provide endpoint security technology, system
authentication and network security enforcement were neither in place nor the
bank had assessed the risk of non- implementation of these. d) Several
observations of internal and external VAPT were not complied, e ) The change
management solution was implemented for servers and hardware but the same
for applications and software was absent to identify the vulnerabilities in the
system. f). During the RBI table top cyber drill exercise in which the bank
participated, it could not identify any cyber-attack based on criticality, nor assess
the severity of the impact; it did not have any escalation matrix, nar structured
incident scenario register to identify, protect and recover from threats.
6. Pillar II Risk Aggregate score-

I Major observations I
bank was exposed to high reputation risk due to; (i)
1 / Decline in revenue growth (CY: 2.94%. PY: 8.35%). decline in client growth (CY: I
I I 5.90%, PY: 6.5%) and low growth in the share price of the bank at 5.32 K during I
I I FY16-17. (ii) Continued increase in the number of banking ombudsman cases
I
I 1 awarded against the bank (CY: 21.62%, PY: 14%).
I
I
I I deviation from projected PAT duo to increased provisioning requirements in high I
I I value frauds and asset impairment. The projected PAT of Z 10000 rnn for 2017-'1
18 was not justified, considering the S 16435 mn loss incurred by bank during
previous year. (ii) Market share ih advances (CY 4.81%, PY 8.82%) and
.
commission and fee income in the total income sf the bank at 2.86% (PY: 2.88%)
also declined.
-A
Cont7den6at Pegs 26 of 38
Residual RisHGrcrup Risk$) Higher currency risk due to increase in percentage
of foreign currency guarantees invoked (PY:3.80% to CY: 5.52%). (ii) High
collateral risk as the aggregate value of collateral at time of sale was only 70% of
the value at time sf classification 0%account as NPA.
Control Gap Risk '
Policy Environment: (a) The mid-term strategy document for the period 2817-
2621 had the following shortcomings: (ij The bank's strategy document did not
deliberate on target market share, targeted customer profile and the basis of
CASA, retail, Agriculture and MSME pr~jections.(ii)The strategy plan projections
were unrealistic and not in alignment with bank's current business profile and
economic trends. (iii) The bank's business plan had projected CET1 ratio and
CRAR below current risk appetite limits and capital projections assumed
significant levels of retained earnings without adequate basis (b) The bank did
not have a policy/documented framework for assessing the model risk, group risk
and pension obligation risk.
Risk Identification & Assessment: (a) The bank did not have in place
process to assess the risks in not achieving each strategic plan objective. (b)
Reprrtational risk assessment as part of ICAAP did not consider possible loss
1
1 corporate culture, perception of employees, risk management and control II
events (except actual losses and penalties levied), peer group comparison,
environment, transparency and accountability. (c) The bank continued to use

mortality table published by LIC (1996)in place sf lALM (2006-08)provided by
IRDA. The difference in the computation of pension obligation as per mortality
table of blC (1996) and sf lALM (2806-08)
table furnished by IRDA and informed
Controls: ( a ) No mitigation plan was in place far strategic risk factors (such as
I market share of bank, percentage increase in branch network, Rank of the bank I
I in terms of MCLR, etc.) assessed as high risk. (b)There was no framework for I
I reporting the number of limits breachedltriggered with regard to reputational risk I
1 events during the quarter ta senior management. (c) internal validations were I
No
I conducted bv bank for models in use. 1
Monitoring & Review:(a) The score card method for assessment of strategic
and reputation risk, had the following deficiencies (i) Strategic Risk- (i) There was
no defined methodology to assess qualitative risks arising from strategic planning
and changes in statutory, regulatory and macro-economic environment factors.
Equal factor weights (25%) were adopted for the sub-factors which was not
appropriate, ii) Regutational Risk - (i) Factor score for market perception was
judgment based. (ii) External credit ratings did not include ratings of Tier II Bonds
of the bank. (iii) Financial parameters (ROA, ROE, growth in advances and
deposits) were not included in the scorecard (b) No corrective measures
recommended by Assessment committee for high risk parameters in the strategic
risk and reputation risk scarecard and overall medium risk.
, , . .,
Confidenlial Page 28 of 38
Part II: CAPITAL ASSESSMENT (iNCLUDING EARNINGS)
I.Pillar 1 Capital & CRAR
The summary ofreported and assessed capital position of the bank as orl March 31,2017
is given below. Details are in Annex 4.
Basel I!! Capital under Basel Ill (!n 7 mn)
Particulars Reported Assessed 1 Divergence Reasons for

divergence$
Total capital (TC) 213471 204469 9Q02 On account of
fresh NPA,
,
Common Equity Tier 32982 123980 9002 existing NPA and
(CET1)capital NPls.
Tier i(T1) capital 9002
Tier 2 (T2) capital 49244 49244 Nil
Basel Ill Capital under Basel Ill (In O h )

- pp
Total capital (TC) 12.03 11-56 0.47 On account of

fresh NPA,
Common Equity Tier 7.50 7.01 0.49 existing NPA and
1 (CET1)capitaI NPls.
Tier l(T1) capital 9.25 8.78 0.47
Ties 2 (T2) capital 2.77 2.78 (0.01)
-
2. Capital management, !CAR, ICAAP and stress testing

2.1 Bank's Capital Planning and Business Projections: The capital planning and
business projections of the bank were deficient:
(a) The business projections, net pr~fitprojections, etc., were overly ambitious. The bank
did not design any optimistic, baseline and pessimistic scenario for the ICAAP
projections. The bank projected average annual growth rate for the advances at 10%
which was optimistic considering the growth in banking industry and current
macroeconomic scenario. Similar was the case for deposits (I
0.2% of average growth
rate).
(b) The average annual growth for net profit projections was unreafistic at 105%.
(c) The capital projections given by the bank at an annual average growth rate of 37%
was based on its retained earnings y-Q-y. However, the same were unrealistic in view
of the unrealistic projections of net profit as mentioned in point b) above.
2.2 ICAAP: a) The risk appetite set by the bank for various risk limits were re-iteration of
the statutory ceilings mentioned in the various regulatory guidelines (e.g. CETt, GNPA,
EaR, cumulative mismatches, etc.), b) There were many instances where the limits as
well as triggers were breached and the ratification became matter of routine (e.g. GNPA
0
ratio, RQA, etc.), c ) The ICABP did not have a consolidated view of the risk management
organization structure, hierarchy I reporting structure embedded in it (d) ICAAP failed to
cover the materiality of the risks arising out sf reputation, strategic and model risk.
2.3 Stress Testing: a) The bank had c~ntinuedto adopt 0.30 GO-relationfactor for
composite financial stress for all three shes5 scenarios i,e. basc line, medium and severe;
which was inappropriate, as the impact on liquidity would be more in case of severe stress
on account of size and interconnectedness of the bank with the overall macroeconomic
environment. b) Operational stress testing did not quantify loss due to external events;
the bank had considered only one risk indicator (fraud and non-fraud losses) for
assessing the impact of stress tests for operational risk; which was in-sufficient t~ capture
0
all potential losses. c ) Results of the Stress testing were bekg put up to the Board with
delay of 2-3 months for all the quarters. Moreover, presenting the results of the stress
tests to the RMC anti Board on the same day, was indicative of the fact that there was no
obsehratian of RMC on the stress test results. d) The bank required 744000 mn to
maintain CRAR of 6.50% under baseline stressed scenario for the quarler ended March
31,2017,which had reached to 4.82%;whereas bank required 7142180 mn to reach !he
minimum CRAR of 10.25% as per the extant regulatory guidelines. e ) Instead of'tackling
the issue of increasirig loan impai
the portfolio (market risk) -!Re root-cause of stressed W A R , the emphasis
Cocfidential
management was on raising capital for improving CRAR. f) The bank was not including
the stress capital while assessing the overalI capital requirement. .
3. Assessment of Internal Generation of Capital

The bank could have issues in internal generation of capital on account o t (a) rise in
NPAs and NPls, (b) reducing NII, (c) dwindling profitability, (d) high number of frauds. The
details of the components of income contributing to the internal generation of capital are
in Annex 4.
h in order to augment the CRAR, bank had not paid any dividend for FY 2016-17.
'-$ 3.2~ u a i i t yofearnings
The total consolidated income af the bank increased by 2.goh during FY 2016-1 7 over the
position during FY 2015-16.During the same period income from interest earnings had
declined by 0.83%; whereas, the other income had increased by 37.79%. The interest
income on advances had declined by 2.66%; whereas, the profit on sale of investments
has increased by 93.62% during the same period. The above data shows that, the bank
was in profit primarily because of profit on sale of investments which may not be
sustainable. The total profit from sale of investment formed the 6.57% of the total income
of the bank. Gross volatile income had increased by 61.98% during the FY 2016-17 as
compared to FY 201 5-16; majorly due to increased income from trading by 93.62% over
0:-PY.
The bank's paid up equity capital stood at 79045 rnn as on March 31,2017 within the
authorized share capital of 730000 mn.During CY bank had raised total capital fund of 3
27060 mn (719300mn AT-I capital and 17760 mn equity capital infused by GOI; due to
65.17% last year). Reported
which the shareholding sf Go1 had increased to 72.92% f r ~ m
CRAR of the bank had improved from 11.?8%(PY) to 72.03% as on March 31, 2017. For
FY 2017-18, bank had mobilized f9580 rnn by Base[ Ill compliant bonds (74500rnn by
Additional Tier I and 75080 rnn by Tier-ll capital bonds). The bank's projected additional
capital requirement to reach minimum CWAR (of 1150% including CCB) and to attain the
Internal Capita! Ratio (of 12.00% set by the bank) by March 31, 2019 would be 737200
mn and 748440 mn respectively. The bark might have difficulty to raise the capital from
the market due to very less reported profit, assessed loss and adverse share price
movement.
5. Assessment of leverage ratio

The reported and assessed leverage ratio as on March 31,2817 of the bank was 5.j 7%
and 4.90% respectiveiy as against t h e prescribed regulatory minimum of 4.50%; the
,n
, -,
corresponding figure for the same were 4.08% and 3.94% for PY (Annex 6).
0
6. Supervisory capital prescription
The required capital for the assessed aggregate risk is a model driven process. The add-
on capital is the difference between the required capital (by the model) and assessed
capital available with the bank, Mowever, supervisory capital prescription is based on
supervisory judgment sf other elements like quality of earnings, ability of the bank to raise
capital, sources of capital infusion, level sf ieverage ratio, etc. Accordingly, based on the
holistic supervisory assessment of risk and the capital position of the bank, your
bank's supervisory capital is assessed as "INADEQUATE".
'f,
In view of the extant transitional arrangements for augmenting of the Regulatory Capital ..,
as per the requirements sf Basel Ill norms till March 37, 2019,the Supervisory Capital
Prescriptions, as of now, will only indicate the adequacy or otherwise, of Supervisory
U
Capital.
Going forward, the decision for implementing quantitative prescription of supervisory
capital will be communicated to-thebanks as and when taken.
cokeitial ' ' Page 32 of 38

Part Ill- COMPLIANCE ASSESSMENT
A. Compliance Culture
(a) Compliance culture in the bank needed improvement as the compliance given for
RARIRMP- 2016 was not satisfactory. The compliance given in respect sf absenrations
in the report were unrelated. Further, there were instances wherein the bank gave wrong
or false compliance without doing actual implementation. Some sf the deficiencies still
continued even though the bank had given compliance for the same.
(b) Quarterly campliance certificate to the regulatory, statutory and internal guidelines were
T.* "
given by the branches, which were collated at RO level and sent to CO compliance and
the same were put up to Board as well as RMC. At no level, any sample test check was
done to ensure actual campfiance though there were instances wherein the compliance
was given by the branches without doing any actual implementation. There was no
tracking of the e~rnpiiancepending to the regulatory guidelines q-o-q or even y-o-ybasis.
(c) No synch~onizatisnwas.abserved between Internal Audit and compliance, as there was
no exchange of information between these departments. Bn instances wherein the
compliance score was high, but, overall risk rating of the branch was low, there was no
further assessment done by the compliance department.
(d) The branches were selected on random basis for compliance assessment without
factoring in whether guidelines related to at! risk areas could be test checked or not. Thus,
there was no scope for representative sampling.
w-
'.' -,{e) There was no reporting framework between the London and 60,compliance. Thus, no
test checking of the host, parent regulatory guidelines as weal as internal circulars.
(f) Similarly, no reporting tine was observed between the compliance officers posted at the
RO level and CCO. Even, I30 compliance officers had no KRA defined for the regular
compliance work and no assessment of this function by CCO,
(g) There was no assessment and endorsement by CCO befare the launch of a new product
in the bank. Ne formal ar Informal mechanism was observed for exchange information
between the legal and compliance depadment these depadments.
8. Major Areas of Financial Divergence
Annex 1.
1. Divergences (shortfall) in Provisioning:

Particulars Remarks
I accounts
4513 Fresh slippage in 10

of Standard Loans corporate accounts
and 1814 accounts in
Performing agricultural short
term crop loan
classified as NPA.
Short 5 5442 1612 Wrong classification
provisioning of of NPA
existing NPA
Sub-total (NPAs) 4 829 28809 6125 1
provisions I
accounts!
outstanding ,
Shortfall in Nil Nil Nil
Standard Asset
Provisioning
Short 10120 2546
provisioning of
Overstatement 331 income reversal far

Income I Qiher fresh NPAS identified
during ISE
2. Divergence in Risk Weighted Assets (RWAs)
RWAs (In 7 ran)
Risks
Repoded Assessed Divergence Remarks
. _ -
was on account of un
,
availed credit limit of ?
Credit Risk 4 51274*1 1506813 (6728) 2160 mn) and reduction
of 78888 mn on account
NPA classification
during ISE.
Market Risk 143180 143180 Nil
Operational
1 7 8888 1 18890 Nil
Risk
Total RWAs 1774811 1768083 (6728)
C. Major Areas af Non-Compliance (Regulatory Guideiines)
ConMent/a[ Page 35of 38

Regulation Area I Subject of Whether
Reference (Para Non-Compliance the non-
8r Circular no.) compliance
was there
in the
previous
RAR
Para t I1 of Master Circular on Deviations observed priority Yes
F1DD.CO.Plan.BC bending to Priority sectcsr
.04104.09.0 112015 Sector-Priority sector misclassificatisn details in table
-16 dated July 1, Lending XI
2015
RBI/DBR/2015- Know Your Customer The bank has not completed Yes
16118 Master (MYC) Norms I Anti- risk categorization in all its
Direction Money Laundering accounts. Ci
DBR.AM k.BC.blo. (AML) Standards I
81114.81.0011201 Combating of Deviations observed as
5- 16 Financing sf customer identification and risk
Para 12 Terrorism (CFT) I profiling was not complete
Obligation of banks
under PMLA, 2002-
Customer
Para 3.2,1 and Master Directions on Delay in reporting of frauds Yes
3.2.6 of Frauds-Classification
DBS.CO.CFMC, and Reporting by
BC.No. 1123.04.00 commercial banks ,
--7
112016-17 dated and select Fls \
July 1, 2016
(Updated as on
July 03,201 7)
Para No. 3 DBS lnternar vigilanceh in Timely meeting of CVO and
.GO. Private Sectorlforeign MDlCEO No 3
FrMC.BC.No.9123 Banks
.04.00112010-
1ldated May 26,
Interest rate on ~sva-it

(f) of DBR.No.Oir. advances computation
BC.Gf113.03.001
2015-16 ,
dated December
17,2015
Para 5.4 jdj aster ~ i k i ~ a r ---7
DBR.Na.BP.BC.2/ Prudential norms on amount Of advances for which
21.04.04812015- lhcome Recognition, intangible securities such as
Asset , Classiflca~ion charge over the-gir
7.
16, dated July I , and
2015
1 Para 7 of
pertaining
I Advances
i Strategic
Provisioning
to
/
Debt I
under a separate head in
"Motes to Accounts"
Acquisition of shares under
-r
authority, etc. has been taken
No
DBR.BP.8C.No.l ~ e s t r & t u r i n ~ SDR-disclosure by banks in
01/21.04.132/281 Scheme the Notes to Accounts in
4-15 June 8,2015 Annual Financial Statements
--
Para 3 (vli) Strategic Debt The bank was not incorporating
of DBR,BP.BC.No Restructuring necessary covenants in all loan
,101121.(94.132/20 Scheme agreements, including
14-15 dated June restructuring, supported by
8,2015. necessary approvalsl
authorizations (including
special resolution by the
shareholders) from the
borrower mmpany, as required
under extant lawslregulatians,
to enable invocation of SDR in
applicable cases --
DBR.BP.BC.No.6 Risk Management CRO did not have the Yes
5121.04.103120 16 Systems -Rote of necessary and adequate
-1 7April 27,2017, the Chief Risk Officer professional
para 2 (c) (@RO) qualificatisnlexperience in the
-em risknt.
DBOD.No.BP.B@. Suitability and Custarner suitability and
4412 1.04.157120 I Appropriateness appropriateness was not
1-12 dated Policy reviewed as instances of
November 2 , booking foward contracts for
201 1 customers who did not have
1 RB112010-11f3381 1 '
board approved policy for t h e
same was evidenced.
A.P. (DIR Series)
Circular No. 32
dated December
1
Order though many CCIBD Yes
accounts were ~verdrawnand
2075, were in out of order status still
paragraph 2.1.2 1 they were not classified as
--
MC on IWC
norms dated July
The accounts 6;; accounts were not re-~
classified as 'standard classifled as substandard even
E F
01, 201 5, assets' should be though ever-greening was
paragraph 17.2.d immediately re-
1
. .,,
Confidential
14
15
16
17
-
MC
-
MC an
on
July 1, 2015
standard assets' upon
Risk Operational
Management and Guidelines anclTerms
Inter-bank
Dealings
and Conditi~ns for
dated booking
RBllFMRD12016-
17131 FMRD
Master Direction
NO. 1/2016-
17 dated July 6,
2016 -
contracts
farward
Bank had not'adhered to Para No
2(g) (iii) of the MC by not
verifying whether the aggregate
overdue export bill was within
'10% of turnover, etc., while
booking forward contracts.
IWAC Declaring the fraud as Bank had not done full No

norms dated July loss assets and 100% provision w.r.t Jaipur frauds
07, 2015 (para provision thereof
(ii)
4.2.9.
MC ori IRAC Identification of NPA Manual blocking of NPA in No
norms dated July based on record of CBS.
01, 2015 (para recovery.
2.1-2)
MC on
Prudential Norms
-
for Classification,
Valuation
Operation
Investment
and
of
Portfolio by Banks
(para 1.2.41)
Mutual Funds The bank breached the 70% No
investment subject to cap in one of Zhe quarters
prudential cap of 10% during psribd under review.
of last year's net
worth.
3-
.
n,
+e
_I
RBS 2017 Syndicate Bank - Annex to RAR
g.) JLF provided for closure of six and merger of two subsidiaries of -, demerger and creation of 4 new entities, transfer of some assets of
to these newly created companies, utilization of the 'sale consideration' towards reduction of existing liabilities of J S t to the extent of 3
55000 mn, conversion of the existing FtTb of amounting ta 7182 mn into equity and GRPS by CDR lenders.
h) and the new companies were said to have required additional capex loans from existing lenders of 1L to the tune of Rs 71250 mn, of
which P 55IbOQrnn was to be utilized for reduction of liabilities of Mlsand the balance for capex requ.irements. A had also proposed
0000 mn. Details of the 'Asset Monetization Plan' with respect to each of'the above four entities are given below:
for a c~rporateloan of ?I
I= (T in millions)
500*1
I
Particulars
1 JSAL j JCL i JSHL
Reduction of bankdebt 5500Q - I-
Additional Term loans 10000 24000 26000
Additional Capex loan ' 0.00 15008 1250 0.00
Conversion to equitylCCPS 10350 0.00 0.00 1 0.00
I
Syndicate Bank's exposure post 90 530 90 360

monetization
The bank's share in equityl66PS 182 0.00 0.00 0.00
Additional equity proposed 750 5000 750 250
As has been explained in preceding paragraphs, the AMP had involved re-djstibution of a substantial portion of ws previously
amounting among three related entities and further entailed elongation repayment tenor up to 25 years
4
3 R8S 2017 Syndicate Bank - Annex to RAR
-
Gnducted during February 14 22,2015 and its extractable reserves were considered sufficient for meeting the fuel requirements of bath
units.
d) The bank claimed that commercial opemiions of both units of the project had mmmensed, viz. of Unit I on September 3,2014 and of Unit
I1 on Febrtdav 21, 2015.However, the-plantfailed to achieve the necessary break-even Plant Load Factor(PLF) and failed to sustain the
rate of power generation necessary to ensure its operations on a comrnercialIy viable basis, which led to severe liquidity canstraints,
incapability of meeting its repayment obligation and led to its accounts being classified under SMA 2 by rtmjority of the lenders, including
Syndicate bank. A JLF was formed as per the extant guidelines and it was decided to implement a corrective action plan {CAP). This
CAP had provided for, inter alia, flexible structuring of the project loan facilities under the 5/25 Scheme and grant of additional finance for
funding devatopment of coal-mi ne and long term working capital requirements.
e ) Implementation of the CAP by the bank was poor with some of the mast important stipulations in CAP mandate were not fulfilled: - CAP
had mandated additional sanction of T 5.7l biDion Tor funding development of the captive coal-mine whereas the funds tie-up had been
finalized only for 74.j3 billion as sanctioned by various lenders; as against R 2.75 billion for cask flow mismatch only T I.65 bitlion was
sanctioned. Tie up of additional PPA's for coai based power plants was pending due to limited avaitability of PPA's on long term basis.
The long-standing tariff dispute remained unresolved; approval of the Madhya Pradesh Electricity Regulatory Cammission (MPERC) for
final projects cost sf T124.00 billion for which a petition had been filed in Nov 2015, had not yet been obtained and final tariff order
remained pending.
f] Syndicate Bank had approved the flexible structuring of its shaw of project loans amounting to Z 2580 rnn and also sanctioned ?I20 rnn
as additional finance during December 2015. It had also sanctioned a long-term loan of El20 rnn and Bank Guarantee limit of Z140 rnn
on March 23,2015 for acquiring the captioned mine (Amelia -North).
g) Since the share of bank finance for the non-IOC part of the cost: overrun had exceeded 10% ~f the original project cost, the aforesaid
sanction of 7580 mn was required to be treated as restructuring in terms of paragraph 6 of R'BI circular dated August 14,2014.
k) Sanction of long-term facilities under CAP, detailed in paragraphs 5 ad 6 hereof was required to be treated as restructuring in terms of
paragraphs 4 to 6 of the DBOD mailbox clarification dated 14.012016. The acwuhts of the company were required to be classified as
NPAs as on December 23, 2015,the date ofsanction of additional long term facilities under CAP as stated herein, viz. December 3,
2015 in terms of paragraph 17.2.Iof master circular on IRAC norms dated 07-07.2075.
i) Flexible restructuring: despite implementation of 5/25 scheme with additional relaxation, the performance of the account deteriorated and
it slipped to SMA 2.To prevent slippage to MPA status, which otherarvise seemed certain, the reconstituted JLF decided upon SBR with
cut-off date as July 25,2016.After its invacafion the implementation of SDR was poor and failed to give desired results. As per bank's
own assessment as an March 31, 2017,the promoters expressed their inability to infuse furiher capital, the cash flow of the company
was negative and no positive cash surplus expected in the s h m e r term. Thus, acmrdimg to bank's awn admission the CAP had failed.
Further, the banks therefore have been mulling S4A scheme which is yet to be implemented.
j) Thus, when the bank's request to maintain the account as standard, it was observed that it is liable to be downgraded in terms of paragraph
6 of RBI circular dated August 14, 2014 and paragraphs 4 to 6 of DBOD mailbox clarification dated January 14, 2016, read along with
paragraph 17.2.1 of MC dated July 01, 2015 on I W C norms.
7. NAM Expressway
Under consortium with Canara Bank as lead bank, 710600 mn was sanctioned for 4 laning stretch of highway from Narketpally to Addanki to
Medarametla under design, build finance, operate and transfer basis. Synd Bk's share was TL of TI459 mn. . The company achieved provisional
COD on March 6, 2014 as stipulated COD of July 17, 2013. Work of 15.26 km was yet to be completed due to delay
9#--.
in handing over of
m
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RBS 2017 Syndicate Bank Annex.to RAR
201 7 and the mall project was scheduled on September 2016 . However, both the projects were to be developed under the aegis of Rajasthan
Tourism. Thus, the company building commercial real estate ((CRE)was in violation of the extant God. guidelines. Further, the prajed could not
achieve its original DCCD. The borrower did not request to extend the project DCCO before expiry of the scheduled DCCO. Again, the bank did
not restructure the project as per extant guidelines asthe project should have been treated as non-infrastructure project. In view of this the
facilities of the borrower should be treated as restructured as per the extant I W C norms w.e.7 September 01, 2018. Thus, the account is liable
to be downgraded w.e.f September 01, 2016 in terms of para 4.2.1 5.3 [i) sf the I W C circular dated July 01, 2015 with the asset classification
as on March 31, 2017 as 'Sub-standard'. The bank had taken the commercial real estate as security, which being in SEZ c a n n ~ be
t sold as
there was no permission and the purpose of the advance was for building the hotel. Thus, the security is treated as nil.
B - Re-elassifieatienI Shart Provisions of N PAS {Existing N PA)

Borrower Date of ' Facility Met Out Date of NPA Provision ' Remark
Name Last Type Standin Asset Securityhraluatio s
Sanetio (indicat g ( Net ClassiBecatio n details
n e as of n
either ECGC
Fund Claims)
Based I
Non-
Fund
Based )
k per As per As As per As per Held Requi Shortf
Bank SSM per per Bank SSM red all
Bank SSM
1. TEBMA 10.Q3. FB 291 30.09 ' 0410211 1 Subs Dou 223 ' 223 44 291 247 Please
shipping 2005 ,2076 tand btFul see
Ltd ard Ill Note
I :I
b
M
N
e
;1 CV
Q
PY
h
l
I"'
0
e\l
PC
w
- - I . .
3 RBS 2017 Syndicate Bank - Annex to RAR
and the WCTL remained outstanding, the account was required to be downgraded by the bank to NPA status as on March 31,2010and placed
in 'doubfful3' category as on March 31,2017 in terns of paragraph 1 1.2.4 of the master circular dated July 01,2010.
2.Lakshmi Energy and Foods Ltd
The bank had restructured the credit facilities extended to the company with cut-offdate of October 01,2014.Restructuring had included, among
others, carving out of irregular portion of the existing working capital facilities of the company amounting to 11171 mn into WCTL. As the company
could not adhere to therestructured repayment terms, the accounts of the company necaed to be downgraded to MPA status as on October 07,
2014 and required to be placed under 'Doubtful I['categow as on M a r ~ h31 ,2017 in accordance with paragraph 17.2.4 of the master circular an
IMC norms dated 01.07.2015.
3. Tubyan NEC Itd.
This project was related to steel industw. Due fa stress in this indilstry the account was restmarctured under CDR on 04.03.2015with cut-off date
Then CDR failed and the financial of t h e company deteriorated and it failed to serve the FITL and WCTL which was part of
a s 01,05.2014.
restructuring terms and,conditions.Thus, the account is liable to elassif~ecias NPA based on pre-restructuringschedule as per paragraph 12.2.4
~f MC an IRA@ dated July 01, 2013. Furthemore, the amount outstanding was Rs 1826 rnn in the instant case.
4, Sri Sai Sindhu Industries Ltd.

An amount of 200 rnn remained outstanding as on August 15, 2012. Major probiems faced by the project were shortage in supply of iron ore
and coat, shortfall of working capital, rise in finance cost, delay in signing power offtake agreement and low generation of waste heat recovery
boiler. These led ta.CDR as on March 22,2013 with cut-off date October 01, 2012. Under CDR, moratorium period and repayment schedules
1 were revised. FITL was to be repaid in 3 years commencing form quarter ending June 2014. Promoter had to bring in P10 mn under the package
before signing the MRA. In the sanction note dated April 06,2015 renew the working capital limits, compliance to the following was pending:
Filing of charges with ROC as per the Master RestructuringAgreement:for credit limits under CBR packagestii) Plegding of 51% shares or 100%
shares held by the core promote^, which ever was higher(iii)adverse comments by the stock auditor to be rectified . Irnpoitantly, infusion of
equity for improving the net worth of the company and working capital margin (ii) increase the capacity utilisafion of power plant and sponge Iron
Unit. Further, the unit visit report dated November 03,2015 sbsawed that the unit was not functioning and was closed for maintenance work,
However, mineral raw material (iron ore) was tying in different heaps. The power unit was also not functioning. The company representative was
asked to submit the revival proposal for viability study as decided in the CDR meeting and was also advised $0 regutarise his overdue accounts.
The bank had classified the account as NPA on ~ u h 29,
e 2015.As this is a case of failed restructuring the date of NPA should go back to the
date as per pre- restructuring i.e. October Ql, 2012 in terms of paragraph I1.2.4 of MC on 1lWG norms July 04,2Qq2.
5. Raj Kumari Cold Storage
The actual claie of NPA as per the CMRD and the file was %9/2/2Qi6, however, the NPA section mainfains the NPA data separately and a m d i n g
to this data the date of NPA was wrongly mentioned as 113120?7.Hence fhe status of the amount changes from sub-standard fa doubtful 1.
RE5 2017 Syndicate Bank -Annex to RAR
Patel Engineering:The bank had an exposure of 9.8% non-convertible debenture issued by the company in accordance with its policy for which
/ it exercised put option w.r.t this instrument vide notice dated July 03,2014 i.e. 17 days before the effective date of put option as per the offer
document demanding payment of entire dues together with coupon. However, the company failed to repay the principai as well as the interest
? w.r.t the said NCD as it was suffering from severe liquidity issues with over 3 I1000 rnn out of its receivables becoming sticky- The repayment
1
I
I
was due on July 20, 2014. Thus, based on record of recovery (para 2.1.2. of extant I W C norms) the account is liable to be downgraded as on
! October 19,2014.
I UDAY Bonds:
1! The bank had received direction from Ministry of Stale for Power to implement UDAY scheme as approved by Gol, Ministry of Power and the
I salient features of which were communicated, vide, oRce memorandum dated November 20, 2015. According, to the foresaid office
memorandum the UDAY scheme was required to be implemented vide MCB letter dated March 31, 2816.Accordingly, the 'bank had obtained
due sanction for implementation of UDAY scheme from its CAC, vide, its order dated February 16, 2018. Since the UDAY scheme had mainly
envisaged takeover of 75% the discom debt as on September 30,201 5 over a two year period i . ~ .50% in 2015-16 and remaining 25% in 201 6-
17 for which the concerned states were to issue SBL bonds. The remaining 25% was required to be converted in ta unsecured Non-SLR bonds
with guarantee of respective State Governments with a maturity of 70-1 5 years and a moratorium on repayment of pririncipal up to 5 years.
FurGher, these non-SLR bonds were to carry coupons not exceeding 10 bps above respective bank's base rate.
In respect of 25% discom debt required to be converted in to Nan-SLR bonds as mentioned in the preceding paragraph, the maximum RoI
worked out to be 9.30p.a.(Base rate + 10 bps ) for Syndicate Bank as painted out by the bank itself in page-12 of the approved CAC note. This
was causing the bank Ioss of 1.44% per annum, since, the loans to discom prior to implementation of UDAY scheme were carrying Rol of
11.24%. Furthermore, the non-SLR bonds were subjected additional repayment moratorium of 5 years and the coupon on these non-SLR bonds
were required service whereas interest erstwhile loans serviced monthly basis. Thus, it:was
17
RBS 2017 Syndicate Bank -Annex t o RAR
RBS 2017 Syndicate Bank -Annex to RAR
I___-
--
&
Weaker
211439
Section 169611 214 439
6 Nil (12.46%) Nil
(% to (12-46%)
- ANBC)
I 157120
84805
7 Beneficiar , (9,26%) Nil 157120
*
ies (9.26%)
As per SSM
1696110 I6961 10
Annex: 2 Computation of outside' liabilities

L
Amount
No. Particulars
A Total Liabilities excluding capital & resewes as 2927509
on March 31,2017
Upper Tier II Instruments
Subordinated debt 44008
Deposits
Borrowings
Other liabilities and provisions
B Internaf Liabilities
Provision for standard assets I1867
-
Provision for dlminutlon in fair value of
Provision for NPAs
Floating provision
Provision for NP I 3706
Provision for depreciation in investments 2442
Administrative Office 51
FITL Provision for Restructured alc 716
Prevision for sold assets 607
Inter Office Adjustments(Net)
-
569
C Total outside liabilities [A-B] 2834776 1
--
Annex: 3 Assessed Net worth
-
A Paid up capital [including ESOP outstanding B interest
1 B (
free funds from H.0. (foreign banks)]
Reserves and Surplus
1
1 1 Share Premium
-
Capital Reserve (excluding revaluation reserve) 286 I :n

Special Resewe ' 15385
General Reserve 5812
0
-
-
-
Investment Allowance Resewe 0
Remittable surplus retained in lndian books [Foreign 0
banks] -- --
Credit Balance in P&L A/c d
0
Any other free resewe (to be specified) 0
C Intangible assets (including net deferred tax assets) & ,703
accumulated losses
D Reported net wotth [A+B-C] 123925
E Adjustments following inspection findings 9002 f-3
Investment Resewe Account 0

Additional toa n Loss Provision 6125
--
0
Net Deferred Tax Asset
Understatement of Liabilities 0
Any other Item to be specifled -(NPI)+ Overstatement of 2877
Income
- - -
F
-
Assessed net worth or reallexchangeable value of paid
up capital and reserves [D-E]
,, 4923
RBS 2017 Syndicate Bank- Annex to PAR
Annex 4: Cokputatisn of Assessed Capital
Sr. Particulars I Items Eligible

No. amount
. -- -
Computation of common Equitv Tier 1 capital (CET'I I

A Common Equity Tier 1 capital (CETI): instruments and
reserves before regulatory i supewisory adjustments (including
ifems such as DTA, revaluation resewe and Foreign currency
translation reserve as pea DBW.Mo.BP.BC.83/21.06.2Q7/20f 5-16
dated March 9, 2046)
B Total renulatow adjustments I deductions
-- . -
R
1 D I ~dlustmentsI deductions applied an CET Ifollowing
Inspection for Supervisory Evaluation (ISE) findingsunder
1 Additional Loan Loss P~ovision 6125

2 Shortfall in Standard Asset Provisionino 0
3 Understatement of Liabilities 0
4 Net Deferred Tax Asset 0
5 Investment Resewe Account 0
6 Anyotheritemtobespecified(NPI+QverstatementofIncome) 2877
E I ~ssessedCommon Equity Tier 1 capital (CETI) - [C D] - I :' 23980
I Computation of Additional Tier f capita1 (AT11 1
I F 1 ~dditionalTier 1 capital (ATI) : instruments before regulatory 1 31865
I 1 adjustments I I
I G I Total regulatory adjustments to Additional Tier I capital 1 , 600 1
1
I
I I~djustmentsI deductions applied on AT1 following IS€
findings
1 0 I
1 Net Deferred Tax Assets
'
RBS 2017 Syndicate Bank- Annex to RAU
Annex 5: Assessment of Internal Generation of Capital

I
I Sr. 1 Break-up of lncome and 1 Current FY T 1 FY T-i I FY T-2 1

I No I expenditure I (Mar 17) I (Mar-16) 1 (Mar-15) 1
Total Interestldiseount Income
(2+3+4+5) (pg I90)
1 3 1 Income on investments 1 5331 1 1 52846 1 48897 1

Interest on market lending/ lncorne on
other interest earning assets
1 1
,--
Fee based & stable mEsc. income
-
[G(ab+6(b) 1156, 10882
6a Fee based income 7569
6b Misc. income from stable sources 3992 3467
I
7 Grossstableincome(~+6) 241599 242860 226404
8 Interest Expended (9+10) ? 67278 172131 160949
Interest on deposits1all other interest 15651 0 j61778 152849
9
, expense
LOInterest on borrowings 10768 10353 8 I00
11 Net Stable Income ( 7 8 ) 74324 70729 65455

-. -
1 12 1 Income from trading 1 17397 1 8985 1 6570 1

13 Realised gains on derivatives (1 1
I 4 Gains on sale sf asset 0 (8) (I>

1 15 1 Recoverv from wlsffs I 3759 1 3871 1 3302 1
Extra-ordinary incornel Dividend
income & other rniscellanasers income
l7
1 Gross volatile income 14206
(12+13+14+15+16)
I
Provisions and contingencies 34328 42648

(excludingtax)(19+20+21)
35454 36384
19 Provisions for Loan losses pMd. .
*
RBS 2017 Syndicate Bank -Annex to RAR
! 20
Provisions for depreciation in
invertmentsi~~l
1 1757 2247 -161
-
21 Other provisions -2883 4017 3617
.-
22 Extra-ordinary expenses 0 0 0
23 Write-offs 1485 834
I 441
24 Net Volatile Income (17-18-22-23)
Assessed provision by supervisor
- I (t2800)
9002
(29276)
4741
(9269)
1797
25
(26+27+28+29+30+31+32+33)
-
I
26 Additional Pr~visionsfor frauds
Additional Provisions for
27
understatement of NPAs
Additional Provisions for 2546 0 0
28
Undentatement of NPls
Additional Provisions for 0 0 0
29 Understatement of Liabilities (Pension)
Additional Provisions for claims not 0 0 0

30
acknowledged as debt
1 Additional Other Provisions (NPA 0 23 805
1
31 Masking)
Additional Other Provisions 331 0 0
32 (Overstatement of Income)
Additional Other Provisions ($1. 0 0 0

33
specify)
(21802)
Assessed net volatile Income (24-
34 1 (34017) (I1066)
--25)
35 Reported net total income (I
1+24) 61521 41453 56186
43 Assessed profit (36-3749) 1 (5413) (24 176) 13432 1

44 Dividend paid (excluding tax) 0 8 3112 1
45
46
Reported Retained Earnings (42-441
Assessed Retained Earnings (4344)
1 3509
(5413)
. v-
1 (g6435)
(21176) 1 W: !
1
I
Earnings Stability I Volatility Assessment
1 1 Earnings I Profit Ratios 1 Current FY T 1 FY T-7 1 FY T-2 1

No
62780
Rate) (8.41%)
and Volatile Income

87:04:09 90:04:06 91 :04:05
1 49 1 Gross Stable income I Interest ~xpended 1 1 1 1
[718*100%] 144.43 141.09 140.67
50 Net Stable Income I Assessed Profit
--
I (I
373) I (334.01) I 487.91
Income / (Provisions &
11 1 1 1 1
1
Contingencies + Extraordinary Expenses
I + Write-offs) [171(18+22+23)*1DO%] 64.26 1, 32.67
'&
"^ 52 Assessed Net Volatile Incorne I Assessed
Profi!!34,4*,00%]- -
53 Reported Retained earnings / Weparted

,. 402.77 ; ; I ' (82.39)
Profit [45142*.100%] 4 O0,Qo 79.57

54 Assessed Retained earnings I Assessed
Profit [46143*100%] 10O.OQ 100
55 Actual vs budgeted income [expressed as 79.91
+ve I -ve percentage]
-
56 Actual vs budgeted profit [expressed as (52.33)
+ve 1 -ve percentage] 35.89
RB5 2017 Syndicate Bank - Annex to RAR 'a
Reported by Assessed by
Bank SSM
Basel Ill Tier 1 Capital ('61) 155245
-
B Leverage Ratio Exposures 3,177,868 3168866
On balance sheet (excluding derivatives 2,990,115 2981 113

-
Derivatives 21,823
Securities Financing Transactions
Off-balance sheet exposures

I
Any other component 0 0
C Leverage Ratio (A/8*1

00°/0) 5.17% 4.90%
Confidential
Syndicate Bank

(Finaneklposifisn as on March 31, 2018)
.y)
)j-..r The RixR Assessnrenr Report has bee17prepar-ed by Reserve Bank of hdin. For [he purpose
of l h i report
~ {he word 'bank ', wherever ir uppeurs, means Tyndicuse Bunk '. This reporl is based
on thr! bmb and records of the bank, xiatenlents made by execulives, o@cers and employees of
the bank Atring [he course of inspection, I-etarr~sand other informatiuurJurnisJ'hed by the bank and
obtained porn other sources believed t be reiiabde. I! may bc added rhai an inspection is not an
audit and does no6 replace it.
Page 1 of 29
Table of Contents
Introduction.........................................................................................
3
Section I: Supervisory Evaluation of R i s k s and Control Gaps
A. Governance & Oversight..,.................................................................3
B. Business Risk .
Credit Risk.......................................................................................... 11
Market Risk......................................................................................... 16
Liquidity Risk. .......................................................................................19
Operational Risk ....................................................................................... 21
Other PilIar II Risks............................................................................... 26
Risk Culture ............................................................................................................................... 28
Note : All figures in the report refer to posldlon of the bank as on March 31, 20-18 or for the period April t 201 7
to March 31. 2018 and figures in paenthesis refer to corresponding previous year position ynless ofherwise
specified.
Page 2 of 29
Confidential
INTRODUCTION
The Risk Assessment of Syndicate Bank for 2017-18 under the Supervisory Program for
Assessment of Risk and Capital (SPAR@) was completed with March 31, 2018 as the
reference date. The assessment has been made based on the off-site anaiysis of the data
and information furnished by the bank as well as the findings of the on-site Inspection for
Supervisory Evaluation (ISE) undertaken from July 31,2018 to September 07, 2018 and
various explanations offered by the bank during the course of inspection.
SECTION I: SUPERVISORY EVALUATION OF RISKS AND CONTROL GAPS

A. Governance and Oversight:
Major observations a
1 1 2018 from 72.92% as on March 31. 2017 on account of infusion of capital of ? 28,390 mn I
I ( during FY 2017-18. I
m o a r d Composition and its Functioning
1 a) I
The,funcGoningof the Board needed improvement as it had not: (i) reviewed the e f f ~ c ~ q
/ ( of the action taken to address the increasing risk in We credit portfolio and other operational I
I I risk areas, as evidenced by increase in impairment of assets, non-adherence to regulatory I
( 1 guidelines and increase in frauds (details mentioned in this report). (b) PCA framework: )
I (The bank had breached the risk ihreshoids for asset quality and profitability under the I
1 I revised PCA framework as on March 31, 2018. The reported NNPA during the CY was I
I 1 6.28% and there was negative return an assets for three consecutive years (CY reported: / I
( ( -1.05 , PY1 assessed: - 0.18%. PY2 assessed: -0.72%).The reported N N PA had further I
1 I increased to 6.64y0and 6.83% as on June 30, and September 30, 2018, respectively. The 1
,/
I 1 bank also breached the GET ratio threshold which stood at 7.01% and 6.04% as on June I
1
( 30,and September 30,201 8, respectively. Despite being advised by RBi in April 2018 to I
1 I take necessary steps to prevent the bank fmm slipping into PCA catepoty, there war no I
I 1 evidence of h e steps listed by the bank belng irnpl~rnentedand monitored effectively by )
1 1 the Board. c) The Board was lacking directon with expertise in risk management. MSME 1
Page 3 of 29
and agriculture. various deficiencies obsewed in these areas have been highlighted]
elsewhere in the report.
1.1.3 Constitution af Board Level Committees
The 1T Strategy Committee and the Risk Management Commiffee (RMC) did not have any
I /member with expertise in IT and familiarisation with risk management, respectively, to give I
perspective on issues and challenges faced by the bank in these areas.
1.I .4 Conduct of Board Level Committees
(a) The Audit CornmiRae had not glven due focus on compliance with the statutory
1 1 auditors' observations and the deficiencies pointed out, such as giving effect to MOCs, I
1I 1 closure of existing NPAs by giving new loans and maintaining only 15% provision for I
I unsecured sub-standard assets instead of 25%, in violation of extant IRAC norms. (b) RMC I
/ 1 failed to take note of transfer of securities from HTM to AFS category, which was subjected I
I 1 MTM only at end instead af being
to qualier valuation immediately after
subject ta I shifting.
I 1 (c) There significant (three months) in approval of ICAAP policy and document I
was delay
I 1 by RMC. (d) ACB had not directed for a review 'low1&

of risk rated branches
'medium' I on
I 1 priority though, t h e deterioration In ratings of 65 branches from 'low1to 'high risk', during I
1 1 subsequent RBlA of the branch, was brought to its notice. I
1.1.5 BoardOversightofRisk&ComplIaneeFun~t;tions
(a) No direction was evident from the Board with regard to fallow up of bank's target to
1 1 reduce its corporate credit portfolio fmm 48% to 30% in a span of three years. ( b ) Various I
I
1 / review notes put up to the Board-levelCommittees were also simultaneously placed before I
1 I the Board on t h e same day without any value addition. (c) Deficiencies in Board oversight I
/ ( were observed on issues such as: (i)Mismatch in data (viz., NPA. Collateral, and NPI-NPA 1
I 1 integration) between different standalone software packages and CBS. (ii) Delay in 1
I 1 implementation of enterprise wide measures such as enterprise risk management tool, 1
I 1 enterprise data warehouse and enterprise fraud monitoring tool. (d) The Board did not 1
( 1 ensure effic& monitoring of the compliance of the bank's London branch with the 1
-.
1 1 KYCIAML guidelines, as evidenced by the adverse comments by the Financial Conduct 1

1 1 Authority (FCA) an its AML compliance.
I
1
1.1.6 1 Board Oversight of Cyber Security Funcflons
r1
Confidential
---1
There were no prescribed theliner tor rctjon on the CERT-In/ CSiTE aduiscrks and
monitoring by the Board was deficient on the action taken en these advisories.
Oversight of Consumer protection Functions
There were-complain$ in regard 10 third party products, failed ATM transactions
( I instances of complaints resolved on the same day, Adequate direction from Board was not I
I
I
II evident on measures to avaid recurrence of such complaints and for implemenfation of

I necessary MIS to monitor their satisfactory addressal.
I I
Operations
on the half yearly performance note on London branch,
I II were not evident with regard to fund raising and deployment and sustainability of current
(
1 business model of the branch. Incidentally. Financial Conduct Authority (FCA), London
I had indicated weaknesses in the risk management I
1 of the branch such as inadequate
I governance and oversight, lack of sufficient independence and trained resources, limited 1
1 I scope of internal audit reviews, and inadequate business-wide and customer risk I
(
1 ) assessment procedures. I
(.PlSenior Management I
I
1
- 1.2.1 involvement of Senior Management
a):Thefe was lack of clarity in roles played by the Credit Monit~ringand Review
I Department (CMRD) and NPA recovev department. The corporate accounts sanctioned I
/
( I was found to be functioning merely as a data collection sokce and even the same was II
at CO level were neither reviewed nor monitored by CMRD: NPA recovery department
(
I not analysed properly for effectiveness of the policy as the department was not proactively
involved in implementing the recovery strategy. (b) As the bank did not identify key
positions for the functional departments, people with skills and work-experience not
relevant to the function were posted to critical departments like Corporate Credit
Department (CCD) and CMRD. (c) Mechanism of monitoring and contiol'b; ROs on
branches was inadequate as the limits were renewed and enhanced in CBS without getting
sanction from the ROs. Further, the sustenance of compliance was not ensured. (d) No
1 periodical interaction beheen Senior Management and oversight functions such as
~nt@rnal
audit, R M D and compliance depaflrnent was evidenced. (e) Periodical.review tb
Page 5 of 29
Confidential
assess the adequacy and evaluation af skill sets of the senior

with the business strategies was not evident.
--
1.2.2 Functioning of Executive Committees
(a) Credit Wisk Management Commitlee (CRMC) was found deficient in its oversight with
regard to: (i) cases of nen-adherence to delegation of powers which resulted in quick
mortality eases, frauds and NPA; (ii) concession in the form of finer rates to lower rated
borrowers in contravention of the bank's internal policy; (iii) inadequate post disbursal
monitoring of loans and (iv) absence of a system to capture erosion in value of security.
(b) Oversigha by Operations Wisk Management Committee (ORMC)was deficient as
observed from: (i) gaps in RCSA and less data capturing; (ii) absence of review of fraud or
complaints data and (iii) delays in policy review and approval, (iv) WCIAML issues
resulting in penalty imposed by RBI.
(c) Oversight of ALCO was deficient with reference to: (i) lack of directions to manage
interest rate risk and rebalancing of G-sec partfolio in light of MTM losses and increasing
modified duration of portfolio and (ii) nsn-monitoring of h e financial risk and impact of
deletedlmodified deals.
Effectiveness of Senior Management Functions
a) The control and monitoring by the senior management was deficient as was evident
from reporting gaps with regard to submission and errors in computation of ABS data,
frauds, complaints, compliance and closure ~f audit observations,b) The bank did not put
in place a framework for coIta8on and consolidation of data from functional departments of
the bank for anward submission. c) The bank had implemented the strategic business
process re-engineering project 'Ananya'. However, no cost-benefit analysis thereof was
done in terms of aehieviilg the objectives in the branches where the project was rolled out,
particularly in the areas such as customer satisfaction and business growth. d) Out of
around 54,000 complaints received by the bank during the year, only 98 cases were
escalated to the Infernal Ombudsman (10).In more than 90% of the cases escalated to
IO, the complaints were rejected ~ i f h assigning
~ ~ f any reason and the informaiion was
not submitted to the Customer Service Committee of the Board. e ) Variations in financial
1 1 parameters and generic reasons (sluggish economy, post demonetisation effect, etc.) 1
Page 6 of 29
fanfiden rial
I
I w o v i d e d to l3oaro' for anaof-r
a-vis targets set.
7
deviations in business adievements vis-
-
Evaluation 8 Controls
,
a significant increase in vigilance eases (CY:41, PY: 15)against the senici
I / management during the year, primarily attributed to their involvement in fraud, credit and -1
1 other financial irregularities. (b) Code of conduct was not monit~redeffectively as was I
1 ( evident from terminations ~f employees including senior executivas, due to unethical I
1 1 behavior and vigilance cases. - I
m u c c e s s i o n PIanning
--
I
I ~ s n o for critical ~ ~
in departments like tgr e z m d &?
I I internal audit, carporate and retail credit and compliance to groom and create a talent /
previ~usyears and inputs from various

1 1 departments were not factored while setling the Annual Business Pian. The bank had not I
I ( achieved many of the targets such as business targets, capital projections, GNPA and 1
NNPA. (b) The bank did not have a detaiied Board-appr~ved branch rationalisation
strategy for its 211 less making branches identified in FY 2018. Further, out of the 58
branches identified to be melrged by May 31,2018, 26 branches were pending merger.
--
risk taking capacity of the bank to
/ 1 achieve the desired business strategy. Consequently, various limits were frequently
I
/ ( breached and were routinely raMied by the c~mpetentauthorities without a review of such I
( 1 In some cases, Me t~leranoelevels for limits were increased to repetitive
limits. avoid
II
1 I breaches (GNPA to (6% 95%).
8.5% and again to KOA (0.4O/0 0.15%) and NNPA (5.50%
I 1 industry conditions,
to 6%) during the year, citing macro-economic conditions and 1 instead
of addressing the underlying issues. CRAR and CET-? (including CCB) was fixed at
10.75% and 7.00% respectively as on March 31, 201 8, which was below the minimum
regulatory requirement). (b) No rout-cause analysislreview was done by the RMD, RMC
I I and Board on increase in NPA in sectcrs like MSME and agriculture. (c) For operational 1
I
-- - -
Page 7 of 29
risk, risk appetite and trigger level for quarterly loss dua to operational risk events were
significantly less than the actual operational risk loss for the four qharlers of FYZ017-18.
1.3.2 Risk Governance Framework
(a) Executive-level Committees like ALCB, investment Committee, ORMC, CRMC and IT
Committee failed to provide direction and guidance based on risk perception as was
evident from gaps in review and monitoring of risk limits, absence of STP bemeen critical
standalone systems and CBS, concerns in operations of overseas branch, weakness in
credit podf~lio,high number of MoCs issued by Statutory Auditors and investment
decisions taken without any sensitivity analysis. ( b ) Business and management risk
parameters used far rating model for advances (CRISIL RAM) did not factor parameters
like promoter's qualification, industry exposure and line of business. Further, critical
financial covenants based on the uploaded audited financial statements I balance sheet
were used without fastoring in actual financial positbn of the borrowers such as adjusted
net worth, gearing ratio and leverage ratio.
1.3.3 Adequacy of Risk Management Functions
The risk management personnel were not provided trainings to acquaint themselves with
CBS,risk modelling and analytics as indicated during last ISE.
1.3.4 Effectiveness of Risk Management Functions
(a) The bank downgraded the internal rating of large borrowers showing signs of stress,
only by one notch, even though the external rating of the borrower deteriorated and was
downgraded by two notches in contravention to the mapping of the ratings mentioned In
its internal policy. [b) Few products were launched without analysis by RMD from risk
perspective. MIS generation suffered from factual inaccuracies and critical data points
were wronglylnot captured in CBS (e.g., group exposure, asset classification, NPI) (c)
There was no feedback from the Board, Senior Management and Internal Audit to
streamline the risk reporting framework in the bank so that the risk identified, measured
and reported were commensurate with the risk profile, size and complexities offunctions
undertaken. d) Them was laxity in control of MO over the delegated functions as well as
monitoring of review done by administrative units (ZOIRO) for the branches as evident
from deficiencies observed in closure of Stock Auditlother audit reports, post sanction
monitoring and end use of funds in MSMEl retail accounts and fraud reporting.
Page 8 of 29
I
1
I1
I
1
1
1
1
1 1.4 1 InfernalAudit
1 1.4.1
I
1
I
1.4.2
I
] Internal Audit Policy

I
(
- 1( not
I
considered an
RBIA. (b) Many branches
-
--
(a) Engagement of Empaneled Retired Officers (ERO) for internal audit assignments was
outsourced activity and they continued to attend spot rectification during
rated 'low risk' yere not subjected to RBIA during PY and had
1 slipped to 'high risk' category this p a r , indicating deficiencies in the risk assessment.
Imp!ementation of Audit Policy:
(a) There was significant delay (up to two years) in closure of RBIA reports,about 10% of
1 the observations were left branches for closure without any follow-up from ZOlCO I
to
I level. (b) Adequate coverage was not
the
to areas like quick rnorlality, repeated I
provided
I nature of frauds and customer complaints. (c) Head of Internal Audit did not have reporting I
I line to MD&CEO in contravention of the extant guidelines. (d) There was no prioritisation I
) of audit areas commensurate with the risk rating and no input sharing mechanism from 1
I functional wings for preparation of the audit plan. (e) The management audit, ,credit audit, I
1 legal audit, etc., were outside the present system of E-thic.
a) Eleven standalone systems and three critical outsourced systems were
1 IS audit. (b) Significant number of observations of IS audit repart. of branches and I
I outsourced en!lties were not resolved within the prescribed time frame of 60 days. (c) I
I
I
I
I
1
1
1 1 Observations were closed by the inspection department without ensuring full compliance. I
1 I (d) Full coverage of various 151IT issues such as deficiencies in patch management, issues II
1 ) in CBS upgradation, ccmpliance to CSITE Cell alertsladvisories and circulars were not
1 1 ensured. I
experience required for conducting
1 1
I CBS. (b) Management Audit did not assess the effectiveness of decision making process II
and management audit was lacking wiihin the audit department in areas like forex and
I ( at Me Senior Management level. (c) Branch Rating framew~rkneeded review on account I

I I of large number of MoCs amounting to i 21.223 rnn passed by Statutory Auditors in I
I
I 53,110 accounts. (d) AIsrts generated by the off-site monitoring cell were closed in a
routine manner by the branches and ne review was done by HBI ACEIACB based on risks
,. Page 9 of 29
like spurt in advances and NPAs. Though Off-site monitoring cell (OMC)of the bank was
in operation, the monitoring was limited to 12 GLs out of more than 4000 GLs, most of
which were non-reckon GLs without exact or mu[tiple matching for reconciliation purpose.
(e) There was no review of outsourced activities of some critical functions like complaints
management and card center. (QTheoverseas branch was not covered under credit:audit.
1 Review of Internal Audit Function
I
The following gaps were obsewed jn the internal audit function :(a) The extent of
transaction testing by RBIN concurrent audit in high risk areas like fraud, NFA, KYCIAML
and nsstro remneiliation was inadequate. (b) There was significant delay in release of
I audit reports to the branches (up to 21 1 days), reply to audit observations at branch and I
I RQ level and closure of branch audit reports (delay up to 375 days). (c) Selection of I
1 branches for compliance testing did not take cognizance of the compliance risk score of 1
I the branches under RBIA. (d) Delay of 5-10 yean between fraud occurrence and detection I
indicated ineffectiveness of the audif mechanism. Concurrent Audit did not detect even a
single instance from the 013 cases of frauds reported during the year, particularly relating
to ODlCC accounts and stocklbook debt. Internal Auditors could not detect frauds even
though around 70% of the branches where frauds had occurred were subjected to RBIA
I at least twice during the past three years. I
1 1.5 I Compliance I I
1S.1 1 Compliance culture was not well developed across the bank as was evident from the
I I
I 1 continued unsatisfactory compliance to RAR and R M P (2016 & 2017).The defloiencles I

1 1 pointedout in the last IS€ regarding complianceto internalauditlconcvrrentaudit, statutory I
1 1 audit continued to persist. The top management failed to ensure satisfactory compliance I
1 1 to ISE-2017 significant number of RAR observations (127 out of 263)and RMP (sirout I
as
1 1 of 11 milestones and
1 levied a penalty of : rnn on account KYClAML violations by RBI. There no II
out
1 1 sub-points 5) remained "on-complied.
af 1 Also the bank was
1 50 of
1 reporling framework between the London branch and Compliance Department and I
was
1
/ / t h e e r e , no test checking of compliance with reference to the home and host country 1
, .
regulatory as well as internal guidelines was unde~aken.

1.5.2 Compliance testing was not done based on sufficient I represenbtive samples and in most
cases, it was based on declaration given by departments regarding status of compliance.
A',*"' ,
1
Page 10 of 29
---------
1
There was no mechanism for exchange of information befween the compliance
1 department and
7
internal audit, parlicularly regarding "on-compliance and persisting (
1 ( compliance failures among the staff for preventive action. The activities of compliance (
1 department were not subjected to review by the internal audit.
I
I 1
/ 1.5.3 / The staff in the compliance department were not provided regu!ar training on 4
1 produds and services and areas of corporate governance and risk management.
I
I
I 1
0. Business risk
2. Credit Risk
2.1 1 Inherent Risk --

-
I
2.1.1 Default Risk
The default risk was elevated on account of (i)fresh slippages (: i 143,043 mn)including
write off from fresh slippages at 3.27% sf the total exposure (PY:1.49%) (ii) Significant
I unrated exposures at 37.25% (PY: 25.85%) of total exposures. (iii) Increased proportion of
low quarity standard exposure at j.58 (PY: 7 25).The default risk was accentuated as out
of 96 unrafed accounts 50 mn),75 were NPA as ~n March 31. 2018. Further, 23 cases
under NPA and SMA with aggregate outstanding of 47,789 mn where resolution was to
be passed within 180 days from March 2018,were yet to be resolved. The default risk of
I I the bank also remained high because of SMA exposures at 0339.423mn as on March 31. 1
2018.
I - - - --I
(
-----
-I i
three industries (Agriculture, infrastructure $I Services) remained at
( 38.68% (PY:38.64%), however, the ioan impairment in these industries had increased to
I I 9.79% (PY: 7.05%).Total exposure to Agriculture, Infrastructure, Services and NBFCs at
I
1
KC---
48.74% (PY: 47.59%) was indicative of significant industry concentration.
----
2.1.3 Exposure and tenor risk
-----
The aggregate exposures at 24.63 times the net worn (PY 22-57),indicated continued
I I
high leverage. The unhedged foreign currency corporate exposure grew signjficantly by
I
1
)
1 105.58% (CY:066,564 mn PY: U32,726 mn). Its proportion in total foreign currency? I
- -
Page 11 of 29
Confiden aid
corporate exposure increased to 54.28% (PY: 26.40%). The weighted average residual 1
maturity (WARM) QP the bank's exposure remained high at 3.78 years elevating the tenor
risk for the bank.
2,2 Confro! Gap Risk
1
I
2.2.1 Policy Environment
/ 1 at short term MCLR. (ii)Finer rates were sanctioned as a matter of routine and without 1
I 1 adequate justification in 150 out of 156 accounts sanctioned at HO during FY 2017-18. (b) 1
(b) The pricing of Portfolio Buyouts was mostly at MCLR on the entire portfolio without
any analysis of rating of %heunderlying porkfolio (c) The bank's Credit Policy did not specify
stricter financial benchmarks for DE ratic, Total Outside Liabilities fAssessed Net Worth,
1 1 Current Ratio and separate marginmoney requirement along with security cover for issuing 1
1 1 performance guarantees. (d) per bank's policy, the computation waiver 1
As of the of
1 1 unapplied interest in compromise settlement/ OTS schemes based on was 1 MCLR instead
1 1 contractual rate of interest, thereby understating the waiver

of (far OTS>O10 mn, I
amount
1 1 the sacrifice on unapplied interest understated by 03,121 mn. Concessions in I

was (e)
1 1 ROI, processing charges and commission were granted exposures in sensitive

for I sectors,
I 1 NBFC and borrowers below hurdle rate in violation of internal policy. I

1 2.2.2 1 Risk Identification & Assessment I
1 (a) Risk Rating System of accounts: [i) Availability of multiple subjective parameters for
I
assignjng scores towards rnanagementlbuainess risk, provided scope for discretion in

rating. (ii) The financial risk parameters did not factor in adual financial position w.r.t.
I 1 adjusted net worth, DSCR and DE ratio. (iii) There was no poiicy for mid-termlmote 1
( Ifrequent review ofaccoUnts where rating for review on account of non-submission 1
was due
1 1 of financials. (iv) The credit risk ratings of than 50% eligible borrowers were
more 1
overdue
1 for review. (v) application Capital for NFB faciiities led I
1 Wrong of ConversionFactor (CCF)
1 to understatement Risk Weighted Assets by 0669 mn for top 20 borrowers.
1 of
1 (b) During ISE it was observed that the bank did not ensure due diligence in assessment 1
I
1
1 1 and end use of funds in same cases while financing for general purposelshoring up of net 1
working capital. (c) Pool Buyout portfolios were not analysed during Stress Testing for
Credit Risk
{c) System-based NPA classificafion: (j) There vras no audit trail fur NPA data retrieved
from CBS as also no audit verification for transition af data from CBS to standalone system
(Return 2bcd), as a result, the veracity of reported data peflaining to fresh slippage, agelng
of NPAs, provisions, GNPA could not be ascertained from C B S . The auditors mainly
focused on MDC acceunfs during verification of statements rather than NPA rettieved from
C0S. (ii) The c E allowed
~ multiple renewals at branch level beyond delegaied powers
thereby leading to potential under-report;ng of NPA in suck accounts (287 accounfs with
ols aggregatirlg 85,4?4 mn as on March 31, 2018 where limits were renewed more than
3 tirnes at branch leve' beyond the delegated authority). BP was not reviewed even when
the book debt statement was not received for more than 6 months. Id) Statutory Auditors
had also raised certain issues such as: (1) Instances were reported [while reviewing the
restructured advances list af 0 1 crore and above] wherein dates of NPA gat changed due
to rollover of NPA acc~untswith principal and interest in the system being re-paid by way
of a new loan instead of continuing in the same loan account number, (ii) repeated MOCs
passed due to wrong upgradation of accounts in 68s (iii)asset status not downgraded in
CBS even after 3 months of passing MQ6. (e) Irrstances of debiting the parking GL and
SB aceaunts for payment of invoked BGs were obsewed. (f) The early warning systems
were not capturing parameters such as frequent invocation d 5 6 s and devolvemen: of
LCs, dispute on title of crsllaferalsecurities and funds received from other banks to Iiquidate
the outstanding loan amount where the bank was ensuring end use of funds. (g) Deviations
in financial covenanfs, securrty coverage were permitted by ROlZO wifhout taking
approprjafe approval from competent authority, Inflated projecfion of cash flow and
financials, confidential opinion from other lenders not obtained, lgnorlng of early warning
sinnals like decrease in sales & cash flows, non- monitoring of end use of funds in case of
small Ioans under MSME under MUDRA, led foquick modality cases. (h) The fraud related
data of last thres years revealed: (I) assessment of ODKC limit w i t h ~tuverifying stock and
remivables led to inflated drawing power in many cases and subsequently the accounts
were reported as fraud amounting to 014,891 mn, (ii) inadequate monitoring of end-use
of funds led to frauds ameunking 09,332 mn largely attributable to diversion of fund^,
operating current accounts sirnlrltaneeusly with ODICC accounts and non-obtention of CA
certificates for end-use.
Page 13 of 29
(a) NOC from other lenders regarding charge creation in exposure to NBFCs was not
available in some cases (101, resulting in imperfection of security. (b) Valuation reports
from 2 valuers were not obtained in case of exposures of Dl00 mn and above (28 in top
50 NPAs). (c) There was no system of monitoring the pendency of CERSA1 registration1
charge registration in ROC ancl also ns, mechanism to map the customer ID with
registration 10 allotted by CERSAI. (d) It was observed that accounts (108 sample
accounts) classified as D-3 were d i ~ s t l yupgraded to standard without looking into the
petformanse during the specifled period and the cash flows. (e) CMRD did not monitor
that the regular sib visits were conducted to ensure that the assets were created and
maintained and that there was no diversion of funds. (f) There was no rnanitoringlanalysis
evident far existing NPAs wherein there was erosion in value of securities Icollaterals on
account af delay in auction and in cases where OTS was done without invocation of
SARFAESI. ( g ) Recovery strategy was not sfTectiveIy implemented and monitored as: (i)
Borrowers did hot adhere to the krma of repayment in 43 (29eases were withdrawn) out
of 100 OTS eases approved at corporate office during FV 2037-18. (ii) In SARFAESI cases,
final disposal could be made only in 204 eases (20%) out of auction process in 1035 cases
in FY 2017-18. (iii) No review ~f recovery for the security receipts as bank got only 0 2 1
mn ( A .2% of total exposure in SRs) through redemption and had to make provision af a537
mn against these SRs due to MKM losses.
Monitoring & Review
(a) Repeated extensions were given for security perfection and no timeline was stipulated
for compliance fe past disbursal terms & conditions in many eas'es especially in Corporate
Loans (15). (b) The appraisal notes did not comment upon referenm to Central Fraud
Registry (CFR). (c) Appraisal of loans for onward lending to NBFCs did net incorporate
churning of receivables, consolidated receivable statement for identifying other bank's
charge on NBFC's receivable'sportfolio, (d) Manual identification of group mrnpanies and
computation of group exposure was prone to errors;. The bank did not analyse its group
borrower exposure in view of connected counterparlies as required in barge Exposure
Framework though its group exposure in NBFCs was 56.75% of its total capital f~nds.(e)
During FY 2017-18, SDR aceobnts (all 10 a/m), 5/25 accounts ( 7 1) and S4A accounts (6)
Pane 14 af 29
before February 12,2018, having agg wgate outstanding of D
'
48,704 mn, had slipped into NPA as on March 31, 2018, reflecting poorly on quality of
appraisal and assessment. (f) Long term funds were utilised for short term purposes and
vice versa in case sf MBFC exposures. (g) No control on interest charged to the ultimate
beneficiary in case of exposure to Pool Buyouts through NBFCs. (h) Moratorium was
extended beyond permissible period leading to wrong asset classification (38 such
education loans with QIS 22 mn were identified fresh NPA). (i)It was revealed from
CFMC report that deficiencies pedaining to KYC verification, customer due diligence, ClBl b
vefificaticn, unit visits of borrowers led to frauds in housing loans. Cj) The present ISE had
declassified certain accounts which were wrongly classified as MSME. (k) No due diligence
and KYC verification of individual borrowers was evidenced in all cases of Pool Buyout
accounts. (I) ~ndividualaccounts were not maintained in CBS in all cases but were
maintained in excel files in Pool Buyouts. (m) There was no periodic field1 unit visit to check
the stock or progress of the project or condition of plant and machinery.
(n) Buyer's credit and AD business: (i) Monitoring of merchant and forex trade
transactions had been delegated to R01ZQs and there was no central HO level monitoring
with regard to underlying documenfation, genuineness of transaction or end use of funds.
Though roll overs and devolvement were observed in LOCIbuyer's credit portfolio, these
were not monitored and reported to Board. (ii) Monthly review of buyer's credit sanctions
made by London branch did not have qualitative assessments Tor identifying deficiencies
I
in sanctioning and risk analysis. (iii). Weak monitoring of AD business was reflectad at ZO
and ROs as there was pendency in capturing as well as marking off sf existing shipping
bills due, at branch level, beyend the prescribed regulatory timelines.(e.g. 10,324 export
bills outstanding for nine mantks ta two years' category, 77,117 export bills outstanding
above two years EDPMS, while 25,888import shipping bills were ~utstandingin the 'six
months to 2 years' and 197'4 above two years as on November 30, 2018.Further, during
review, it was observed that an AD branch had 2100 import bills yet to be entered into the
IDPMS system, in the beyond two year category).
Confiden ti01
(i) Despite having warning signals and inputs from various audits for fraud connotation in 1
I
some accounts, the same were not remmmended for RFN fraud. jii) No action was taken
on the CRlLC alerts received in accounts red nagged by other banks (52borrowers).
3. Market Risk
1 Major Observations
3.1.1 1 Trading Book

I
The Modified duration of the portfolio as on March 31, 2818 was high at 4.43, primarily due
I I to investment in G-secs, exposing the investment portfoliq to higher MTM variations and I
interest mte risk.
3.2.2 Banking Book
The bank was exposed to substantial interest rate risk in banking book on account of: (a)
1 1 Embedded optionality as 28.69% of fixed tenor loans over :I 10 mn were prepaid during 1
1 1 the period. (6) A 200 bps adverse change in the interest rate could lead to 14.80% (PY 1
/ / 12.2%) erosion in net wwth on accwnt of duration mismatch, primarily driven by higher /
1 1 risk sensitive liabilities (deposits and borrowings) in 6 months to 1 year and 1 year to 3 1
1 1 years bucket. This would also result in earnings at risk of 8,378 mn and 12.78% 1
2 impad
1 1 on NII. (c)Rising yield curves during the penod resulted in ;5,738 mn erosion in the value 1
of HTM portfolio, which was 3.33% of Tier I capital.
3,2 Contml Gap Risk
3.2.7 Palicy Environment:
(a) The Investment pelicy was deficient on aceaunt sf the following: (i) Policy was silent ofl
1 1 NPI management strategy though 142% increase in NPI was observed during the period. )
1 1 (ii) VaR limit in the investment policy did not cover bondsldebentures under HFT and 1
mutual funds resulting in understatement of VaRa ($1 The bank did n ~have
t a Board-
approved Customer Appropriateness & Suitability Policy for derivative contracts.
11 1 Res~ltantly,the investment policy allowed sanction of forward cover irrespective of the 1

1 customer csteg~risationlinternalrating. (c) Concentration limits were not set for bank's 1
. ,
/ / exposure to G-seclSDL portfolio (88.81% oftotal investment as on March 31.2018). MTM /

losses to the tune of : 1,585 mn were booked on G-secfSDL porffolio durlng the year
Page 16 of 29
I
-
.
resuliing in an overall [bss of TI 2,615 rnn on investments as at March 31, 20j8, IClALCO
-r
had also not given specific directions with regard to rebalancing I re-composition of the
I
portfolio in background of increasing modified duration and resultant MSM losses.
--
& d R m a n f i t i s a t i o n and Assessment
(a) Analysis on profitability of bond portfolio was not done during revision of limit for
~nvestrnentin Bsnds /Debentures. F~flher,while flxjng the limit of +I- 27% of N11 for EaR,
the bank had not analysed whether it could bear a 27% impact on its N11 given its
deteriorating profitability. (b)The market risk limits for N 0 6 P as per the investment policy
(l_l 7200 mn) was not in tune with risk appetite limit for NBOP [L 11013 m).(c) The current
Transfer Pricing rate mcdel neither captured the liquidity cost nor the interest rate risk in
the banking bock while evaluating the profitability of branches. Davelapment of a fund
transfer mechanism that was cornmened in 2015 and expected to be irnplementea by
March 2016 had not yet been implemented. (d) under lRR8B ti) Embedded optionality for
term loans and basis risk while measuring and m~nitsringIRRBB was not factwed. (ii]
Combined scenarios of lRRBR with its related risks such as credit or liquidity risk were not
assessed. (e) Deficiencies in computation of NOOPL were: (i) In case of LCs and
guamntees issued in foreign currency, behavioral analysis for estimating likely
devolvement was not done. (ii) Future receivableslexpenses not yet accrued were not
included in calculation of NOOPL. (f) The average N 0 8 P utilisation during the year was
only 36.18% indicating that threshold limit was not commensurate with actuaf business
position.
3.23 Confrols
-(ation of KMs-CBS for' *PA-NPI olassZcation was deficient as PAN of the
customers and not unique customer IDSwere used as the common identifier for comparing
the data of ITMS with 65s.As a result, though seven out of the nine accounts cIassified
as NPI (post integration) had fund-based exposure, thdr CBS customer IDS were not
correctly mapped in ITMS reports. (b) During last three FYs, average delay of more than
three hours in deal entry and arnthorlsation by front ofice was ohserved in 47.14% deals.
Further, on an average, 14.57% of money market deals were entered after 5 pm, i.e., after
market hours. Reasons and impact of such delays were not anatysedlreparied by front
I office, (c) Operational deficiencies of dealing room included: (i) A dealer in forex front ~ ~ Y I C Q
Confidential
I was not rotated from his deskwithin 2 yea'n (as at April 2018)though required by the 1
bank's investment poIiey. (ii) No log book was maintained to record the movement of
People in and out af dealing mom. (d) For domestic G-sec portfolio, though mid office had
started conducaing rate scan at periodic intervals, no threshold for variations from market
rate were set, rendering the exercise ineffective. Further, there was no system in place to
apprise ALCOlRMC on rate scan exceptions an a periodic basis.
Monitoring and Review
(a) IC had allowed to hold the investment in shares (despite stop loss limit breach) without
adequate justifications in many cases resulting in loss of 07.4 rnn in equity portfolio during
the year. (b) Report for deals cancelledlmodified were n ~ available
t in ITMS and
consequently, causes for modifications or financial -impact of
frequent
eancellations/modifications were not captured and monitored by back office. (c}, Nostro
account statements were manually downloaded from SWIFT interfaoe in the fotm of
editable M file and uploaded into ITMS for reconciliation which increased the risk of data
corruption ar misuse of information. (d) The bank was yet to obtain online view facility
through internet banking for seven out of 26 nastro accounts and therefore, could not
monitor the transactions in these accounts on a real time basis. (e) Though the sensitivity
analysis capability was made available in ITMS software, actual sensitivity analysis
I 1 conducted and incorporated at the time of investment was neither documented by front 1
1
mf1 offtce nor monitored by back office.
Reporting
1
( a ) Impact of 2QO bps change in interest rate on market value of equity (MVE - domestic
basis) had breached internal limit sf 19% for Global MVE in 5 months in FY 2017-1 8 under
baseline scenario. However, these were not reported by WMD to ALCO. (b) Though
directed by IC, reasons for not offloading equity and details of research reports from
minimum of 3 separate sources in case of breach in stop loss were not incorporated in
notes put up to 1C by treasury.
Page 18 of 29
Confidenti d
4. Liquidity Risk
Major Observations
1 4.1.1 1 Structural Liquidity i

Only 66.83% of long term assets were financed through stable long-term funds.
I -
4.1.2 Stress Liquidity
I '
(a) Non-availability of liquidity buffer through un-swapped foreign
I the bank to liquidity risk from foreign currency operations. (b) Volatile liabilities funded )
1 I earning assets to an extent of 40.79% indicated dependence of bank on short term interest /
(
I 1 sensitive funds. I
4.1.31on cent ration d funding sources
I)(s) Liabilities to top 20 depositors had increased by 8.88Y0and constituted 26.40% oftotal 1
I
I I deposits as March
at (25.39% during
31, 2018 PY) (b) Incremental CASA declined by 1
1 1 42.36% to L'45,449 rnn (CY) camparedto 1:78,861 mn (PY) indicating decline in funding 1
through stable deposits.
a) Upper risk limit for bulk deposits was kept high at 80% of total deposits though the
I
II 1 strategy required less relhnce on wholesale deposits. (b) The revised ALM policy of the
I
1
1 bank had not incorporated the process to compute and report NSFR.
\
1
4.2,2 ] Risk Identification and Assessment -1
I/(a) ~verageutilisaiior: of various to!eramelimits in SLS was only between 20-60%,and very /
I 1 high average positive cumulative mkhaiches were observed in l d (536.53%). 2-7d 1
( (d 45.62%) and 8-14d (100.18%) buckets for which no tolerance analysis was on record. (b)
(
( I The contingency funding plan did not indicate ensuring committed lines of credit from II
I ( financial institutions under stress scenarios. The basis used to arrive at haircuts applied for I
1 I liquidity funding options was also not evident. (c) The bank had not defined components of (
1 other operating costs used in MCLR mmputatian.(d)Term deposits with contractual maturity
of one year accounting for 89.66% o f term deposits, wholesale deposits constituting 46.88%
of term deposits and rise in undrawn fund-based commitments at 17.34'3'0
-
Page 19 of 29
total commitments increased vulnerability of the bank in case of premature withdrawals. The
bank did not have a process to monitor concentration of funding from a particular source,
tenure or instrument, nor did it prepare strategies for diversification.
limited to the bank's domestic portfolio, (ii) Actual LCIEG devolvernent based on historical
data were used instead of calculation of potential cash flows. (iii) The study classified the
volatile portion of CASA in 4 d, 2-7d and 8-148' buckets and the balance was put in the over
1 year and up to 3 years bucket without any basis. This affected the accuracy of bucketing
I in SLS statement. (b) The preparation of various liquidity statements invalved manual 1
1consolidation in excel sheets without any independent validation. (c) Deficiencies in LCR (
1 computation: (i) bank did not compute LCR in significant currency (USD) as HQLAs in USD 1
1 were not maintained, which was 11% of total consolidated cash Aows. (ii)Cash flows related 1
( to CClRSlFCYlRS were not considend. (iii) The bank was considering all cash inflows of 1
investments maturing in 38 days in the denominator irrespective sf whether the asset was
included as H Q M or not, resulting in risk caf double wunting. (iv) Computation for FY 17-18
did not include operational deposits. (vi) Outflows associated with off balance sheet items
1 were not based on behavioral studies. I
Monitoring and Review
(a) Despite IC direction, the process f ~transmitting
r fund inflowlcutfiow data from branches
had not been automated. Consequently, the bank had borrowed 63 times from call money
market during last one hour of the market hauw at a higher average cost of 5.83% compared
to an average cost of 5.86% for money market borrowings during the year. (b) No
directions/strategies were given by ALCO for reported expected tiquidity deficit of E 33,878
mn during January 2018. As a result, bank borrowed from call money market for 24 days in
the month, without assessing excess SLR fund position or alternative sources of liquidity.
(c) The bank had invested surplus funds in liquid1 ultra-shm-term debt schemes of mutual
funds during April-Dec 2017 with a target yield of 7.50% p.a. However,
average annualiseel return sf6.49% was walised from such investments in the September
2017 quarter and despite tower than targeted yields, IC had approved further investment in
Page 20 of 29
mutual funds during the year, resulting in an average yield of only 5.92% p.a on the
investments.
4.2.5 Reporting
No MIS was in place to assess and apprise ALCO of the number of occasions the bank
borrowed at rates higher than the we~ghtedaverage rate of the day for a particular
borrowing.
5. Operational Risk
Major observations
5.7 I Inherent Risk
People risk was high on account of: (a) Number of charge sheets issued against top three
grades increased by 67% y-o-y (PY:36,CY:60).Out of total 60 charge sheets, 41(PY: 15)
pertained to vigilance issues with 33 resulting in major punishments jhcluding terminations
(PY: 9). Number of employee terminations (42) due to unethical behavior and vigilance
cases against middle and senior management contributed more than 50% of total such
cases. b) Seven fold increase (y-2-y) in number (PY: 23, CY:146) and around fa$ fold
I
increase in value (PY E70 rnn , CY 7.2676mn) in case of internal frauds, to an extent of 2%
of PAT. Even these figures were under-reported as the bank did not etassjfy some cases of
frauds as internal whe:ein both customers end e~ployesswere invoked in fraud
perpetration. Additionally, frauds perpetrated by customers had also increased six fold (y-
o-y). Further, on acceunt of fraud cases, there was a financial loss of ;; 19,723mn. ('el
Miniscule spending on training and skill imparting (6.07% of total operating expenditure)
( I and the bank did not readily have accurate data on the arn~untspent on training as it was 1
I 1 dubbed with the other revenue expenditure(e) High attrition rate among key employees I
(48 i.e., 6% of total nurnber of key pasjtions in areas such as RMD and Treasuv).
accentuated due to: (i)large number of KYC non-compliance during

was
I ( the year (1 16/76 instanzes) with regard to risk categwisation of customers, de-duplication (
( ( exercise and re-KYC: (ii) non-capturing of customer complaints at branches in relation to
I
( - 1 employee behavior (few instances observed during incognito visits to bank's branches and 1
Page 21 of 29
Confidential
complaints received against the bank) and non- tracking of in-operative or dormant
accounts (81 I,317) and their activation. Transaction risk was not captured as the bank was
not monitoring the losses arising out sf the modified I cancelled deals (156) during the
period.
5.1.3 External Risk
There was no capturing of complaints resolved on the same day at branches (onan average
20 complaints per quarter for a branch on sample basis for 20 branches), failed ATM
transactions (on an average 20 per quarter for a branch on sample basis for 20 branches),
1 1 complaints related 1
to third party produds and outsourced services, thus leading to under-
I 1 reporting capturing
and incorrect outsourced
of data on employeesservices I 1 and cost of
( outsourcing. There arising out of complaints from 1
1 process to capture legal
was no
I customers and record operational loss due external
risk
1
1 no of data to
I and fire (13such events amounting to r 7.5mn during the period).
events like ATM vandalism
I 1
m c e risk was heightened on account of non-compliance to RMP and RAR of 1
I 1 previous ISE, KYCIAML norms, gaps in UClC and de-duplication exercise. The bank was I
I 1 levied a penalty of 50 mn on account of KYClAML violations by RBI. There were also I
Ki
1 ,
1 large number of instances of penalties (1245)by CERSAl on the bank due to delay in 1
registration of mortgages.
5.1.5 IT-Operational Risk
a) Manual intervention in critical processes such as AML-KYC, RAM rating, credit card
operations and ITMS, was fraught with risk of data integrity and accuracy. (b) There were
33 information sewrify incidents during the review period (28 pertained to phishing
websites, 10 were phishing mails, 4 dark web and 2 incidents of fraud). The bank was not
1 1 proactively monitoring potential phishing websites of banks, service providers and payment 1
I / gateways. I
5.2.1 Policy Environment
I I
1 (i)The operational risk policies were not r e v i e w e d d
I 1 to manitor the delay in approval of these policies at ORMC, ACE, RMCB and Board. (ii) The 1
fraud risk management policy did not identify the competent authority for declaring a fraud.
, , Page 22 of 29
--
The policy did not provide for Fraud ~onitoring Group (FMG) and its constitution.
Consequently on a few occasions (three),the same GM who had sanctioned the loan was
part sf the FMG, indicating conflict of interest. (iii)IT policy did not provide for: a) Risk
assessment framework to sirnuhe external events and quantiw losses to assess the
financial i m p a d per security incident Idisruption of services and assess the effectiveness
I of the security incident response team, b) Cyber risk jnsurance cover bo transfer the risk
1 end cover financial loss.
I
~tifldentlficatio&
n Assessment
7 (a) The following debiencies were observed in Risk Control Self-Assessment (RCSA)
/ framework: (i)the mapping of the loss categories to the business lines was not examined
as many Ioss events, viz., thee l robbery, fire incidents and ATM vandalisation, were not
captured. (ii) data related to frauds / near miss events was not accurate as a few cases of
frauds were reported as near miss incidents. Identifying and monitoring of near-miss
incidents including attempted frauds at the branch !eve1 was absent (iii) assessment of
effectiveness of control mechanism was limited to mitigation of residual risk and it failed to
identify inherent risk areas where no controt was in place (viz., fraud detection and reporting
mechanism, effectiver~essof audit mechanism including internallconcurrent audit and off-
sib monitoring), (iv) KRls did not include critical areas like income leakage, fraud detection
and reporting and mis-selling of third party products. Low frequency, high impact events
were nof taken in to consideration for optimisation of KRI library. (b)Cornpliance
assessment was ineffective as there was no ongoing monitoring of compliance with
regulatory guidelines relating to fraud and 1RAC norms, even though monthly compliance
certificates from branches1 ROslZOsl functional departments were obtained. (c)The! bank
did not have Domain Keys Identified Mail and Domain-based Message Authentication,
Reporting and Conformance tool to prevent and detect e-mail spoofing threats and phishing
threats. (d) The bank failed to adhere to the timelines in the implementation of advisories
relating to SWIFT. Besides, there were gaps in implementation such as: (i) Centralised
authorisation of SWIFT transacfisns at treasury was done based on the details provided by
the branches and not by verifying the underlying documents, (ii) The CC1L file routing
system and transfer OF MT 940, 950 fjles from Swift sewer to the 1TMS were not through
automated filed transfer, but physically downloaded into editable -txt format and matlually
Page 23 of 29
I uploaded for processing. e) Five out of 96 observations on the IT examination and 5 out of
112 observations on IT gap assessment analysis were pending as the bank was yet to
implement Network Access control (NAC) and Netwan behavior analysis solutions (NBA).
Controls
(a) The four new products launched were not in line with the business plan of the bank.
Proper breakeven analysis and idenfificati~na: target segment were not done.
(b) In a sample of 10 cases, the same customer had multiple customer-ids even though the
bank claimed completion of de-dupe exercise.
(c) Fraud Management: The following concerns were observed: i) Repeated instances of
frauds (100 out of I013 during the year) with same rnodus operandi in the same regions I
branches, through sanction of QDlCC limit based on inflated drawing power, accounts taken
over from other banks without adequate clue-diligence, multiple frauds in housing /vehicle I
SKCC loans, fund transfer based on e-mails and card skimming. (ii) Delay of more than
two years from the date of detection to declaration of fraud and reporting to RBI, (iii)
Absence of a tracking mechanism to review and report to its Top Management/ Board about
the number of instances wherein Flash repart/ FMR-I was fited by the branches and total
number of cases declared as fraud. (iv) In some cases, the process of declaring the account
as fmud was delayed, dting recovery, in contravention of extant guidelines, (v) Quick
mortality cases were not placed b e f ~ wthe FMG for examination from the perspective of
frauds,(vl) No action was taken against the empaneled lawyers who conducted title
investigation and the legal audit, though frauds in availing housing loans were ~ p ~ r t in
ed
32 cases involving 0 4 0 8 rnn duMg FY 2039-j8. (d)HR (i) In the absence of a review of
positions requiring speciaiisation, the rnanpawer planning was adhoc.(ii) There was no
special focus on training programs on risk management, fraud risk, credit appraisal and
monitoring and KYCIAML, though these issues were highlighted in previous ISE.
(e) Vigilance: (i) In NPA and quick mortality cases, the staff accountability exercise was
not completed within six months, (ii)In 85% of fraud cases, no staff acc~unhbilitywas fixed,
(iii) In a few fraud cases, the vigilance process was yet to be compieted even though the
same was initiated more than 2 years back.
(f) AMUSTR: (i) Twenty two branch induced AML scenarios were n ~ Implemented
f as no
alerts from branches on such scenarios were received by AML cell till the date of inspection
Confidential
(ii) deficiency in monitoring of transaction based alerts at ROlHO were observed as

9.64% alerts of FY 2017-78 (from Jul 209 7 onwards) and 28.56% alerts (from April 2018
onwards) were pending for closure as on October 75, 2818. Further, only 157 STRs filed
out of total 4,575,950 alerts during FY 2017-18 (iii) No system was in place for immediate
change in risk category of accounts afler STR filing and based on inputs from enforcement
and regulaiov authorities. jiv) Alert for breaching the transaction threshold limit in CASA
accounts did not consider the indiviclual'slfirm's income. (v) Sixiy three Transaction based
money laundering aleris recommended by IBA were not implemented by the bank. (vi) 60%
of alerts generabed by system were dropped at HO level indicating ineffective alerts
parameterisatlon.
(g) KYCl risk categorisation: (i) No mechanism was in place to monitor accounts due for
re-KYC or reporting the status of accounts pending for re-KYC to the Board. (ii) Periodic
reverse scanning of accounts in UN sanction list was not done. (iii) Parameters suck as
customer constitution, business segment and economic profile for risk review of accounts
were not available in the CBS master. (iv) Annual report on Inoperative accounts was not
placed before the Board, which was contrary to extant guidelines.
(h) The confidentiality of data in the packages maintained ~ubsidethe CBS environment
such as balance sheet package, Retum2BCD package were at risk as the data was neither
encrypted nor had proper storage for back up. Further, these packages sourced primary
data from CBS, but did net push the data back to CBS through STP, so that both the
packages show same results.
(i)Cyber preparedness: The bank couM not correctly detect any of the simulated cyber
security scenarios advised by RBI (CSITE CdI) in the table top cyber drill exercise. The
bank had also not undertaken simulated cyber drills based on cyber alerts given by CSITE
cell to assess the cybei security preparedness of the bank.'
(j) Confidentiality of Customer Data in Credit Card and POS Management: (i) Credit
card applications of customers with full credentials and private information were available
to the vendor and data pertaining to credit cards required for capital computation was
provided by the vendor, (ii)There was no system to map individual account in CBS with
each credit card in reol time, but a single CBS Gb was used b reconcile, based on the files
received from the vendor.(iii) The activation of POS terminals was vested with the vendor
Page 25 of 29
1 and not the bank, resulting in three instances of frauds amounting to 55 mn on account of 1
wrongful activations for swiping international cads without bank's permission.
(a) During FY 201 7-1 8, out of the 754 claims amounting to 33,839 mn,none was settled
I
by the insurance companies. Out of these, 41 claims were rejected by insurance companies
for various reasons (which constituted 25% of total claim value) and the rest were pending
for settlement. (b) There was no trend analysis on the nature of complaints received,
resolved, turnaround time and repetitive complaints. In case of third party products, the
bank did not have a mechanism to record customer acceptance to the critical terms and
conditions of the product. (e) It was observed from 20 sample cases sf debit failed ATM
transactions that the bank did not compensate the customer, which was contrary to extant
guidetines.(d) In some Savings bank (SB) preducts (viz. product wde-214) sweep-in and
sweep-outfacilities were allowed with stipulation that the minimum balance post sweep-out
should not be less than n 10,000.However, in many instances this was not ensured and
the balance in the account became negative as sweep-out even beyond the available
balance was allowed. Operatianal IT Risk: (a) Three high and j3 medium risk obsewations
in regard to the internal vulnerability assessment and penetration test were still pending for
rectification even after more than six months. Further, the internal and external VAPT for
ATM switch was not in glace. The bank had also failed to adhere to the CSlTE advisory of
conducting VAPT for all public facing appljeatbns on quarterly basis. (b) Enterprise Wide
Fraud Monitoring solution was not implemented. (c)DW drilt for in-house applications was
I 1 done once in 6 months and not at quarterly intervals, contrary to extant guidelines. 1
6. Other Pillar [I Risk
Major observations
6.1 Inherent Risk
6.1.1 Strategy Risk
(i) Compared to projected net profit sf 7 7,750 mn for W 17-1 8 (revised to loss of T 23,2B0
mn in March 2018 review), bank posted a net loss of P32,238mn for FY 17-q8 (PY profit T
3,590 mn) due to higher provisirsning, reduction in treasury incams and mark to market
(MTM) losses. (ii) There was a decline in comrniasisn and fee
I
t 1 46.983 mn (6.21% y-0-y basis). The bank'fihare of commission and fee income in total
1
I 1 income was low at 2.89%.
)6.1.2Reputidion Risk 1I
/ Concerns observed included the following: (i) Declining client gmMh (CY: 5.2196.
1I 1 5.90%) (ii) Decline in interest income and prolit on sale of investments resulting in 7.10%
I
I ) decline in revenue (PY: 2.94% growth) (iii)Customer dissatisfaction evident from increase I
I1 I1 in legal cases filed against the bank (CY:379. PY: 281) and high percentage of banking
ombudsmen cases (11.30%) awarded against bank
I1
~ ~ - K o I G ~ ~ Risk 1
I
I 1 Projected growth in deposits at 16.53% and CASA at 20.51% for FY 18-19 was unrealistic 1
1 I respectively in last Lhrea P l s . (ii) increasing trsnd in cost of deposits and cost of funds was II
(given that the average growth of domestic dep~siBand CASA were 2.36% and 8.12%,
1 I projected for the period 2019-23, despite a declining trend in these ratios over the last four I
I
I I FYs. Moreover, this was also not in line with bank's strategy af increased focus on low cost I
I 1 CASA and better liability management. (b) There was no market perception policy for I
I I monitoring social media and adverse market perception, resultantly, social media perception I
/ I was rated medium in reputation risk scorecard without any basis, (c) The bank's mudel risk (
I ( policy was deficient as: (i) Models used by bank for swap valuation, operational risk, and I
I 1 software for ALM were excluded from model risk management. The requirement of I
1 ( validations and standard far usage policy did not define validation standards or methodology 1
I I to be used for internal validaljon of other mode!. mentioned in the policy. I
1 6.2.2 ) Risk Identification and Assessment I
[I 7
(a) hficiencies in sbategic risk roorecard included: (i) Risk from strategio planning was
I 1 rated 'verylow' though significant gaps were observed between targets and ectuals for FY I
I 1 17-18. {ii) Only deviations in advances and deposits growth were considered to assess the 1
1 1 risk from fnanciai parameters under strategic planning and holistic view of achievements 1
under all KPls was not taken. (83) Deficiencies in reputation risk scorecard: (i) Status of the
bank w.r.t PCB guidelines was rated 'vary low', though bank had breached NNPA and RoA
1 ,
1 parameters in PCA framework as on March 31. 2016 . (ii) Reputation risk from external rating I
Page 27 of 29
was classified'low' though risk appetitefor ratings of bank's bonds had been breached (Sept
was not based

-1
17 quarter). (GI Defieiendas in pension assessment: (i)Attrition rate used by actuary at 1%
on the bank's past attrition rate trend sf average 2.17% p.a, (ii) The Board
decided to continue using modality table published by LIC (1996) instead of adoption cf 1
1 / IALM table provided by IRDA as the latter added pressure on profits and capital to the tune I
u g h risk wes rated as 'medium', the RMD had not provided any correcthe
~ o o T h o reputation I
I
1 I actlon plan, as mandated by the ICAAP. (b) No internallexternalvalidations had been carried 1
1 out for models used far computation of PO, LGD, capital ratios, additional standard asset 1
I 1 provision and VaR. I
I
) 6.2.4 I
Monitoring and Review: Collateral management policy was not reviewed since November
1 ( 2016, though deficiencies (such as wluaijons an higher side, no response from valuers, I
I ) expiry of proprietcc of firm) were observed. Two different valuations given for h e same (
1 I property were observed in 18 {43n/~)out of 41 cases, however, continuance of the
I
valuers in
i1
[ - ( the panel was recommended.
7. Risk Culture
Risk Culture
h k cuiture in the bank war weak and no attempts were evident lo
even though deteri0ratiol.sin financial panmeters of the bank were observed with incurrence
of losses and declining income. Despite being in the fourth cycle of RBS, many dab points 1
underwent change due to lack sf functionaj ownership and no synchrclnisation between
functional departments. The inkma! audit framework failed to bring in robust risk culture in
the operational aspect of functioning of the bank was not evident in view af the deficiencies
in fraud and complaints management, KYCIAML, RCSA, , GL misuse, integrity issues at
I
senior management level, inadequate capacity building, deficient collateral management
and auto NPA classification. Risk Culture in the 1T area of the bank was inclined towards
compliance to regulatory prescripti~nsrather than providing pre-emptive responses towards
I
risk quantification, appetite, mitigation and transfer. Strong internal contrbls to minimise the
risk and loss was not evident in view of !he breaches in risk limits and continuing losses.
Page 28 of 29
Confidential
I Lack of clear directionslstraisgies by top management in this reg&,

1 mitigation of the risk anddivergence from hank's long term business plan. -1
resulted in nan-
Page 29 of 29
Table of Contents
Sectian It:
A. Summary of Aggregate risk at bank level

I , '.,.
B. Capital Assessment Q including Earnings)

Plllar I Capital & CRAR .............................................................
Capital Managemenf I C M P and Stress Testing ............................
Assessment of Internal Generation of Capital ............................
scope & Ability to infuse Capital ..............................................
Assessment sf Leverage Ratlo.. ................................................
Supervisory capital prescription ........
.....................................
C. Compliance Assessment
.....................
Major Areas of Financial Divergence . . .............
Major Areas of Non-Compliance...............................................
D.Annexures
Annex-1 : Major Areas of Financia! Divergence ...........................
Annex-2: Computation of Outside Liabilities,. ......... ... .............
Annex-3: Assessed Net Worth.. .................................................
Annex-4: Computation of Assessed Capital.. ..............................
Annex*: Assessment of Internal Generation of Capital................
.
Annex-6: Leverage Ratio.. .......................................................
Note : All figures in the repoff refer to positim aP the bank as on March 31, 20f8 or far the period April 1, 2017
to March 3 1, 2098 and figures in p a ~ n t h e s i srnkf to corresponding p ~ v i o u syear posiiion unless ofhenvise
specifled
RBS report 2018- Syndicate Bank "Confidential
A. SUMMARY O F AGGREGATE RISK AT BANK LEVEL

As per the SPARC process, the Aggregate Risk Score of the bank is arrived at-
--=A-
which is indicative of High Risk. On applying the assessed CRAR of 12.09% to the
aggregite risk scare, the Risk of Failure Score of the bank is arrived at=
k-1 ateg gory Aggregate Risk
Board I
Senior Management 0
---
Risk Governance
Internal Audit
Compliance
Governance & Oversight Risk
Credit Risk
Market Risk
bi'quidityRisk
Operational Risk -!
Other Pillar I1 Risk
-
Business Risk
BANK LEVEL AGGREGATE RISK
B. CAPITAL ASSESSMENT (INCLUDING EAWNI NGS)
1. Pillar I Capital & CRAR

The summary of reported and assessed capital position of the bank as on March 31,2018
is given below. Details are in Annex 4,
Capital: under Base! 1
I1 (In 7 mn)
d Assessed Divergence for

I divergences
Total capital (TC) 224,127 221,496 2,634 On account of
135.796' 22,331
fresh NPA and
existing NPA
Tler I(TI) capital
Tier 2 (TZ) capital
Page 2 of 11
-
RBS report 2018 Syndicate Bank -Confidential
CRAR under Easel 111 (in %)
Particulars Reported Assessed I Divergence Reasons for

divergences
Total capltal (TC) 12.24% 12.09% 0.15% On account of
'common E
Tier 1 (CET?) q u i t y T F [ ~ fresh
l NPA,
existing MPA
and credit RWA
capital I I I
Tier 1(Tf ) capital 9.41 % 9.26% 0.15%

Tier 2 (T2) capital 1
I
2.83% 1 2.83%
I I
2. Capital management, ICAR, ICAAP and Stress testing

2.1 Bank's Capital Planning and Business Projections
(a) The bank could not achieve many of its business targets for the year FY 2013-18. It
reported a net loss of 7 32,228mn against a projected profit of7,750mn in FY 2017-
18. Gross slippages were at f 143,700mt?against the projected amount of f 60,000mn.
Gross NPA as on March 31, 2018 was T 257,590 mn as against the projected amount of
7792,006mn. RoA as on March 31, 26j 8 was (-1 1.05% against the pr~jected0.23%.
(b) The bank breached several risk appetite parameters {internal targets) such as GNPA,
NNPA, fresh slippages, high coat deposit to total deposit and loss an operational risk,
(9
-..
(c) Capital planning for FY 2817-18had set a target of raising 255,000mn (GET 135,000
mn, AT 1 and Tier 2 of 710,000rnn each) by the 3rdand 4Ihquarter. The bank could raise
only 'f 49,408 rnn (GET 339,900mn + AT 1 7 4,500 mn + Tier 2 75,000mn) before
March 2018. It cowtd not raise Additional Tier 2 capital of ? 5,008 mn wing to lack of
interest shown by t h e investors due to declining earning parameters.
The capital projections also continued to assume significant levels of retained earnings
every year (75% of projected PAT for the year). Given t h e trend and current level of
retained earnings (nil from FY 15-16 onwards), the assumption was not in alignment with
the performance of the bank.
m
d~
\\*f
RB5 report 2018 - Syndicate Bank -Confidential
(d) Though the bank in its risk appetite statement had stabd that it was commirted to
maintain capital level that was adequate to maintain comfortable buffer over regulatory
minimum, it had projected a GRAR of 10.73% for Dec-13 and 10.33% for Mar-19 quarters
which was below the minimum regulatory requirenent.
(e)The balance sheet size of the bank increased by 8.33% (Y-o-Y) es on March 31,2018.
The increase in liabilities was mainly on account of rise in borrowings by 69.48% and
increase in the assets was due to growth in investments by 22.74%.
(f) Borrowings: The bank had borrowed :98,210 rnn through term rep0 as on March 31,
2018 (nil in PY) stating that borrowing from market against excess SLR available was
cheaper compared to bulk deposit rates. However, wholesalelbulk deposits (as a % of
total deposits) had not shown a consistently declining trend as it increased from 49.1 1%
in March 2017 to 51-54% in September 2018, then declined to 44.1 6% in February 2018,
but increased again to 46.88% in March 2018.
(g) Other assets increased predominantly due to increase in net deferred tax assets
(DTA) from : 7,027mn as on March 31, 2017 to : 21,250 mn as on March 31, 2018
(increase of 202.38% y-o-y). The rise in net DTA was on account of: (i) Provision reversal
of G9,410 mn in NPA accounts due to recovery, and (ii) reversal ~f Deferred Tax Liabilities
(DTL) to the extent of 24150 mn due to tax reuncl. Incidenfally, cash shortage under
extant guidelines.
Other assets was not reporfed as fraud. contrary to
(h) Investment in G-secs had increased by 24.53% (y-o-y) as on March 20j8,however,
there was MTM losses (I1,585 mn) due to hardening ef yields. Investrnent in bonds and
debentures also increased by I I .65% (y-o-y) despite rise in NPI for such investments to
the tune of 174% during the period.
(i) Contingent Liabilities increased by 31.7% (y-o-y) as on March 3?,2018.This was on
accounf of increase in outstanding forward exchange contracts (due to rise in trading
volumes of DSDIINR in interbank rnarket and cross-c~lrreneies)as well as currency
options by 50.18% and Letter of Credit by 23.30%.However, gains due to revaIuation on
forward contracts increased only by 3.42% in FY 2817-1B.
Page 4 of 11
RBS report 2018 -Syndicate Bank -Confidential
Assessment of Plllar I and Pillar II capital and internal Capital Ratios.

The impact of Pillar I1 risk on regulatory capital as worked out by the hank was 715,430
mn, Consequently, the internal capital ratio worked out to 11.36%. WhPe the Pillar I
capital requirement increased from 7 181,920 mn to 7 199.110 mn during the period
under review, the Pillar 11 capital requirement was assessed to be lower by the bank at CI
15,430 rnn (PY: 7 81,440 mn) owing to significant decline in concentration risk from 7
66,420 mn to 7 12,090mn.
ICAAP
The ICAAP policy needed to be revisited in the following areas: (a) The bank had not
1CY evaluated country risk, counterparty bank and exposure risk in its ICAAP document. (b)
in the assessment of compliance risk, the bank had not analysed non-
compliancesldeviations observed during internal Iconcur~mtaudit. Penalties imposed by
various regulators were also not factored. (c) ICAAP for March 2018 was approved by
Board only in September 2818.
2.2Stress Testing
(a) The bank required an amount of 799,780 mn to maintain minimum regulatory CWAR
of 10.875% under the baseline stress scenario, Capital plan to achieve minimum CRAR
. under base line stress scenario was not enumerated. (b) The quarterly nates on stress
test results submitted ts the 60ard were mere statistical statements without any proposed
action, and were put up with a considsrable delay sf 2-3months. Stress test results of
March 2018 were approved by the RMClBoard only in September 2018. (c) Policy on
-73 stress test did not include multifactor sensitivity analysis for market risk. Impact of
illiquidity was not considered as a factor in market stress testing.
3. Assessment of Infernal Generation of Capital
The gross volatile income decreased by 29.70% when compared to the previous year
due to reduction in income from trading by 45.62%. Net volatile income reduced by
418.31% compared to previous year and continued to be negative due to increasing
provisions for loan lasses (114.93% increase) and depreciation on investments/NPI
(246.38% increase). The details of the components of income contributing to the internal
generation of capital are given in Annex 5.
..,
Page 5 of11
RBS repcrt 2018 -Syndicate Bank -Confidential
3,l Retained earnings

The bank reported a net loss of 7 32,228mn for the current year and hence did not have
any retained earnings for the current year.
3.2 Quality of earnings
The operating profit of the bank had decreased by 8.72% in FY 17-13 over the previous
year and total income of the bank had declined by 7.j0% to 'f 245,820 mn compared to
7264,610 mn in the previ~usyear. The quality of earnings would continue to be under
pressure given the increasing level of NPAs.
The decline was largely on account of a 5.33 % decline in the interest income on
advances and 45.62 % decline in profit on sate of investments, during the period, The
earning assets of the bank had increased by 1.?5% as on March 31, 2018 over the
position as on March 31,2017, whereas the nrsn-earning assets had increased by 6.76%
during the same period. The cost income ratio of the,bank in FY 2M7-18 was 58.41 %
compared to 56.51% during the PY. The net interest margin of the bank, had increased
to 2.13% in FY 2017-18 from 2.07% in PY mainly due to decline of 8.99% in interest
expended. The ratio ofloss to total income, had increased to 36.09 % in FY 201 7-18 from
72.85 % in PY mainly en account of 87.87 % increase in provisions and contingencies of
loans and investments during the same period. The asset productivity had declined to
7.97 % in FY 2077-18 from 8.74 %in PY due to decline in total income of the bank.
The paid up equity capital was '114,173 mn as against an authorised capital of ?30,009
mn as on March 31, 20'18.The bank, as parb of its board approved capital planning, was
contemplating to raise additional capital to the tune of 370,000mn through issuance of
various capital instruments during 2018-19 which may be challenging owing to the current
financial perbrmance of the bank. During December 2077,the bank raised equity capital
of 711,508 rnn through QIP and during March 20'18, Government of India had infused
capital bf 7 28390 mn in the bank.
The reported and assessed Ieverage raiio as on March 31, 261 8 were 5.04% and 4.97 %
respectively (Annex 6).
RBS repnrt 2098 - Syndicate Bank -Confidential
6. Supervisory capital prescription
Based on the holistic supervisory assessment of risk and the capital position of the bank.
the bank's supervisory capital is assessed as " INADEQUATE".
C. Part Ill. COMPLIANCE ASSESSMENT
4. Major Areas of Financtal Divergence

The summary of majar areas of financial divergence, including assessed risk weighted
Annex1.
(i) Divergences [shodfall) in Provisioning (Rs. in mn)
Particulars No. of Outstanding Shortfall or Remarks
borrower amounts Additional
s1 provision
accounts required
- - -
(In T mn)
Reclassification of 38 22 3 Fresh slippage in 38
Standard Loans as education loan
Non-Performing accounts
Re-classiflcafian I 3 12,580 2,628 Wrong classification
Short Provisions d of NPA and under-
NPAs (Existing reporting of provision
NPA(
Sub-total (NPAs) 41 ?2,582 2,631
provislons I
accounts/
outstanding
Valuation of 0 0 0
Investment
Shortfall in 0 0 0
Standard Asset
Provisioning
Overstatement 0 Q 0
Income I Other
Assets
Undersfatement of 0 0 0
Expenses /
Liabilities
Total 41 12,582 2,631
RBS report 2018- Syndicate Bank -Confidential
(ii) Divergence in Risk Weighted Assets (RWAs)
-- RWAs (In 7 mm)

Risks Reported Assessed Divergence Remarks
Credit Wrong CCF applied for

1,519,850 1,520,519 669 NFB facilities
Risk
Market 151,162 151,162 Nil
Risk -
Operation
159,897 159,897 Nil
al Risk -
1,830,909 1,831,578 669
2. Major Areas of Nen-Compliance (Regulatory Guldeiines)

-
Regulation Area I Subject of Non- ) Nature fE Description of Non- Whether the
Reference (Para & Compliance 1 Cornplianc~ non-
Circular no.) compliance
was there in
the previous
RAR
- DBOD.NO.BP.BCT
Customer suitabiliiy and The bank did not have a specific
4121.04.1591207 1- Appropriateness $clicy Board approved Customer
12 dated Appropriateness & Suitability
November 2,201 1 Policy detailing steps for
RBllZD1b7 113381
ascertaining suitability of
customers far derivative products
A.P. (DIR Series)
Circular Nd. 32
based on parameters such as
dated December
financial data, product
28, 2010 para 8.3
requirement, operational
competence, risk management,
corporate governance etc.
Para 2 (a) (v) and ( 9 Interest a on Deviations observed in MCLR Yes
of DBR.No.Dir. advances computation
BC.67113.03.001
zt115-1e,
dated December
!
-17, 2015
Para ix, of Annex ts Undertakings in case of For cancelled forward contracts, Yes
R5112017-78/75 cancelled forward before passing the gains to the
A.P. (DIR Series) contracis customer, the bank was not taking
Circular No, 08 dt undertakings that the same would
Oct 12,2017 not be rebeok~dor ensure the
ex osure
RBS report 2098 - Synclicate Bank -Confidential
para 2.7.1 of RBI NFB facility extended to 401 borrowem with outstanding
MC on Guarantees men-constituent NFB aggregating 575,763mn as
borrowers on 31.03.2078 were extended
acceptances dated Nan-Fund Based facilities wwitk~uf
any regular Fund Based Facility.
Gaps in System based i. No restrictions in place in CBS
on IRAC dated July classifisation of NPA for multiple renewab at branch
01,2015 and MIS reporting level beyond delegated powers
wmoarffaging NPA in such
accounts
ii. asset status not downgraded in
C B S even after 3 months of
passing MOC
iii. Discrepancies noticed in
generation of SMA 2 accounts
Red Flagging and

- below L I O rnn
Tracking of EWS in loan accounts
tracking of Early not integrated with the credit
'
Warning Signals monitoring process and no

infrastructure in place for
identifying various crucial EWS
indicators
7, Para2.2Annexof Stress Testing of No policy to conduct Stress Test
RBI circular Portfolio Buyout not on ~ortfolioHuyout accounts.
DEOD.No.BP.BC- done
103/21.04,1771201
1-12 dated May 07,
201 2 _I
8. Para 2.8.2Annex of Mechanism to ensure The Bank had not maintained Na
RBI circular application of prudential individual obligor-wise accolrnts in
DBOD.No.BP.BC- norms on individual CBS nor had put any mechanism
1D3/21.D4.l77/201 obligor basis. to ensure verification of individual
1-12 dated May 07, accounts end application of
prudential norms in case of
I 2012 portfolio buyouts.
Part-II , CDD Two mandatory Nu check in CHS for collecting two No
measures for sole documents while! mandatory docurnenfs whiIe
proprietary firms, opening proprietorship opening proprietorship accounts in
para 28, accounts CBS
Maskr Direction
DBR.AML.BC.No.8
t114.01.00112015-
16. dated February
Muitiple customer-ids In many instances, one customer No

62(a) on Customer for the same customer had multiple customer-ids even
Acceptance Policy though the bank claimed de-
dedupe exercise was complete
and Ongoing due
I "
Page 9 of I1
RBS repon 2038 -Syndicate Bank -Confidential
Direction
DBR.AML.5C.No.B
1114.0~.00112015-
-r-
16, dated February
25,2016
-
periodic Many high risk customers such as Yes
Para 37 ongoing System of
due diligence, review Of risk jewelers, trusts, ek.,were rated as
Master Direcbi~n categorisation of lLnw'
DBR.AML.BC.No.8 accounts
1114.01.001/2015-
16, dated Februaw
25,2016
T ~ ~ F - E G AML
~ G system to carry out No parameters were set in the
DBR.AML.BC.No.8 risk based transaciion AML system to carry out risk
1114.01.00112015- monitoring (RBTM) and based transaction monitoring
16, dated February adow enhanced (RBTM) and adopt enhanced
measures for measures for cuslomersl products
customers1 products to to mitigate AMUCR risks
rnitiaate AMUCFT risks
Freezing of accounk by No freezing of accounts by the
DBR.AML.BC.No.8 the bank when w-KYC bank even though re-KYG was not
1114.01.001~20f5- was not done done within time frame
16, dated Februaiy
14. 1 25,2018
. .. ~ a s t e i The
Para 37 ibl.
Direction
--
transadf~ns in No alert definition for capturing
accounts of marketing money mulas and multi-level
BBR.AML.BC.No.8 firms, especially marketing (MLM)
1114.01.001f2015- accounts of Multi-level
16, dated February Marketing (MLM)
25: 2016 Companies shall be
closely monitored
Pars 5.1, 5.2,

Master Circular on 3 reports to RBI
Frauds
Classification
Reporting,
and
1 ~ a t e dduly 01, 2045
.
1I 16. ] Para 1.2 Master Banks must fix staff
-1
of FMR-2 6 The bank was not submitting No
FMR-I1 and FMRIII reports to RBI
Even though in 85% fraud

I
1
Circular on.~rauds- accountability in respect there was delayed reporting, no
Classificaiion and of delays in reporting staff accountability was fixed.
Reporting, fraud cases to the RBI
Dated July 01,2015
I ' 2 , 3.3, FMR-I reporting of D~layed reporting to RBI was Y e s
Master Circular on frauds to RBI within 3 obsenred in more than 85% of the
Frauds weeks Rorn data of fraud cases with delays ranglng
detectiog
Page 10 of 11
!'
RBS report 201% -Syndicate Bank -Confidential
Classification and from 22 days to 2766 days from

Reporting, date of detection.
Dated duly 01, 2015
18. Para 5.12,Failure to re-credit the In many cases (sample size-20)af No

Reconciliation ofcustomer's account debit faiIed ATM transactions the
transactions atwithin 7 working days of bank was not compensating the
ATMs failure - Time receipt of the complaint customer, even though there was
limit, DBR shall entail payment of
, no refund within 7 working days
No.Leg,BC.21189.8 eorngensation to the
7.00612015-16, customer @ 3 1001- per
dated July 01, 2015 day by the issuing bank
Page 11 of 11
Table-X: Divergence in WWA
Credit Risk - RWA
Market Risk - RWA

Operational-Risk - RWA
Total RWA
15lcI62'
159,897
f ,330,909
Tq*eT
159,897
1,831,578 669
Table-XI: Priority Sector Cfassifisation

Sl Paramef ers Amount reported by Misclass Actual '
'IP.
,
7:
1i Target
bank
Achieved
ifleatlon Achfevern
identifie
d by
SSM
ent as
assessed
by SSM
Shortfall Reasons for I
'1
Total Priority
Sector Advances ,
688,280
(40%) -
727,615
(42.47%)
'" 727,615
(42.41%)
MI
308,826 330,785 Nil 330,785

2 TddlAgricullure Nil
(1 8.28%) (I
9.28%]
Out of Tntal
I ' 3
Agriculture Loans
Advances to small
and Marginal
'
137,258
(0%)
183,280
(10.68%)
Nit 183,280
(1 8 38%)
Nil
Farmers
Micro Enterprises 128,837 177,040 172,847
93 Nil as per MSUE
0 , (% 10 ANBC) (7.5%) (1 0.32%)
41
(10.07%)
p; .
Other Priority
2481776 218,790
Sectors (excluding 2 18.790 Nil
(14'5%' (12.81%) (I
2.81%)
Agriculture & ,
Enterprises!
M~G~ D .-
Weaker Section 171,570 247,099 Nil 247,099

Nil
6 (14.40%) (14.4OOh)
(% to ANBC) (18%)
85,785 204,550 Nil 204,550 Nil
women
(I 1.92%) (I 1.92%)
~eneficiaries
--
(546)
k
-
As per-~ank As per SSM
-
Adjusted Net Bank Credlt
(Previous Year) 1,715,699 , r ,715,699
/~rnputatian
7
of Outside Uabilifes
Srm ~artlculars Amount

No.
A Total Liabilities excluding capital &reserves as 3,229,I 85
on March 31,2818
-
Upper Tier CI Instruments 0
- --
Subordinated debt 49,aOO
--
Deposits 2,727,761
Borrowings 247 ,I
36
Other liabilities and provisions 205,288
- -
B Internal Liabilities 150,622
Provision for standard assets 7 I,404
Provision for diminuflon in fair value of -1,431
Provision for NPAs 122,391 +
Floating provision 7,022

Provision for NPI 8,892
Provision for depreciation in investments 3,341
Administrative Office 00
FlTL Provision for Restructured alc 1,755
Provision for sold assets 2
Inter Office Adjustments(Net) 294
C Total outside liabilities [A-81 3,078,563
Annex 3: Assessed Net W o d ~
----
ST'
No. Partioula r~ Amount
A Paid capital [including ESOP outstanding 8 interest
free funds from H.O. {foreign banb)l 14,173
- - -
8 Resames and Surplus 7 19,748
I Statutory Reserve 34,728
Share Premium 66,351
-- capital Reserve (excluding revaluation resenre) 3,480

special Reserve 15,365
Revenue Reserve (8,277)
-
-
General Reserve 5,812
Investment Allowance Reserve 0
- - - - 1 Remittable surplus retained in Indian books [Foreign banks] I 0

Credit Balance in P&L Alc 0
Foreign Currency Translation Resenre 289
C IntangibIs assets [including net deferred tax assets) & 15,925
-accumulated losses
D Reported net worth [A*B-C] 117,996
1
E Adjustments following inspection findings 2,631
0
Investment Reserve Account
Additional Loan Loss Provision 2,831
Net Deferred Tax Asset 0
-
Understatement of Liabilities
y Item to be specified
~ n other
Annex 4: cornputationof Assessed Capltal

I
Common Equity Tier 1 capital (CETI): instruments and reserves

before regulatory I supervisory adjustments (including ifems
such as DTA, revaluation reserve and Foreign currency translation
reserve as per DSW.No.BP.BC.83/21.06,201/2015-16 dated March
,1 140,822
ad iustments I deductions
. - - -
Inspection for Supervisory ibaluation (ISE) findingsunder RBS

I Additional Loan Loss Provision 2,631
2 Shortfall in Standard Asset Provisionina.. 0
1
I
1
I
3 Understatement of Liabilities 0
4 Net Deferred Tax Asset 0
5 Investment Reserve Account 0
0 Ariy other item to be specified 0
E Assessed Common Equity Tier 1 capital [CETI) LC D] - 9 35,796
Computation of Additional Tier 1 eapital (AT?)
I I
I
F Additional Tier 1 capital (ATl) : instruments b e f ~ r eregulatory
adjustments
G l ~ o t aregulatory
l adjustments to ~d&otional Tier 1 capifal
i
I
.
] Adjustments 1 deductions applied on AT1 following ISE findings1

C- 1I I
Net Deferred Tax Assets .O

2 Any other ifem to be s~ecified n
J l~ssessedATI) capital [H I] - I U
'33,903
Computation sf Tler 1 Capital (TI)
I Computation of Tier 2 Capital (T2)

I
M Tier 2 capital: instruments and provisions 1 51.916
I P IAdiuotmentsB deducfions amlied.. -

on F2 followina ISE findinas
" I 1 01
/ T ~ d dAdditional
: Standard assef ~rcvisions I 0 1
/TAII~ other item to be specified i
O
-
Q Assessed Tier 2 (TZ).ca$tal, 10 Pf
, ,
51,797
computation of Total Capital (TC)
-
Syndi~ateBank Annex t o RAR
Annex 5: Assessme3 of Internal Generation of Capital
Sr. Break-up of income and expenditure Current FY 7 FY T-1 FY 7-2

No (Mar 18) (Mar-I 7) (Mat4 6)
- -
-- J
2 Inierestldiscounf on advancabills 157,228 168,562 173,105
3 Income nn investmen& 51 ,Q96 53,311 52,846

L- ----
4 interest on balances with RBI
Interest on market lending1 Income on
Fee based & stable misc. income
6 11,880 1 4,561 10,882
EWa)*6(bI
8a Fee based income , 7,099 7,569 7,415
- -
iG7 MISG.
s -cnj 4,781 3,942 3,467
7 , Gross stable income (1+6) 241,599 242,060
8 Interest Expended (9+10)
I - - 152,239 167,278 172,131
1
I
i Interest on deposits/ all other interesl
L
1 expense
.
140.861 156,510 16.1.7713
.-
3
10 Interest on borrowings 1 5,378 10,768 10,353

J
11 Net Stable Income 17-13) 77,400 74,321 70,729
i2 Income from trading
- 9,460 17,397 8,985
13
- ----
Realisedgainson derivatives 0 0) (1)
14 Gains on sale of asset
(6) 0
(8)
75 Recovery from W/OVS
4,883 3,759 3,871
1 Exh-ordinary income/ Dividend income
ather miscellaneous income 1,842 1,858 1,359
4 6,179 23,013
1 - -- -
Syndicate Bank -Annex to M R
1 I (excluding tax) (19+20*21) I I I I

-
19 Provisions for Loan losses 78,281 35,454 38,384
Provisions for depreciation in
20 6,088 1,757
investmentYNPl 2,247
21 Other provisions
--- (632) (2,a83) 4,017
22 Extra-ordinary expenses 0 0
- 0
L 23
24
Write-offs
Net Volatile Income (17-18-22-23)

869
(66,3451
7,485
(12,800)
834
(29,276)
*
- - -
-+[ +:.
25
Assessed provision by supemisor
(26*27+28+29+30+31+32*33)
- -
1 2,631 9,082 4,741
26 Additional Provisions for frauds 0 0 -0

Additional Provisions for understatement
27 2,631 6,125 4,718
of NPAs
Additional Provisions far Understatement
28 0 2,546 0
of NPls
Additional Previsions for Understatement
29 0 0
of Liabilities
Additional Provisions for claims not
30 0 0
acknowledged as debt
Additional Other Provisions (NPA
31 0 0 23
n Masking))
Additiwna I Other Provisions
.
,' 32 8 33 1 0
(Overstatement of Income)
1 33 1 Additional Other Provisions (PI. specify) I 0 1 o I o 1

34 Assessed net volatile Income (24-25) (68,976) (21,802) (34,017)
35 Reported net total income (I

1+24) 1: 1,855 61,521 41,453
I
I I
36
-- 1 Assessed net total income (11*34) 8,424 52,519
37 Operational expehses $38+39+40) 54,941 55,002 54,669

Staff expenses, Director's keslBoard 38,059 37,947 27,164
38 Members' fees & expenses
39 Depreciation on bank's property and 2,378 1,373 1,993 10
3
Syndicate Bank -Annex t o BAR
' repairs
I
40 Other Operating Expenses 16,504 15,682 22,512
-
41 Provisions for tax [1Il6Si3) 2,930 6,219
- --
42 Reported proRt (35-37-41) (32,228) 3,589 (16,435)
43 Assessed profit (363?-41] (5,413) (21,t76)
44 Dividend paid (excluding tax) 0 0 0
45 Reported Retained Earnings (42441 (32,228) 3,589 (16,435)

I
- --
L
(34,859) (5,413) (21,I 76)

46 Assessed Retained Earnings (43.44)
P -
C
Earnings Assessment
- Stability I V~latiiity
Sr. Earnings I B r ~ f iRatios
t Current FYT FY T-1 FY T-2
No (Mar 18) (Mar-17 ) (Mar-?6)
47 Net Inkrest Income [I -81 65,520 62,760 . 59,847
(Nll Growth Rate) (4.40 %) (4.87%) (8.41 %J
48 Share sf IMerest, Fee and Volatile
89:05:06 87:04:09 90:04:06
lncomt 11:6:171-
49 Gross Stable Income I Interest
9 50.84 144.43 141,09
Expended [718*100%]
table Income I Assessed Profit
(222.04) (7 373) (334.01)
-
51 Fs
-
Volatile income I (Provisions &
Contingencies + Extraordinary
Expenses +. Wrlte-offs)
[I 7/(38+22+23)*100%]
52 Assessed Net Volatile Income / sA:
. ?
Assessed Profit [34143*1OD%] 197.87 402,77 160.64

53 Reported Retained earnlngs I Reported
Profit [45/42*1:OO%J 100 *
54 Assessed Retained earnings I 1

- -
Assessed Profit [46/43*1~0%] *
55 Actual vs budgeted income [expressed

as +ve I -vepercentagej (14.67) 97.37 7991
56 Actual vs budgeted profit [expressed as
*ve I -ve percentage] (5.15.87) a 35.89 (52.33)
57 Investment income r Total ~ncome 25-0040 2e.a2% 24.05%
58 investment portdoliof Total assets
-- _ A
24.80%
- -- 21.89% 22.28%
Annex.6: Leverage Ratio

, ,
-
Reported by Assessed by
++-
Bank SSM
JA~ieTier 1 Capital (TI)
I+--
Leverage Ratio Exposures 3,418,511 3,413,414
On balance sheet (excluding derivatives
I I
1 1
Derivatives
I
I S e c u r i t i e s F i n a n c i n g Transactions 49 49
J I
)~ce sheet exposures 161,369 ) 161,369

1 I
1
Any other component
C 1 Leverage Ratio (AIB*lOCIOh) 5.04% 4.97%

Syndicate ~ a n k
(Financial position as on March 31, 201 9 )
This Risk Assessment Report (RAR) has been prepared by the Reserve Hank of India. For he purpose of this
report, the word 'bank; wherever il eppesrs, means the 'Syndicare Bank: This RAR is Based on the books and
records of the bank, statemsnts made by executives, omcers and employees of the bank during the course of
inspection, returns and other infarmaHon lumtshed by the bank and obtained from other sources believed ta be
refiable.It may be added that sn mspection is not an audit and does not replace it.
Page 1 o f 31
Table of Contents
Introduction................................................................................ 03
Section 1: Supervisory Evaluation of Risks and Control Gaps
A. Governance & Oversight .......................................................... 03
B. Business Risk
Credit Risk ...............................................................................
Market Risk.. .....................=......................................................19
Liquidity R k k ........................................................................... 21
.
Operational Risk .,.......................... . . ..................................... 23
.
Other Pillar I I Risks ................
................................=.............. 30
- ..-. - . . - . . . . . . . .... u- . . .- - ... ..- ....-...

>
Section 11: Summary of Aggregate Risk at Bank-level 31
Note : :Al figures ill the repoif refer to position of fhe bank as orl March 31, 20.19 or for the period April I,
2018 to March 31, 2019 end figures in parenthesis refer to corresponding previous year posifian unless
othervvlse specified.
Page 2 of31
L 11
INTRODUCTION
The Risk Assessment of Syndicate Bank for 2018-19 under the Supewisory Program
for Assessment of Risk and Capital (SPARC) was completed with March 31, 2019 as
the reference date. The assessment has been made based on the off-site analysis of
the data and information furnished by the bank as well as the findings of the on-site
Inspection for Supetvisery Evaluation (ISE) undertaken from July, 29, 2019 to
September 13,2818 and various explanations offered by the bank during the course
of inspection. The critical observations emanating from the inspection sf Head Office
and Treasury branch under Section 35 of the Banking Regulation Act, 1949, are
incorporated in the repot
SECTION I: SUPERVISORY EVAL$%ATlUN

OF RISKS AND CONTROL GAPS
{'?>
A. Governance and Oversight
Major observations
1.1 Board
II Promoter's Shareholding: The shareholding of Government of India (Got) had
increased from 73.07% as an March 31,2018to 84.66% as on March 31,2019 on
account of infusion of capital of 4 3,963 emre during FY 2019,
Composition and its Functioning: (i) The vacant positions on the Board
B~ard
increased from 4114 as on March 3 Y , 207 9 to 7/15 as on September 20,2019. (ii)
Persistent vacancies at the Board level impacted canstitution of Board-level
Committees, t n the absence of a full Board, effective rotation of directors was not
possible. The Information Technology Strategy Committee (ITSC) and Risk
I 1 Management Committee (RMC) did not have a member with expertise in IT and I
Risk Management, respectively. (ii~)Inadequacy in assessments of business
projections led to breach in PCA Risk Threshold I for NNPA ratio and ROA as on
March 3 ? ,2019 for the second FY in succession (CY: NNPA: 6.16%, ROA: -0,87,
PY: NNPA: 6.28%, RQA: -1.05). (iv) Compliance with the bank's Corporate
Governance Policy had not been ensured as the B ~ a r dapproved a Scheme for
Loan against Paddy Receipt and Comprehensive Agriculture Lending Policy
1 1 without obtaining critical inputs an the assessment of potentialbusiness opportunity I

and emerging risk, at the time of- approval. While there was no disbursement inder
this scheme as on March 31, 2019, the GNPA ratio as a percentage to total
Page 3 of3 1
--.. -
advances to Agriculture and Allied Activities increased significantly from 10.96% as
on March 31,2018 to 14.34% as on March 31,2019.
Conduct of Board Level Committees: ti) Various policy deficiencies pertaining to
accounting of 'claims n ~ acknowledged
t as debt', security perfection, stressed
sector analysis, nen-review of policy an sale of third party products since 2003,
reflected weakness in the oversight of the risk functions by the Risk Management
Committees. (ii) Audit Cernmiffee of the Board (ACB): Compliance mechanism
of ACB was deficient as: (a) incornpietel delayed compljances were accepted
without any direction to take timely and complete corrective action, (b) ACB did not
give specific direetians despite high pendency in uploading of KYC data on CKYC
and large number of MoCs suggested by Statutory Auditors. (iii) Despite high
pendency in closure of internal audit reporks, the ACBlBoard was not apprised of
'high' and 'medium' risk paras which remained outstanding for compliance. (iv) The
Special Committee for Monitoring and Follow up of Fraud cases (SCMFFC) did not
meet as and when frauds of T Icrore and above were detected. The pendency in
examining staff accountability and lodging of FIR indicated that the oversight of
SCMFFC needed improvement. Measures taken to plug the system lacuna that led
to frauds were not put up to the SCMFFC and no specific directions were given by
the Committee in such cases. Further, no review was undertaken by the Committee
to assess the efficacy of the remedial actions taken to prevent recurrence of frauds,
despite subsequent detectjon of frauds of similar nature using the same rnodus
operancli. Notes' on frauds were put up to ACB with a delay of 7 months. (v) The
Customer Service Committee of the Board (CSC) did nct have experts and
customer representatives as inviiees.
Board's Oversight of Overseas ~ ~ e z t i o nThe
s : bank's London branch w&
undergoing review by Skilled Person as per Financial Conduct Authority (FCA)
directions as deficiencies in the risk management practices of the branch were
observed by FCA. As per the latest review repod, Skilled Person had accepted
closure of only 23 out of 38 paints reviewed in Financial Gsjme Redemption Plan
(FCRP), Though t h e report was put up to the Board, no directions were given on
the same. During FY 201 9, total business of the branch declined by 1.93% due to
restrictions placed on business operations by FCA and the branch was incurring
net losses due to NPA and related provisions since FY 2077,
--
Board Qversight over ITICyber Security Functions: (i) inputs relating to
business plan of the bank were not factored in the formulation of the IT strategy.
(ii)The status /compliance to the IT Strategy plan was not reviewed and timelines
were not ad hered to for web application firewall for mobile banking & UP1 and digital
authentication in LAPS.(iii) IT Strategy did not cover: (a) CBS upgradation project
'SUPARNA', and (b) anti-skimming solution implementation in ATMs. (iv) There
was no documentation of Business Impact analysis, IT Risks & Data Migration 1
Risks of p rojecb SUPARNA.
I
Senior Management a
(i) Senior management did not take adequate steps to address vulnerabilities
emerging from the incidents of frauds, quick mortality cases and fresh slippages as
brought out in this report. Lack sf coordination between business and control
functions was also evident from delays in bank's response to supewisory queries,
repeat deficiencies in the Internal Audit reports and non-compliance1 non-
sustenance to supervisory findings of previous ISE. (ii)Lack of co-ordination among
I
senior management was evident from: (a) delay of four months in deciding the
I
authority to investigate whistle blower complaints following removal of such
I
complaints from the purview of vigilance. This resulted in whistle blower complaints
I
remaining unattended during the period. (b) There was no coordination among
I
Vigilance and Fraud Management Office for timely identiflfieation of frauds through
I
vigilance investigation. It was obsewed that DGM Vigilance, without the approval
I
of the Chief of Internal Vigilance, had taken a decision not to declare an account
I
as fraud,The account was subsequently declared fraud after considerable
as
delay. (cj No analysis of deficiencies was undertaken from policy/systerns and
I
proceciuredrisk perspective on the irregularities shared by the Inspection
Department in respect af various loan portfolios and instead, the same was merely
fowarded to ZOIRO with no follow-up. (iii) The bank did not conduct training
programmes on cyber security for the Tap Management. It also did not apprise the
ITSC about the tatest status af implementation of IT projects. (iv) The CIS0 did not
place before the Board.dltTSC, a quarterly review note on the cyber security
preparedness, status of cytaer security drills and action taken on the
recommendations mads during such drills relating to vulnerabilities & for
strengthening the existing systems. (v) Key person risk was evident as t h e lateral
_- . _-- --- -
Page 5 of31
1 among the existing GMs, who did not have professional qualification7
T e n t failed in case of the CRO and the bank had to appoint a CRO from
in Risk /
Management. (vi) The Board's direction related to on-boarding of small merchants
for LlPl transactions was not implemented as updation of KYC for merchant savings
I bank accounts to the level of current accounts, was yet to be completed. (vii) Only /
1 one out ofseven CxOs of the bank had undergone mandatoiy certification in IT and I
I
cyber security till completion of ISE. (viii) There was laxity in control and monitoring
by HO over the delegated functions to units (ZUIRB) as was evident from delay in
1 closure of audit reports, deficiencies in past sanction monitoring, end use of funds 1
in MSRrlEl retail accounts and fraud reporting, (ix) Memorandum to the Board
regarding customer service aspects were put up annually, as against requirement
on a half yearly basis. (x) Instruction on prompt reporting on detection of fraud of 7
1.00lakh and above to the Board was not implemented.
Risk Governance
Risk Governance Framework: (i) The ALCQ, Investment Committee, ORMC, and
( CRMC did not provide adequate directiqn and guidance based on risk perception I
as was evident from gaps observed in review and setting of risk limits, concerns !n
the operations of the overseas branch, weakness in Corporate/ MSMEl Agricujture
I and retail credit portfolio, deficiencies in Credit Risk Mitigation during on-boarding I
1 and post sanction monitoringa delays in ratification, approval of investment
II
1 decisions and increasing incidence of frauds. (ii)There was no system of placing
1 new produds to the Customer Sewice Committee of the Board to analyse if the "4..
j products were in line with the business plan of the bank.The Board had authorked I
a Committee of GMs to approve new products and put up a review of performance
of these products to the BoardjACB. However, review of only two out of 11 products
launched during the year under review were put to BoardlACB. (iii) Co-ordination
among relevant departments was inadequate as evidenced from; (a) No inputs
were taken from the Risk Management Department (RMD) during implementation
of Fraud Risk Management Solution (FRMS), (b) Non-sharing with RMB the
assessment of causes ofquick mortality, wilful defaulter, etc. (c)No input was given
by CRMC on pricing of new asset product (Synd BEML). (v) Report on validation
of models was not placed before the RMClBoarcl.
1.3.2 Effectiveness of Risk Management Functions: (i) Input errors and incorrect
I I parameterisation resulted in erroneous asset classificatian, security values, RWAs

I 1 computation and Priority Sector Lending (PSL) mis-classification. (ii) Internal
I ( controls w.r.t KYC due diligence and NPA monitoring associated with the bank's
I I assignment portfolio (T 3,764 crore as on March 31, 2019) were found to be

( I deficient. The internal policy did not delineate roles of internal audit and concurrent
I I audit for ascertaining genuineness and authenticity of MIS shared by the originator
as also adequacy sf due diligence standards adopted by the bank regarding the
assignment podfolio. (iii) The bank failed to undertake risk mitigation measures in
case af Agri and Non-Agri Jewel Loans (? 8,525 ersre as on March 31, 2019)
despite detection of more than 450 cases of frauds during FY 2819 due to pledge
of spuriousjewellery in connivance with the appraisers, roll over of loans and wrong
( 1 claims of interest subvention to that extent. (iv) Quarterly note on Stress Test and
I 1 ICAAP assessments were put up to RMC with a delay af 3-4 months. (v) Serious
deficiencies were &sewed in SWIFT operations, such as use of generic IDS and
delay in user review. (vi) The NBFC porifolio analysis by RMD did not factor risk
mitigants for asset-liability mismatch in the sector and risk associated with possible
diversion of funds by NBFCs. There was no discussion on risk mitigants available
I 1 to the bank in case of sudden defaults by NBFCs as exposures were not secured
by financiallnon-finalciat readily redeemable collateral.
1.3.3 Risk Appetite: (i) The ntsn-core assets to be mcnetked to meet the risk appetite
for CETI ratio (7.50%)were not identified by the bank. (,ii) Risk appetite for IT Risk
did not factor downtime for important payment channels such as UPI, Internet
banking and Aadhar enabled payment system. (iii) Operational risk appetite had
1 1 been revised without any quantitative assessment. (iv) The risk appetites were not
1 1 supported by any stress test results.
1I 1.3.4 1 The CRO had no direct reporting line to MDIRMC and his reporting line was through
I
I an ED who was also in charge of business units, creating a conflict of interest. The
CRO did not meet the RMC on a one to o n e basis at quarterly intervals, contrary
to extant instructions. There were three changes in the CRO position during the
year and no Board approval was obtained for the appointment of the CRO.
1.4 Internal Audit
/ The following deficiencies =re observed in the quality, effectiveness and 1
I independence of audit functions: (1) considerable delay in closure of internal audit 1
r e p o h continued. As on August 06,2019, 25% of the audit reports were due for
closure for more than the prescribed 60 days. (ii) There were 1848 concurrent audit
reports, 397 RBIA and I 5 8 compliance audit reports pending for closure till close
of ISE. Reports were pending f ~ closure
r for mow than a year also (494 Concurrent
Audit, 43 RBIA and 43 Compiiance Audit), (iii) 26 obsewations (out of 49) in dealing
I room audit and 12 observations (out of 18) in ITMS application audit conducted in (
December 201 8 were yet to be closed. (iv) B i r e ~reporting
t of Head of Internal Audit
to MD & CEO was put in place in compliance to ISE 2018 but no such repods were
submitted despite MD's detailed instruction in the matter. (v) Internal audit did not
detect use of generic system level IDS in SWIFT without the approvaI of the
competent authority, despite the bank having been penalised by RBI on
implementation of SWIFT guidelines. (vi) The internal audit was not focused
towards Retail, Agriculture and MSME though the business strategy focused on
these areas. (vii) The internal audit function was not subjected to quality assurance
review. Though IS audit cheeklist was subjected to external validation, no such
assessment was done for other internal audits. (viii) The new RBIA scoring model,
implemented on April 81, 20'18, was not subjected to any external validation. (ix)
The management audit sf Internal Audit department was last conducted during
September 2017 and was overdue since January 2019. (:t) Sustenance of
compliance did not form a part of repoding to BoardlACB. (xi) Compliance Audit
did not cover sustenance of compliance of RARIRMP of RBI.
Risk Rating: Direction of risk was not identified for t h e
1 was included in the bank's policy. The inherent business risk did not consider the 1
MoCs passed in the branch as a criterion for assessment of risk. The rating of
branches remained 'low'l'medium' despite detection of frauds in these branches.
---- -
Audit Plan: In the absence of historical date in the audit software, the a~dit'~lan
preparation was manual and prone t~ errors. It was prepared by Zonal Inspection
Centres (ZICs) and there was no checwng at the HO level. The annual audit plan
did not factor repeated obsemations in previous RBIA, perpetration of frauds, KYC
I or AML violations and training requirements of 10s. I
Page S of 31
--
Special Audit: There was no structured system for examining the special
I investigation reports from fraud The special investigation reports of
perspective.
1 two branches were not examined from fraud perspective despite serious
1 irregularities (irregularities of similar nature were declared fraud by the bank). There
1 was no pool of specialised staff identified for such special audits, with increased
focus and training in fraud detection.
Management Audit: The management audit did not identify any high risk area. It
was a factual report rather than an exercise in identifying gaps and practices. It was
conducted for oniy f ~ u out
r of the seven departments scheduled during FY 2018-
19. The Management Audit of Treasury was conducted once in two years in
contravention of Internal Control Guidelines (ICG), which mandated a yearly
assessment.
before crystallising contingent liability due%
court cases. Differences in the CBS and Capital Assessment Model (CAM)
batances existed. The Trial balance was generated through an external software
1 by collating GL balances of CBS, as CBS did not generate GL wise trail balance
1 for review.
-A(: (i) The scope of concurrent audit was deficient as: (a)
Verification ~f action on warrants, court orders were not included in the checklist.
(b) CA did no%cover key areaslbusineaaes such as credit cards, NEFTlRJGS desk,
Internet banking and other delivery channels Iike UPI, AEPS,pending EDPMS and
1 IDPMS entries, etc. (c) retail sanctions did not cover verification of risk scoring,
valuation comparison vis-a-vis local government (circle) rate, verification of Net
worth calcufation of borrower. (d) No centralised concurrent audit system existed
for identification of deficiencies in PSL misclassificatian and computation of risk
weight. (ii) The effectiveness of the CA was not reviewed to identify and correct
deficiencies in the system. The deficiencies observed were: (a) Though 56 frauds
were detected by RBIA and Special investigation, no frauds were detected through
CA. (b) Special audifs conducted in 60'branchas under CA, detected serious
irregularities. Frauds were also detected in nine such branches. (e) Large number
of MoCs (around 34,000) were issued by the Statutory Auditors relating to security
valuaiion, leakage of income and restructured accounts. (d) CA could not detect
gross violation of extant guidelines in issue of BG at the Haveri branch as BGs to
a b k ) issued in serial numbers;;
1
branches w%-not included in the scope ofihe audit.
I I (el There were instances of Concurrent Auditors not being appointed even after
four m ~ n t h sof end of their term.
- --
Compliance
The compliance culture in the bank needed strengthening as: (i) The bank had
confjrmed in compliance to RMP 2018 that all transaction based money laundering
alerts were implemented lhrough the new system. However, the new system was
not live till completion of ISE. (ii) The Board did not formuIate any disincentive
structure for breaches, despite imposition of penalties by fhe regulator. There was
no system of fixing staff accountability in the case af compliance failures. (iii) fhere
was no monitoring by the Board or Compliance Department on the progress of
response given to DO letters sent by the Top Management of RBI an compliance
issues and Fraud Risk Management. Subsequent developments were not reported
to the Board. Though the bank had in its response submitted that FRMS system
was live since March 2019, the same was n ~fully t operational. Review of Internal
I ] Audit machinery to focus on fraud prevention. as reported in the response, was not I
( 1 evidenced. (iv) There was no direct reporting lines far the compliance oficeis at I
ZBIRO to the CCQ. (v) The @GO did no% report directly to the BoardlACB. (vi)
Senior management did not carry out identification of weak compliance areas in
1 I the bank on the bask of internal audit or enhanced the focus of compliance testing I
I
I
1 despite penalties and increasing instances of frauds.
I -
I
I 16 I Risk Culture
---
-
{
-
, 3.
! LA-
~ ( i ~ R i s k r a p o n ors exception reports were not before the Board periodically

for assessing the direction and level of risk in the bank. (ii) The compliance
department was not proactive in monitoringlconfrotling the compliance risk.Despite
penalty for violation of SWIFT guideiines, deficiencies persisted. (iii) The major
mechanism sf control was issue of circularJletters to WOlZOslbranches which was
ineffective in preventing credit frauds and credit monitoring. (iv)Risk Sensitivity of
the bank towards Early Warning Signais to detect stress1 fraud in the accounts at
an early stage was iow. Majority of the credit frauds reported were net identified as
WFA earlier. The existing system was no! efficient as it utilised limited parameters.
(v) The existing staff strength and the framework to monitor AML alerts was
inadequate vis-a-vis the volume of alefis generated. All trade b a s d money
laundering alerts were not irnplernenfed. (vi) Data integrity risk existed due to
manual intervention in MIS, CRILC and OSMQS. (vii) Large number of MoCs, high
PSL misclassification, penalties levied tay regulator, deficiencies in KYC/risk
categorisation and customer sawice, implementation challenges emerging from
upgradation to new CBS were concerns under operational risk. (viii) Weak Credit
Risk Monitoring framework, MIS deficiencies, lack of measures in strengthening on-
boarding criteria of retail/ Agriculture loans, gaps in reeovev measures and
reporting led to increased Credit Risk.
B.Business risk
2. Credit Risk
'PO 1 Major observations
2.1 I Inherent Risk
I
1
(i) Default risk continued to be high on account of GNPA ratio at 11.37% (PY:
I 1 11.53%), 68.1 3% of NPAs being in doublful category, high fresh slippages 1

(slippage ratio at 5.54% : ?17,592crore), more write ofFfrom slippages at t 6,775
crore, and downgraded exposures and exposures not rated for more than 12
months farming 36.85% of total exposure. Though the NNPA ratio was contained
at 6.16% (PY 6.28%), it was breaching the PCA threshold 1 as on March 31,201 9.
The present IS€ also identified additional provisioning to the extent of 7 I184
, wore.
(ii) The recovery risk of the bank was high due to large sacrifice in OTSl
cornpromise settlement cases (62.83%),waiver of u napplied interest (91.58%),
deficiencies in mapping non-financial readily redeemable collaterals (in CBS) and
1 ( low financial callaterals (7.25% d exposures). Additionally, waiver of unapplied I

I 1 interest was under-reported by t 192 crore in OTS cases (accounts more than 7 1 I
crore) due to internal policy deficiency (interest accrued from the date of NPA was
computed on MCLR rather than af the contracted rate). In a few OTS cases, the
principal write off was more than the provision held amount. (iii) Concentration risk
remained medium through exposure to NBFCs (71.66%) and Infrastructure
(1 1.25%). The weighted average residual maturity of bank's exposure was 4.02
years (residual maturity of 54% of the loan book was more than 3 years) which
I I indicated high tenor risk.
I
I
2.2 I Control Gap
--
( 2.2.1 / Policy Environment (i) The Recovery Policy had not prescribed timelines for I
I I valuation and perfection af security in the case of road projects (wherein DCCO /
I 1 was not achieved and NPAs). (ii) It also did not contain guidelines for 1
were
I I application of discount on the market value to arrive at the realisable value, if the I
I I same not indicated in the valuation reports. (iii) Moratorium periodllimits for I
was
I ) products, facilities and counterparties were not differentiated, and the rationale for I
determining t h e holiday period in loans was not defined. (iv) There was no
policyiguideline on exclusion of receivables discounted through TReDS, from DP
I 1 calculation. (v) Deficiency in policy/methodology on arriving at additional provision I
I 1 for stressed sector. e.g. Exposure to power, NBFCs, trading companies, etc.. did /
not form part of the banks stressed sector analysis, even though fresh slippage of
T2,484 crore was observed in these sectors. (vi) Measures to be undertaken if the
I 1 external rating of a borrower was downgraded to 'Ds,were not stipulated in the I

Credit Risk Management policy,
- .- .. -.. - --
identification and Assessment
m i s a
11
l Deficiencies: ( i ) The bank relied on lead bank's appraisal without
1 assessing proposals as per its own benchmark financial covenantshisk appetite1
I risk pricing leading to revenue loss and increase in stressed exposures. (ii)Lease .
Rental Discounting (LRD) loans were sanctioned with repayment tenor more than
1I ( the lease period (including renewable clause). (iii) TLs were given to companies in I
I
1 the power sector for meeting cash flow mismatches without ascertaining end use I - I
I
of funds. (iv) DP was not computed correctly as unpaid stocks, advances to ( ,+, 1
suppliers, obsolete stacks, receivables aging more than the prescribed period were
not reduced, as observed in sample cases,
P i - '
- ..- --
Risk Rating: (i)Only 699 accounts (out of 1034 eligible accounts) were externally
rated. (ii) Rating model of NBFC (RAM) did not factor ALM mismatches in long tenor
buckets (more than three years) at the time of an-boarding (which was not in line
with the business model sf these companies). (iii) Extension in DCCO and progress
in projects in accordance with the milestonesfprojections were not included as
parameters for rating. {iv) Risk scoring sf retail borrowers was deficient as higher
weig hfage (without objectivity) was given to 'marketwbitity' of primaq security and
low weightage to CIBIL scores, providing scope f o r categorisation of non-
investment grade.
investment grade borrowers (as per CIBIL) as =...-.
--.
~ P -.- - -. - ,,A , ,
Credit Risk Mitigation (CRM): (i) The security cover on NFB exposure decreased
by 22% though the total MFB exposure decreased by only 3.84%. (ii) Many eligible
MSME exposures (15% borrowers) were yet to be cavered under CGTSME. (iii)
STLs for urgent Working Capital purposes were given to a large borrower below
the hurdle rate even though diversion sf funds was noticed earlier in similar facilities
granted to the same borrower. (iv) No margin was kept in case of arbitration BGs
without any policy. (v) Repeated extension of timelines for security petfeetion were
altowed in few instances. (vi) ClBlh reports of individuals I partners I associates I
guarantors were not verified b e o m assessment of proposals in 724 cases. (vii)
Deviations in prescribed ratios QDER, Current Ratio, DSCR) was permitted, without
any objective criterialbsnchrnark on extent d such deviations. (viii) While relaxing
on-boarding criteria (internal ratings and prescribed ratios), additional risk mitigants
were not prescribed. In some instances, fresh exposure to borrowers with external
rating below investment grade were sanctioned (LRD loans).
I
NBFCIHFCs: (i) The bank's exposure to HFCs increased significantly by 68% (?
7,255 crore as on March 31, 20A8 to 3 12,219erare as on March 31, 2019) and
formed 40% sf its total WBFC exposure. (ii) Repayment schedule of such loans
were not aligned to the cash flow from the underlying onward lending assets. (iii)
Concessions in interest rate (up to 200 bps) were sanctioned as a matter of routine.
(iv) Dilution in policy towards margin requirement for security coverage from 25%
to 10% were also observed. (v) Loans were disbursed to entities involved in 1
activities like investment in group entities, anward lending towards mortgage of
residential and commercial real estate, renewable energy, etc., without ensuring
the end use, except relying on CA certificates. (vi) ALM mismatches in long tenor
buckets were observed in most of the cases. (vii) Few instances uf Current
Accounts of borrowers being opened without obtaining NOC from ather banks were I
observed. (viii) Annual Financial Statements (AFS) of HFCs did not reveal bank-
wise breakup of receivables tkoug h most of 'these were under multiple banking
arrangements. (ix) Clean loan amounting to ? 3,CIOO crore was sanctioned to a large
borrower without any charge on receivables/cash flows.
Pool Buyout: (i) The bank wasnot maintaining individual obligor-wise accounts in
CBS.(ii) There was no evidence of reporting of individual accounts to CIBIL, after
I
the pool was purchased. (iii) Multiplc Ioans given bs same borrowers, were not I
identified by the bank indicating lack of due diligence (8 such cases in sample
analysis of one pool buyout). (iv) Deficiencies in KYC verification1 due diligence
I 1 were also noted by Statutory Auditors. 1
I
I
2.2.2.6 Jewel Loans: (i) Multiple rollover (via closing of existing loan with proceeds of new
1 loan) of non-agriculture1 agriculture loans against jewellery (bullet payment), I
without repayment of principal at the end of loan tenor (one year) was observed. I
(ii) Interest subvention on Agri jewel loans (Synd Swarna) was given to ineligible
1 borrowers as in some instances principal was not repaid (loans renewed after I
>
I I payment of interest only) and multiple loans were given to the same borrower /
I I exceeding the total limit of T3 lakh, (iii) In some instances, evidence of land holding I
1
(no record of land holding) for agriculture jewel loans in urban and metro branches
were observed.
1 2.2.2.7 ( Retail Loans: (i) Stage-wise disbursements were not made leading to frauds in I
I 1 housing loan (HL) accounts in instances. (ii) Approved plan for new 1
some
I I constructi~nwas not taken before sanction of such HLs, in a few (iii) I

cases.
I. I Deficiencies in due diligmce were also absewed in case of HLs such as, latest
salary slipllTR not obtained, non-verification of CIBlb score before sanction,
Encumbrance Certificate confirming bank's charge not obtained, and CERSAI
chargel additional charge creation not done. (iv) A binding clause in the sanction
I 1 letter mandating the borrower to arrange insurance of the building at borrower's I

I 1 cost from a third party was not ensured. (v) Appraisal form for Education Loan did 1
1 1
not contain appraiser's comments on recognition sf the College I University I
Institute.
2.2.3 Controls
2.2.3.1 Issues in MSME loans: (i)High GNPA ratio in Mudra loan at '19.31% (18.25% in
SHlSHU category). (ii)Monitoring of crucial performance parameters was deficient
(TODs allowedl adhoc limits sanctioned, end use monitoring not ensured,
relaxation in financial covenants, prdpost disbursement terms & conditions at
branches without any timelines, waiver of stock statement, non-upciation of DP) as
1 reflected in the assessment of quick mortality accounts and LFAR observations. (iii)
1 Inadequate utilisation of guarantee and subvention schemes (CGTSME claims
amounting to 7 740 crore were lost due to delayed lodgement of claim, 414 claims
for ? 23 crore were sent for- resubmission, ctaims amounting to T 110 crow were
--
yet to be lodged though the accounts were NPA as on March 31,2019)and many I
I 1 eligible accounts not covered under CGTMSE. (iv) RBI defaulter list and caution 1
I 1 lists were not verified before sanction. (v) Inefficient utilisation of TRaDS (only 3 ,I
r
1
I
transactions recorded during FY 2019).
2.2.3.2 Monitoring of taken over loans was deficient as: (i)there was no monitoring of
I interest rate concessions/ enhancements in exisBng limits offered by the bank while
/ taking over, (ii) 97% of loans were taken over from NBFCs without any credid
1
I I opinion, (iii) 25% of exposure was in the HL category (without ensuring completion 1
i 1 of transfer of title deeds,' ceding of charges by the previous lender, new 1
1 1 encumbrance registered, details updated in CERSAI), and (iv) instances of taking 1
( over loans below the prescribed hurdle rate were observed. 1
.,.
.
in registration to CERSAI were: (i)No mapping sf number
and type of assets registered vis-&-visthe corresponding collateral/ account holder
I in CBS. (ii) No monitoring on status of completion of registration for current
I 1 pertaining to subsisting transactions at CMRD, HO. (iv) Registration of charges for II

1 sanctions. (iii) Absence of status update and follow up on registration of charges
I movable securities (hypothe~ationof plant and machinery, stocks, debts including

book debts or receivables) was not ensured as more than 70% of charges
registered during FY 20 19 were for immovable properties only. (v) Satisfaction of
securities to be done in CERSAI portal after ceding of charges (which were already
registered in CERSAI) was not monitored.
-- .--
Other Controls: (i) Exposuw computation was done only

monitoring of security perfection at HO level. (iii) Accuracy of details. on LC
1 1 devolvementl BG invocation fmm CBS was not ensured leading to manual I

( I compilation and monitoring at HO. (iv) There was no mechanism to monitor Group I
Borrower Limit in CBS (being manually compiled by credit departments).
- -
Caltateral Management: (i) MOCs to the tune of ? 419 crore for 598 accounts were
passed due to overstatement of value of security indicating deficiency in ~oIlateral
reporting. (ii) There was no control mechanism to verify whether charge
createdlregistered, hypothecation created on primary security/coIlaferal security,
except internal audit. (iii) Veracity sf data provided to RBI on loans covered by
primary security could not be verified as quotation arnoarntlvalue mentioned in t h e
1 1 valuation reports (at the time of opening of account) were taken as security cover 1
'I without ensuring the updated status of actual charge creationlasset creation. (iv)
In many instances, full value of security was considered for aeeu rity coverage and
no haircuts were prescribed based an past .experience 8% realisation, litigations
associated with securities available and discrepancies in security perfection.
NPA Identification: (i) The system did not identify 432 accounts
as NPA even though reviewslrenewalswere pending for more than six months. (01s
Z 51 wore in sample accounts with debit balance more than ? 10,000 as on March
31,2019). (ii) Cases of non-achievement of DCCO, relaxed IRAC norms for MSME
(780 days) were marked manually, which were prone to error as system did not
generate exception reports for such exclusions from NPA. (iii) BGs invoked were
debited to GL accounts and GLs were not reconciled at the end of the day, leaving
potential to camouflage auto movement of NPA ('1 8 out of I 0 0 sample cases). (iv)
Multiple short renewals were given by branches in a few cases, (v) Wrong (
feedinglupdatian of value of collateral in CBS led to wrong asset categorisation and
1 I under provisioning in NPAs. (vi) Statutory Auditors had also reported instances of 1 .
I 1 wrong DP calculation (326 cases), frequent overdrawals in excess of limit (235 1
accounts), stcpcklbook debtlcreditors figure not matching with the audited balance
sheet (132 cases) leading to potential underreporting of NPA. (vii)
Moratoriumlrepwyment schedule was not correctly entered in CBS and were
changed at the branch level without any justification in case of Educatjon Loans
(134 such ELa with 01s i 5 crore were identified as fresh NPAs.). (viii) MOCs for
fresh NPAs during March'l9 quarter in 1403 cases for 519D crore with more than
80% cases pertaining to Agriculture, MSME and Pool buyout accounts indicated
I I deficiency in the system based NPA identification. 1
1 2.2,h oni it or in^ and Review - -
( 2.2.4.1 J -
(i) Manual compilation of details on BGs invoked but not paid led to omissions in 1
1 I monitoring and reporting. (li) Branch Heads were authorised to take decisions on /
non-payment of invoked BGs without any ratificationlappraval from the delegated
authority, contrary to extant instructions. (iii) Crucial observations sf Stock
AudiVStatutory Audifllnternal Audits (if closed by the monitoring authority) were not
covered during reviewfrenewal to enable the sanctioning authority to take an
informed decision. (iv) The bank had pernitfed issue of manual BGs without
entering details in CBS. (v) Failure to
1 additional pricing/recall of loans (depending on stipulated sanction t e r m
( 1 observed. (vi) Stock Audit was waived in a few accounts without any alternative 1
monitoring strategy. (vii) Stocklboclk debts were not reconciled with the audited
balance sheets. (viii) No reviewlmanitoring of exposure was done in respect of
I 1 companies which were struck aff from ROC records by the Government (10,015 1
companies).
-- ,
was taken (w.r.t reassessment of risk

branches, staff accountability, snap audit of particular portFolio, etc.) even though
fraud connotations were noticed in same branches during internallstatutory Audit
and ISE. (ii) The fraudlEWS mechanism was weak in case of consortium accounts
due to the following: (a) These were 25 accounts marked as fraud by other banks
but nat by the bank, as on March 31,261 9. After being pointed out during ISE 2019,
the bank declared six of those accounts as RFA during July 20'19.SubsequentIy,
five ofthose six accounts were declared as fraud. (b) There was a delay of up to 4
months in obtaining a copy of forensic audit report (for a large borrower) from the
lead bank detaying the process of detection. (c) All major fraud cases (more than 7
50 crore during FY 2019) were classified either based on lead bank classifying the
account as fraud or based an obsenrations of Forensic Audit report. (iii) The
integration of credit monitoring with EWS was under implementation. The existing
system was manual wherein the bank had selected only 15 out of the 42 identified
signals as core EWS and considered them for classification of RFA. (iv) The
thresholds were not defined far the identified signal and the identification was left
to branches, without any guidance. (v) There were six accounts in RFA status for
more than six months, contrary to extant instructions. Further, delay sf more than
1 1 six months was observed in few instances for taking action on RFA accounts 1
of RFA or declaring as frauds).
deficiencies were observed in
I 1 of merchantingtrade transactions. In 15 cases, the total period for outlay of foreign I

exchange was beyond the stipulated 4 months period. (ii) There was no monitoring
of pendency in advance remittances received for export. As on August 27,2019,
advance remittances (1636 cases) received for exports remained outstanding
I 1 beyond the stipulated period of 1 year under contract. (iii) Expired guarantees 1
continued remain outstanding CBS control and had 1
Page 17 of 31
/ implications on capital requirements and credit risk exposure monitoring. (iv) The 1
) 1 bank did not collect additional interest on 90 borrowal accounts towards Unhedged
Foreign Currency Exposure (UFCE) thereby violating its internal policy on UFGE
and allowing income leakage of 7 5 crore. (v) There was no MIS on export proc~eds
received through Currency Declaration Form (CDF). (vi) An effective mechanism
for follow uplreconciliation of Bill of Entrylshipping bills was lacking as large number
of entries were outstanding in EDPMS (20,083)and IDPMS (27,783) as on June
30,2019.
Recovery strategy was deficient as: (i) 47% (offer amount) sf OTS sanctioned
during FY 2019 at HO level were cancelled d u e to borrowers not settling the amount
(7 342 crore out of OTS sanctioned far 4 686 crere). (ii) bow realisation through
SARFAESI (Out of 2755 auctions for T 2,560 crore during FY 2019, only 3 224
- I 1 crore, for 364 cases, could be realised).(iii) No analysis was done on recovery born 1
I ( the guarantor. (iv) Decrees in 3282 cases (P 176 crore) remained unexecuted as I
I
I 1 I
on March 31, 2019.(vi) Despite poor recovery and wide variation in value at the
1 I
1 time af sale vis-8-vis on-boarding, haircuts on collaterals were not modified. 1
2,2,5 1 Reporting
/ 2.2.5.11 RWA assessment: (i) The bank had taken outstanding amount insiead of1
I I sanctioned amount in case of NFB exposure (for accounts less than t 5 crore) for I
1 1 computing RWA, contrary to extant instructions. (ii) Additional Risk Weight of T 28
II
I I crore was assessed on account of less RW applied on restructured accounts,
personal Loans classified erroneously under regulatory retail, underreporting of n
..
CRE, RW not applied an manual BGs issued and NGLT expenses.
(i) Priority Sector Loans amounting to ? 1,532
crore (mainly Education and Housing loans) were de-classified leading to
underachievement of PSL targets. (Assessed: 39.7096,Reported: 4Q.54%) (ii)
1 1 streamlining of 437 product codes (required for enhancing correct reporting of PSL) I
by branches was n ~done.
t (iii) Overcharging of interest on Crop Loans ranging
from 7.05% to 23.55% was obsewared even though interest subvention was claimed
in such accounts. (iv) Adherence to fair practices code in case of Agri loans was
deficient as: ( a ) Acknowledgment of loan application, along with timeframe
indicating disposal of application, was not provided to (b)
~ O ~ F O W ~ ClBlL
~ S . report
I I analysis was not recorded in the loan appraisal farm. (v) Sanction letter was not I
issued tea borrowers. (vi) Aadhar linkage was not made
far availing short term crop loans (with subvention) (vii) Registered Equitable
Mortgage (REM) register was not maintained at branches extending Agri Loans.
3. Market Risk
Major Observations
3.1 1 Inherent Risk
1 (i) The bank was exposed ta significant interest rate risk as the potential fluctuation
I
in market value of trading book far a one bp change in interest rate was ? 22.71
wore (PY: ? 17.90 crore). (ii) Due to duration mismatch of Risk Sensitive Assets
(WSA) and Risk Sensitive Liabilities (RSL), a 280 bps change in the interest rate
could lead to 15.75% (PY 14.80%) erosi~nin net worth. FuRher, the embedded
optionality risk in the loan book was high as prepayment was observed in 27.31%
of fixed tenor toans over T I more during FY 2019, accentuating the mismatches in
maturity buckets. (iii) The bank had high concentration ~f fixed income investments
in trading book (92.81%), Due to adverse interest rate rnavement, the bank incurred
MTM losses of 7 822 crore and profit on sale of investments declined to F 364 crore
in FY 2018 (PY:7 948 crore). The risk was accentuated by the high MD limit of the
1 1 trading book at 5.75(actual MD was 4.43 as on March 31, 2019).
I
1
3.2 1 Control Gap
The internal rating analysis befare on-bearding non-SLR investments and
assessment of risk-adjusted returns was not stipulated. (b) There was no sub-limit
prescribed for guaranteed bonds. (e) Products meant for customers and proprietary
trading were not distinguished. (d) Unlisted securities were not included under
illiquid securities. ( e ) Revised policy for FY 2020 was yet to be approved by the
Board. (ii) The bank was using an internal model to ascertain level and direction of
market risk. The risk appetite thresholds in the model were made to align with the
investment policy rather than fixing them tan the basis of sustainable level of risk.
1 1 (iii)Though the average maximum utilisatian of global AGL during the year was low 1
1 1 at 45.08% (64.46% PY), the limit was not reviewed based on trading volume. I
1 1 (iv) Tolerance limits of gap in RSA-RSL buckets under [RRBB were not reviewed.
.sh,l." '
1
Page f 9 of 31
--
I
Risk identification and assessment: ti) The bank sold DISCOM bonds which were
classified as NPI in its book and purchased the bonds of the same issuer from the
secondary market with higher maturity and lower coupon. Though the transaction
I
was carried out to improve the return, the impact of duration and the MTM loss due 1
to adverse interest rate movement were not analyssd. (ii) Derivatives, unquoted
shares, mutual funds and preference shares were not included in stress testing. (iii)
There was no documentation of NO0P computation methodology. (iv) No upper
limit was set for concentration of unlisted equity. Further, no analysis was done with
regard to high concentration of unlisted securities (41.17% of equity investment) and
NPI (55.23% in equity pei%olio and 39.72% oftotal NPls) in equity poTtfolio. (v) Root-
cause of high duration gaps in domestic RSA and RSL was not analysed. (vi) The
bank's policy allowed sanction 0%forward cover to customers below the internal -
1 '
hurdle rate subject to margins tkat could also be waived off, thereby diluting
suitability and appropriateness assessment.
---. - .-
Controls: (i) Lack of maker checker process in the valuation exercise resulted in
I
netting of MTM appreciation on ETEs and under-provisioning of ? 33 Iakhs during
FY 2019.(ii) The following deficiencies were observed in the Integrated Treasury
Management System (ITMS): (a) ITMS was not linked to Human Resource
Management: System (HRMS) and disabling user privileges was done manually
without periodic verification process. In 12 instances, transferred employees 1
continued to have access in ITMS. (b) The fields for deal date and deal time were I
editable in ITMS. ( c ) Audit trails were inadequate as in f 858 interbank transactions,
makerlcheckers were recorded as generic 'Upload', and maker'. (d) Activity logs of
ITMS were not reviewed. (e)Reason for deal modifications entered by front office
staff were not captured in ITMS. (iii) There were 74 instances where authorisation
was done by the maker of the deal as evidenced by same dealer ID being recorded
as maker and checker in deal slips. This was neither identified by back office during
deal slips verification nor painted out by concurrent auditors. (iv) Only HFT (0.37%
of investments) was considered as trading book for the purpose of matched FTP, 1
excluding AFS book that comprised 32.63% of the investment portfolio. I
Monitoring and Review: (i) Periodical analysis on deal modifications and
deviations in forex rate scans was not done. Furlher, no M I S was put up to ALCOllC
on forex rate scan results. (ii) Back-testing of Forex VaR was not done. (iii) About
...-.
verify deal time in broker note with deal slips. In some
available in the broker notes.
Reporting: Quarterly position on level and direction of
--
15-20% of the outstanding nostro entries were manually matched and there was no
maker checker process to rule out erroneous matching. For 110 un-reconciled
nostro credits which were pending for more than 5 days, generic reasons (such as
cases,
to ALCQlBoard did net include any suggestior:to mitigate the risk.
4. Liquidity Risk
Major Obsenratjdns
I
branch will utilise tomorrow, no forex officer, not reckiving call) were given for delay.
Back-testing of 'auto-match' rules was not carried out. (iv) Forer back off ice did not I
time stamp was not I
4.q Inherent Rlsks

I
(i)There were negative cumarlative mismatches in 'Up to 6 months bucket' for both
combined as well as for foreign currency operations, which evidenced short term
liquidity constraints. (ii) Thsugh CASA increased by 5.3 1%, the volatile portion
increased from 5,14% to 6.84% elevating liquidity risk under stress conditions.
Liquidiiy buffer at times of stress through un-swapped foreign &rrency funds was
also not available to the bank. (iii) The proportion of earning assets funded using
short term liabilities increased to 58.27% (PY: 40.7'9%) during the year and the
bank's position as a net borrower in the interbank market for 200 out of 250 days,
1 indicated increased reliance an sholt term funds. (iv) Increase in average cost of
1 bulk deposits from 5.83% to 6.44%, despite decline in bulk deposits by 30.10%
during the year, highlighted bank's dependence ran higher cost funds. Further,
though concentration to top 28 depositors declined by 36.Ql0h,short term assets
that could be liquidated within 14 days reduced by 54.99%.
4.2 Control Gaps
4.2.1 Policy defkiencIes: (i) Strategy for management of intm-day liquidity in foreign
currency was not elaborated in the AbM policy. (ii) The term deposit policy did not
I 1 detail methodology for pricing of term deposits and rates were usually decided 1 on
peer comparison. (iii) Methodology for variance component calculation under
REP0 linked lending rate (RLLR) was ne% definqd,. ..
Risk identification and assessment: (i) The risk limits &t in the ALM policy were
not based on risk appetite and actual utilisation: (a) High limits were set for undrawn
commitments to liquid assets (20%) and ratig of volatile liabilities to temporary
assets (60%) with low average utilisation of 37.23% and 4'1.60%, respectively, in
FY 287 9. (b) Ratio of liquid assets to short term liabilities was set at minimum 50%
though average during the year was 422.31%. This was also not in line with @FP
wherein radio below 60% triggered a bank specific liquidity stress event. (c) The
bank had fixed risk appetite limit of excess SLR at 12% of NDTL for FY 20 19 without
optimum cost benefit analysis. (ii)Despite ISE 2077 observation, penalties paid to
ombudsmen and others, donations and prize money were included in the operating
costs for MCLR computation. Also, ALCO was authorised to change the calculated
MCLR up to 15 bps, contrary to extant guidelines. (iii) Though cumulative liquidity
mismatch (75-30d bucket) under the bank-specific baseline scenario was assessed
at Z 15,581 crore, sources of funds were identified only to the extent of T 10,780
crare. (iv) No methodology was defined for determininglreviawing the haircuts for
assets used in collateralised borrowing.
--
Controls: (i) The following issues were observed in NDTL computation: (a)
ISlinternal audit did not examine the mapping of Gk codes for items included in
computation ~f NDTL. (b) Provision for income tax was included, in contravention
of extant guidelines. (c) Debit balances under other demand liabilities were netted
offagainst credit balar~cesresulting in understatement of MDTL. (ii) The preparation
of SLS statement was deficient on account of the following: (a) The outflow on
account of AT1 bond payments were not considered while bucketing Statutory
Reserves under 'above 15 years' bucket. (b) Provision for tax, non-cash items
under other liabilitieslassets, and advance tax were put in 'above 15 years' bucket
without defined basis. (iii) A single liquidity premium was computed for all
currencies under matched FTP model, regardless sf their tradability. The bank had
also not placed resultsfanalysis based on the new FTP model to ALCOlBoard in
the first quarter of FY 2020 despite instructions by Board and requirement of FTP
policy. (iv) Deficiencies in b6R computation included: (a) lnflows from SMA 1 and
S M A 2 advances were considered without any assessment of possibility of default.
(b) AD retail accounts with DICGC guarantee were considered as retail stable
1 deposits irrespective of whether they were transactionallrelationship based in 1
1 nature.
I
I
I
4.2.4 Monitoring and Review: (i) Deviations observed in back-testing of dynamic
/ liquidity statements and behavioural analysis of non-defined maturity produds were 1
I not used to review the bucketing of cash flows. Also, back-testing of hehavioural (
I studies was done only once during FY 2019,contrary to internal guideline of half- (
( yearly tesiing. (ii) Despite IC directions, tracking of brge ticket inflowsloufflows was I
not yet automated. (iii) No analysis was placed before ALCO on foreign currency
liquidity risk (USDLCR at 26.42% and continuous negative structural gaps in 1 day
and 2-7 day buckets for USD, EUR, GBP and JPY). (iv) Penalty on premature
I closure of bulk deposits was revised from 2% to 1% to attract more buik deposits 1
1 ofi 5 orore and above while the bank's strategy was to reduce the reliance on bulk
I
1
I
1 deposits. (v) Maximum term deposits in 'Iyear bucket' (59.43% of term deposits) 1
( increased the concentration. risk. The 'Synd 500' introduced to rnobiliae longer /
1 maturity deposits was also discontinued by ALCO w.e.f 05.08.2019 without I
1 evaluating alternative strategies to increase longer tenor deposits. I
4.2.51Rep~lting:(i)BLR 6 return for intraday liquidity was notsubmitted for USD which I
I was
I
identified as s significant currency along with INR. (ii) The bank was borrowing I
/ at higher rates for arbitrage purpose, but MIS on the same did not indicate I
) incremental arbitrage profit earned to justify such higher borrowing rates. 1
5. Operational Risk
;fl
0-ations P
9
m e n l n h e r e n t Risks
I (i)The bank was levied penalty on two occasions (T 3 crore) during the year due to
I
I 1 violation of SWlFT and fraud detection and reporting guidelines. (ii)The bank spent I
I ( only a miniscule amount on training (0.06% of total operating expenses) and about I
I I
1 9% ofthe officers did not attend any training in the last 3 years. Officers working in I
I / critical areas such as SWIFT, Compliance, and Department of information I
I 1 Technology (DIT) were not provided regular trainings. (iii) The number of vigilance I
I / cases against employees in top 5 internally defined grades increased by 62.59% 1
! ( (PY-131, GY: 213).There were 22 vigilance mses against DGMs and GMs. (iv) 1
----
-=re) rise in frauds in terms of number anbvahe, respectively, during the year ' 1
I 1 The bank reported multiple ingtances of fraud as a single instance, if the madus I
operandi was same, thereby under-reporting the number of frauds. (v) Increase in
debit card complaints during the year by 79% (PY: 40,188CY: 7%,895) indicated
I I weakness in the control environment for debit cards. (vi) Internal audits detected 1
I I large number of KYC violations during the year (1,98,380) which indicated I
I
( I weakness in KYC process in the bank. (vii) All the eight instances of unauthorised 1
/I / access to bank's IT systems peltained to password sharing among staff which 1
1 indicated a lack of IT awareness. (viii) The number of cyber security incidents was (
/ 1 602,of which 510 were related to card skimming, as transadion based FRMS was
not fully functional.
Control Gaps
p.2.1 ~ o l i c yenvironment -I
T
-h
/e I succession planninfdidT~Fn&ludethe o p e z o n a l ofcia
i -1
I 1 departme~tslike DIT and Accounts. Branch heads were excluded from key persons I
\
1 during the review of succession planning. (ii) The transfer policy of the bank did not I
1 1
I periodicny. (iii)The identification of sensitive posts dona in January 2010, had not II
have any provision for transfer of staff posted in sensitive areas at defined
I 1 been
1 I not availed mandatory leave. (v) The policy for sale of third party products was not II
revised till completion of ISE (iv) There was no identification of staff who had
I ( reviewed (
I
I since 2003, even though new corporate agency arrangements were

I
t '
I 1
entered into with private insurance companies during FY 2019.

--. ..--... ,--+....-
5.2.1.2 Customer service - (i) There was no system of triennial audit of the quality of
/ I
1
custmer service. (ii) Analysis of Turnaround Time calculation did nbt take into
1 account nature of complaint to help identify resolution gaps to address the issue. I
1
I
I 1 No analysis of repetitive complaints and cbmpleints reopened was done. (iii) There 1
I I was high pendency in the redressal of complaints escalated to the CMD (26%). (v)
I
1
I I Audit of Internal Ombudsman scheme was not conducted by me bank, contrsry to
I
1
1 5.2.2
( extant guidelines.
Risk identification
- - - +I
I
/ 5.2.2.1 1 Loss data - (i)Though the bank--- was receiving the exfernel loss data, the same/
--"- -
I I was not analysed for identification of potential risk and control lapses. (ii) The I
I 1 penalties levied on account of non-adherence to guidelines on currency chest
- - :.-r:-
- --,-- -
r-operations did n d figure in the loss data and there was no framework to quantify
the financial loss due to IT bugs. (iii) There was no reconciliation between loss data
collected and GLs, though the same was prescribed in the bank's policy. (iv) The
bank did not have an automated incident reporting mechanism for the staff to report
errorslnear miss events. The data was collected manually from branches and
consolidated by RMD, though Offsite Monitoring Cell of the baink was identified as
1 a source to provide the near loss event data. (v) The assessment of near miss I
1 events was limited thefts and burglary and did not
to network down events I
include
( and attempted internal frauds. The bank had reported only 39 near miss events I
1 during t h e year which was low compared to its size and scale of operations. (vi) 1
1 There were instances of frauds committed by the Banking Correspondents (BC) of 1
1 the bank by taking advantage of a bug in the Aadhar Enabled Payment System
(AEPS), The money was recovered and the BC was arrested, however fhe case
1 was neither reported as a fraud nor as an attempted fraud and did not form part o f ,I
I
1 near miss data. . I

FOR~.~ -------
---.----
Control Self Assessments (RCSA)was not conducted for critical p r o c e s s d
1 like fraud management, customer sewice / grievances/ ndressal system, till I I
i
completion of IS€. (ii) Mapping of RCSA findings with the internal audit findings
was not complete. (iii)Review of the RCSA results based on inputs of audit findings
was pending. (iv) There was no back testing sf RCSA with the internal loss data.
(i) There was no defined frequency of monitoring of Key Risk Indicators
/ tolerance level of new KRls were not defined. (ii) KRls did not include critical areas
tI1
like staffturnover, fraud detection and reporting.
internal GL:(i) The monitoring d branch collection accounts needed
as: (a) The ACE note did not detail the ageing analysis. (b) HO was dependent on
i
branches for data in this regard. (c) Despite frauds having been perpetrated in the 1
I branches through collection accounts,
these there were 340 unreconciled branch
I1
( collection accounts with the date of last transadion more than 3 years old and
1 maximum balance of 7 lakhs. The 47 (ii) reconciliation status of credits in failed
I
1 ATM transaction account bank wide NEFVRTGS internal G1.s were not up 1
and put
1 ACB. There were differences between the Advances GL and accountwise 1
ta (iii)
/balances, which were by adjustment entries. Though
reconciled bank made I the
----
Controls:
(i)Training - (a) Feedback an the trainings conducted was not discussed by the
Training Advisory Committee (TAC). (b) There was no external member on the TAG
1(
(an academician) to guide the bank on training matters, contrary to internal policy.
(c) Officials posted in SWIFT seeti~nat treasuv did not have training in SWIFT.
Staff operating the SWIFT infrastructure at branches were not trained prior to
posting in that role and periodically thereafter. (ii) There was no cenfralised system
to monitor the validity of the insurance policies and the same was left to each
business unit procuring the policy. There was no data centrally available for
insurance claims approved or rejected for IT hardware of the bank.
--- 1
Outsourcing - (i) The status of 87-M reconciliation, which was outsaurced, was 0
:, ,
not put up to the ACB, (ii) Against a system sf robust audit advised in the
outsourcing guidelines, the bank was conducting only IS audit of the outsourced
IU
entities. Financial and managerial aspects were not captured in the IS audit,
contrary to bank's policy. The verification of antecedents of staff deployed by the
outsourced agency was not monitored. (iii) Despite the frauds committed by BCs
appointed by vendors on behalf sf-the bank, the overal! risk rating of the vendors
was assessed as 'low' and 'medium'. (iv) The Outsourcing Compliance Certificate
was furnished to RBI with a long delay (March 2018 certificate was sent on January 1I
2019 and March 201 9 was not sent till September 2019).
-
KYClAML - (i) There was no SOP for alert managementlreview
system. (ii) Alert for breaching the threshold limit for transactions in CASA were
inconsistent, since it did not take into consideration the individual'slfirm's income,
e.g., the threshold for increase in high value transaction, high value cash
transactions in students and new accounts. (iii) The CTR was generated by the
bank an the basis of account number instead of Customer ID. (iv) The effectiveness
of KYC: monitoring system needed strengthening as: (a) there was no provision in
CBS to identify a minor account on completion sf 18 years and to convert the same
as a regular account. (b) There was no reverse scanning of existing acc~untsin
CBS with the U N list. (c) There were around 29 lakh accounts pending for Re-KYC,
of which, around 18 lakh were 'high risk'. (d) There were A 1 small accounts
operational for more than two years in CBS. (e) Accounts of politically exposed
persons were rated as 'medium', with 2819
&we. cases
.. where the risk categorisation
were not reviewed formore than six months and there were around 21,700
accounts where the last risk categorisation review dates were future dates. (f)
Identification sf beneficial owner was not a mandatory field in CBS. There were
accounts where the beneficial owner was not identified as per PML rules. (g) The
staffallocated {nine) far monitoring AML alerts were inadequate considering the
number of alerts generated (daily average of 3090 aleria), (v) Aadhar offline
verification amendments released by the bank had no operational guidelineslSOP
for branches to carry out offline verification.
Critical process - Major deficiencies obaenred in various critical processes were:
(i) There was no restriction in CAM application (used for calculation of credit risk
weight) on risk weight master change. (ii) The additional authariser for SWIFT
messages above a padicular threshold did not verify the underlying documents
before authorising the transactions. (iii) SWIFT allowed the same CBS user to be a
verifier: (iv) Review sf SWIFT users of London branch was not done. (v)There was
no system of immediate deactivation of SWIFT and CBS users due to retirement
and transfers. Further, employees'biometric access ta the Primary DC server room
were disabled with a considerable delay after transfer out. (vi) The bank did not test
the archived swift massages for retrieval. (vii) The file generated in CBS for upload
in SWIFT server was not encrypted. (viii) Generic system level ID was used
frequently for user management without approval from the competent authority. (ix) 1
Fund basedlnors-fund based limits of corporate customers were monitored only at
quarterly intervals as against on a weekly basis, as prescribed. (x) logs generated
from SWIFT were not reconciled by GAS on a daily basis.
II
5.2.4 - Monitoring and review
5.2.4.1 BCPIDR Drills - (I) There was no centralised monitoring and reporting for the
I conduct of OR Drills. (ii) The bank conducted DR Drills and managed BCP related I
I 1 to only 20 out of 34 critical s stems. This was also discontinued since January 2019 1
I 1 due to CBS upgradation project. (iii) All the servers were down in the Data Centre 1
I 1 due to power failure for 30 minutes on May 08,2019,which was the third such 1
incident in the last three years.
--
in the bank's internal framework far MtS reporting
were: (i) The Enterprise-wise data warehouse was yet to be implemented. Data
1
I
from treasury and London branch were not part of the current MIS setup. (ii) All
r-I / consolidated bank-wide critical MIS reporting such as capital computation, CRILC
1 data and OSMOS reporting were
updation and prone to
manual errors. Critical DSB i I
( 1 returns like ALE and RAQ generated by collating data from
were various
I I
I 1 departments. The changes due to
I
MOC in CRILC data were also carried Out
I 1
manually. (iii) Delay in submission of OSMOS returns was observed in 33 cases
during the year with delays up to I days. (iv) CBS did not capture the fhird housing
Ioan as CRE leading to PSL misclassification and error in capital computation. (v)
The failure rate in uploading data to Credit information Companies (CIC) was 38%
as on March 31,201 9.During the year, bank had received around 21,000disputes
from C181L which raised concerns en the accuracy of data provided to CICs. (vi)
Though the bank was in the fifth year of RBS cycle, only 70 out of 660 RBS data
points were fully automated. Correction in 42 data points reflected issues in data
quality and interpretation. (vii) The hank had submitted data to National E-
Governance Sewices Limited (Me%) under Insolvency and Bankruptcy Board of
India (Information Utilities) Regulations, 2017 only once during the year, as against
the requirement of monthly data submission. The default data was not updated
expeditiously to Nest.
--
Payment System - (i)The bank did'nothave a Board approved policy for issuance
of ?Pis and related activities. (ii) There was no centratised system to monitor delay
in remitting NEFTIRTGS credits to the customer. Though the bank claimed no delay
for the same, overnight balances in transit NEFTlRTGS accounts of t h e branches
indicated delay of more than a day. (iii) SMSlernail to the originating customer after
, .
the receipt of the positive confirmation was not sent in case of NEFT, (iv) The
( I 1
System Audit Report, as advised in t h e extant instructions on data localisation, was
I / not sent to RBI till cornpietian of ISE. (v) In case the mobile number was updated 1
I / in the records of the bank, e- commerce and POS transaction facilities were 1
automatically enabled with ATM facility, without the customer's consent.
n
In ~7cases,fhebanksubmi~edincorrectamounttoRBI
I 1 in FMR1. (ii) There were delays in reporting of serious irregularities of special audit 1
I 1 to the competent authority for declaration of frauds. (iii) Conduct of staff 1
accountabilitywas pending in 75 cases for more than six months for frauds declared
during FY 201 9. (iv)A total of 623 officers were involved in fraud cases in FY 207 9,
action was pending for 393 officers a k r conduct of staff accountability and 309
cases were pending for identification of vigilance angle till completion of ISE. (v)
The departmental action against staffwas pending in 81 out sf 191 fraud cases of
FY 2017 and 100 out of A88 cases of FK 2878 till completion d ISE. (vi) The bank
any fraud case during the last three years. (vii) There was no system
did not c l ~ s e
to capture cases where investigative agencies had initiated criminal proceedings
suo mota and to examine suck cases from fraud perspective. (viii) Feedback was
not Shared with the CAs on frauds detected in branches audited by them.
Qperatians IT - ( i ) There was: (a> no review of existing applications to assess any
requirement of upgradation, (b) no centralised mechanism to maintain the inventory
sf authorised software installed on different devices,(e) no identification of existing
process to be automated, (d) no review of uselaIiotrnent of generic IDS used for
backend access for database administration, (e) messenger access on all systems
in Data Centres posed data pilferage risk, and (0no analysis to assess the capacity
lntilisation for the IT resources to ascertain if the existing Nebark Tools &
Applications were under-utilised or sufficient to handle security requirements. (ii)
Critical patches and anti-virus was not updated in all servers, patches were applied
with considerable delay (more than 80 days) for three consecutive quarters, leaving
systems vulnerable to attacks. (iii)Security Incidents were reported to RBI only at
quarterly intervals, instead of reporting within 2-8hours. Analysis for fine tuning the
systems to prevent recurrence, financial & customer impact analysis, business
disruption analysis was not done for incidents. (iv) Forensic audits were eondu~ied
with a delay of 6 months for the cyber incidents and implementation of
recammendations were pending. (v) Windows Remote Assistance for remote login
facility by vendors was enabled without documenting the permission process, (vi)
Log analysis was only for three parameters (ins&, update B delete) and root cause
analysis of the same was not done. There was no documented procedure and
reporting mechanism for ~Iesureof logs. (vii) The periodicity of data backup was
not regular. (viii) Vulnerability Assessment (VA) was not conducted for intranet
applications, Network devices and Security devices on a half-yearly basis, contrary
to the cyber security policy of the bank, (ix) The bank neither conducted the
penetration testing (PT) for the public facing application on a periodical basis nor
deployed automated vulnerability scanning tool to monitor vulnerability on an
ongoillg basis. ( x ) Closure of VAPT observat@.nswas not placed to ISMC on a I
quarterly basis and there was delay of up to four months in rectification of identified
risk vulnerabilities.
-
6. Other Pillar I! Risks

1 Major observations
6.1 1 Inherent Risks
I
7
6 1I (i) The increase in reputation risk was evidenced by: (a) decline in
I 1 22.09% during the year, and (b) increase in the number of Banking Ombudsman 1
I 1 cases awarded against the bank (CY:32, PY: 20). (ii) The value of collateral 1
1 1 realised at the time of sale was only 38.72% of the value at the time of classification 1
I 1 of accounts as NPA for the sales carried out in FY 2019, which highlighted the 1
1 1 significant risk in recovery through sale of collateral. 1
1 6.2 1 Control Gaps I
1 6.2.1 I
1 Policy deficiencies: The following deficiencies were obsewed in the Business /

I 1
1 deposits and advances, respectively, the bank had projected unrealistically high I1
strategy document (a)Though actual CAGR (FY 15-19) was 0.44% and 1.35% for
I 1 growth of and 9.14% far deposits and advances, respectively, in FY 2020,(

I 10.04%
1 (h) high cost to income ratio of 59.23% was projected for next five years while i
I 1 measures to reduce the same were not enumerated, (c) limits were not set for NPA 1
I 1 in Agri and MSME loans though these were focus areas. Also, the GNPA ratios for I
I 1 Agri and MSME as at March 31. 2019 were high at 14.34% and 12.47%' (
I I
I 1 respectively.
I
,I ,/--+ *
6.2;2 Risk identification and assessment: (i)Reputational risk scorecard: (a) Increase
I I 1
in frauds were not factored, (b) Status of ihe hank w.r.t PCA Guidelines did not
I I consider risk threshold 3 breach for negative ROA as on March 31, 2019, (c) 1
I / 1
Customer complaints related to card centreiATM transactions (71,895 complaints
I 1 during FY 2019) were not included. (d) The bank had not analysed the proportion I
I 1 of mobile and internet banking services in comparison with ATM and CBS services I
1 1 while deciding their weightage in business disruption fdctor. (ii) Pension risk I
1I 1 assessment: The bank continued to use the mortality table published by LIC (1996) 1
I for FY 2019,though it envisaged moving fe, IALM table of IRDA in the next 2 years. I .
1 6.2.3 Controls: The following deficiencies-&re observed in the collateral management: I
(i) The bank's process to track validity or availability of valuation reports was not
Sp"' ' '
statutorya;ditors had pointed out 648 NPA a c c q
robust. As on March 31,2019,
wherein either the valuation reports were not available or their validity had expired.
Valuation reports were stilt pending for 264 accounts. (ii) The second valuation for
205 eligible accounts and Iegal audit in respect of 41 borrower accounts was
pending (iii)There was significant deterioration in collateral value after classification
of accounts as NPA and bank was neither tracking the decline in realisable value
nar undertaking a root cause analysis for such deterioration.
-. - - -- -
Section I[:Summary of Aggregate Risk at Bank-level

As per the SPARC process, the Aggregate Risk Score of the bank is arrived at=
\Tn
*-e
which is indicative of "High Risk". On applying the assessed CRAR ~f 13.49% the
Risk Categow Aggregate Risk

Board
Senior Management
Risk Governance
Internal Audit
Compliance
Governance 8 Oversight ----
Credit Risk
Market Risk
Liquidity Risk
Operational Risk
Other Pillar Il Risk -
Business Risk
BANK LEVEL AGGREGATE RISK
Page 31 of 31
-
Syndicate Bank Annex to Capital Assessment
I. Annexures for Capital Assessment
Annex I : Reported and Assessed Capital t

1 , Pdsition
Capital under Basel Ill (In Tcrore)

divergence
Total capital (TC) 22,717
provisions on
Common Equity
account of fresh and
Tier 1 (CETt) 14,858 7 3,874 existing NPAs.
caplial
-
Tier 1(TI) capital 18,134 16,950
Tier 2 (TZ) capital
-
4,583
1 4,583
CRAR under Basel lil (in %)

Particulars
1 Total capital (TC)

1/ 14.23
11 13.49
11
Reported Assessed Divergence Reasons for
0.74
divergence
1 (i) Additional Loar
loss provisions or
I Common Equity 9.31 1 8.57 1 0.74 [ account of Fresh ana
( Tier 1(CET1) existing NPAs (ii)
I capital Increase in R W h .
I Tier 1(T1)capital ( 11.36 1 10.62 1 0.74 1

1 Tier 2 (T2) capital 1 2.87 1 2.87 1 -
Page 3. of 19
-
Syndicate Bank - Annex to Capital Assessment .'.
The summary
Annex 2: Major Areas of Financial Divergence
of major
1
areas of financial divergence, including assessed risk weighted
Annex 2A.
(a) Divergences (shodfall) in Provisioning (in ? crore)
Additional
provision
required
f
Standard Loans as identified during IS%
Non-Performin
-Re-classification I 3 ,464 1,183 Wrong classification
Short Provisions of of NPA and under-
NPAs (Existing reporting of
provisions I
accountd
(b) Divergence in Risk Weighted Assets (RWAs) 0

RWAs {in T crore)
Risks
-130,180 59
12,472- 12,472
Page Z of 1I
file-
Syndicate Bank - Annex t o Capital Assessment ,
6 - Re-classification I Short Provisions of NPAs (Existing NPA)

Borrowe Date d Facility Net Out Date of NPA CIassification Securitylvaluation Provision I Remark
r Name - Last Type Standin details
Sanctio g(Net ,.
n of ECGS .
Claims)
- I I
As As per As per As per As per As per Held 1 I
Require Shortfall I I
per SSM Bank SSM Bank SSM

Bank
3I' 1 17.09. i 17.09. 1
2018
Sub-
2018 : standard !
Loss 1 528 Nil 153
513 I
;
460
Note #I
below
4
I
Fund
Based !I 782
I
'29.12. 29.12.
/2018 2018 /
I
/
Sub-
Standard
'i1 Loss
I
997 1 74 118
I j 782 1
I
664
I
i
:
j
1
Nob#2
below
(,
1
-
I i I
Based &
10 Ii 69 : 59
Note #3 i
I below i
Limited Based
1564 78
1 Notes --
Note?: -1s ~ e x p o r t s imports,
, d e e r n e e
1 management. The actaunt slipped to NPA on 17.29.2018 due to non-payment of devolved LC.The account had been referred to NCLT but was yet to ba admitted. Stock
Audit -was conducted as on 31.12.2018and another firm had been appointed to conduct the forensic audit in the amount. As per the Stock Audit Report dated 11.03.2019]
1 (for position as on 31.42.2018), the DP of Working Capital Lenders was Nil due to Nil position of stock and receivables pending beyond six months. Therefore, the working 1
1 capital exposure of the bank was unsecured as t+e facility was secured only thraug h hypothecation of S t o c k and Receivables. Though the bank was in discussion with 1
I Edt for s&~jng,the dues through transfer of a freehold property, the same had not happened till close of ISE. The valuation report of the pmperty proposed to be 1
(I-,
:., /
Ql3 Syndicate Bank - Annex to Capital Assessment
1 transferred and title of the propem

. . - were not available with the bank. In terms of para 4.2.9 of MC on IWC dated duly-2 account should be classifid as Lass I
I and 100% provision needs to be made as on March 31, 2019. Accordingly additional provision of ? 460 crore is recommended in this account as on March 31,2019.
5-1 Financial Services LM: (i) .. The bank had downgraded the account on December 29. 2018 on the basis of record of recovely. However, as per stock audit
reporl dated September, 2018, auditors had considered total drawing power as zero and had indicated that the company had not utilised the funds for the purpose for
which it was sanctioned. They had seriaus concerns about the details of security charged and proper application of IRAG norms by the borrower. (ii)Ten banks (till August
I
19,2019) had declared the amount as RFA and were internally verifying the account for classification as Fraud. The bank, however, had not analysed the account from
RFMraud perspective. (iii) NCLAT had classified the account under "Red calegory" i.e.. entities which cannot meet their payment obligation towards even senior secured
; financial creditors as and when such payment obligation become due. (v) Hence, based on the status of the account, the realisable value of security was considered as Nil ,
on IRAC dated July 1, 2015.
.. per
. para
. 1.2of IRAC 2015, provisioning should be made on the basis of avairability o f security and the realisable value thereof. (ii) The
borrower had availed working capital facility, far which stock audit report available with bank was dated Saptember 19, 2817 (more than one year old as on March 31,
2014),hence not considered. Further, as part of collateral security for same of the fixed assets (land, building and factory), current valuation reports were available, which
I were less than 3 years old, hence, has been considered for calculation of security value. Excluding. there fixed assets, t!le bank had considered WDV of Fixed assefs from
Ii Audited Balance Sheet (FY 2018),which was excluded. (iii) Therefore, the assessed realisable value of the security for i'rre bank was 14 crore, which was less than 10% of
he outstanding, and the asset is classified as loss asset as per para 4.2.9 (i) (b)of
- IRAC norms dated JuTy 0'1,201 5.
-
Syndicate Bank - Annex to Capital Assessment
9\ -5
Table-ll: Divergence in RWA
Particulars
I :?
a
: - - -. ...
1 1
As per SSM Shortfall I Remark 1
sk- RWA 130,180 59 ReferNote$
I Market I : I S- ~
--+- -130,721 -
-
RWA 12.472 I 12.472
Operational Risk - RWA
--
I
Totaf RWA
77,013
159.606
I - 2 - 2 -
/
17,013
159.665
- _ 59 _ I
Note $ i) GL balance in CBS was more than the balance in CAM and bank did not apply RW on the
I I
. .
difference of T.30 crore; ii) RW of 100% agalnst 125% was applied on an unrated restructured account; iii)
Certain personal loan accounts were classified under Regulatory Retail Portfolio (RRP) ; iv) Certain CRE
loan accounts were classified under residential property ; v) No RW was applied for BGs (no1 entered in
CBS) of Haveri Branch; vi) No RW applied for NCLT expenses debited from General Ledger (GL).
c,: Table-Ill: Priority Sector Classification
Parameters Amount reparted Miscla Actual Shortfall Reasons for

by bank ssificat Achievern declassifica
ion ent as tion
-assessed
Target Achieve ed by by SSM,
e
Total Priority
Sector
Advances
72,748
(40%)
1
1
73.733
(40.54%) 1 ,532
1 72,201
(39.70%) 1 547 1 Ptease
refer Note #
Tota!
Agriculture
Qut of Total
Agriculture
loans to Small
& Marginal .
Farmers
Micro
Enterprises
(% to ANBC)
Other Priority
Sectors
(excluding
Agriculture &
Micro
Enterprises)
Weaker Section
I% to ANBC)
Wbmen
Beneficiaries
Syndicate Bank - Annex t o Capital Assessment
Note #:
In violation of extank guidelines applicable till April 23, 20q5 the bank classified even those education bans
as PSA which exceeded the st~pulatedloan amount (a6.37 crore). Aceaunts (7 87) pertained to non-priority (B
0.85 crore) and vehicle Loans not falling within the category of priority sector lending (7 0.57 crore) were
classifiecl under priority sector. Hausing loans (I 41 55 accounts) where the overall cost of dwelling unit or the
loan amount exceeded the stipulated limits IT1312.98 crore); loans to the same borrower for third dwelling
unit onwards (7132.82crore); Rousing loans to bank's own employees (F0.51 cmre); certain loans to non-
individuals classified as loans to individuals for educationat purposes (165.06 crerre); in the absence of any
record to verify the number of dwelling units or iRe amount of loan per dwelling unit, finance to The Tamil
Nadu Coop Housing Federation for housing (?I 0.86 crore); loans to individuals for educational purposes
including vocational courses beyond the stipulated loan amount for the studies in India & abroad
(88.37crore), were classified as PSA,in violailon of extant guidelines.
As per Bank As per SSM

Adjusted Net Bank Credit
81,871 18?,871
(Previous Year)
-
a7
Annex 3: Computation of Outside Liabilities (in crore)
Sr.
Particulars Amount
No.
A Total Liabilities excluding capital & reserves as
307,600
on March 31,28t9
Upper Tier II l nstruments 3,700

Subordinated debt 4,600
Deposits 259,897
Borrowings 17,304
-
Other liabilities and provisions 22,099
8 Iriternal Liabilities 14,230
Provision for standard assets 838
Provision for diminution in fair value of

58
restructured accounts (Standard accounts)
-- -
Provision for NPAs (1 neluding Floating Provision of T. 182 wore) 11,813
I. -.
Provision For FlTL Restructured Account

--
Provision for Depreciation in Investments I NPI 1,362
' C Total outside liabilities [A-61

-
-
Annex 4: Assessed Net Worth (in crore)
Particulars Amount
I
Paid up capita1 [including ESOP outstanding & interest

free funds from H.O. (foreign banks)]
- -
Reserves and Surplus

I
Statutory Reserve I 3,095
Share Premium 9,528
Capital Reserve (exciuding revaluation reserve)
-
Special Reserve 1,536
- -. -
Revenue ~ e s e k e
- I 2,680
General Reserve
-
Investment Allowance Reserve I -
Credit Balance in P&L NG 1I -
Foreign Currency Translation Resewe
Intangible assets (including net deferred tax assets) &

I 112
accumulated losses
Reported net worth [A+B-C]

I 13,100
Adjustments following inspection findings 1,184
Investment Reserve Account

--"-.-- - .. --
Additional Loan Loss Provision
Shodfall in Standard Asset Provisioning

-
Net Deferred Tax Asset

-
--
L -
Assessed net worth or reallexchangeable value sf paid

11,916
up capital and reserues [D-€1
6 C'""
47
Annex 5: Computation of Assessed Capital (in wore)
-
er 2 capital: regulatory adjustments

Syndicate Bank -Annex to Capital Assessment
! g I
Annex 6: Assessment of Internal Generation of Capital (in crore)
Sr. Break-up of income and expenditure Current fV T FY T-1 FY T-2

No (Mar-I 9) (Mar-I 8) (Mar-17)
I Total tnterestldiscount Income

(2+3*4*5)
3 Income on investments 5,667 5,200 5,331

4 Interest on balances with RBI 31 40 29
- .
Interest on market lending1Income on

Fee based & stable misc. income
E6(a)+6(b)
6b
7
Fee based income
Misc. income from stable sources
Gross stable income (1+6)
1 22,9I0
456 1 478
22,965 1 24,4
38960 1
-- - -
Interest Expended (9+10) 15,076 15,224 16,728

lntetest on deposits/ all other interest f 3,928 14,086 15,651
expense
--.-
Interest on borrowings 1,148 1,138 f ,077
Net Stable Income (7-8) 7,834 7,741 7,432
- .
Income from trading 364 946 1,740
.--
Realised gains on derivatives

14 Gains on sale of asset -
-
15 Recoveryfrornw/offs 488 375
-
Extra-ordinary income1 Dividend income
8 other miscellaneous income
~12+13+14+15+16)
--. .
.- -. .
Gross volatile income
....
, -
Provisions and contingencies

(excluding tax) (19*20.+24)
-.
Provisions for Loan losses
I 106
1,039
4,892
-
7 84
1,617
8,q 66
7,620
186
2,302
3,433
3,545
-
Syndicate Bank Annex to Capital Asessment
Provisions for depreciation jn

investrnentslNP1
+
Other provisions
Extra-ordinary expenses
I
- I
-
Write-offs
Net Volatile Income (17-18-22-23) 1 (4.884)
Assessed provision by supervisor

(26*27+28*29+30+31+32+33)
-t
- - .
Additional Provisions far frauds
Additional Provisions for understatement 1,184 263 6I3
of NPAs -
______C
41
Additional Provisions for Unde rstaternent 2 54
of NPls
Additional Provisions for Unde wtaternent
of Liabilities
--
Additional Provis~onsfor claims not
acknowledged as debt I : . :
Additional Other Provisions (PI. specify)

Additions t Other Provisions (PI. speci.$I)
Additional Other Provisions (PI. specify) 1 +.
Assessed net volatile Income (24-25)

Reported net total i ncsrne (11+24)
Assessed net total income (11+34) 1
Operational expenses Q38+39+40)
Staff expenses, DirecboPs feeslBoard
Members' fees & expenses
1 4.072
Depreciation on bank's properly and 1

repairs
- . .
Other Operating Expenses

Provisions for tax
Reported profit (3537-41)
Assessed profit (36-37-41)
1 0 5
44 Dividend paid (excluding tax) 0 61 0

45 Reported Retained Earnings (42-441
46
-
Assessed Retained Earnings (4344)
(2,588) (3,223) 359
(3,772) (3,486) (541)
Earnings StabIltty I Volatility Assessment
Sr Earnings d Profit Ratios Current FY T-1 FY T-2

FY T (Mar-i8) (Mar-17)
M (Mar 19)
0
47 Net Interest Income f 1-81 (%I11 Growkh Rate) 6,848 6,553 6,276
(I.48%) (4.48%) (8.41%)
48 Share of Interest, Fee and Volatile Income
11:6:I71 91 :05:04 89:05:06 87:04:09
49 Gross Stable l ncorne IInterest Expended
[718*100%] - 15136% 3 5 0 . 8 5 % 144.43%
50 Net Stable Income / Assessed Profit I (207.69) (222.06) (I 373.75)
1143*1OO%]
[I % %
51 Gross Volatile lneome I(Provisions 8b
Contingencies + Extraordinary Expenses -t
Write-offs) [17/(7 8+22+23)*10(9%]---- 17.54% 19.59%
-
52 Assessed Net Volatile income !Assessed

Profit [34/43*%00%] 160.87% 187.91% 402.96%
53 Reported Retained earnings I Reported P r ~ f i t
[45142*IQO%j 180% 4 06% 100%
54 Assessed Retained earnings I Assessed Profit
46143*100% 180% 100% IQO%
55 k d u a l vsbudgeted income [expressed as i v e
I -ve percentage] , __lS.35%) 1451% --
97.39%
56 Actual vs budgeted pmfit [expressed as +vG I -
ve percentage 46.91% 515.87% 35.89%
57 Investmehi inc!omel~otaI income %5.18% 25% 26.72%
58 lnvestrne~ortfolial Total assets -- 24.44%
.- 24.80% 21.89%
Syndicate Bank - Annex t o Capital Assessment
Annex 7: Leverage Ratio under Basef Ill (in crore)

---
Sr. Particulars Reported by Assessed by

No, Bank SSM
A Basel III Tier II Capital (TI) 18,134 16,950
6 Leverage Ratio Exposures 329,312 328,128
On balance sheet (exelud ing derivatives 3 1Q ,496 309,312
- --
Derivatives 5,345 5,345
Securities Financing Transactions --.+- ----
-
Ofl-balance sheet exp&sut-es 13,471 13,471
-
Any other component ---.
--
C Leverage Rafio (A!B*'IOO%) S,Sl% 5.17%
Syndicate Bank -Annex to Capital Assessment
If. Annex for Compliance Assessrnenf
Major Areas of Non-Campllance (Regulatory Guidelines)
Regulation Area 1 Deviations obsewed by

Reference (Para Subject of Non- SSM
& Clrcular no.] compliance compliance
was there in
last ear
Master Directions Classification o/ i) There were 187 accounts
on Priority Seetor ineligible category unde~ pertaining to non-priority
Lending RBI priority sector. products as per scheme
(FIDD.CB.Plan.) codes of the bank, which
circular No. were classified under
1104.09.01/2016- Priority sector.
17 dated Juty 7, ii) Vehicle Loans which did not
2018 updated on fall within the category of
December 04, priority sector [ending were
2018 classified under Priority
sector.
MD on PSL: Para Misclassificali~n oi i. Housing loans (14,105
No. '10.1 and 10.3 Housing Loans undel accounfs) where the overall
of RBI priority sector, cost of dwelling unit or the
(FlQD.CO.Plan.) loan amount exceeded the
circular No. stipulat~d limits, were
1104.09.8112846- eategerised under priority
17 dated July 7, sect or.
2018 and also in (ii) Multiple housing bans to
Para 5.1 of the same borrower, which
FIDD.CO.Plan. satisfied the overall cost of the
circular No. dwelling unit or the loan
BC.4104.09 amount were also classified
.01120?5-16, under priority sectar.
dated July 01, (iii) Housing loans to banks'
2015. own employees were
classified under priority sector.
(iv) The bank could no8 obtain
I keep I produce any record to
verify the number of dwelling
units or the amount of loan per
dwelling unit and hence
finance to The Tamil Nadu
Coop Heusjng Federation for
1housing, were deelassiRed as

PSA (<-
Para ii of R8I Interest Subvention of There were 20 Agriculture
L
circular 3% was given to Jewel Loan accounts from
FIDD.CO.FSD.BC ineligible borrowers sample analysis, to which
.No,15105.02.0011without repayment of interest subvention was given
2018-19 dated Principal within one year withaut repayment of Principal
March 7, 2019 of availing crop loan. within one year of availing
ere Inan. ..,-,.,.,
'
6
106 Syndicate Bank - Annex to Capital Assessment
Control no. 3(b) of Un-reconciled Nostro There were I10 Nostro credii
DBS (CO) entries beyond 5 entries pending for
CSITEi4493131.O working days. reconciliation for more than 5
.01512017-j8 days.
dated F%b 20,
2018
para of 1.I 1tb) of Liabilities nut to be Provision far income tax was
R01/2615-16198 included for DTUNDTL included by bank in NDTL
DBR.No, Ret.BC.2 computation. computation.
4112.01.001lZ015-
16dt July 1, 2015
Para 3.3.1 8anks m u s t fix &ff Though there was delay in Yes
Master Directions accountability in respect 481 cases during FY 201 9 in
on Frauds - of delays in reporting reporting of frauds, stafl
Classification and fraud cases to the RBI. accountability was identified in
Reporting by only 24 cases.
Commercial
Banks and Select
Fls dated July 01,
201 6 and updated
as on July 03,
2017.
Para 2.2.4 (ii) & (i) Banks should, while The bank had no! cautianed
2.2.5 forwarding guarantees, the beneficiary in case of 22
Master Circular - eaution the beneficiaries BGs issued by their Haveri
Guarantees and that they should, in their Branch.
Co-acceptances own interest, verify the
dated July D l , genuineness of the 28 BGS issued by Haveri
2075 g~larantee with he branch above ? 50,00g was
issuing bank. signed by only one official.
(ii) Bank guarantees

issued for ~58,0001-and
above should be signed
by two omciala jointly. A
lower cut-off point,
depending upon the
size and category sf
branches, may be
prescribed by banks,
where considered (
were eleven small

which were allowed
for more than two
Know doing full KYC.
Syndicate Sank - Annex to Capital Assessment
1 o?-
brniskes evidence of
having appiied for any
of the
QVDs during the first

twelve -months of the
opening of the said
account.
The entire relaxation
provisions shall bEl
reviewed after twenty
four months.
-
Para 34, Part IV Identification of Identification of beneficial
Identification of beneficial owner. owner was not a mandatory
Beneficial Owner, field in CBS. Beneficial owners
Master Direction - were not identified in 17,124
Know Your trust accounts.
Customer (KYC)
Direcbian,
February 26,
2026.
Annex 3 - Cyber Security lncidenf As and when the cyber
Security Reporting (SIR} to RBI incidents were identified, the
Framework in (wlthin two to 6 hours) same was not reported. SOC
Banks. DBS. collected the infcrrnation only
CQICSITEIBC.111 at the end of the quarter and
33.0~.00112015- repoded to RBI.
16 dated June 62,
2016.
Para 4.1, ~ a &
Direction an
frauds dated July
01,2016 above are reported %a
their bt~ardspramptly on
their detection.
Para 2.3.11 (6).ii The tenor of the l o a n s Multiple rollover [via closing
& iv, Master shall not e x e s d 42 existing loan with proceeds of
Circular - Loans & months from the date of new laan) of N Q ~~ricu'lturel
~
Advances- the sanction and such Agriculture Loans againsl
Statutory end loans shall be governed jewellery (bullet payment),
Othw Restrictions by extant norms without repayment of principal
dated July 01, pertaining to IRA@ st the end of Ioan tenar of one
2015 which shall be year.
applicable ones the
principal and interest
-become overdue. -- --
Para 4, BankslFis are advised No status i p d a t e and follow

DBR.Leg.No.BC.1 to complete filing the up on registration ot charges
5109.08.021)/201B- subsisting
19 dated
Decamber 27,
2018 an Filing o! -BankslFls
,- .
< >-,-.
I
+
, .-
-..
Security Interest advised to file the

relating to charges relating to all
Immovable (other surrent transactions with
than equitable CERSAl on an angoing
mortgage), basis.
Movable and
Intangible Assets
in CERSAI.
inspection Report
Syndicate Bank
Table of Contents
Section 1 - Regulatory Operations ....................

.............. 3
A. Capital Assessment (including eal-nings)............................ 3
B. Compliance Assessment .................................... 6
-
Section I1 Conduct of Business ................... .
...
............. 7
/- .\,
A. Customer conduct ........................................................... 7
B. Market Conduct.............................................................. 8 0
C. Conduct Governance ...................................................... 8
1. Annexures for Capital Assessment
Annex-I: Reported and Assessed Capital Position

Annex-2: Major Areas of Financial Divergence
Annex-3: Computation of Outside Liabilities
Annex-4: Assessed Net Worth
Annex-5: Computation of Assessed Capital
Annex-6: Assessment of Internal Generation of Capital
Annex-7: Leverage Ratio
Annex for Compliance Assessment
' . I
3 Section 1 - Regulatory Operations
A. Capital Assessment (Including Earnings)
Pillar I Capital & CRAR

I.
The reported CRAR of the bank improved from 12.24% (assessed 12.09%) as on
March 31,2918to 14.23% (assessed 13.49%) as on March 31,2019. However, during
the June 2018 and September 2018 quarters, the bank had breached the minimum
regulatory CETl ratio requirements. The summary of reported and assessed capital
position of the bank as on March 31,2019 are in Annex 1.
2. Capital management, ICAR, ICAAP and stress testing

(7'
2.1 Bank's Capita! Planning and Business Projections
(i)As per the Long Term Strategy and Business Pian (five year period FY 2019-20 to
FY 2023-24)' the bank had projected its total business to grow by an average of
10.46% during the period. The projection was optim~sticand not reflective of the actual
position, as its CAGR (FY 2015-16 to 2018-19) was only 0.85% and the total business
s h r u n k by 3.85% during FY 2019.The bank could not achieve any of its original targets
set in the business plan for FY 2018. Consequently, the bank revised its target
downwards for the December 201 8 and March 2019 quarters but still could not achieve
mast of the targets. As against t h e projected growth of 3.38% in global deposits and
de-growth of 0.78% in global advances during FY 2019, global deposits reduced by
t.j 4.72% and global advances reduced by 2.77%. The bank had incurred a net loss of ?
2,588 crore against the projected loss of ? 4,875 crore during FY 2019.
(ii) Capital planning for FY 2019 had set a target of raising ?7,000 crore (CET: ?5,000
crore, AT I:?1,000 crore and Tier 2: T1,OQQ crore) by the 3rd and 4th quarter. The
bank was able to meet capital ratio requirements at the end of March 201 9 quarter due
to capital infusion of ?3,963more from Gol and reduced requirement of capital due to
reduction in credit RWAs.
(iii) The bank also raised 7580 crow through Ernployee Share Purchase Scheme
+,%T
..
-.,y(ESPS)and the same was kept in share application money-pending allotment and not
?-
$onsidered in CRAR computation for March 2019.

(iv) As the bank had incurred a loss during FY 2019,it paid interest of T 378 crsre on
IPDIIATI bonds by drawing from Statutory Reserves by routing t h r ~ u g hProfit & Loss
Account.
2.2 Assessment of Pillar I and Pillar II capital and Internal Capital Ratios
(i)The impact of Other Pillar I I risk on regulatory capital reported by the bank was 20
bps as on March 37, 2019. Consequently, the internal capital ratio worked out to
14.03%. While the Pillar 1 capital requirement decreased from ? 19,911 crore to S
17,357crore during the period under review, the reported Pillar II capital was 7 323
crore as against 7 1,543 crore during the previous year.
(ii) The bank did not envisage any additional capital for cyber risk and collateral
concentration risk under Other Pillar II.
(iii) The bank did not analyse non-compliancesldeviations observed during internal
Iconcurrent audit while assessing @omplianceRisk,
(iv) Capital Assessment Model (CAM) did not have a system to check veracity and
correctness of data pushed to CAM through user departments. Incidentally, it was
observed that personal loans amounting to TI24 crore were kept under Regulatory
Retail Portfolio (RRP) and assigned a risk weight of 75% as against the mandated
125% RW, as on June 30, 207 9.
2.3 ICAAP
(i)Quarterly note on ICAAP & stress test assessments were put up to RMC with a gap
of 3-4 months from the end of the quarter thereby reducing the usefulness of the
information.
(ii) The bank did not define any timeline for submission of Quarterly note on Stress
Test and ICAAP assessment to RMC.
(iii) Observations of internal review1 validation of ICAAP for the year 2017-18 and 18-
19 were yet to be closed. I? .
2.4 Stress Testing

(i) Though the stress testing framework was being reviewed periodically, there
deliberation in Risk Management Committee (RMC) of the Board on its
by estabtishing linkage with macro-economic indicators1 inter--dependence across
sectors.
(ii) Scenarios used by the bank in stress tests did not assess spill-over effect of
strategic or repartatisnal risk events on other types of risks.
3. Assessment of Internal Generation of Capital

(j) The gross volatiIe income decreased by 35.75% y-o-y due to reduction in income
from trading by 61.52%. Net volatile income continued to be negative due to high loan
provisions and write ofis,
(ii) NII growth rate had been declining consistently over the past three years, i.e., from
FY 2017 to FY 2019.
q-\ (iii) Operating expenses for FY 2019 increased by 10.17% due to increase in staff
, ' expenses and Director'slBoard Members' fees & -expenses.
3-2Quality of earnings
(i)The contribution of interest income in total income stood at 71.54% as on March 31 ,
2019 and was consistently declining in the last three years.
(ii)The net interest income for FY 2019 increased to ? 6,648 crore as against ? 6,552
crore in FY 2018. Total income declined by 5.19% primarily due to decline in other
income by 7 582 crore (20.74%) during FY 2019.Tkis was due to decrease in profit on
sale of investments on account of hardening of G-sec yields.
(iii) The operating profit decreased by 27% to ? 2,819 crore in FY 2019 from ? 3,864
crores in FY 2018 on account of decline in non-interest income which was decreased
rf \
-.
by 21% to 7 2,224 crore in FY 2019 from 7 2,806 crore in FY 207 8 .

The bank was mainly dependent on GQIfor capital infusion. Due to low asset quality
and unabsorbed losses,the ability of the bank to generate capital internally was low.
The capacity of t h e bank to raise equity capital from the market was limited due to low
market valuations.

The reported and assessed leverage ratios were 5.51% and 5.17%, respectively, as
on March 31, 2019, which were above the current regulatory
,,:..-A . , , ,
*
- ,
- ~6.6upervisorycapital prescription
, ,
Based on the supervisory assessment ~f risk and the capital position, bank's
A
supervisory capital is assessed as "INADEQUATE".
7. Solvency Assessment
The Assessed Net Worth (ANW) at 7 7 1,916 crore as on March 31, 2019, together with
the bank's realisable value of assets was considered to be adequate to meet its outside
liabilities as required under Section 22(3) of B.R. Act, 1949. It continued to maintain in
"realand exchangeable value", the minimum capital required for it and thus complied with
Section 11 of BR Act, 1949. JT
B. Compliance Assessment
(i) Compliance to an obsenration of WAR 2017 and seven observations of RAR 2018
were pending till completion of IS€. Compliance to two observations of IT assessmeni
C)
conducted during March, 2017, were also pending and the same was not monitored
by the CCO.The compliance to FCA observations on AML requirements for London
branch were pending despite being a part of RMP 201 8.
(ii) The major regulatory compliance pending till completion of IS& were: (a)
Implementation of anti-skimming and white listing solution was pending for 100 BNAs.
(b) Introduction of legal identity identifier for large corporate borrowers was pending
'1
for 87 borrowers with exposure of more thah 7700 crore. (c) Filling sf security interest f %.
relating to immovable (Other than equitable mortgage), moveable and intangible
assets in CERSAI was pending. (d) There was a pendency of 92.15% in uploading
KYC data with CERSAI.
(iii) The bank was imposed penalty of ? 1 more and 7 2 crore by RBI during the year
0
for violation of fraud monitoring and SWIFT related guidelines, respectively. The bank
was also issued a SCN by FIU IND for deficiencies in the records filed for Cross wire
border transfers reports during July 2019.
(iv) For regulatory instructions, no independent compliance testing was conducted by
compliance department and the testing was based only on the self-declaration by
funciibnal departments. my
&)'There h a s no system of quality assurance through external audit of the

depattment.
(vi) There was no emphasis on training to compliance officers. During
2019,only one officer was deputed for compliance related training.
$ . (vii) The compliance department did not monitor the new products during the initial
period to assess any cearnpliance risk.
(viii) The Compliance department did not have list of all SOPS in the bank nor did it
monitor their updation as per regulatory changes.
(ixj T-herewas no structured system of: (a) interaction of Compliance Department with
major functional departments regularly, and (b)vetting of internal circulars issued by
the functional departments.
(x) Treasury had no separate compliance testing mechanism.
Section II - Canduct of Business
A. Customer Conduct
Bk3
(i) The card related complaints did not include the complaints received' for 'on us'
,!
,
I'
transactions which the bank claimed to resolve in a day. The credit card complaints
f
./- received directly at the card centre helpdesk were not included in the data on total
complaints.
(ii) The Cat! Centre of the bank did not register complaints f ~ grievance
r redressal.
(iii) The bank had no control over the departments and branches which were not
registering the complaints in the centralised complaint management system. There
were complaints regarding fraudulent Aadkaar Enabled Payment System (AEPS)
a. transactions, which were neither resolved nor the liability of the customer establ~shed
2I
\
within 90 days, contrary to extant instructions.
'? (iv) It was obsewed that 26 complaints received by the bank against outsourced
employees during FY 2079 were not available in the list of total complaints furnished
in the Annual Report.
(v) The data submitted for total customer complaints during FY 2019 were also
sourced manually. About 283 complaints received after October 2018 were not
recorded in the centralised portal.
(vi) Majority of the feedback received for resolved complaints were ~~nsatisfactorylpoor
which indicated deficiency in the grievance redressal.
(vii) The option of third gender was not available in the P!GMY scheme and NRI
account opening form. The nomination details were not updated in the CBS at the time
of opening of accounts in all cases, but maintained in manual regis{&s
- *.-
..
\
branches The nomination details were available in only 26% af the accau
. .
-7,
.till ~nmnlntinnnf I-CF ,
: < .
A ,-
,- .., r -- .-.
---.
.
B. Market Conduct
(i) The SMS charges and locker rent revised during the period were not approved by
the Board and the assessment of reasonableness was not done before revising the
charges.
(ii) Minimum balance charges were fixed, depending on a range of shorlfall rather than
a fixed percentage levied on the amount of difFerence between the actual balance
maintained and the minimum balance as agreed upon at the time of opening of
account.
(iii) No informationhotice was given to customer in advance to make good the
minimum balance amount before recovering charges.
(iv) There were instances where application of minimum balance charges were value
dated to dates when there was no sufficient balance in the account leading to penal
interest being charged from the customer on account af negative balance.
(v) In case of cash deposit, selflthird party were not recorded in the passbook.
(vi) The calculation of spread component in repo rate linked loans was not defined.
Parameters for calc~ilationof card rates for pricing of term deposits was not defined.
C.Conduct Governance
(i)There were vigilances cases against the senior management, viz., Chief Information
CJfficer, GM Credit, DGM Compliance, DGM Staff accountability and DGM Inspection.
(iij Though there was delay in 481 cases during FY 2019 in reporting bf frauds, staff
accountability for delay was examined in onIy 24 cases.
(iii) The GM in charge of Fraud Management was also in charge of operational
departments leading to a conflict of interest.
(iv) ED In-Charge of business units was also in-Charge of risk management function,
leading 'ro conflict of interest.

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cO.DOS.DSD.NO.S 3&8 10'1-72-00112822-2023 September 02, 2022

Shri Abhinav Agganwal

Risk Assessment Report

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

Scope & Ability to Infuse Capital ...................................................... 24

Annex-I : Major Areas of Financial Divergence.................8................. 1

PART I: RISK ASSESSMENT REPORT

Summary of Aggregate Risk at Bank Level

Governance & Oversight Rjsk

SUPERVISORY EVALUATION OF RISKS AND CONTROL GAPS

1 . Governance & Oversight - Aggregate score:=

1 1 bank's performance on quarterly targets was reviewed region-wise and the 1

same was accepted as the performance of the respective Field General

1 1 iheir assigned functional responsibilities. 1

I , 1 detecting non-compliance ~f KYC/ AML guidelines and failed to detect the I

2. Credit Risk -Aggregate score:-

I 1 deviation from loan policy in adhering ta tenor discipline resulted in substantial I

I I added to potential recovery risk. High amounts of sacrifice (31.32%)1 waivers I

1 book, which was not done during 2014-15.

( ( accounts and three overseas acc~untswere yet to be reviewed / reassessed

I I corporate bormwers classified as NPA by the bank during March 1, 2014 to

xisting NPAS were observed.

I 1 financial covenants agreed to at he time of sandion of credit facility, I

3. Market Risk Aggregate Score:

stated profit maximisation goal in very general terms and no views

1 accorded post-facto approval without effective deterrents for breaches of bank 1 I

4, Liquidity Risk "Aggregatescore:-

I ( during all fortnights in FY 15 beyond 28 days bucket, which was, however, I

I 1 borrowings to total assets of the bank showed an increasing trend. I

was yet to implement its ~undTrensfer1

I 1 no justification was given for continuing with such a high limit. 1

I I prescribed the flow of information, hierarchy and reporting mechanism during I

Assessment and Major observations

I internal frauds, large number of employee behaviour related customer1

1 1 senior management), and increased instances of KYC non-compliances 1

involved in external frauds by customers and non-customers as a proportion of

I I physical assets due to external events like burglary, etc. I

number (54) of penalties amounting to 7169 mn levied by the Income tax

I 1 comprehensive planning for human capital existed. (c) No periodic assessment 1

I / non-conduct of due-diligence on importer and overseas supplier, etc. were 1

I I bank has implemented 18 out of 22 transactions based alert scenarios for I

6. Operational (IT) Risk - Aggregate Score:

1 1 to 4.44% of total operating expenses on account of requirement of hardware 1

1 1 in two out of nine systems having upstream and downstream interfaces to a 1

I1 I pending issues for compliance in IT strategy implementation in respect of I

1 1 recommendations, automated vulnerability assessment tools, etc. Certain

1 1 Few deficiencies in IT operations were not documented, such as steps of I

1 1 Committee recommendations were complied. 34 reports on these /

I 1 be completed within a month was completed only by December 2015,even I

Confidentid Page f9 of27

Performing Loans 2 907 880

2. Divergence in Risk Weighted Assets JRWAs)

Reported Assessed Divergence Reasons for

Basel Ill CRAR under Basel Ill (in %)

Particulars Reported Assessed Divergence Reasons for

2, Capital Management, ICR, ICAAP and Stress Tests

(a) Bank's Capital Planning and Business Projections

3. Assessment sf Internal Generation of Capital

4. Scope & ability to infuse capital

Confidenfial Page 25 of27

Para I.(v) af Master Circular on

MC on Direct investment in the overseas JV/ WOS, non-

PART V: ANNEX to RAR

Syndicate Bank's Risk Assessment and Inspection Reports by RBI

Syndicate Bank's Risk Assessment and Inspection Reports by RBI