Market Risk Market Risk implies the risk of loss of earnings or economic value due to adverse changes in market

rates or prices. The sources of market risk may be enumerated as under. Interest rate risk: The risk that aries from changes in yield curves, credit spreads and volatility in interest rates. Currency exchange rate risk: The risk that arises from changes in exchange rates and their volatility. Equity price risk: The risk that arises from changes in the prices of equities, equity indices, equity baskets and volatility in stock market. The market risk may also arise from changes in commodity prices and volatility. However, your Bank does not have any exposure to commodity related markets. Your Bank has clearly articulated policies to control and monitor its treasury functions. These policies comprise management practices, procedures, prudential risk limits, review mechanisms and reporting systems. These policies are reviewed regularly in line with changes in financial and market conditions. The Interest rate risk in your Bank is measured through Interest Rate Sensitivity Gap Reports and Earning at Risk. Furthermore, your Bank calculates duration, modified duration, Value at Risk for its investment portfolio consisting of fixed income securities, equities and forex positions on monthly basis. It monitors the short-term Interest rate risk from the NII (Net Interest Income)perspective and long-term interest rate risk from the EVE (Economic Value of Equity) perspective. The Value at Risk for the treasury positions is calculated for ten days holding period, at 99.0% confidence level. Moreover, the stress testing of fixed interest investment portfolio through sensitivity analysis and equities through scenario analysis is regularly conducted in your Bank. Based on the RBI directions, your Bank has also been estimating the Economic Value of Equity Impact on a quarterly basis. Treasury Operations Your Bank operates a State of the Art Dealing Room at BarodaSun Tower at its Corporate Office in Mumbai. Through this dealing room, your Bank is well positioned to scale up itsTreasury Operations. The Treasury Division handles yourBanks domestic treasury operations and covers activities invarious markets i.e. Foreign Exchange, Interest Rates, FixedIncome, Derivatives, Equity and other alternative asset classes.The advanced technology platforms are used by your Bank tooffer a basket of financial products to its clients including interest rate swaps, currency swaps, forwards and options.Your Bank has also put in place a sophisticated Automated Dealing system to offer the auto generated real time foreignexchange rates to the clients of its authorised branchesspread across the country. As a customer friendly initiative, during the year FY13, enhancements were made by replacing the old servers with high end servers for BOB-Authorised Dealing System facilitating improved and faster processing of transactions cutting delays and breakdown in customer service.Under the Business Process Re-engineering, your Bank has successfully implemented Global Treasury solution across major financial centers. The Global Treasury Platform is running smoothly in nine centres, notably, Mumbai, London, Bahamas, Brussels, Dubai, Bahrain, Singapore, Hong Kong and New York. The tenth implementation of Treasury solution at DIFC Dubai, an offshore Banking unit is on the cards. During FY13, promotion of growth and control of stubborn inflation were the key monetary policy challenges. The RBI reduced the Repo and Reverse repo rates by 100 bps and infused liquidity by cutting CRR by 75 bps during the last year. The RBI also conducted Open Market Operations to the extent of Rs 1,27,180 crore to infuse liquidity into the system. Higher than announced borrowing programme and high inflation put pressure on Gilt yields until November, 2012. This and the

pause by RBI in changing monetary policy rates resulted in the 10-year benchmark gilt to trade in the range of 8.05%-8.25% during July to December, FY13. However, after the resumption of Open Market Operations by the RBI in Dec, 2012 and easing of policy rates in January 2013, the 10 year Gilt touched a low of 7.80% while ending the year at 7.95%. Against a backdrop of weak economic growth and corrective steps & measures by the government to control fiscal deficit, your Banks Treasury accumulated securities offering higher yields and maintained a prudent duration for its fixed income portfolio. This strategy was useful for the Bank to maintain a good average yield on its Investments and also helped in booking of profit on sale of Investments when the rate cutting cycle resumed in the last quarter of the year. The average yield on Domestic SLR investments was 7.76%. During FY13, the Treasury earned Rs 7,450 crore as Interest/Discount earnings, while the Profit on Sale of Investment and Exchange Earnings were Rs 617 crore and Rs 803 crore, respectively. Your Banks Treasury offers customized solutions using products viz Interest Rate Swaps (IRS), Currency Swaps (CIRS), Forwards and Options to meet the Interest rate and Foreign Exchange risk mitigation requirements of the corporate clients. During the year, your Banks Treasury actively participated in the arbitrage opportunities available between various asset classes including Money Market CBLO, Call, Market Repo, Government Securities and Forex markets. The Treasury actively utilised the market movements and used Overnight Indexed swaps for harnessing available hedging and trading opportunities.The sentiment in Equity markets improved during second half of FY13 due to FII inflows, reform initiatives announced by the Government and improving fundamentals of the US economy. The Equity Desk of the Treasury actively churned its portfolio and booked profits at regular intervals whenever an opportunity emerged in the markets. In line with the announcement of the Finance Minister in his budget speech for FY12, your Bank, last year, co-promoted the countrys First Infrastructure Debt Fund M/s India Infradebt Limited to facilitate the flow of long term debt fund to infrastructure sector. The Foreign exchange desk of the Treasury retained its position as one of the premier market players in the Forex desks of the Public Sector Banks. The Proprietary trading desk was active in cashing in of available arbitrages, using volatility in the markets and mobilised resources in a tight liquidity position impacting the Indian markets. Your Banks Treasury Mid-Office monitors market exposures and limits fixed by the Board of Directors, on a real time basis. The Risk Management parameters, including Value-at-risk (VaR) are used to measure Market Risk on all portfolios. These measures are backed up by the Back Testing on risk numbers and Stress Testing of various investment and currency portfolios.
inVESTMEnTS 3.1 Classification The Investment portfolio of the Bank is classified, in accordance with the Reserve Bank of India guidelines, into: a Held to Maturity (HTM) comprising Investments acquired with the intention to hold them till maturity. b Held for Trading (HFT) comprising Investments acquired with the intention to trade. c Available for Sale (AFS) comprising Investments not covered by (a) and (b) above i.e. those which are acquired neither for trading purposes nor for being held till maturity. 3.2 Acquisition Cost Cost of acquisition of Investments is net of incentives,

front-end fees and commission. 3.3 Basis of Valuation Investments classified as HTM are carried at weighted average acquisition cost unless it is more than the face value, in which case the premium is amortized over the period remaining to maturity. Investments classified as HTM includes debentures / bonds which are deemed to be in the nature of / treated as advances (for which provision is made by applying the RBI prudential norms of assets classification and provisioning applicable to Advances). Investments in Regional Rural Banks, Treasury Bills, Commercial Papers and Certificates of Deposit which have been valued at carrying cost. Investments in subsidiaries and joint ventures (both in India and abroad) are valued at acquisition cost less diminution, other than temporary in nature. Banks investments in units of VCFs made after 23.08.2006 are classified under HTM category for initial period of three years and are valued at cost. After period of three years from date of disbursement, it will be shifted to AFS and marked-to-market as per RBI guidelines. Investments classified as HFT and AFS are marked to market scrip-wise and the resultant net depreciation if any, in each category disclosed in the Balance Sheet is recognized in the Profit and Loss Account, while the net appreciation, if any, is ignored. Investments made by the Bank as Primary Dealer in Treasury Bills under HFT category have been valued at carrying cost. For the purpose of valuation of quoted investments in Held for Trading and Available for Sale categories, the market rates / quotes on the Stock Exchanges, the rates declared by Primary Dealers Association of India (PDAI) / Fixed Income Money Market and Derivatives Association (FIMMDA) / Foreign Exchange Dealers Association of India (FEDAI) are used. Investments for which such rates / quotes are not available are valued as per norms laid down by RBI, which are as under: a Government / Approved securities - on Yield to Maturity basis. b Equity Shares, PSU and Trustee shares - at book value as per the latest Balance Sheet (not more than 12 months old), otherwise Re.1 per company. c Preference Shares - on Yield to Maturity basis with appropriate credit spread mark- up d PSU Bonds - on Yield to Maturity basis with appropriate credit spread markup. e Units of Mutual Funds - at the latest repurchase price / NAV declared by the Fund in

respect of each scheme. f Venture Capital - Declared NAV or break up NAV as per audited balance sheet which is not more than 18 months old. If NAV/ audited financials are not available for more than 18 months continuously then at Re. 1/- per VCF. 3.4 Disposal of Investments Profit/ loss on sale of Investments classified as HTM is recognized in the Profit and Loss Account based on the weighted average cost / book value of the related Investments and an amount equivalent of profit on sale of Investments in HTM classification is appropriated to Capital Reserve Account. Profit/ loss on sale of Investment in AFS/ HFT category is recognized in Profit and Loss Account. 3.5 The Bank is following uniform methodology of accounting for investments on settlement date basis. 3.6 In respect of investments at overseas branches, RBI guidelines or those of the host countries, whichever are more stringent are followed. In case of those branches situated in countries where no guidelines are specified, the guidelines of the RBI are followed. 3.7 The transfer of a security between these categories is accounted for at the acquisition cost / book value / market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer is fully provided for. 3.8 In respect of non-performing securities, income is not recognised, and provision is made for depreciation in the value of such securities as per RBI guidelines. 3.9 REPO / Reverse REPO The Bank has adopted the Uniform Accounting Procedure prescribed by the RBI for accounting of market Repo and Reverse Repo transactions [other than the Liquidity Adjustment Facility (LAF) with the RBI]. Repo and Reverse Repo Transactions are treated as Collaterised Borrowing / Lending Operations with an agreement to Repurchase on the agreed terms. Securities sold under Repo are continued to be shown under investments and Securities purchased under Reverse Repo are not included in investments. Costs and revenues are accounted for as interest expenditure / income, as the case may be. Securities purchased / sold under LAF with RBI are debited / credited to investment Account and reversed on maturity of the transaction. Interest expended / earned thereon is accounted for as expenditure / revenue.