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

SECTION I: CURRENT SITUATION CURRENT PERFORMANCE..5 VISION STATEMENT5 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 PORTERS FIVE FORCES MODEL...................................................................................................38

SECTION IV: INTERNAL FACTOR ANALYSIS SUMMARY (IFAS)

IFAS..42 FINANCIALS ....43 GROUP STRUCTURE44 CORPORATE CULTURE.45

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SECTION V: STRATEGIC FACTOR ANALYSIS SUMMARY (SFAS)

SFAS48

Section VI: STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

TOWS MATRIX.... 49 CHANGE MATRIX.... 51

Section VII: IMPLEMENTATION..52

Section VII: EVALUATION & CONTROL61

REFERENCES

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KOTAK MAHINDRA BANK LIMITED

THINK INVESTMENTS, THINK KOTAK Section 1: CURRENT SITUATION

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CURRENT PERFORMANCE
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.

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Three defining qualities of Bank of the future Simplicity Humility Prudence

Significance of the groups 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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KOTAK MAHINDRA BANK LIMITED

THINK INVESTMENTS, THINK KOTAK Section 2: CORPORATE GOVERNANCE

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CORPORATE GOVERNANCE
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 Banks 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 Banks 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.

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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 Mahindra Prime 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 Groups 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 Prime Limited Kotak Mahindra Old Mutual Life Insurance Limited Mr. Dipak Gupta is also member of the Investor Relations (Shareholders/ 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 Canadas 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 ADBs 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
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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 Indias 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 Banks 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 **Appointed as an Additional Director with effect from 1st April 2011. Notes:

18th

March

2011

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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KOTAK MAHINDRA 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 investor.greivances@kotak.com 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: bina.chandarana@kotak.com 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 Banks 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.

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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 Banks 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 Directors Responsibility Statement to be included in the Boards report in terms of clause (2AA) of Section 217 of the Companies Act, 1956. Changes, if any, in accounting policies and practices and reasons for the same. Major accounting entries involving estimates based on the exercise of judgment by management. Significant adjustments made in the financial statements arising out of audit findings. Compliance with listing and other legal requirements relating to the financial statements. Disclosure of any related party transactions. Qualifications in the draft audit report.

o o o o o o

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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
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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 reconstituted 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--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 ViceChairman 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.

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KOTAK MAHINDRA BANK LIMITED

THINK INVESTMENTS, THINK KOTAK Section 3: STRENGTHS, WEAKNESSES, OPPORTUNITIES & THREATS
(SWOT)

EXTERNAL FACTOR ANALYSIS SUMMARY (EFAS)

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STRENGTHS, WEAKNESSES, OPPORTUNITIES & THREATS (SWOT)

STRENGTHS Innovative financial products of diverse categories Professional management Strong technology Disciplined fund management OPPORTUNITIES Increased growth in Industry banking International customers Microfinance is a booming sector Liberalization of Indian economy

WEAKNESSES Lesser penetration as being late entrants Low publicity and marketing as compared to other premium banks Very few branches in the country Rural areas still not covered THREATS Keen competition in products and mainly in services Liberalization of Indian economy ICICI & HDFC strong globally Apprehension towards Kotak being a private company

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EXTERNAL FACTOR ANALYSIS SUMMARY (EFAS)

Rating

External Factors

Weight

Weighted Score

Comments

OPPORTUNITIES Increased growth in Industry banking International customers Microfinance is a booming sector Liberalization of Indian economy THREATS
Keen competition in products and mainly in services

.10 .15 .15 .10

4.2 4.0 4.5 2.5

0.42 0.6 0.675 0.25

Kotaks strong base in corporate banking Innovate more products to suit globally Most of the firms are going for retail banking Setting up branches on the foreign soil

.10 .10 .20 .10 1.00

4.3 4.0 5.0 4.2

0.43 0.4 1 0.42 4.195

Very little chances of differentiating oneself Make provisions to be ready for the competition by the foreign players Constitute large market share Create trust in the minds of the people

Liberalization of Indian economy ICICI & HDFC strong globally Apprehension towards Kotak being a private company Total Scores

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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.

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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 farmers 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.

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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.

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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.

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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.

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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
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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.

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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 peoples life style, their behavior, consumption pattern etc. is changing and also creating opportunities and threat for banking industry. There is some socioculture 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
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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.

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TECHNOLOGICAL FACTORS
TECHNOLOGY IN BANKS Technology plays a very important role in banks 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.

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Porters Five forces Model

MODERATE

HIGH HIGH

HIGH

MODERATE

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.

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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 banks 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 antireforms. 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, IPOs, Gold and Real Estate investments.

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Threat of substitutes: Substitutes for banks are local moneylenders and hundiwalas, financial companies and NBFCs. Local moneylenders and hundiwalas come under unorganized sector. Finance companies and NBFCs 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.

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KOTAK MAHINDRA BANK LIMITED

THINK INVESTMENTS, THINK KOTAK Section 4:

INTERNAL FACTOR ANALYSIS SUMMARY (IFAS)

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INTERNAL FACTOR ANALYSIS SUMMARY (IFAS)

Internal Factors Weight Rating Weighted Score Comments

STRENGTHS Innovative financial products of diverse categories Well renowned and reputed people at the top level Strong integrated IT management system Disciplined fund management

.15

4.5

0.675

Competitive advantage Developing products by differentiating from competitors Less confidential leakages

.10

2.0

0.2

.10

3.5

0.35

.15

4.0

0.6

Low chances of frauds

WEAKNESSES Lesser penetration as being late entrants Low publicity and marketing as compared to other premium banks in the urban areas Very few branches in the country Rural areas still not covered Total Scores

.10

4.0

0.4

Always being follower

.20

3.0

0.75

Lack of awareness

.10 .10 1.00

2.0 4.5

0.2 0.45 3.625

Less generation of revenue in total Untapped Indian market

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FINANCIALS
Profit & Loss
Items
Total Income Operating Expenses Total Expenses Net Profit for the Year Earnings Per Share (Rs) Equity Dividend (%)

------------------Rs. In Crore----------Mar '11

4,811.12 1,528.58 3,992.94 818.18 11.1 10

Mar '10 Mar '09

3,676.59 1,447.42 3,115.50 561.11 16.12 8.5 3,222.70 1,333.60 2,946.61 276.1 7.99 7.5

Mar '08
2,845.84 999.25 2,551.91 293.93 8.53 7.5

Mar '07
1,641.93 696.06 1,500.57 141.37 4.33 7

Key Ratios
Items
Profitability Ratios
Operating Expense / Total Funds Profit Before Provisions / Total Funds Net Profit / Total Funds Total Income / Capital Employed (%) 3.24 2.65 1.85 10.78 4.1 2.53 1.7 11.13 4.43 1.49 0.97 11.59 3.93 2.18 1.22 11.75 4.4 1.35 0.94 10.62

Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

Activity Ratios
Total Assets Turnover Ratios Asset Turnover Ratio Leverage Ratios Total Debt to Owners Fund Current Ratio Quick Ratio 0.11 5.7 0.11 4.9 0.11 7.08 0.12 7.21 0.11 5.82

4.28 0.05 10.86

5.26 0.05 8.46

4.01 0.09 5.91

4.57 0.06 5.83

6.62 0.05 5.74

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GROUP STRUCTURE

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CORPORATE CULTURE
Our values are traits or qualities that we as organization consider worthwhile:
they represent the Organizations highest priorities and deeply held driving forces. Its 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 others 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

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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 organizations welfare Focused on productivity and cost conscious Empower others Networking Take personal accountability Share success

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KOTAK MAHINDRA BANK LIMITED

THINK INVESTMENTS, THINK KOTAK Section 5:

ANALYSIS OF STRATEGIC FACTORS (SWOT) STRATEGIC FACTOR ANALYSIS SUMMARY (SFAS)

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STRATEGIC FACTOR ANALYSIS SUMMARY

1 2 3 4 5 Duration

INTERMEDIATE

SHORT

Weight S1 S2 Innovative financial products of diverse categories Well renowned and reputed people at the top level 0.15 0.1

Rating Weighted Score 4.5 0.675 2 0.2

LONG Comments xx xx Competitive advantage Developing products by differentiating from competitors Always being follower Lack of awareness Innovate more products to suit globally Better schemes & offers xx xx

xx

W1 W2

O2

Lesser penetration as being late 0.15 entrants Low publicity and marketing as 0.15 compared to other premium banks in the urban areas International customers 0.1

4 3

0.6 0.45

xx xx

0.4

xx

xx

O3 T1

Liberalization of Indian economy Keen competition in products and mainly in services

0.15 0.15

4.5 4.2

0.675 0.63

xx

xx xx

T4

Apprehension towards Kotak being a private company

Total

0.05

4.3

0.215

xx

Very little chances of differentiating oneself Create trust in the minds of the people

3.845

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KOTAK MAHINDRA BANK LIMITED

THINK INVESTMENTS, THINK KOTAK Section 6:

STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY THREATS, OPPORTUNITIES, WEAKNESSES & STRENGTHS (TOWS)

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TOWS MATRIX INTERNAL

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 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)

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
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)

EXTERNAL
OPPORTUNITIES
1. Increased growth in Industry banking 2. International customers 3. Microfinance is a booming sector 4. Liberalization of Indian economy

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)

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CHANGE MATRIX

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.

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KOTAK MAHINDRA BANK LIMITED

THINK INVESTMENTS, THINK KOTAK Section 7:

IMPLEMENTATION

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IMPLEMENTATION
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 partners 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 banks 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.
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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.

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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 todays 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 industrys 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 Banks 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 stepslimitation 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 moneylendersboth professional and agriculturalcan 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 lendings 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 wholegovernment, 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 Indias prosperity in future.

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KOTAK MAHINDRA BANK LIMITED

THINK INVESTMENTS, THINK KOTAK Section 7:

EVALUATION & CONTROL

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EVALUATION & CONTROL

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