Kotak fINAL

India-Europe International Business School

STRATEGIC AUDIT

OF

Kotak Mahindra Bank

“THINK INVESTMENTS, THINK KOTAK”

By

Nitesh Gupta

MBA | Finance

Submitted to

MR. ANUP AWASTHI

PROFESSOR

STRATEGIC MANAGEMENT

K O T A K M A H I N D R A B A N K

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SECTION I: CURRENT SITUATION

CURRENT PERFORMANCE………………………………………………………………………………………………………………………..5

VISION STATEMENT…………………………………………………………………………………………………………………………………5

KMBL STRATEGIES…………………………………………………………………………………………………………………………………..7

SECTION II: CORPORATE GOVERNANCE

CORPORATE GOVERNANCE…………………………..............................................................................................…………………..9

INVESTOR RELATIONS ................................................................................................................................19

COMPLIANCE WITH NON MANDATORY REQUIREMENTS……………………………………………………………………….21

COMMITTEES OF THE BOARD………………………………………………………………………………………………………………..22

SECTION III: STRENGTHS, WEAKNESSES, OPPORTUNITIES & THREATS (SWOT) & EXTERNAL FACTOR

ANALYSIS SUMMARY (EFAS)

SWOT .........................................................................................................................................................26

EFAS................................................................................................................................ ………………………………………………………..27

PEST ANALYSIS OF THE INDIAN BANKING INDUSTRY.................................................................................28

PORTER’S FIVE FORCES MODEL.................................................................................................………………………………………..38

SECTION IV: INTERNAL FACTOR ANALYSIS SUMMARY (IFAS)

IFAS………………………………………………………………………………………………………………………………………………………………………………………..42

FINANCIALS ………………………………………………………………………………………………………………………………..…………………………………….….43

GROUP STRUCTURE……………………………………………………………………………………………………………………………………………………………44

CORPORATE CULTURE……………………………………………………………………………………………………………………………………………………….45


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SECTION V: STRATEGIC FACTOR ANALYSIS SUMMARY (SFAS)

SFAS…………………………………………………………………………………………………………………………………………………………………………………………48

Section VI: STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

TOWS MATRIX…………………………………………………………………………………………………………………………..…………………………………….….49

CHANGE MATRIX……………………………………………………………………………………………………………………..…………………………………….….51

Section VII: IMPLEMENTATION…………………………………………………………………………………………………..52

Section VII: EVALUATION & CONTROL………………………………………………………………………………………61

REFERENCES


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KOTAK MAHINDRA BANK LIMITED


Section 1:

CURRENT SITUATION


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Kotak Mahindra Bank (KMB) reported a good set of numbers for Q2FY12. Consolidated earnings

were higher by 20% y-o-y driven mainly by lower operating and provisioning expenses. Capital

market businesses continued to drag on overall profitability. Standalone earnings for the bank

grew by a strong 33.5% y-o-y driven by a sharp drop in provisions. Net interest income (NII)

grew 20% y-o-y on a consolidated basis and about 11% y-o-y on a standalone basis. Advances

growth was robust at 41% y-o-y. Asset quality on an absolute basis remained flat and improved

even further as a percentage of advances. Overall, the banking business delivered a good

performance which was dragged down on a consolidated level by the other verticals.

Vision Statement

The Global Indian financial services brand: Our Customers will enjoy the benefits of dealing with a global Indian brand that best understands their needs and delivers customized pragmatic solutions across multiple platforms. We will be a world class Indian financial services group. Our technology and best practices will be benchmarked along international lines while our understanding of customers will be uniquely Indian. We will be more than a repository of our customers' savings. We, the Group, will be a single window to every financial service in a customer's universe.

The most preferred employer in financial services: A culture of empowerment and a spirit of enterprise attract bright minds with an entrepreneurial streak to join us and stay with us. Working with a home-grown, professionally-managed company, which has partnerships with international leaders, gives our people a perspective that is universal as well as unique.

The most trusted financial services company: We will create an ethos of trust across all our constituents. Adhering to high standards of compliance and corporate governance will be an integral part of building trust. Value Creation: Value Creation rather than size alone will be our business driver.

CURRENT PERFORMANCE


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Three defining qualities of “Bank of the future”

Simplicity

Humility

Prudence

Significance of the group’s logo


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KMBL Strategies

Here they want to be

Mission Statement: To be a world class Indian financial

services group.

To be the most preferred employer in the financial services.

To be the most trusted financial company.

Value based growth.

Where they are

Kotak Mahindra Bank rated “ Best Workplaces in India 2008” (Study by The Great Places to Work Institute India)

Presence in six major overseas cities.

The Indian retail banking segment is still in a growth stage and the KMBL has many expansion plans in the pipeline.

How they got there

Value driven management

Professional Service

Technological innovations

User friendly online banking

Mobile Banking, SMS banking

All under one roof

Wide range of banking/financial products.

One account for multi-usage;

Demat, Fixed Deposit, term

Deposit, Mutual funds etc….


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Section 2:

CORPORATE GOVERNANCE


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“Corporate Governance is concerned with holding the balance between economic and social

goals and between individual and communal goals. The corporate governance framework is

there to encourage the efficient use of resources and equally to require accountability for the

stewardship of those resources. The aim is to align as nearly as possible the interests of

individuals, corporations and society” (Sir Adrian Cadbury in ‘Global Corporate Governance

Forum’, World Bank, 2000). The Bank believes in adopting and adhering to the best standards

of corporate governance to all the stakeholders. The Bank’s corporate governance is, therefore

based on the following principles:

• Appropriate composition, size of the Board and commitment to adequately discharge its

responsibilities and duties.

• Transparency and independence in the functions of the Board.

• Independent verification and assured integrity of financial reporting.

• Adequate risk management and Internal Control.

• Protection of shareholders’ rights and priority for investor relations. • Timely and accurate disclosure on all matters concerning operations and performance of the Bank.

The Bank believes that good corporate governance leads to the optimal utilization of resources

and enhances the value of the enterprise and an ethical behavior of the enterprise leads to

honoring and protecting the rights of all the stakeholders. The Report on the Bank’s corporate

governance, as per the applicable provisions of the Clause 49 is as under:

Board of Directors

The composition of the Board of Directors of the Bank is governed by the Banking Regulation

Act, 1949 and Clause 49 of the Listing Agreement. The Board of Directors, comprising a

combination of executive and non- executive Directors, presently consists of nine members, of

whom six are non-executive Directors. The Chairman of the Board is a non-executive Director

and five out of nine Directors are independent. The Board mix provides a combination of

professionalism, knowledge and experience required in the banking industry. The

responsibilities of the Board inter alia include formulation of policies, taking new initiatives,

performance review, monitoring of plans, pursuing of policies and procedures.

CORPORATE GOVERNANCE


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A Brief description of the Directors, along with the companies in which they hold directorship

and the membership of the committees of the Board are furnished hereunder:

Mr. Uday Kotak, Executive Vice-Chairman and Managing Director

Mr. Uday Kotak, B.Com, MMS (Masters in Management Studies), aged 48 years, is the Executive

Vice-Chairman and Managing Director of the Bank and its principal founder and promoter. Over

the past 21 years, he has built a team of professionals who have been given independent

charge of various businesses in Kotak Mahindra group. He was responsible for starting the

business as a start-up venture in a limited range of activities and then building it up into a full

financial services group, many of the constituents of which are among the leading players in

their respective fields. He is also on the Board of Indian Council for Research on International

Economic Relations (ICRIER) and Indian School of Business. He is on the Board of the following

companies:

Kotak Forex Brokerage Limited

Kotak Mahindra Asset Management Company Limited

Kotak Mahindra Capital Company Limited

Kotak Mahindra Prime Limited

Kotak Mahindra Old Mutual Life Insurance Limited

Kotak Securities Limited

Mr. Uday Kotak is also a member of the Investor Relations (Shareholders’/ Investor Grievance)

Committee of the Bank, Chairman of the Audit Committee of Kotak Mahindra Capital

Company Limited and Kotak Securities Limited, member of the Audit Committee of Kotak

Mahindra Asset Management Company Limited.


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Dr. Shankar Acharya, Non-Executive Part-time Chairman

Dr. Shankar Acharya, B.A. (Hons.) From Oxford University and Ph. D. (Economics) from Harvard

University, aged 61 years, has considerable experience in various fields of economics and

finance. He is honorary professor at the Indian Council for Research on International Economic

Relations (ICRIER) and a Board Member of ICRIER, the National Council.

Mr. C. Jayaram, Executive Director

Mr. C. Jayaram, B. A. (Economics), PGDM-IIM, Kolkata, aged 51 years, is an Executive Director of

the Bank and is currently in charge of the Wealth Management Business of the Kotak Group. He

has a varied experience of over 29 years in many areas of finance and business and was the CEO

of Kotak Securities Limited. He has been with the Kotak Group for 17 years and has been

instrumental in building some of the new businesses of the Kotak Group. He is on the Board of

the following companies:

Kotak Mahindra Asset Management Company Limited

Kotak Mahindra Investments Limited


Kotak Securities Limited


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Mr. Dipak Gupta, Executive Director

Mr. Dipak Gupta, B.E. (Electronics), PGDM - IIM, Ahmedabad, aged 46 years, is an Executive

Director of the Bank and has over 19 years’ experience in the financial services industry, out of

which 15 years have been with the Kotak Group. He was responsible for leading the Kotak

Group’s initiatives into the banking arena and is in charge of the retail banking business and

operations. He was also the CEO of Kotak Mahindra Prime Limited, a subsidiary company of the

Bank. He is on the Board of the following

companies:

Kotak Forex Brokerage Limited

Kotak Mahindra Capital Company Limited

Kotak Mahindra Investments Limited


Kotak Mahindra Old Mutual Life Insurance Limited

Mr. Dipak Gupta is also member of the Investor Relations (Shareholder’s/ Investor Grievance)

Committee of the Bank, Audit Committee of Kotak Mahindra Prime Limited, Kotak Mahindra

Capital Company Limited and Kotak Mahindra Old Mutual Life Insurance Limited and He is a

Chairman of the Audit Committee Kotak Mahindra Investments Limited.


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Mr. Asim Ghosh

Mr. Asim Ghosh, aged 63 years, is a B.Tech, IIT Delhi and MBA from the Wharton School,

University of Pennsylvania. Mr. Ghosh commenced his career in consumer goods marketing

with Procter & Gamble in the U.S. and Canada and worked subsequently with Rothmans

International as a Board member of one of Canada’s major breweries. He moved to Asia in 1989

as CEO of the Frito Lay (Pepsi Foods) start up in India. Thereafter, he was in executive positions

with Hutchison in Hong Kong and India for the past 16 years. He continued as the CEO of

Vodafone Essar Limited till 31st March 2009 and as a Non-Executive Director till 9th February

2010. He is also on the Board of Husky Energy Inc., other Husky Group Companies and some

Hutchison Whampoa Group Companies.

Dr. Sudipto Mundle

Dr. Sudipto Mundle, aged 62 years, graduated from St. Stephen College, New Delhi, and has a

Ph.D. in Economics from the Delhi School of Economics. He was a Director in the Strategy &

Policy Department, Asian Development Bank (ADB), Manila and also India Chief Economist and

Deputy Director at ADB’s India Resident Mission, New Delhi. He was appointed as a Director of

the Bank with effect from 21st July 2010. He is a Partner Director of the Governance Group,

Singapore; an Emeritus Professor (Hon.) at National Institute of Public Finance and Policy, New

Delhi; a Member of the Board of Governors of Institute of Economic Growth, New Delhi; a

Member of the Monetary Policy Technical Advisory Committee, Reserve Bank of India; a


PAGE 14

Member of the National Statistical Commission, Government of India; and President of PREETI

Foundation.

In his earlier career Dr. Mundle was Economic Advisor in the Ministry of Finance, Govt. of India;

and Reserve Bank of India Chair Professor at the National Institute of Public Finance and Policy,

New Delhi. He has also served in other academic institutions including the Indian Institute of

Management, Ahmedabad and Centre for Development Studies, Trivandrum. He was a

Fulbright Scholar at Yale University, USA; and had visiting assignments at Cambridge University,

UK, Institute of Social Studies, The Hague, Netherlands and Japan Foundation, Tokyo, Japan.

Mr. Prakash Apte

Mr. Prakash Apte, B.E. (Mechanical), aged 57 years, is presently the Chairman of Syngenta India

Limited, one of the leading agri business companies in India. Mr. Apte, in a career spanning over

34 years has considerable experience in various areas of management and business leadership.

During more than 15 years of very successful leadership experience in agri business, he has

gained varied knowledge in various aspects of Indian Agri Sector and has been involved with

many initiatives for technology, knowledge and skills up gradation in this sector, which is so

vital for India’s food security. He was instrumental in setting up the Syngenta Foundation India

which focuses on providing knowledge and support for adopting scientific growing systems to

resource poor farmers and enabling their access to market. He is a Director of Syngenta

Foundation India and Crop Life Association of India. Mr. Apte was appointed as an Additional

Director of the Bank with effect from 18th March 2011. Mr. Apte is a member of Audit

Committee of Syngenta India Limited.


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Mr. Amit Desai

Mr. Amit Desai, B.Com, LLB, aged 51 years, is an eminent professional with 30 years of

experience. Mr. Desai was appointed as an Additional Director of the Bank with effect from

18th March 2011. He is also on the Board of Kotak Mahindra Trustee Company Limited and

Terra DeKM India Pvt. Ltd. Mr. Desai is a member of Audit Committee of Kotak Mahindra

Trustee Company Limited.

Mr. N.P. Sarda

Mr. N.P. Sarda, B.Com, F.C.A., aged 65 years, is a Chartered Accountant for more than 40 years.

He is a former partner of M/s. Deloitte Haskin & Sells, Chartered Accountants, the past

President of the Institute of Chartered Accountants of India in 1993 and was a public

representative Director of the Stock Exchange, Mumbai (BSE). Presently, Mr. Sarda is

representing India on the global IFRS Advisory Council. Mr. Sarda was appointed as an

Additional Director of the Bank with effect from 1st April 2011.

The following table gives the composition of Bank’s Board and the number of outside

directorships held by each of the Directors and the committee positions held by the Directors

during the year ended 31st March 2011:


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* Appointed as an Additional Director with effect from 18th March 2011

**Appointed as an Additional Director with effect from 1st April 2011.

Notes:

1. The Committee Memberships mentioned above are of only Statutory Committees as per

Clause 49 of the Listing Agreement with Stock Exchanges, namely Audit Committee and

Shareholders’/Investors’ Grievance Committee.

2. None of the Directors on the Board is a member of more than ten committees and the

Chairman of more than five committees in all the companies in which he is a Director (for this

purpose the membership of Audit Committee and Shareholders’ Grievance Committee have

been taken into consideration). All the Directors have made disclosures regarding their

membership on various committees in other companies.


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3. In compliance with the Clause 49 of the Listing Agreement, Mr. Shivaji Dam, an independent

director on the Board of the Bank was appointed on the Board of Kotak Mahindra Old Mutual

Life Insurance Limited, a material non listed Indian subsidiary. However, Mr. Dam ceased to be

a Director of the Bank effective 21st March 2011 on his completing a tenure of eight years as a

director of the Bank, pursuant to the provisions of Section 10(2A)(i) of the Banking Regulation

Act, 1949. Subsequently, at the next board meeting of the Bank held on 5th May 2011, Mr.

Prakash Apte, an independent director, has been appointed as a director on the board of Kotak

Mahindra Old Mutual Life Insurance Limited.

4. Pursuant to the provisions of Section 10(2A)(i) of the Banking Regulation Act, 1949, Mr.

Anand Mahindra, Mr. Cyril Shroff and Mr. Shivaji Dam ceased to be Directors of the Bank with

effect from 21st March 2011 on their completing a enure of eight years as directors of the

Bank.


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INVESTOR RELATIONS

The Bank publishes consolidated results on a quarterly basis. The same are also reviewed by the

Audit Committee before submission to the Board. The consolidated financial results of the Bank

and its subsidiaries are prepared and posted on the website of the Bank for the current as well

as last five financial years. Also the quarterly results and earnings updates are posted on the

website of the Bank.

Every quarter, the Executive Vice-Chairman and Managing Director and the Executive Directors

participate on a call with the analysts shareholders, the transcripts of which are posted on the

website of the Bank. The Bank also has dedicated personnel to respond to queries from

investors.

Financial Calendar:

For each calendar quarter, the financial results are reviewed and taken on record by the Board

around the last week of the month subsequent to the quarter ending. The audited annual

accounts as at 31st March are approved by the Board, after a review thereof by the Audit

Committee. The Annual General Meeting to consider such annual accounts is held in the second

quarter of the financial year.

Stock Exchanges on which listed:

The annual fees for 2011-12 have been paid to the Bombay Stock Exchange Limited and the

National Stock Exchange of India Limited, where the shares of the Bank are listed. Also

maintenance charges are being paid periodically to Luxembourg Stock Exchange.

Trading of shares to be in compulsorily dematerialized form:

The Securities and Exchange Board of India has included the equity shares of the Bank in the list

of shares in which trading are compulsorily in dematerialized form, from 29th November 1999.

The equity shares of the Bank have been activated for dematerialization with the National


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Securities Depository Limited with effect from 4th August 1998 and with the Central Depository

Services (India) Limited with effect from 26th February 1999 vide ISIN INE237A01010. Pursuant

to the sub-division of the equity shares of the Bank, w.e.f. 15th September 2010, the new ISIN is

INE237A01028.

Share Transfer System:

Applications for transfers, transmission and transposition are received by the Bank at its

Registered Office or at the office(s) of its Registrars & Share Transfer Agents. As the shares of

the Bank are in dematerialized form, the transfers are duly processed by NSDL/ CDSL in

electronic form through the respective depository participants. Shares which are in physical

form are processed by the Registrars & Share Transfer Agents on a regular basis and the

certificates dispatched directly to the investors.

Investor Helpdesk:

Share transfers, dividend payments and all other investor related activities are attended to and

processed at the office of our Registrars & Share Transfer Agents. For lodgement of Transfer

Deeds and any other documents or for any grievances/complaints, kindly contact Karvy

Computershare Private Limited, contact details of which are provided elsewhere in the Report.

For the convenience of the investors, transfers and complaints from the investors are accepted

at the Registered Office between 9:30 a.m. to 5:30 p.m. from Monday to Friday except on bank

holidays. As advised by Securities and Exchange Board of India (“SEBI”) the Bank has a

designated email-id [email protected] for the purpose of registering complaints

by the investors. The same has also been displayed on the website of the Bank.

Kotak Mahindra Bank Limited

Registered Office: 36-38A, Nariman Bhavan,

227, Nariman Point, Mumbai 400 021.

Tel. No.: (022) 66581100

Fax: (022) 22855577

E-mail: [email protected]

Website: www.kotak.com


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Compliance with Non-mandatory Requirements:

1. The Board

The office of non-executive Chairman of the Bank is maintained by the Bank at its expenses and all the expenses incurred in performance of his duties are reimbursed by the Bank. Pursuant to Section 10(2A) of the Banking Regulation Act, 1949 all Directors other than its Chairman and / or Whole-time Directors cannot hold office continuously for a period exceeding eight years.

2. Remuneration Committee

The Bank has set up ESOP / Compensation Committee of Directors to recommend/review overall compensation structure and policies of the Bank. Details of the said Committee have already been provided hereinabove.

3. Shareholders’ Rights

The quarterly results of the Bank are published in one English and one Marathi newspaper,

having wide circulation in Maharashtra. Further, the quarterly results are also posted on the

website of the Bank - www.kotak.com. Along with the quarterly results, detailed earnings

updates are also given on the website of the Bank. Further, the quarterly investors’/analysts’

conference call is made to discuss the financial results and performance of the Bank and the

Group. The results are also available on www.sebiedifar.nic.in. In view of the foregoing, the

half-yearly results of the Bank are not sent to the shareholders individually.

4. Audit qualifications

During the period under review, there were no audit qualifications in the Bank’s financial

statements. The Bank continues to adopt best accounting practices and has complied with the

Accounting Standards and there is no difference in the treatment.

5. Mechanism for evaluating non-executive Board Members

The Bank has constituted the Nomination Committee which evaluates every year whether the

members of the Board adhere to the ‘fit and proper’ criteria as prescribed by the Reserve Bank

of India. The adherence to the ‘fit & proper’ criteria by the members of the Nomination

Committee, i.e. the Executive Directors is evaluated by the Board of Directors.

6. Whistle Blower Policy

The Bank has adopted the Whistle Blower Policy pursuant to which employees of the Bank can

raise their concerns relating to the fraud, malpractice or any other untoward activity or event

which is against the interest of the Bank or society as a whole. The Bank hereby affirms that no

personnel have been denied access to the audit Committee.


PAGE 22

COMMITTEES OF THE BOARD OF DIRECTORS

The Board has constituted several committees to deal with specific matters and delegated

powers for different functional areas. The Audit Committee and Shareholders’/Investors’

Grievance Committee have been constituted in accordance with the guidelines issued by the

Reserve Bank of India, Securities and Exchange Board of India read with requirements of the

Companies Act, 1956. Besides the above, the Board has also set up other committees such as

ESOP/Compensation Committee, Share Transfer and Routine Transactions Committee (START),

Management Committee, Premises Committee, Asset Liability Committee (ALCO), Nomination

Committee, Investment Committee, Risk Management Committee, Information Technology

Committee, First Tier Audit Committee, Customer Services Committee and Committee on

Frauds.

AUDIT COMMITTEE

The Audit Committee of the Bank comprises of three members, with any two forming the

quorum. The terms of reference of the Audit Committee of the Bank are as follows:

a. Oversight of the Bank’s financial reporting process and the disclosure of its financial

information to ensure that the financial statement is correct, sufficient and credible.

b. Recommending to the Board, the appointment, reappointment and, if required, the

replacement or removal of the statutory auditor and the fixation of audit fees.

c. Approval of payment to statutory auditors for any other services rendered by the statutory

auditors.

d. Reviewing, with the management, the annual financial statements before submission to the

Board for approval, with particular reference to:

o Matters required being included in the Director’s Responsibility Statement to be

included in the Board’s report in terms of clause (2AA) of Section 217 of the Companies

Act, 1956.

o Changes, if any, in accounting policies and practices and reasons for the same.

o Major accounting entries involving estimates based on the exercise of judgment by

management.

o Significant adjustments made in the financial statements arising out of audit findings.

o Compliance with listing and other legal requirements relating to the financial

statements.

o Disclosure of any related party transactions.

o Qualifications in the draft audit report.


PAGE 23

e. Reviewing with the management, the quarterly financial statements before submission to

the board for approval.

f. Reviewing with the management, performance of statutory and internal auditors, and

adequacy of the internal control systems.

g. Reviewing the adequacy of internal audit function, if any, including the structure of the

internal audit department, staffing and seniority of the official heading the department,

reporting structure coverage and frequency of internal audit.

h. Discussion with internal auditors any significant findings and follow up there on.

i. Reviewing the findings of any internal investigations by the internal auditors into matters

where there is suspected fraud or irregularity or a failure of internal control systems of a

material nature and reporting the matter to the Board.

j. To look into the reasons for substantial defaults in the payment to the depositors, debenture

holders, shareholders (in case of non-payment of declared dividends) and creditors.

k. To review the functioning of the Whistle Blower mechanism.

l. Carrying out any other function as is mentioned in the terms of reference of the Audit

Committee.

The Committee consists of Dr. Shankar Acharya (Chairman), Mr. N.P. Sarda, Dr. Sudipto Mundle

and Mr. C. Jayaram. Mr Sarda was appointed with effect from 1st April 2011 and Dr. Mundle

was appointed on 2nd May 2011.

Three out of the four members of the Committee are Non-Executive Independent Directors. All

members of the Committee are financial literate within the meaning of the Clause 49 of the

listing agreement. Mr. N.P. Sarda possesses accounting and financial management expertise.

The Company Secretary acts as the Secretary to the Committee. The Chairman of the Audit

Committee Dr. Shankar Acharya was present at the last Annual General Meeting to answer the

queries of the shareholders.

Management Committee

The Management Committee of the Bank consists of four members, with any three forming the

quorum. The Committee has been constituted to review all important matters to be placed

before the Board, assess adequacy of policies on an on-going basis, review business operations,

corporate governance, and implementation of policies, to establish systems for facilitating

efficient operations and to approve donations. Further, the Board of Directors of the Bank at


PAGE 24

their meeting held on 20th October 2010 authorized the Management Committee to exercise

the supervisory powers in connection with the risk management of the Bank which interalia

includes, monitoring of the exposures, reviewing adequacy of risk management process and up

gradation thereof, reviewing the internal control system and ensuring compliance with the

statutory/regulatory framework of the risk management process.

In view of the cessation of Mr. Shivaji Dam as a Director of the Bank, the Committee was re-

constituted by the Board on 18th March 2011 and now consists of Mr. Uday Kotak, Mr. Dipak

Gupta, Mr. C. Jayaram and Mr. Prakash Apte as members of the Committee.

During the year, eleven meetings of the Committee were held. Mr. Uday Kotak and Mr. Dipak

Gupta attended all the eleven meetings of the Committee. Mr. C. Jayaram attended ten

meetings and Mr. Shivaji Dam attended five meetings of the Committee.

ESOP/Compensation Committee

The ESOP/Compensation Committee of the Bank comprises of three members, with any two

forming the quorum. The constitution and composition of the Committee is in accordance with

the guidelines issued by Reserve Bank of India.

The ESOP/Compensation Committee has been constituted to recommend/review overall

compensation structure and policies; consider grant of stock options to employees; review

compensation levels vis-à-vis other banks and industry in general and determine the

compensation payable to the Directors including performance/achievement bonus and

perquisites. The performance bonus to the Executive Directors is based on the

recommendation of the Executive Vice-Chairman and Managing Director of the Bank. The

Board of Directors of the Bank decides the performance bonus to be paid to the Executive Vice-

Chairman and Managing Director and the Executive Directors on the basis of the performance

of the Bank and the fulfillment of responsibilities assigned to them. Non-Executive Directors at

present, are not paid commission over and above the sitting fees. The Bank has issued stock

options to its employees and the employees of its subsidiaries under various stock option plans,

details of which are provided in the Directors’ Report.

In view of the cessation of Mr. Anand Mahindra, Mr. Cyril Shroff and Mr. Shivaji Dam as

Directors of the Bank, the Committee was re-constituted by the Board on 18th March 2011 and

consists of Mr. Amit Desai (Chairman), Dr. Shankar Acharya and Mr. Prakash Apte as members

of the Committee with any two forming the quorum.


PAGE 25



Section 3:

STRENGTHS, WEAKNESSES, OPPORTUNITIES & THREATS

(SWOT)

EXTERNAL FACTOR ANALYSIS SUMMARY (EFAS)


PAGE 26

STRENGTHS WEAKNESSES

Innovative financial products of diverse categories

Lesser penetration as being late entrants

Professional management Low publicity and marketing as compared to other premium banks

Strong technology Very few branches in the country

Disciplined fund management Rural areas still not covered

OPPORTUNITIES THREATS

Increased growth in Industry banking

Keen competition in products and mainly in services

International customers Liberalization of Indian economy

Microfinance is a booming sector ICICI & HDFC strong globally

Liberalization of Indian economy Apprehension towards Kotak being a private company

STRENGTHS, WEAKNESSES, OPPORTUNITIES & THREATS (SWOT)


PAGE 27

External Factors Weight

Ra

tin

g

Weighted Score

Comments

OPPORTUNITIES

Increased growth in Industry banking

.10 4.2 0.42 Kotak’s strong base in

corporate banking

International customers .15 4.0 0.6 Innovate more products

to suit globally

Microfinance is a booming sector

.15 4.5 0.675 Most of the firms are

going for retail banking

Liberalization of Indian economy

.10 2.5 0.25 Setting up branches on

the foreign soil

THREATS

Keen competition in products and mainly in services .10 4.3 0.43

Very little chances of differentiating oneself

Liberalization of Indian economy

.10 4.0 0.4 Make provisions to be

ready for the competition by the foreign players

ICICI & HDFC strong globally .20 5.0 1 Constitute large market

share

Apprehension towards Kotak being a private company

.10 4.2 0.42 Create trust in the minds

of the people

Total Scores 1.00 4.195

EXTERNAL FACTOR ANALYSIS SUMMARY (EFAS)


PAGE 28

PEST ANALYSIS OF INDIAN BANKING INDUSTRY:

PEST analysis of any industry investigates the important factors that affect the industry and

influence the companies operating in the sector. PEST stands for Political, Economic, Social and

Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the industry

and how those factors can influence the industry.


PAGE 29

POLITICAL FACTORS

Government and RBI policies affect the banking sector. Sometimes looking into the political

advantage of a particular party, the Government declares some measures to their benefits like

waiver of short-term agricultural loans, to attract the farmer’s votes. By doing so the profits of

the bank get affected. Various banks in the cooperative sector are open and run by the

politicians. They exploit these banks for their benefits. Sometimes the government appoints

various chairmen of the banks.

Various policies are framed by the RBI looking at the present situation of the country for better

control over the banks.

FOCUS ON REGULATIONS OF GOVERNMENT

Banking is least affected as compare to other developed economy which is attributed to

Reserve Bank of India for its robust policy framework, stricter prudential regulations with

respect to capital and liquidity. This gives India an advantage in terms of credibility over other

countries.

Government affects the performance of banking sector most by legislature and framing policy

government through its budget affects the banking activities securitization act has given more

power to banking sector against defaulting borrowers.

MONETARY POLICY

Monetary Policy 2009-2010

Bank Rate: The Bank Rate has been retained unchanged at 6.0%. Repo Rate It has been reduced

under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0% to 4.75% with

immediate effect. Reverse Repo Rate : It has been reduced under LAF by 25 basis points from

3.5% to 3.25% with immediate effect. RBI has retained the option to conduct overnight or

longer term repo/reverse repo under the LAF depending on market conditions and other

relevant factors. Cash Reserve Ratio: CRR has been retained unchanged at 5.0% of NDTL.


PAGE 30

FDI LIMIT

The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during

the first quarter of this fiscal came as a welcome announcement to foreign players wanting to

get a foot hold in the Indian Markets by investing in willing Indian partners who are starved of

net worth to meet CAR norms. Ceiling for FII investment in companies was also increased

from 24.0 percent to 49.0 percent and have been included within the ambit of FDI investment

BUDGET MEASURES

Budget Provisions:-

Increase Farm Credit: The FM has further increase the farm credit target for 2009-10 at Rs

325000 crore compared to Rs 287000 crore targeted in 2008-09. Subvention of 1% to be paid as

incentive to farmers: The Budget continued the Interest subvention scheme for short-term

crop loans up to Rs 300000 per farmer at the interest rate of 7% per annum. Also additional

subvention of 1% to be paid from this year, as incentive to those farmers who repay short-term

crop loans on schedule. Also additional allocation of Rs 411 crore over Interim Budget 2009-10

was made for the same.

Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by six

more months for farmers owing more than 2 hectare of land. The Union Budget 2008-09

allowed these farmers 25% rebate on loan if they repay 75% of their overdue within stipulated

period of 30th June 2009. Currently this facility has been extended from 30th June, 2009 to

31st December, 2009. Setting up of separate task force for those not covered under the debt

waiver scheme: The government also announced that it will set up a task force to examine the

issue of debt taken by a large number of farmers in some regions of Maharashtra from private

money lenders who were not covered by the loan waiver scheme announced last year.


PAGE 31

OTHER PROVISIONS

The threshold for non-promoter public shareholding for all listed companies to be raised

in a phased manner.

To allow scheduled commercial banks setting up off-site ATMs without prior

approval subject to reporting.

To provide banking facilities in under-banked/un-banked areas in the next three years.

A sub-committee of State level Bankers Committee (SLBC) would identify and formulate

an action plan for the same.

The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at least

one Centre/Point of Sales (POS) for banking services in each of the un-banked blocks.

BUDGET IMPACT

The Union Budget 2008-09 has focused on farm credit. The agriculture sector has recorded a

growth of about 4% per annum with substantial increase in plan allocations and capital

formation in the sector. The one-time bank loan waiver of nearly Rs 71000 crore (Rs 710 billion)

to cover an estimated 40 million farmers was one of the major highlights of the last Budget.

This Union Budget has provided further six months extension of 25% rebate on loan for farmers

owing more than 2 hectare of land. With Government bearing this burden, banks would not be

affected much. It will only help banks to clear their most stubborn NPA accounts on banks

book.

Moreover the emphasize on hiking promoter shareholding in Public sector banks,

expanding network with ATM's, opening of banking center in un-banked blocks are some of the

positive moves for the sector. On the flipside, the spike in government borrowings is set to

adversely affect the treasury income of banks in general and public sector banks in particular,

through rise in yields on government securities.

OUTLOOK

The Union Budget 2009-10 has not granted much of new grants/stimulus to the banking sector

as a whole. However it has increased the Government borrowing to Rs 451093 crore (Rs

4510.93 billion) compared to Rs 361782 crore (Rs 3617.82 billion) targeted in the Interim

Budget 2009-10. This is likely to push the Bond yields high moving forward. Despite ample

liquidity in the system, the 10 year benchmark yield has zoomed above 7% levels owing to rise

in borrowing target. Hardening of yields is likely to affect treasury profits of banks in general

and Public sector banks in particular.


PAGE 32

ECONOMIC FACTORS

Banking is as old as authentic history and the modern commercial banking are traceable to

ancient times. In India, banking has existed in one form or the other from time to time. The

present era in banking may be taken to have commenced with establishment of bank of Bengal

in 1809 under the government charter and with government participation in share capital.

Allahabad bank was started in the year 1865 and Punjab national bank in 1895, and thus, others

followed.

Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are

implemented which has an impact on the banking sector. Also the Union budget affects the

banking sector to boost the economy by giving certain concessions or facilities. If in the

Budget savings are encouraged, then more deposits will be attracted towards the banks and in

turn they can lend more money to the agricultural sector and industrial sector, therefore,

booming the economy. If the FDI limits are relaxed, then more FDI are brought in India through

banking channels

GROWING ECONOMY / GDP

Indian economy has registered a growth of more than 9 per cent for last three year and is

expected to maintain robust growth rate as compare to other developed and developing

countries. Banking Industry is directly related to the growth of the economy.

The contributions of various sectors in the Indian GDP for 2007-2008 are as follows:

Agriculture: 17%

Industry: 29%

Service Sector: 54%

It is great news that today the service sector is contributing more than half of the Indian GDP. It

takes India one step closer to the developed economies of the world. Earlier it was agriculture

which mainly contributed to the Indian GDP. The Indian government is still looking up to

improve the GDP of the country and so several steps have been taken to boost the economy.

Policies of FDI, SEZs and NRI investment have been framed to give a push to the economy and

hence the GDP.


PAGE 33

LOW INTEREST RATES

Reserve Bank of India controls the Interest rate, which is based on several monetary policies.

Recently RBI has reduced the interest rate which stimulates the growth rate of banking

industry. As on September 11, 2009 Bank Rate was 6.00 per cent, the same as on the

corresponding date of last year. Call money rates (borrowing & lending) were in the range of

1.50/3.47 per cent as compared with 5.25/11.00 per cent on the corresponding date of last

year.

INFLATION RATES

Inflation represents a rise in general level of prices of goods and services over a period of time.

It leads to erosion in the purchasing power of money. Resultantly, each unit of currency buys

fewer goods and services Different fiscal and monetary policies have curbed the Inflation rate

from the high of 12.63 per cent to 3.92 per cent. To fight against the slowdown of the Economy,

Government of India & Reserve Bank of India took many fiscal as well as monetary actions.

Clubbed with fiscal & monetary actions, decreasing commodity prices, decreasing crude prices

and lowering interest rate, we expect that Indian Economy could again register a robust growth

rate in the year 2009-10. Inflation stands at 3.92 per cent on 7th February 2009 against a high

of 12.63 per cent on 9th August 2008.

AGRICULTURE CREDIT

Agriculture has been the mainstay of our economy with 60% of our population deriving their

sustenance from it. In the recent past, the sector has recorded a growth of about 4% per

annum with substantial increase in plan allocations and capital formation in the sector.

Agriculture credit flow was Rs 2, 87,000 crore in 2008-09. The target for agriculture credit flow


PAGE 34

for the year 2009-10 is being set at Rs.3,25,000 crore. To achieve this, I propose to continue the

interest subvention scheme for short term crop loans to farmers for loans upto Rs.3 lakh per

farmer at the interest rate of 7% per annum. For this year, the government shall pay an

additional subvention of 1% as an incentive to those farmers who repay their short term crop

loans on schedule. Thus, the interest rate for these farmers will come down to 6% per annum.

For this, I am making an additional Budget provision of Rs 411 crore over Interim BE.

DEBT RELIEF FOR FARMERS

The one-time bank loan waiver of nearly Rs 71,000 crore to cover an estimated 40 million

farmers was one of the major highlights of the last Budget. Under the Agricultural Debt

Waiver and Debt Relief Scheme (2008), farmers having more than two hectares of land were

given time upto 30th June, 2009 to pay 75% of their overdues. Due to the late arrival of

monsoon, I propose to extend this period by six months upto 31st December, 2009.


PAGE 35

SOCIO CULTURAL FACTORS

Socio culture factors also affect the business. They show in which people behave in country.

Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and

consumption habit of people, their language, beliefs and values affect the business. Banking

industry is also operates under this social environment and it is also affect by this factor. These

factor are changing continuously people‟s life style, their behavior, consumption pattern etc. is

changing and also creating opportunities and threat for banking industry. There is some socio-

culture factors that affect banking inIndia have been analyzed below.

TRADITIONAL MAHAJAN PRATHA

Before the birth of the banks, people of India were used to borrow money local

moneylenders, shahukars, shroffs. They were used to charge higher interest and also mortgage

land and house. Farmers were exploited by these shahukars. But farmers need money. So, they

did not have any choice other than going to shahukar and borrowing money from them in spite

of exploitation by these people. But after emergence of banks attitude of people was changed.

Traditional mahajan pratha still exist in India especially in rural areas. This affects the banking

sector. Rural people afraid to go to bank to borrow money instead they prefer to borrow from

shahukar whith whom they have relationships from the time of their fore fathers. Banking

infrastructure is also week in some interior areas of India. So, this is reason it still exist.

SHIFT TOWARDS NUCLEAR FAMILY

Attitude of people of India is changing. Now, younger generation wants to remain separate

from their parents after they get married. Joint families are breaking up. There are many

reasons behind that. But banking sector is positively affected by this trend. A family needs

home consumer durables likefreeze, washing machine, television, bike, car, etc... So, they

demand for these products and borrow from banks. Recently there is boost in housing finance

and vehicle loans. As they do not have money they go for installments. So, banks satisfy

nuclear families wants.

CHANGE IN LIFE STYLE

Life style of India is changing rapidly. They are demanding high class products. They have

become more advanced. People want everything car, mobile, etc.. What their fore father had


PAGE 36

dreamed for. Now teenagers also have mobile and vehicle. Even middle class people also want

to have well-furnished home, television, mobile, vehicle and this has opened opportunities for

banking sector to tap this change. Everything is available so it has become easy to purchase

anything if you do not have lump sum.

POPULATION

Increase in population is one of the important factors, which affect the private sector banks.

Banks would open their branches after looking into the population demographics of the area.

Percentage of deposit in any branches of banks depends upon the population demographic of

that area. The population of India is about 102.90 is expected to reach about 119.70 cores in

2011. About 70% of population is below 35years of age. They are in the prime earning stage

and this increase the earning of the banks. Total Deposits mobilized by the Private Sector Banks

increased from Rs, 2,52,335 crore as on 31st March 2004 to Rs. 3,12,645 crore as on 31st

March 2005. Deposits showed a subdued growth during 2004-05.Income distributions also

affects the operations and overall business of private sector banks.

LITERACY RATE

Literacy rate in India is very low compared to developed countries. Illiterate people hesitate to

transact with banks. So, this impacts negatively on banks. But there is positive side of this as

well i.e. illiterate people trust more on banks to deposit their money; they do not have market

information. Opportunities in stocks or mutual funds. So, they look bank as their sole and safe

alternative.


PAGE 37

TECHNOLOGICAL FACTORS

TECHNOLOGY IN BANKS

Technology plays a very important role in bank’s internal control mechanisms as well as

services offered by them. It has in fact given new dimensions to the banks as well as services

that they cater to and the banks are enthusiastically adopting new technological innovations

for devising new products and services.

ATM

The latest developments in terms of technology in computer and telecommunication have

encouraged the bankers to change the concept of branch banking to anywhere banking. The

use of ATM and Internet banking has allowed „anytime, anywhere banking‟ facilities.

Automatic voice recorders now answer simple queries, currency accounting machines makes

the job easier and self-service counters are now encouraged. Credit card facility has

encouraged an era of cashless society. Today MasterCard and Visa card are the two most

popular cards used world over. The banks have now started issuing smartcards or debit cards to

be used for making payments. These are also called as electronic purse. Some of the banks

have also started home banking through telecommunication facilities and computer technology

by using terminals installed at customers home and they can make the balance inquiry, get the

statement of accounts, give instructions for fund transfers, etc. Through ECS we can receive the

dividends and interest directly to our account avoiding the delay or chance of losing the post.

IT SERVICES & MOBILE BANKING

Today banks are also using SMS and Internet as major tool of promotions and giving great

utility to its customers. For example SMS functions through simple text messages sent from

your mobile. The messages are then recognized by the bank to provide you with the required

information. All these technological changes have forced the bankers to adopt customer-based

approach instead of product-based approach Technology advancement has changed the face

of traditional banking systems. Technology advancement has offer 24X7 banking even giving

faster and secured service.

CORE BANKING SOLUTIONS

It is the buzzword today and every bank is trying to adopt it is the centralize banking platform

through which a bank can control its entire operation the adoption of core banking solution will

help bank to roll out new product and services.


PAGE 38

Porter’s Five forces Model

Threat of entry:

Existing firms have strong presence and recognition. The majority stake in Public sector

banks is being held by the government of India. This reduces the credit risk for lenders

and depositors to a considerable extent. Due to collapse of a few private sector banks

(and even co-operative banks for that matter), creates a virtual barrier to entry for the

private and foreign players.

The industry is capital intensive, which acts as a barrier to entry.

India is a fast growing nation and many foreign banks are coming here to reap benefit

out of it, which is a big threat to existing banks. Further liberalization of banking

sector for foreign participants is expected post 2009. A slew of banks are in the foray

which include global biggies like Royal Bank of Scotland, Switzerland's UBS, US-based GE

Capital and Credit Suisse Group.

HIGH HIGH HIGH

MODERATE

MODERATE


PAGE 39

Access to distribution channels and economies of scales of established players in the

market also increases barrier to entry. As we will see ahead that banking business model

is a volume game.

Reforms and policies of government are the major determinant for deciding the level of

entry barrier in the Indian banking industry.

Overall, entry barrier is moderate in this industry.

Bargaining power of buyers:

Bargaining power in this industry for corporates would largely depend on its credit ratings. Big

corporate and companies who have big transactions between them as well as various services

may have enormous bargaining power if their credit rating is high.

Individual buyers (retailers) have good bargaining power due to immense competition among

financial sector entities.

Agricultural credit forms a reasonable part of a bank’s credit and due to government support

(part of priority sector advances), customers of these segment have good bargaining power

more so during good monsoons.

Bargaining power of suppliers:

High during periods of tight liquidity. Trade unions in public sector banks can be anti-

reforms. Depositors may invest elsewhere if interest rates fall.

Main supplier of money in the banking industry is retailers and corporate. Bargaining

power depends on the interest rate which is determines by the demand and supply of

money in the market.

Inter-bank market (money market) is also considered to be the supplier. In times when

demand of money is high, costs of funds are high and vice versa.

Bargaining power of the suppliers also depends on risk-return characteristics of

the alternate investment products. A recent study conducted by CRISIL, explained that

banks are facing tough competition from alternate investment sources like Mutual

Funds, Equity, IPO’s, Gold and Real Estate investments.


PAGE 40

Threat of substitutes:

Substitutes for banks are local moneylenders and hundiwalas, financial companies and NBFC’s.

Local moneylenders and hundiwalas come under unorganized sector. Finance companies and

NBFC’s come under organized sector. Unorganized sector in India has vast coverage in small

villages and towns but due to increasing network of banks and their reliability, the

unorganized sector is decreasing its business. The cost of funds for banks is cheaper and

therefore, can price its loans cheaper. Thus, overall power of substitute is less than moderate.

Competitive Rivalry

Banking industry has two things to capitalize on. One is economies of scale and other spread

margin. For achieving economies of scale, a large market share is needed and due to number of

players there is intense competition. Presence of many Indian and foreign banks and their strive

for higher market share will increase the competitive rivalry among existing players. Due to a

large number of players, the industry is seeing and can foresee a lot of mergers and

takeovers. Also, PSU banks are banking on their volumes and vast branch network make more

money from lending activities. Private sector banks are offering various innovative products

and variety of quick services lead to an inevitable marketing war between the banks.


PAGE 41



Section 4:

INTERNAL FACTOR ANALYSIS SUMMARY (IFAS)


PAGE 42

Internal Factors Weight Rating Weighted

Score Comments

STRENGTHS

Innovative financial products of diverse categories

.15 4.5 0.675 Competitive advantage

Well renowned and reputed people at the top level

.10 2.0 0.2 Developing products by

differentiating from competitors

Strong integrated IT management system

.10 3.5 0.35 Less confidential leakages

Disciplined fund management

.15 4.0 0.6 Low chances of frauds

WEAKNESSES

Lesser penetration as being late entrants

.10 4.0 0.4 Always being follower

Low publicity and marketing as compared to other premium banks in the urban areas

.20 3.0 0.75 Lack of awareness

Very few branches in the country

.10 2.0 0.2 Less generation of revenue in

total

Rural areas still not covered

.10 4.5 0.45 Untapped Indian market

Total Scores 1.00 3.625

INTERNAL FACTOR ANALYSIS SUMMARY (IFAS)


PAGE 43

FINANCIALS

Profit & Loss

------------------Rs. In Crore-----------

Items Mar '11

Mar '10 Mar '09 Mar '08 Mar '07

Total Income 4,811.12 3,676.59 3,222.70 2,845.84 1,641.93

Operating Expenses 1,528.58 1,447.42 1,333.60 999.25 696.06

Total Expenses 3,992.94 3,115.50 2,946.61 2,551.91 1,500.57

Net Profit for the Year 818.18 561.11 276.1 293.93 141.37

Earnings Per Share (Rs) 11.1 16.12 7.99 8.53 4.33

Equity Dividend (%) 10 8.5 7.5 7.5 7

Key Ratios Items Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

Profitability Ratios

Operating Expense / Total Funds

3.24 4.1 4.43 3.93 4.4

Profit Before Provisions / Total Funds

2.65 2.53 1.49 2.18 1.35

Net Profit / Total Funds 1.85 1.7 0.97 1.22 0.94

Total Income / Capital Employed (%)

10.78 11.13 11.59 11.75 10.62

Activity Ratios

Total Assets Turnover Ratios 0.11 0.11 0.11 0.12 0.11

Asset Turnover Ratio 5.7 4.9 7.08 7.21 5.82

Leverage Ratios

Total Debt to Owners Fund 4.28 5.26 4.01 4.57 6.62

Current Ratio 0.05 0.05 0.09 0.06 0.05

Quick Ratio 10.86 8.46 5.91 5.83 5.74


PAGE 44

GROUP STRUCTURE


PAGE 45

CORPORATE CULTURE Our values are traits or qualities that we as organization consider worthwhile:

they represent the Organization’s highest priorities and deeply held driving

forces. It’s our way of life.

We are Down to earth and approachable

Non-hierarchical – not level driven

Humane, warm and fun filled

Encourage open and frank discussions

Open to feedback

Leadership not driven by power or command control, but by cooperation and

collaboration

Inclusive-participative

High level of engagement with colleagues and customers

We show Mutual respect for each other and are transparent in our dealings

Apolitical

Value other’s contributions

Honest, open and fair in all dealings with employees, customers, vendors. Business

partners, stakeholders and society as a whole

Equal opportunity no discrimination based on role, designation, rank, caste, sex.

Religion

Constructive feedback

Encourage Team success


PAGE 46

We have a Passion to Achieve

Competent and Sound Business Acumen

Committed and Enthusiastic

High level of energy

Willing to stretch and take challenges

Positive and optimistic

Focused on ‘Results’ and not ‘Reasons’.

Being best in class-both thoughts and actions

We use an Entrepreneurial approach

Continuously innovate – Looking for a better way of doing things (products,

services, processes, people)

Look at long term

Execution excellence

Constantly look for opportunities and be proactive

Ability to take risks for the organization’s welfare

Focused on productivity and cost conscious

Empower others

Networking

Take personal accountability

Share success


PAGE 47



Section 5:

ANALYSIS OF STRATEGIC FACTORS (SWOT)

STRATEGIC FACTOR ANALYSIS SUMMARY (SFAS)


PAGE 48

1 2 3 4 5 Duration

SHO

RT

INTE

RM

EDIA

TE

LON

G

Weight Rating Weighted Score

Comments

S1 Innovative financial products of diverse categories

0.15 4.5 0.675 xx xx Competitive advantage

S2 Well renowned and reputed people at the top level

0.1 2 0.2 xx Developing products by differentiating from competitors

W1 Lesser penetration as being late entrants

0.15 4 0.6 xx Always being follower

W2 Low publicity and marketing as compared to other premium banks in the urban areas

0.15 3 0.45 xx Lack of awareness

O2 International customers 0.1 4 0.4 xx xx Innovate more products to suit globally

O3 Liberalization of Indian economy

0.15 4.5 0.675 xx xx Better schemes & offers

T1 Keen competition in products and mainly in services

0.15 4.2 0.63 xx xx Very little chances of differentiating oneself

T4 Apprehension towards Kotak being a private company

0.05 4.3 0.215 xx xx Create trust in the minds of the people

Total 1 3.845

STRATEGIC FACTOR ANALYSIS SUMMARY


PAGE 49



Section 6:

STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

THREATS, OPPORTUNITIES, WEAKNESSES & STRENGTHS

(TOWS)


PAGE 50

INTERNAL

EXTERNAL

STRENGTHS 1. Innovative financial

products of diverse categories

2. Well renowned and reputed people at the top level

3. Strong integrated IT management system

4. Disciplined fund management

WEAKNESS 1. Lesser penetration as

being late entrants 2. Low publicity and

marketing as compared to other premium banks in the urban areas

3. Very few branches in the country

4. Rural areas still not covered

OPPORTUNITIES 1. Increased growth in

Industry banking 2. International

customers 3. Microfinance is a

booming sector 4. Liberalization of

Indian economy

1. Design products for global customers (S1, O2)

2. Expand business overseas (S2, S3, S4, O4)

3. Develop products for the micro sector (S1, O3)

1. Enter aggressively in the retail sector (W1, O1)

2. Learn from competitors and market the products domestically and internationally (W2, O1, O2, O4)

3. Concentrate on the rural sector by opening branches across the country (W3, W4, O3)

THREATS 1. Keen competition in

products and mainly in services

2. Liberalization of Indian economy

3. ICICI & HDFC strong globally

4 Apprehension towards Kotak being a private company

1. Penetrate (expand) more in the Indian banking industry (S1, S2, S3, S4, T1, T2, T4)

2. Introduce new product & services with competitive advantage (S1, T3)

1. Benchmark with ICICI and HDFC products & services (W1, T3)

2. Increased awareness of the differentiated products (W2, T1, T4)

TOWS MATRIX


PAGE 51

Recommended Strategy from the software: Stability: No Change Strategy. The company has

insufficient resource/ability for growth, but may remain competent in the current context.

CHANGE MATRIX


PAGE 52



Section 7:

IMPLEMENTATION


PAGE 53

Expand business overseas (S2, S3, S4, O4)

Before Kotak plans on expanding its business and going global, it should consider these 7 vital

points:

1. Being the national player in the private sector in India the demand for Kotak Mahindra

banking services in foreign lands will correlate closely with its size and success. In today's age of

easy information access, consumers and business professionals in most countries are aware of

what's popular here in India and what's not. Based on its performance in the home country it

will have a great impact on the foreign soil.

2. For going global Kotak Mahindra should look in for a merger with a financial institution with a

huge customer base but due to certain circumstances are not able to fulfill the needs of the

customers. This will give them an edge to enter the economy with one of their strengths of

innovative products. Also it will save on their marketing cost. It is always beneficial to first find a

customer and then design a product to meet his requirements rather than the other way round.

3. Get the right partner - Partner in this context means the resource partners and the special

interest groups. Securing the right business partner in each country is the number one rule for

success. The bank must check the potential partner's financial status, influence and reputation

in the local business community, access to resources and experience in bringing the home

country's brand to his/her home turf. In smaller countries, the partner’s political influence and

history since politics and business are often intertwined

4. Do the country homework - In some countries the bank should be aware of the tariffs or

regulations that could inhibit the bank’s success and the fact that the differences between

countries can be significant. The bank should mainly focus on learning and knowing as much as

possible about every foreign country it intends to enter before putting it onto the expansion

list.

5. Have a replicable operating model. When expanding internationally offshore it's important

to realize that the cost structure will likely vary significantly. Supply costs, labor costs, real

estate costs, seasonality can all pose significant hurdles to the banks success. The bank should

develop an operating model that's simple with main components that are clearly identified and

benchmarked to its existing model.

IMPLEMENTATION


PAGE 54

6. The bank should plan its growth by spreading risk with a balanced country portfolio

approach. It should be similar to spreading risk when investing in the stock market. Otherwise,

generating growth opportunistically rather than strategically can result in poor and inconsistent

communications, lack of field support, skyrocketing overhead costs, brand dilution and even

lawsuits.

7. Growing internationally is a continuous learning situation. The bank business will experience

entirely new challenges, questions and uncertainties. There will be setbacks. Most businesses,

even the most successful here at home, experience losses in their early years of international

growth. The banks approach should be international development with a five-year business

plan for success.

Expanding internationally can be an attractive and lucrative business proposition. When

carefully and strategically planned and executed, an international business unit will add to the

value of overall business.


PAGE 55

Enter the retail market aggressively (W1, O1) & Penetrate (expand) more in the

Indian banking industry (S1, S2, S3, S4, T1, T2, T4) & Develop products for the

micro sector (S1, O3)

Retail banking has immense opportunities in a growing economy like India. As the growth story

gets unfolded in India, retail banking is going to emerge a major driver.

The rise of the Indian middle class is an important contributory factor in this regard. The

percentage of middle to high income Indian households is expected to continue rising. The

younger population not only wields increasing purchasing power, but as far as acquiring

personal debt is concerned, they are perhaps more comfortable than previous generations.

Improving consumer purchasing power, coupled with more liberal attitudes toward personal

debt, is contributing to India's retail banking segment.

Retention of customers is going to be a major challenge. According to a research by Reichheld

and Sasser in the Harvard Business Review, 5 per cent increase in customer retention can

increase profitability by 35 per cent in banking business, 50 per cent in insurance and

brokerage, and 125 per cent in the consumer credit card market. Thus, banks need to emphasis

retaining customers and increasing market share.

Information technology poses both opportunities and challenges. Even with ATM machines and

Internet Banking, many consumers still prefer the personal touch of their neighborhood branch

bank. Technology has made it possible to deliver services throughout the branch bank network,

providing instant updates to checking accounts and rapid movement of money for stock

transfers. However, this dependency on the network has brought IT departments’ additional

responsibilities and challenges in managing, maintaining and optimizing the performance of

retail banking networks. Illustratively, ensuring that all bank products and services are available,

at all times, and across the entire organization is essential for today’s retails banks to generate

revenues and remain competitive. Besides, there are network management challenges,

whereby keeping these complex, distributed networks and applications operating properly in

support of business objectives becomes essential. Specific challenges include ensuring that

account transaction applications run efficiently between the branch offices and data centers.

Customer service should be the be-all and end-all of retail banking. The other day a document

released by the British Bankers Association, entitled UK Retail Banking Manifesto: addressing

the challenges that lie ahead for the industry and its stakeholders on September 29, 2004 came

to my notice. This document analyzed the key policy issues relevant to the retail banking sector

and highlighted the role of financial inclusion, responsible lending, access to finance, and

consumer protection. It is in this context that that one is reminded of the needs to develop the

standards and codes for banking. The contribution of the Committee on Procedure &


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Performance Audit on Public Services (CPPAPS) (Chairman: Shri S.S. Tarapore) has been

invaluable and has provided great insight. Based on the recommendation of the CPPAPS, the

Annual Policy Statement for 2005-06 announced the decision to set up an independent Banking

Codes & Standards Board of India on the model of the mechanism in the UK in order to ensure

that comprehensive code of conduct for fair treatment of customers is evolved and adhered to.

The codes and standards, together with the institutional mechanism to monitor them, are

expected to enhance the quality of customer service, to the individual customer in particular.

The codes will bring about greater transparency in the system and also tackle the issue of

information asymmetry. The Board would function as an industry-wide watchdog of the

banking code and ensure that the banks comply with the banking codes. The codes would

establish the banking industry’s key commitments and obligations to customers on standards of

practice, disclosure and principles of conduct for their banking services. The Board will monitor

compliance with the Codes by the affiliated banks.

Sharing of information about the credit history of households is extremely important as far

retail banking is concerned. Perhaps due the confidential nature of banker-customer, banks

have a traditional resistance to share credit information on the client, not only with one

another, but also across sectors. Globally, Credit Information Bureaus have, therefore, been set

up to function as a repository of credit information - both current and historical data on existing

and potential borrowers. The database maintained by these institutions can be accessed by the

lending institutions. Credit Bureaus have been established not only in countries with developed

financial systems but also in countries with relatively less developed financial markets, such as,

Sri Lanka, Mexico, Bangladesh and the Philippines. In Indian case, the Credit Information Bureau

(India) Limited (CIBIL), incorporated in 2000, aims at fulfilling the need of credit granting

institutions for comprehensive credit information by collecting, collating and disseminating

credit information pertaining to both commercial and consumer borrowers. At the same time

banks must exercise due diligence before declaring a borrower as defaulter.

Outsourcing has become an important issue in the recent past. With the increasing market

orientation of the financial system and to cope with the competition as also to benefit from the

technological innovations such as, e-banking, the banks are making increasing use of

'outsourcing' as a means of both reducing costs and achieving better efficiency. While

outsourcing does have various cost advantages, it has the potential to transfer risk,

management and compliance to third parties who may not be regulated. A recent BIS Report on

'Outsourcing in Financial Services' developed some high-level principles. A basic requirement in

this context is that a regulated entity seeking to outsource activities should have in place a

comprehensive policy on outsourcing including a comprehensive outsourcing risk management

programme to address the outsourced activities and the relationship with the service provider.

Application of these principles in the Indian context is under consideration.


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Learn from competitors and market the products domestically and

internationally (W2, O1, O2, O4)

In order to be competitive in the market, Kotak Mahindra Bank should adopt the quickest way

to be successful, is by consistently checking the playbook of its competitors. By taking the time

to investigate what has made their businesses work, the company will be able to learn their

best methods and improve upon its model. Here are some ways to do which the company can

adopt in order to learn from its competitors.

•Shop the competition: Identify the competitors through the phone book, online research, or

through word of mouth.

•Analyzing Web sites: Search the Internet and read what the competitors say about their own

products and services. This also helps company to see how the competitors use the Web for

advertising and as a marketing tool.

•Read the local newspaper daily: Find out what special pricing policies, discounts, and

incentives the competitors offer. This will give the company an idea about their advertising

strategy.

•Mingle with competitors: Attending industry seminars and meetings provides opportunities to

learn a lot about the competitors in a non-threatening environment.

•Visibility in the community: Find out if the competitors are supporting local charities or

community activities. Also look to see if they are exhibiting at trade shows or community

business expos.

Competitive information is essential to creating a successful business. By conducting this

thorough competitive analysis, the company will be able to make a successful move into

business ownership.


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Concentrate on the rural sector by opening branches across the country (W3,

W4, and O3)

ENHANCING the growth rate in agriculture to 4.1 per cent, as envisaged in the Eleventh Five

Year Plan, and improving its robustness would require substantial investment in irrigation and

water management technologies, diversification and boosting productivity of different crops

through improved seeds and plant-care practices. The move towards inclusive growth is a big

challenge for the financial system of the country, including commercial banks. Banks would

need to adopt an innovative, customer-friendly approach to increase their effective reach so

that the share of organized finance increases. A participatory and partnership-based model for

financial inclusion, coupled with community-linked financial initiatives is the need of the hour.

In the near future customer-friendly products, delivery channels, relationship banking,

dependency on IT systems and competitive pricing would be the driving forces. Banks will have

to move to high-tech banking. The Internet would be the engine of the banking revolution in

the decades to come and e-commerce would be its fuel. Therefore, the key to survival of banks

in future will be the retention of customer loyalty by providing value-added services tailored to

their needs.

First, traditionally banks have viewed rural areas as a segment purely in need of upliftment. This

was based on the underlying philosophy of a social obligation. However, the future lays with

those who see the poor as their customers, namely, financial inclusion. By ‘financial inclusion’ is

meant the provision by the financial system, of financial products and services at an affordable

price, to those who have been financially excluded. As banking services are in the nature of a

public utility service, it is essential that banking and payment services are provided to the entire

population without discrimination. The harsh reality is that the spread of banking facilities in

India is uneven, with a substantial portion of the households, especially in the rural areas, still

outside the coverage of the formal banking system. Almost 40 per cent of the adult population

of the country is unable to access mainstream financial products.

The Reserve Bank of India has recently adopted a decentralized approach in this regard with

close involvement of State Governments and banks and has used multiple channels to expand

the outreach of banks. It is important to mention that the Union Bank has launched a new

initiative called ‘Village Knowledge Centers’. Here, technology is used to help the farmer

improve his productivity. The Bank’s staff at these village knowledge centers act as relationship

managers, liaising between local authorities and farmers, facilitating the opening of accounts

and ensuring that credit is provided to the needy. Such examples need to be followed by other

banks.


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Secondly, commercial banks should change their marketing concept. Under the new concept of

marketing, the task of management should not so much be skill in making the customer do

what suits the rest of the business, as to be skillful in conceiving and making business do what

suits the interest of the customers.

Thirdly, stress should be laid on deposit mobilization from the agricultural sector itself to

finance its own credit requirements. Such a move will entail two steps—limitation of

unproductive expenditure and deposit of savings by the agriculturists in banks. It is common

knowledge that villagers spend huge sums on unproductive social ceremonies, drinking,

litigation, etc. Their outlook needs to be changed with the help of banking staff and utilizing the

services of the mass media. Villagers must be convinced that money spent on such social

obligations is a waste and they themselves would gain in the long run if they would save and

invest. The services of officers and staff of the community development projects may also be

utilized for this purpose.

4. The more important aspect of the whole drive is the deposit of savings by the agriculturist in

the banks. Vast sums of money are lying idle even today in rural areas. We think that, in spite of

different agencies engaged in providing agricultural finance, the village moneylender continues

to be a necessary evil. These moneylenders have great influence on the villagers. To mobilize

the savings of the villagers, the services of these moneylenders—both professional and

agricultural—can be utilized. The nationalized banks may appoint them as their agents. The

banks should then ask them to encourage the villagers to deposit their money in the banks and

approach the banks for loans through them. The appointment of moneylenders as agents has

an added advantage. These moneylenders have been living in villages for a long time and are,

therefore, accustomed to the rural way of life. They know the local language and can,

therefore, mix well with the villagers. This is not the case with the qualified, educated and

sophisticated bank staff. Many a time, superiority complex on the part of the bank employees

drives away the villagers. As a result to this, it is also suggested that, as far as possible, the staff

to be deputed in the rural branches, should be drawn from the villages or semi-urban areas

themselves and better living conditions be assured for the bank employees.

5. There is need for a reorientation in the credit policy of banks. Priority sector lending’s should

be restricted only to the core sector. Banks should provide credit not merely on the basis of


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collateral security such as land and buildings but they should also advance loans to the

agriculturists after assessing the ‘absorptive capacity’ and the increase in productivity that is

feasible with the help of such loans. Crops should also be accepted on a loan of security. To

assess the ‘absorptive capacity’ of the farmers commercial banks should maintain a staff of

agricultural experts.

6. The commercial banks should also provide credit to the agriculturists on the basis of ‘joint

guarantee’ given by the village panchayat or by a few well-known farmers of the village. The

acceptance of such a basis will greatly help the farmers, particularly small farmers, in securing

loans from commercial banks. This will also result in more purposeful advent of the commercial

banks in the rural sector and will bring them into relationship with cooperative institutions. It

will also ensure a fair understanding between them and encourage commercial banks to

operate on the principle of collective service for a collective need.

7. One problem experienced by banks is that, many a time, villagers divert the loans from

productive to unproductive uses. This needs to be stopped and it needs to be ensured that the

credit is used for the purposes for which it is meant. Banks may think in terms of advancing

credit to agriculturists in the form of agricultural inputs. While giving credit to farmers in the

form of agricultural inputs, it should be ensured that inputs are supplied in adequate quantities

and in time and complementary and supplementary facilities are also available.

Finally, it needs to be remembered that lost attempts would not solve the problem of

agricultural credit. The credit system as a whole—government, commercial and cooperative—

must be so joined together that it does not suffer either from a gap or an overlap. It is only then

that the real fruits of credit facilities will be enjoyed by the country at large in the form of

agricultural development which still is the key to India’s prosperity in future.


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Section 7:

EVALUATION & CONTROL


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EVALUATION & CONTROL

Documents

Kotak fINAL