of larger loans (ii) there is a long history of ratings agency evaluations for publicly traded firms which , along

with the extensive data available for publicly traded firms, provided an extremely useful benchmark for the development of quantification methods for commercial portfolios. However, despite this commercial side emphasis, retail credit is a substantial part of the risk borne by the banking industry, and can not be ignored. Recognizing this, over the last decade or so, the industry and academia have devoted significant resources to developing more sophisticated credit-scoring models for measuring this risk. Like their counterparts on the commercial side, these models also rely heavily on quantitative analysis. Derivatives: There has been a spurt of derivatives exposures in the off balance sheet exposures. The composition of derivatives portfolio of the banking system has also undergone a significant transformation. Forward foreign exchange contracts which accounted for around 80% of total derivatives in March 2002 declined steadily and stood at almost 43% in March 2006 while the share of interest rate contracts went up from 19% to 54% during the same period. Foreign currency options have recorded noticeable increase during the last year. The share of single currency interest rate swaps in total derivatives of the banking system has risen sharply from 15% in March 2002 to 53% in March 2006. The risks arising on account of OBS activities of banks are controlled through a combination of both banks internal risk management and control policies and risk mitigation mechanism imposed by the regulators. The board approved internal control policies covering various aspects of management of risks arising both on and off balance sheet exposures constitute the first line of defence to the bank. Holding of minimum defined regulatory capital for all OBS exposures, collection of periodic supervisory data and incorporating transparency and disclosure requirements in bank balance sheet are some of the major regulatory initiatives undertaken to control and monitor OBS exposures of the banking system. The rapid proliferation of derivatives exposures inevitably poses a challenge on account of the downside risks associated with them, if not managed properly. There are issues relating to use of structured products, valuation, counterparty related issues, risk management and reporting issues and last but not the least, training and skill development. While derivatives facilitate risk hedging and risk transfer to institutions more willing to bear the risks, the tendency of participants to use derivatives to assume excessive leverage, and lack of prudential accounting guidelines are matters of concern. One of the features of in the Indian derivative market relates to concentration risk in respect of both the market makers (banks) and the corporates. The combined share of top 15 banks has steadily grown from around 74% in March 2002 to 82% of total OBS exposures of the banking system in March 2006, of which 62% is accounted for by foreign banks. Concentration of knowledge is another risk which results in the concentration of derivative activity among few players. RBI has been stressing on the need to carry out due diligence regarding customer appropriateness and suitability of products before offering derivative products to their customers. There is need to use risk mitigation techniques such as collaterals and netting to reduce systemic risks and evolve appropriate accounting guidelines. RBI has also issued two separate draft guidelines, one for valuation/accounting of investment portfolio in general and the second relating to derivatives. The proposed guidelines attempt to put in place fair value accounting norms for derivatives broadly in line with IAS 39, the international accounting standard for valuation and accounting for financial instruments. For investments, the proposed framework envisages a symmetrical treatment for unrealized gains and losses, with gains for HFT being reflected in the Profit and loss account. For AFS, however, a gain or loss on subsequent measurement shall be reflected in Unrealised gain/ loss on AFS portfolio. Similarly for derivatives, all valuation gains and losses are proposed to be routed either through the P&L (for less than 90 days) and or through a new account titled ' Unrealised gains/losses on derivatives' (90 days and more), somewhat similar to AFS portfolio. The idea

is to bring all derivative transactions 'on-balance sheet' as against 'off-balance sheet' as is being done currently. Further, in order to address all issues related to derivatives in a comprehensive manner, we are now in the process of harmonizing the regulatory prescriptions based on generic principles rather than approving specific products. Stress Testing: The Governor in his Monetary Policy for 2006-07 had stressed the need for banks to have robust stress testing process for assessment of capital adequacy given various possible events like economic downturns, industrial downturns, market risk events and sudden shifts in liquidity conditions. Similarly exposures to sensitive sectors and high risk category of assets would have to be subjected to more frequent stress tests based. Stress tests would enable banks to assess the risk more accurately and, thereby, facilitate planning for appropriate capital requirements. Subsequently RBI has issued draft guidelines on stress testing. These guidelines cover all major risk areas viz. market risks, credit risks, operational risks and liquidity funding risk. Banks are required to identify an appropriate range of realistic adverse circumstances and events in which the identified risk crystallises and estimate the financial resources needed by it under each of the circumstances to : a) meet the risk as it arises and for mitigating the impact of manifestation of that risk; b) meet the liabilities as they fall due; and c) meet the minimum CRAR requirements. It may be pertinent to note that the banks have been advised to apply stress tests at varying frequencies dictated by their respective business requirements, relevance and cost. Financial Conglomerates: There is increasingly a need to extend the framework of risk management to the group wide level, particularly among financial conglomerates. The rapid expansion of financial services, both in terms of volumes and variety have, as it is, posed a challenge for financial stability. This is made all the more difficult by the organisational dimension which perhaps provides scope for regulatory arbitrage. While this could appear beneficial to the organisation in the short run, it only hightens systemic risk that in turn exposes the institution to externalities which have a cost. There has been entry of some banks into other financial segments like merchant banking, insurance and several new players have emerged who have a diversified presence across major segments of financial sector. Some of the nonbanking institutions in the financial sector can acquire proportions large enough to have a systemic impact. It has, therefore, become necessary not only for the supervisor to have a "conglomerate" approach to regulation and supervision but also for banks themselves to put in place risk management systems at global levels i.e for the whole organizational as a whole, rather than only the bank level. The risks associated with conglomeration may include: 1. The moral hazard associated with the Too-Big-To-Fail position of many financial conglomerates; 2. Contagion or reputation effects on account of the 'holding out' phenomenon; 3. Concerns about regulatory arbitrage, non-arms length dealings, etc. arising out of Intra-group Transactions and Exposures (ITEs) both financial and non-financial It is in this context that the issue of integrated risk management, at the enterprise wide as well as group wide level, acquires significance. RBI has put in place a framework for oversight of financial conglomerates, along with SEBI and IRDA. Half-yearly discussions have also been initiated with the Chief Executive Officers of the designated entities of the conglomerates to address outstanding issues/ supervisory concerns. IV. To conclude, at the systemic level, efforts have been made to create an enabling environment for all market participants in terms of regulation, infrastructure and instruments. In this context, let me mention about two recent legislative developments that may have far reaching impact on the financial markets in India. One is the promulgation of the RBI (Amendment) Act, 2006. A major issue of concern in the OTC derivatives market in India was the issue of legality. While the Securities Contract Regulation Act, 1956 gave specific legal recognition to derivative instruments traded in the exchanges, there was no explicit

legal recognition of OTC derivatives in India. As legal clarity is a basic requirement for the healthy development of any market, legality of OTC derivatives was provided by an appropriate amendment to the RBI Act, with retrospective effect. RBI has also been now empowered to regulate the interest rate and forex OTC derivatives market. The second legislative development pertains to the enactment of Government Securities Bill. The substantive changes brought about in the Government Securities Act are that it provides for hypothecation, pledge and lien of government securities, maintenance of records in electronic form and most importantly, enables STRIPing of Government securities. Further, during the last few months, few liberalization measures have been introduced in securities market, that would surely have a bearing on the risk management practices in the market, the most important being introduction of 'when issued' trading and short selling in the G-Sec markets in a limited way. Currently the when issued trading is limited to reissuances only. We are examining extending this to new issuances also, as requested by market participants. What has developed incrementally over the years is now being consolidated and once the regulations, infrastructure and appropriate accounting standards stabilize, several other initiatives like credit derivatives could be considered.

Special Address by Smt. Shyamala Gopinath, Deputy Governor at the FICCI-IBA Conference on 'Global Banking: Paradigm Shift', September 27, 2006, Mumbai.

SPEECH DELIVERED BY SHRI SURESH S. HEMMADY, CHAIRMAN AT THE 100th ANNUAL GENERAL MEETING HELD ON May 20, 2006

A warm welcome to you all to the 100

th

Annual General Meeting of

your Bank. Our journey together of a hundred years has been exciting and eventful. And it gives me a feeling of immense pride to mention that we move on to the 101st year with the exuberance of a one year old and the experience of a hundred year old.As promised last year, this year too the Annual Report of your Bank was completed in record time. The Profit & Loss Statement and Balance Sheet was signed on April 15, 2006. The financial year 2005-06 has been a mixed bag of results. On the business turnover front, the Bank has been able to add over Rs.831.00crore of business, which was more than double of last years business growth. The average business addition per branch has also been a record Rs.21.86crore.

On the macroeconomic front , the financial year 2005-06 has been

good with GDP growing at 8.1% and agriculture, industry and service growing at 2.3, 9.0 and 9.8 per cent respectively. Bank deposits grew by 14.1% while bank advances grew by 23.3%.

Your Banks business growth has surpassed the average industry

growth levels. Deposits grew by Rs.427.97crore as against Rs.279.91 crore last year. In percentage terms the growth was 21.32% as against the industry growth of 14.1%. Advances grew by Rs.403.24crore with a percentage growth of 32.41% as against the industry growth of 23.3%. On the Investment & Treasury front, your Bank has been able to invest surplus funds wisely. Interest income on investments during the year has increased by Rs.16.34crore (percent growth of 25.95%). Although G-sec prices continued to fall substantially, the Bank has been able to restrict the depreciation on securities to Rs.2.23crore during the current year as against Rs.11.03crore in the previous year. Your Bank has also been able to earn a profit of Rs.2.00crore from trading in securities. Your Bank maintains an Investment Fluctuation Reserve (including capital reserve created out of gain on sale of securities from held to maturity category) of Rs. 10.18 crore (as against Rs.9.22 crore required as per RBI guidelines) to guard against market risk on the investment portfolio. A good Asset Liability Management system has also helped the Bank to maintain high liquidity levels and ensure timely re-pricing of its assets and liabilities. This has also reduced the cost of deposits to 6.37% as on 3103-2006 from 6.86% on 31-03-2005. Your Bank has been able to better its growth in profitability with net profits growing by 4.47% in the current year as against 0.5% in the previous year. Your Bank has declared a net profit of Rs. 21.00crore this year.

On the Expansion front ,your Bank was able to open five new
extension counters during the financial year 2005-06, three in Pune, one in Nashik and one in Bangalore. All the extension counters have during the year added over Rs.5.00crore of deposits each to the total business of the Bank. Falling in line with the Reserve Bank policy of allowing expansion only through mergers, your Bank submitted proposals for acquiring four smaller Co-operative Banks. Of these, the order for merger of one Bank namely Shree Saptashrungi Urban Co-operative Bank Ltd. was received on April 24, 2006. The date of merger was May 1, 2006. The merger has been put into effect smoothly. I take this opportunity to thank you all for your unstinted support for the merger. The remaining three mergers also are likely to be effected in the current financial year. On the Banks attempts to foray into new business areas, the financial year 2005-06 saw the successful launching of Depository Services in October 2005. The services were initially introduced only at locations in

Mumbai and then by the year end extended to all the Banks branches. Since inception, the Bank has been able to open over a thousand demat accounts. In addition the Bank in the current year is also planning to obtain permission from the Reserve Bank of India to maintain a Currency Chest and introduce Foreign Exchange Services.

On the NPA front, your Bank has done well to restrict further
addition to NPA accounts. Consistent follow-up measures on existing NPA accounts also helped your Bank to reduce the net NPAs further from 2.87% as on March 31, 2005 to 1.30% of net advances as on March 31, 2006. During the financial year 2005-06 recoveries from NPA accounts increased by 32.82% over the previous year.

Having identified technology as a key driver for its growth

strategy and having put in place a world class banking software, your Bank, during the year was given permission by The Reserve Bank of India to market its banking software to other banks. Such permission is the first of its kind in the co-operative banking sector and reflects the professional standards adopted by your Bank in all areas. Keeping in mind the need to provide convenient banking to customers, the Information Technology department during the year introduced various new banking products, major amongst them being Cache Token for non-ATM card holders and automated e-mailing of statement of account to customers. Recently, the Reserve Bank of India has allowed good Co-operative Banks to install onsite as well as offsite ATMs and network its ATMs. Your Bank has already chalked out its plan for expansion through ATMs.

On the audit front , your Bank has ensured the existence of adequate
internal controls in all its operational and administrative areas. This coupled with high levels of ethical standards, professional integrity and regulatory compliance has ensured disciplined and healthy overall growth. During the financial year 2005-06 too, your Bank has been awarded an A audit classification.

On the Risk Management front , your Bank had already initiated

measures to monitor market and interest rate risks in the previous year namely 2004-05. During the financial year 2005-06, your Bank has also initiated measures to implement credit risk monitoring systems under the able guidance of CRISIL, one of the leading experts in this field. These systems are likely to be in place during the current financial year.

The discontinuance of section 80P benefits (exemption from

income tax) to the Co-operative Banking System has been a set back, nevertheless the recent relaxation in business restrictions will help Cooperative Banks compete with all sectors in the banking industry. The macroeconomic factors are likely to be positive in the current year with a good GDP growth rate pegged at 7 to 7.5%. Having recorded an

exceptional growth in business during the year, we propose to continue this trend in future too. A professional Board of Directors and a well qualified Management team has always been one of our main strengths and with this we will continue to make a mark in the banking industry for another hundred years and more.

While convenience banking for customers would be the main

focus in all our operations, other thrust areas in future would include: y y y y y y Expansion through acquisition of smaller and financially viable cooperative banks and opening of ATMs. Marketing of your very own Banking software Genius to other Banks An aggressive marketing strategy to establish our presence as a Co- operative Bank with a difference Introduction of new products in line with customer needs Risk Management systems to identify and mitigate risks and ensure stable growth Timely action on defaulters to ensure maximum recoveries from NPA accounts.

With extreme pleasure , I place on record the Boards appreciation of

the contribution made by all the employees towards the growth of your Bank. Their commitment and devotion has helped further enhance the employee productivity ratio in the Bank that happens to be amongst the best in the Indian banking fraternity. Your Bank has completed its 100th financial year and will celebrate the completion of its centenary year on December 27, 2006. Its indeed a privilege and a moment of pride to be a part of the team that took your Bank into its hundredth year. And with the unstinted support and trust that you all have shown in us I have no doubt that our Institution will progress with the required confidence towards another 100 years in banking. I take this opportunity to express our gratitude to our members, depositors, clients and well wishers for their valuable support.

Your Bank is obliged to the officials of the Reserve Bank of India,

especially the Urban Banks Department, the Central Registrar, Cooperative Societies, New Delhi, the Commissioner of Co-operation, Pune and the officials of the Departments of Co-operation in the states of Maharashtra, Goa and Karnataka for their invaluable guidance and assistance from time to time.

The Board is grateful to all the members for their continual support
and trust in us.The Board also would like to put on record its appreciation for the professional services offered by the Banks Legal Advisers, Management and Tax Consultants, Architects, Concurrent Auditors, Internal Auditors and Statutory Auditors for their co-operation and guidance.

I would also like to thank all those institutions, authorities and

individuals who have extended their support and helped the Bank scale new heights.

Lastly I would like to mention that

Leaders look towards the horizon And not just the bottomline

Let us together continue to be leaders and role models for others in the Co-operative Banking sector in the years to come.
Suresh S. Hemmady Chairman.