State Bank of India - Annual Report

 STATE BANK OF INDIA

ANNUAL REPORT 2007-2008

DIRECTOR'S REPORT

Management Discussion and Analysis:

Economic Backdrop and Banking Environment:

After growing at 5.0% in 2006 and 4.9% in 2007, IMF estimates global GDP growth to decelerate to 3.7% in 2008 in the wake of the current financial crisis. The financial market turbulence in developed economies following the US sub-prime mortgage crisis has reduced financial leverage, lowered credit availability and negative wealth effects have emerged as risks to consumption and growth in advanced economies, especially in the US. Continuing inflationary pressures from food and commodity prices as well as high and volatile crude oil prices are other risks being faced by the global economy.

India continued to be one of the fastest growing economies of the world. During 2007-08, the Indian economy grew at a robust pace for the fifth consecutive year. Real GDP growth, estimated at 8.7% in 2007-08, is in tune with the average annual GDP growth of 8.7% in the five year period 2003-04 to 2007-08. Agriculture and allied activities are estimated to grow by 2.6% in 2007-08, which is in line with the average growth of 2.6% per annum during 200001 to 2007-08. Foodgrains production touched a record high in FY08, with total foodgrains production placed at 227.3 million tonnes, surpassing the target of 221.5 million tonnes and recording an increase of 4.6% over the previous year. Industrial growth at 8.6% during 2007-08 has moderated somewhat against 10.6% in the previous year. The services sector maintained its double-digit growth at 10.6% during 2007-08, higher than the long term average of 8.9% (2000-01 to 2007-08). Within services, transport and communications and financial services recorded double-digit growth for the last two years and are expected to maintain the growth momentum. Trade and hotels showed higher growth of 12.1% in 2007-08 against 11.8% growth in 2006-07. Another positive feature underpinning growth is the sharp rise in the rate of savings and investment in recent years, which rose to 34.8% and 35.9% respectively in 2006-07.

Towards the close of the fiscal year, higher inflation rate was noticed due to rise in global prices of food, metals and crude oil. Inflation based on WPI declined from 6.4% at the beginning of the fiscal year to a low of 3.1% by mid-October 2007, partly reflecting moderation in the prices of some primary food articles and manufactured products. After hovering around 3% during November 2007, inflation began to edge up from early December 2007 to touch 7.4% by 29 March 2008, mainly reflecting hardening in prices of primary articles such as fruits and vegetables, oilseeds, raw cotton and iron ore, as well as fuel and manufactured products such as edible oil/oil cakes and basic metals, partly due to international commodity price pressures. However, fiscal and monetary measures are being taken to contain inflation and maintain high growth.

Despite Rupee appreciation, exports continued to show a healthy growth, rising by 23% in dollar terms during 2007-08 against 22.6% in the previous year. Overall exports growth was driven by petroleum and crude products, gems and jewellery, iron ore, non-basmati rice, cotton, transport equipment, etc. While India's exports to USA, its single largest trading partner, showed deceleration, exports to UAE and China remained robust. In the same period, imports increased by 27.0% against 24.5%, mainly due to higher oil imports; non-oil imports were led by capital goods, chemicals and related products, edible oils, gold, silver and pearls, precious and semiprecious stones. Due to higher growth in imports than exports, the trade deficit widened by 35.5% to US$ 80.4 bn during 2007-OS from US$ 59.3 bn in the previous year.

The overall stance of RBI's monetary and credit policy during the year was to ensure price stability and financial system stability along with continuation of the growth momentum, emphasis on credit quality and credit delivery including financial inclusion. During 2007-08, the Bank Rate, Repo and Reverse Repo rates were kept unchanged. To .manage the liquidity in the economy, RBI raised the Cash Reserve Ratio four times: in April, August and November 2007 from 6% to 7.50%. In line with liquidity tightening, PLRs and deposit rates of major banks were hiked during the year. While lending rates rose to 12.25-12.75% from 12.2512.50%, deposit rates (for more than one year maturity) rose to 8.25-9.0% from 7.5-9.0% in the previous financial year. However, in the month of February 2008, to keep up the growth momentum in the economy, some banks announced cuts in their PLR and interest rate on housing loans below Rs.20 lakh.

The tight monetary policy followed by RBI to control inflation and money supply had a moderating impact on credit growth, which increased by 21.6% in 2007-08 against 28.1% in 2006-07. Deposit growth also moderated to 22.2% in 2007-08 from 23.8% in 2006-07.

For the current year, despite slowdown in the major economies of the world, the Indian economy will continue to grow at 8-8.5% driven by investment. Due to a number of fiscal and monetary measures taken by the Government and RBI to put a check on prices, inflation is expected to come down to 5-5.5% by March 2009.

Financial Performance:

Profit:

The Operating Profit of the Bank for 2007-08 stood at Rs. 13,107.55 crore as compared to Rs.9,999.94 crore in 2006-07, registering a growth of 31.08%. The Bank has posted a Net Profit of Rs 6729.12 crore for 2007-08 as compared to Rs.4,541.31 crore in 2006-07, registering a growth of 48.18%.

While Net Interest Income recorded a growth of 13.04% and Other Income increased by 28.52%. Operating Expenses increased by 6.64%.

Dividend:

The Bank has increased dividend to 215%.

Net Interest Income:

The Net Interest Income of the Bank registered a growth of 13.04% from Rs.15,058.20 crore in 2006-07 to Rs. 17,021.23 crore in 2007-08. This was due to growth in interest income on advances. The Net Interest Margin was at a healthy 3.07% in 2007-08.

The gross interest income from global operations rose from Rs. 37,242.33 crore to Rs. 48,950.31 crore during the year. This was mainly due to higher interest income on advances.

Interest income on advances in India registered an increase from Rs.22,872.66 crore in 2006-07 to Rs 32,162.68 crore in 2007-08 due to higher volumes. Also average yield on domestic advances increased from 8.67% in 2006-07 to 9.90% in 2007-08. Interest income on advances at foreign offices also increased due to higher volumes.

Income from resources deployed in Treasury operations in India increased by 11.03% despite decline in average yield mainly due to higher average resources deployed. The average yield, which was 6.99% in 2006-07, declined to 6.92% in 2007-08.

Total interest expenses of global operations increased from Rs.22,184.14 crore in 2006-07 to Rs. 31,929.08 crore in 2007-08. Interest expenses on deposits in India during 2007-08 recorded an increase of 45.56% compared to the previous year, whereas the average level of deposits in India grew by 22.09%. This resulted in increase in the average cost of deposits from 4.69% in 2006-07 to 5.59% in 2007-08.

Non-Interest Income:

Non-interest income stood at Rs.8,694.93 crore as against Rs.6,725.26 crore in 2006-07.

During the year, the Bank received an income of Rs. 197.41 crore (Rs.598.12 crore in the previous year) by way of dividends from Associate Banks/ subsidiaries and joint ventures in India and abroad.

Operating Expenses:

There was marginal decline of 1.84% in the Staff Cost from Rs.7,932.58 crore in 2006-07 to Rs 7,785.87 crore in 2007-08. Staff Cost included an amount of Rs.575.00 crore towards Wage arrears.

Other Operating Expenses have also registered an increase of 23.94% mainly due to increase in expenses on rent, taxes and lighting, insurance, postage, telegrams and telephones, repair and maintenance, audit fees and miscellaneous expenditure.

Operating Expenses, comprising both staff cost and other operating expenses, have registered an increase of 6.64%.

Provisions and Contingencies:

Major amounts of provisions made in 2007-08 were as under:

* Rs.88.68 crore (writeback) towards provision for depreciation on investments, excluding amortization of premium on Held to Maturity' category (as against Rs.379.23 crore in 2006-07).

* Rs.3,823.50 crore towards Provision for Tax, excluding deferred tax credit of Rs. 219.43 crore (as against Rs. 3,014.61 crore in 2006-07 excluding deferred tax credit of Rs. 19.83 crore).

* Rs. 105.00 crore towards Fringe Benefit Tax (as against 88.50 crore in 2006-07).

* Rs. 2,000.94 crore (net of write-back) for nonperforming assets (as against Rs. 1,429.50 crore in 2006-07).

* Rs. 566.97 crore towards Standard Assets (as against Rs. 589.19 crore in 2006-07). Including the current year's provision, the total provision held on Standard Assets amounts to Rs. 2,069.38 crore.

Reserves and Surplus:

* An amount of Rs.4,839.07 crore (as against Rs. 3,358.11 crore in 2006-07) was transferred to Statutory Reserves.

* An amount of Rs. 304.35 crore (as against Rs.321.15 crore in 2006-07) was transferred to Other Reserves.

* An amount of Rs. 62.18 crore was transferred to Investment Reserves. (Nil in 2006-07).

* An amount of Rs. 4,075.64 crore was withdrawn from Other Reserves towards transitional liability for complying with Accounting Standard - 15 (Revised) - 'Employee Benefits'.

Assets:

The total assets of the Bank increased by 27.35% from Rs.5,66,565.24 crore at the end of March 2007 to Rs. 7,21,526.31 crore as at end March 2008. During the period, the loan portfolio increased by 23.55% from Rs.3,37,336.49 crore to Rs. 416,768.19 crore. Investments increased by 27.06% from Rs.1,49,148.88 crore to Rs 1,89,501.27 crore. A major portion of the investment was in the domestic market in government and other approved securities. The Bank's market shares in domestic advances was 15.28% as of March 2008.

Liabilities:

The Bank's aggregate liabilities (excluding capital and reserves) rose by 25.64% from Rs. 5,35,266.68 crore on 31st March 2007 to Rs. 6,72,493.65 crore on 31st March 2008. The increase in liabilities was mainly contributed by increase in deposits and borrowings. The Global deposits stood at Rs.5,37,403.94 crore as on 31st March 2008, representing an increase of 23.39% over the level on 31st March 2007. The Bank's market share in deposits was 15.44% as of March 2008.

Table-1 Key Performance Indicators:

Indicators SBI SBI Group 2007-08 2006-07 2007-08 2006-07

Return on Average Assets (%) 1.01 0.84 0.99 0.87Return on Equity (%) 17.82 14.24 17.93 15.08Expenses to Income (%)(Operating:Expenses to Total Net Income) 49.16 54.18 56.64 58.15Basic Earnings Per Share (Rs.) 126.62 86.10 168.61 120.66Diluted Earnings Per Share (Rs.) 126.50 86.10 168.45 120.66Capital Adequacy Ratio (%) 13.47 12.34 13.49 12.36(Basel-I) Tier I 9.14 8.01 8.95 8.05Tier II 4.33 4.33 4.54 4.31Net NPAs to Net Advances 1.78 1.56 1.43 1.31

Performance Highlights:

Core Operations:

A Global MarketsB Wholesale Banking GroupC Mid Corporate GroupD National Banking GroupE Rural Business GroupF Corporate Strategy & New BusinessG International Banking GroupH Associates & SubsidiariesI Asset QualityJ Information Technology

A. GLOBAL MARKETS:

A.1 In keeping with its integrated approach to all treasury activities in various markets in different time zones i.e., Forex, Interest Rates, Bullion, Equity and Alternative Assets, the Bank redesignated its Treasury Operations into 'Global Markets'

A new state-of-the-art Dealing Room with online connectivity to all active forex intensive Branches across the country was inaugurated at Corporate Centre in Mumbai with facilities matching the best in the industry. This facility ensures continuous availability of market determined forex rates to our customers.

The year witnessed volatility in 10-year base yields which moved upwards to 8.38% during the year and finally closed at 7.94% as on 31st March 2008. Marginal slow down in credit growth led to increase in overall Domestic investment portfolio by Rs.36311.76 crore over 31st March 2007. Liquidity position remained comfortable during most part of the year which helped the Bank to bring down high cost bulk deposits. In the backdrop of higher interest rate regime, Bond Market conditions were less conducive to trading opportunities. The Bank diversified its trading activity to Equity and Mutual Fund portfolio to encash the opportunities available through the. buoyant capital markets during the year.

A.2 While trading profits from Fixed Income portfolio came under pressure because of higher interest rate regime, Global Market's profits were contributed primarily by trading in equity and mutual funds. Trading profits from equity and mutual funds portfolio has increased by 321%. Interest income from investment portfolio increased in absolute terms due to the increase in the overall Fixed Income portfolio from Rs.1,36,927.48 crore to Rs.1,73,239.24 crore. RBI's decision to increase CRR rate from 6.00% to 7.50% in four stages during the year and withdrawal of interest payable on CRR balances impacted overall income from Treasury operations. Average yield on treasury operations net of income on CRR balances increased from 6.45% to 7.35%.

A.3 The Bank contained the interest rate risk of the Fixed Income Portfolio through a combination of measures including reduction in the duration of the portfolio and shifting of securities with a book value of Rs.9,662 crore from Available for Sale portfolio to Held to Maturity portfolio.

A.4 Trading volumes in forex operations increased substantially from Rs.7,67,889 crore to Rs.11,74,029 crore thereby increasing the exchange income from these operations by 59% Y-O-Y to Rs.321.64 crore from Rs.202.20 crore.

B. WHOLESALE BANKING GROUP:

B.1 The Bank's Wholesale Banking Group consists of three Strategic Business Units viz., Corporate Accounts Group, Project Finance & Leasing SBU and Stressed Assets Management Group.

The Bank has recently launched the 'Wholesale Banking Initiative' to harness the SBI Group synergy for the benefit of the corporate customers by providing them with a One Stop Shop' facility for all their banking needs. The initiatives aim at providing comprehensive, customised and specialized banking solutions to the corporates thereby enhancing Bank's share of business with them.

Table-2 WBG - Highlights: (Amount in Rs. crore)Particulars As on As on Growth 31.03.2007 31.03.2008 %

Deposits 6669 9823 47Advances 37989 46042 21

B.2 Corporate Accounts Group (CAG):

The loan portfolio of CAG constituted about 23% of the Bank's Commercial and Institutional non-food credit and 12% of the total domestic credit portfolio as on 31.03.2008.

Initiatives taken:

* With focused initiatives on fee-based services, fee-based income registered an impressive 62% growth during the year.

* CAG continued on the growth trajectory in forex business registering a YOY growth of 79% and contributed 49% of the total domestic forex turnover of the Bank.

* SBI FAST, the Cash Management Product (CMP), in addition to offering collections and payments services, also facilitates the corporates' liquidity management by offering various value added products. These include auto sweep facility, customized MIS and reconciliation support, automated bulk NEFT, ECS and RTGS payments with reconciliation support etc. It has started processing of centralized payments in bulk (Income Tax Refund Orders) and has put in place a call centre for this purpose. CMP is well poised to enter new areas like customized e-payments and e-collections with Straight Through Processing.

B.3. Project Finance & Leasing SBU:

The Project finance SBU focuses on funding core projects like power, telecom, roads, ports, airports, SEZ and others. It also handles non-infrastructure projects with certain ceilings on minimum project costs. During the year, the focus was on syndication and underwriting of project loans. Project Finance SBU took up projects involving total debt of Rs.92,558 crore and achieved sanctions of Rs. 20,195 crore, while it syndicated Rs. 54,951 crore with other banks during the year 07-08.

In view of the unfavourable climate and availability of alternative funding options at cheaper cost, the Bank decided not to write leases during the current year also. As at the end of March 2008, the disbursements and capitalization were 'NIL' and profit amounted to Rs.8.81 crore.

B.4. Stressed Assets Management Group (SAMG):

The performance of SAMG during the year 2007-08 is given in Table No. 3

below.

Table-3 SAMG - Highlights

(Amount in Rs. crore)

1. Cash Recovery in NPA 3372. Upgradation to Standard Assets 533. Write Off 3684. Gross reduction in NPAs (1+2+3) 7585. Recovery in written off accounts 336

Stressed Assets Management Group (SAMG) was initially set up to take over all NPAs with outstanding of Rs. 5 crore and above for focused efforts in resolution of NPAs. The coverage has now been extended to Rs.1.00 crore and above across the country.

92 Stressed Assets Resolution Centres (SARCs) have been opened across the country for more focused resolution of NPAs with outstandings upto Rs.1 crore in SME and Personal segments. Out of these, 44 independent SARCs are being brought under SAME in a phased manner to give further fillip to the Bank's recovery efforts. In this direction, 9 SARCs have already been brought under the control of SAMG during the year. The performance of SARCs is encouraging and we expect to make substantialprogress in the Management of NPAs.

C. MID-CORPORATE GROUP:

C.1. The Mid-Corporate Group (MCG) has been immensely successful in attracting the business of Mid-Corporate units through relationship management and quicker credit processing. To give added focus to this segment during the year, a Dy. Managing Director & Group Executive (Mid Corporates) was posted to independently head the operations of the Mid-Corporate Group.

Table-4 MCG - Highlights:

(Amount in Rs. crore)Particulars As on As on Growth 31.03.2007 31.03.2008 %

Advances (incl. food) 68,446 76,338 11.5Advances (excl. food) 60,138 73,874 23Offsite advances 27,445 35,128 28Total 87,583 1,09,002 24advances(excl. food)Deposits 10,011 11,648 16

* The Group handles about 300l0 of the total non-food advances of the Bank and operates through 8 Regional Offices situated across the country. It is estimated that 38% of the Mid-Corporate universe in the country is covered by the Bank. The coverage is expected to be extended to more centres during the current year.

* 695 new mid corporate clients were added to the MCG during the year.

* The total credit portfolio (fund based) of the Group stood at Rs.1,09,002 crore as on 31st March, 2008. This is more than the aggregate business handled by many of the top banks in the country.

* The average yield on advances went up from 8.76% in March 2007 to 9.73% in March 2008.

Initiatives Taken:

* Syndication Desks have been created at two Regional Offices, Mumbai and Chennai, to tap the opportunities available for syndicating working capital facilities.

* Project Finance Cells have been set up in Chennai and New Delhi Regions.

* Substantial business in the form of IPOs/ Private Equity/Debt Syndication/ Foreign Currency Loans/Overseas Acquisitions/External Commercial Borrowings has been arranged for MCG clients through SBICAPS/Foreign Offices.

New Products:

* A new product, Construction Equipment Loan, to cater to Construction Companies has been launched.

C.2 Gold Banking:

A separate Department, Precious Metals Department, has been created at the Bank's Corporate Centre for the purpose of boosting the Gold Banking business.

The Bank launched retail sale of gold coins which is now available at 250 branches across the country. The scheme would be extended to cover 1000 branches in a phased manner during the current year.

While 52 branches are authorized for metal loans and bulk sale of gold to jewellery manufacturers the number is being increased to 70.

Gold Deposit Scheme has been revived for institutions like temples, trusts, etc.

D. NATIONAL BANKING GROUP:

The Bank's National Banking Group (NBG) consists of three Business Groups viz., Personal Banking, Small & Medium Enterprise (SME), and Government Banking.

During the year Bank achieved a milestone by opening its 10,000th Branch at Puduvayal, Sivaganga District in Tamil Nadu, which was inaugurated by Hon. Finance Minister Shri P. Chidambaram.

During the year, as many as 965 branches were opened, and at the end of March 2008 the Bank has a vast network of 10,186 branches to reach out to customers, even in the remotest parts of the country.

Table-5 NBG - Highlights:

(Amount in Rs. crore)Particulars As on As on % 31.03.2007 31.03.2008 Growth

Deposits (excluding inter bank) 3,67,524 4,54,883 23.77Advances (including food but excluding 1,98,701 2,44,617 23.11inter bank) Advances (excluding food) 1,95,531 2,43,068 24.31

D.1 Personal Banking Business Unit:

During the year, Personal Banking domestic deposits have grown from Rs.1,90,870 crore to Rs.2,36,645 crore, showing a growth of Rs.45775 crore (23.98%) as against Rs.27,684 crore during the previous year.

During the year, Personal Banking Advances have grown from Rs. 73,590 crore to Rs. 88,549 crore, showing a growth of Rs.14,959 crore (20.33%) as against Rs.12,530 crore during the previous year.

SB1 emerged as a leader this year in terms of Individual Home Loan disbursements among SCBs & HFCs as on 31.12.2007. Bank was voted, for the second year in a row, as The Most Preferred Housing Loan Provider in CNBC AWAAZ Consumer Awards for 2007 along with the Most Preferred Bank Award in a survey conducted by CNBC TV 18 in association with AG Nielsen & Company covering more than 10,000 respondents across 21 cities and 13 small towns.

New Products introduced during the year were SBI Reverse Mortgage Loan and SBI Home Plus in the area of Home Loans. Repayment period for Home Loans has now been increased upto 25 years to facilitate lower repayment obligations and applications are now accepted online through Bank's website.

The Bank had opened 78.65 lac new Savings Bank Accounts during the year as against 62.40 lac previous year.

The Auto Loan portfolio has shown a healthy growth of Rs.1,645 crore in absolute terms, which is 29.89% higher than last year's growth.

SBI is market leader in Education Loans and has a market share of 24% amongst PSU Banks. The growth in Education Loans during the year is Rs.1,112 crore which is 33.67% higher over March 2007.

SBI Scholar Loan is extended to the students joining 52 elite institutions like IIMs/ IITs/AIIMS/ Management Institutes etc. at concessional interest rates and terms.

Web based registration of applications for Education Loans was launched by Hon'ble Finance Minister on 14th November 2007. In principle sanctions are given online for SBI Scholar Loans.

D.2 SME Business Unit (SMEBU):

SME Business Unit is implementing multiple strategies to maintain Bank's premier position in SME financing.

Advances to SME sector increased to Rs.76,329 crore as on 31.03.2008 from Rs.58,674 crore of the previous year registering a Y-O-Y growth of 30%.

Deposits under SME sector increased to Rs.1,65,168 crore as at the end of March 2008 from Rs.1,23,054 crore of previous year, recording a growth of 34% during the year.

Initiatives taken:

* Customer Relationship Executives have been recruited from the Market and placed in potential SME branches for serving effectively Medium Enterprises.

* Traders Bonanza campaign has been conducted and loans sanctioned to more than 60,000 traders.

D.3 Government Business Unit (GBU):

The following initiatives were taken in Government Business:

a) Electronic Accounting System in Excise and Service Tax (EASIEST) for indirect taxes was extended to the entire country.

b) E-Payment of Central Excise, Service Tax, Customs Duty, Rail Freight introduced.

c) Centralised Pension Processing Centres (CPPC) were established at all LHOs covering 5814 branches (18.80 lac accounts). Remaining branches will be covered in a phased manner.

d) Cyber Treasury for online collection of State Government taxes has been extended to the State of Madhya Pradesh, Chhatisgarh, Rajastan and Gujarat for collection of VAT/CST and the solution is being offered to other State Governments shortly.

E. RURAL BUSINESS GROUP:

During the year 2007-08, Rural Business Group of the Bank comprising rural and semi urban branches, accounting for about 70% of the branch network of the Bank grew by Rs.29,807 crore in deposit representing a growth of 22.8% and Rs.18,734 crore in advances representing a growth of 23.4%. This was against a growth of Rs.16,367 crore in deposit and Rs.17,684 crore in the advances in the previous year. Market share of Rural and Semi Urban branches during the year upto December 2007 has improved by 0.92% in deposit and 0.98% in advances. Bank's share in current year growth upto December 2007 was 32.04% in deposits and 31.97% in advances.

AGRI BUSINESS:

Table-6 Agriculture - Highlights:

(Amount in Rs. crore)Particulars As on As on Growth 31.03.07 31.03.08 %

Deposits 6,460 8,058 25Advances 33,857 42,806 26

As against the benchmark of 18% set by RBI, the Bank for the first time crossed the benchmark and recorded its Agricultural Advances at 18.37% of Adjusted Net Bank Credit (ANBC) as at March 2008.

The following important themes have been adopted by the Bank to foster its Agricultural business:

'Growth with Quality':

Thrust is laid on contract farming and value chain financing. Special scoring model has been introduced for financing tractors which aims to improve the quality of the advance.

The Bank, in order to diversify its Agricultural business portfolio, prepared three year National Business Plan covering Horticulture, Dairy, Fisheries, Food processing and Biotechnology.

'Bonding with farmers':

As a sustainable business strategy, the Bank is focussing on Bonding with Farmers. Under the scheme of SBI Ka Apna Gaon, one of the broad business themes is adoption of villages for overall development and economic upliftment and so far 237 villages have been adopted.

2400 Farmers' Clubs were promoted and as many as 30,000 Farmers' meets (Credit and Recovery Camps) were organized by the Bank during the year.

Micro Finance and Financial Inclusion:

A major initiative taken in the area of financial inclusion has been the introduction of SBI Tiny Smart Cards to the financially excluded. This, in simple terms can be defined as a Bank in a box. The Card is highly secured as it works on the bio-metric validation of the customer. More than two lacs SBI Tiny Smart Cards have been issued as at the end of March 2008. The Smart Card project together with the Business Correspondent model has been successfully piloted and rolled out nation-wide. The Bank has been able to cover more than 10 thousand unbanked villages, including far flung areas of North-Eastern, Eastern and Central parts of the country. SBI Tiny Cards are used for opening No Frills Accounts' and providing basic banking services. These cards are also used to route government payments direct to beneficiaries in 6 Districts of Andhra Pradesh for example, payment of wages under National Rural Employment Guarantee Programme (NREGP) and Social Security Pension scheme (SSP). The scheme is being extended to other States as various other State Governments have approached the Bank for the purpose.

Self Help Groups (SHGs):

The Bank is the market leader in SHG-Bank Credit Linkage Programme since its inception. In the year 2003, Bank had set a challenging target of credit linking 1 million SHGs by March 2008 which has been achieved. Cumulatively, the Bank has credit linked 10,18,481 SHGs and disbursed loan to the extent of Rs.5077.72 crore so far. Bank has brought out unique products for SHGs, viz., SHG Credit Card / SHG Gold Card, Sahayog Niwas - a housing product for SHGs. Bank has also introduced a Scheme for financing NGOs / MFIs for on-lending to SHGs. We are the first bank to recruit officers from market exclusively for promoting micro finance. SBI has won awards for topping in SHGBank Credit Linkage in Orissa, Jharkhand, Maharashtra, Uttarakhand, Tamil Nadu and Uttar Pradesh. SBI has sponsored and financially supported NGO SAMANWITA' in collaboration with Government of Orissa.

The Rural Business Strategy:

The Rural Business strategy drawn up by the Bank envisaged setting up a multi-pronged sourcing force, coupled with back-end processing capacity by way of Rural Central Processing Centres. The front end marketing force comprised, besides the branches, alternate channels like Officers Marketing & Recovery (OMR) and the Business Facilitators/ Business Correspondents.

MRT Channel:

The OMRs not only source high value Agriculture segment loans, but also all

types of deposits, loans and cross-selling products across all the segments. The Bank has more than 3000 OMRs and is planning to recruit additional 3000 OMRs during 2008-09.

Business Facilitators (BF)/ Business Correspondents (BC) Channel:

Utilizing the liberalization permitted by RBI, the Bank has entered into various national level alliances with entities such as India Post, ITC Limited, Drishtee Foundation and Zero Microfinance And Savings Support Foundation.

INDIA POST has been engaged as a Business Correspondent (BC). The BC alliance with India Post is currently functioning in 110 post offices in six states. The India Post alliance is being extended to other states also. Besides, BCs and BFs are also being engaged at the regional levels. The BC model has enabled the Bank to reach hitherto unbanked and under banked areas.

Rural CPC:

To meet the requirement of processing of the increased business flowing from the alternate channels, 10 Rural Central Processing Centres (RCPCs) have been set up across the country, which is proposed to be scaled upto 100 RCPCs in the year 2008-09.

E.2. Regional Rural Banks (RRBs):

Post amalgamation Bank has got 16 RRBs with a network of 2,351 branches spread over 115 districts and 16 states in the Country. The aggregate deposits and advances of the sponsored RRBs stood at Rs.13,573 crore and Rs.7,856 crore respectively as on 31st March 2008. The profit have jumped from Rs.32.77 crore as on March 2007 to Rs.115.68 as on March 2008. During the year, a remittance product Gramin Pay Order (GOP) was introduced for facilitating remittances from remote areas to increase fee income in RRBs. Post amalgamation, RRBs have broad based their product profile by introducing Debt Swap Scheme, Ware House Receipt Financing.

E.3. Credit Assistance provided to Scheduled Castes and Scheduled Tribes:

The credit assistance provided by the Bank to SCs and STs stands at Rs.6,883 crore out of total priority sector advance of Rs.1,32,300 crore.

Table No-7: Recovery position of SC/ST borrowers (Scheme-wise):

Scheme Recovery %

Prime Minister's Rozgar Yojana (PMRY) 31.85Swarnajayanti Gram Swarozgar Yojana (SGSY) 35.57Swarnajayanti Shahari Rozgar Yojana (SJSRY) 36.25Scheme for Liberation & Rehabilitation of Scavengers (SLRS) 29.53Differential Rate of Interest (DRI) 65.82

Prime Minister's New 15 Point Programme for the Welfare of Minorities.

All commercial banks have been advised to ensure smooth flow of bank credit to minority communities (Sikhs, Muslims, Christians, Zoroastrians and Buddhists).The Government of India directed the banks to prepare a road map laying down specific State-wise annual targets over the next 3 years to ensure that Priority Sector lending to Minority Communities is raised to 15% by the end of 200910. The number of Minority concentration districts (MCDs) which were 44 in March 2007, has been enhanced to 121 in the financial year 2007-08. (our present lendings to Minority Communities in identified districts constitute 13.50% of the priority sector advances of these identified districts).

During the financial year 2007-08, our Bank has opened 256 new branches in the MCDs. Further, 140 centres have been identified for opening of new branches. Nodal officers have been designated for co-ordinating Minority cell related work at all our Local Head Offices. Our Lead District Managers have been advised to monitor the credit flow to Minorities at monthly intervals and take corrective steps wherever the performance is low.

Our financial assistance to Minority Communities in the identified Minority concentration districts is furnished hereunder:

Table No-8 Credit Assistance to Minorities:

(Amount in Rs. crore)Period No. of No. of Amount districts A/cs identified by GOI

Mar. 2006 44 5.93 lacs 1016Mar. 2007 44 7.94 lacs 2106Mar. 2008 121 9.88 lacs 3516

Our Local Head Offices have been advised to have special publicity campaigns for creating awareness of our schemes to Minorities. Village level meetings are being conducted to create awareness of financial assistance to Minorities in all the service area villages of the bank apart from Visual and Print media. 28 Training Camps and Melas were arranged by our branches in MCDs wherein 1,87,153 members of minority communities participated.

Information on assistance to Minorities has been put up on our Bank's Website. We are now targeting two schemes- SBI Talent Awards' Scheme and Adoption of a Girl Child Scheme, at our branches in MCDs.

F. CORPORATE STRATEGY & NEW BUSINESSES:

In order to maintain our premier position in the financial services arena the Bank has institutionalized innovation and change. Against this backdrop, and in order to quickly identify and respond to emerging opportunities the Bank created the position of Dy Managing Director (Corporate Strategy & New Businesses) in the year 2006. During the last one and a half year, various new business initiatives have been undertaken by the Bank, as under:

F.1. Pension Fund Business:

State Bank of India has been appointed as a sponsor of Pension Fund Manager (PFM) by PFRDA to manage the pension funds of Central and State Govt. employees under New Pension System (NPS) of Govt. of India. SBI Pension Funds Pvt. Ltd. has been incorporated as a wholly owned subsidiary of State Bank of India to manage the pension funds under NPS. The Company has been allocated the largest share (55%) in the pension fund corpus.

F.2. Financial Planning and Advisory Services (FP&AS):

Financial Planning and Advisory Services initiative is focused on deepening the existing relationship of the Bank with mass affluent and high-end customers and help them in managing their assets through a mix of products/strategies. Our relationship managers will advise the customers to meet their needs of protection, invest in various classes of assets through investment planning, tax planning, retirement and real estate plans. Going forward, we plan to commence wealth management services by March 2009 and further introduce private banking by March 2012.

F.4. Mobile Banking:

The proliferation of mobiles has led to the emergence of a new channel for the delivery of basic banking services and small value e-commerce services. Considering the immense potential and the cost effectiveness of delivery, the Bank has decided to introduce mobile telephone based banking services which we plan to commence before the end of the first quarter of 2008-09.

F.5. Private Equity:

The Bank has identified private equity in different areas as a key new business. The rapid expansion of Indian economy, especially in growth sectors like Technology, Pharma, Health Care, Realty and Infrastructure, has opened up large opportunities of equity funding which have continuously shown superior returns. The Bank is at an advanced stage of preparedness for setting up various equity funds. Regulatory approval processes and JV formation are under implementation and a few funds are expected to be floated by the end of first half of the financial year.

F.6. Custodial Services:

With increasing securities transactions originating from domestic and foreign investors, there is an excellent demand for providing full range of custodial services. Accordingly, the bank has decided to expand its present capabilities in the domestic custody and offer these services as a new business in collaboration with a leading global custodian. The process of forming the joint Venture is at an advanced stage. In addition to Custody (local and foreign institutional) & Depository services the JV would provide other value added services like Fund administration and securities lending and borrowing services on a full-fledged Straight Through Processes (STP) and web enabled environment.

F.7. Non-Life Insurance:

While SBI LIfe is meeting a part of the requirements under Protection Services, the insurance offering bouquet will be complete with the inclusion of General Insurance products, greatly enhancing the customer value proposition at our vast branch network and enhancing the brand value of the Bank. With this end in view the Bank has decided to enter General Insurance Business through the joint venture route. The Bank aspires to be amongst the top 3 players in the General Insurance space within a period of 10 years. It is expected that the JV partner will be identified shortly and MOU/ Definitive Agreement(s) will be signed during the quarter ending June 08. After this process, Insurance Regulators (IRDA) and RBI will be approached for seeking regulatory clearances. We anticipate the start of the business by the year end.

F.8. Merchant Acquisition Business:

The increase in usage of cards of various kinds provides huge opportunities. We are in the process of entering merchant acquisition services through a joint Venture subsidiary in order to bring in the best practices and services at par with international benchmarks. We expect this business to grow substantially over the next few years and achieve market leadership position.

G. INTERNATIONAL BANKING GROUP:

Operations of Foreign Offices:

As on 31.03.2008, the Bank had a network of 84 overseas offices spread over 32 countries covering all time zones.

Net Profit from Bank's overseas operations (including subsidiaries and joint ventures with more than 50% shareholding) registered a growth of 84% during the fiscal year mainly driven by significant growth of 48% in Net Customer Credit.

Resource Management:

The bank was able to manage growth despite tight liquidity position in the global markets due to issues arising out of the US sub-prime mortgage crisis. This was because the core focus area remained on primary deposit mobilisation which stood in good stead in this period of extreme volatility.

Despite volatile and challenging global market conditions, the Bank successfully entered the Malaysian Ringgit denominated bond market. This represented first ever MYR bond issue by an Indian borrower in the Malaysian market.

NRI Business:

NRI remittances business routed through Bank's foreign offices during the year registered a growth of more than 160%. The online USD and GBP remittance products more than doubled in the year. SBI -Nepal Express Remit has been launched from select Indian branches for enabling speed remittances to Nepal.

Instant Transfer remittance facility, launched in Mar 07, was extended to 51 foreign offices in 18 countries. Internet enabled Instant Transfer was launched from Nepal and Bahrain offices; this product will be extended to other countries shortly.

Tie ups with two exchange companies in Oman and UAE in addition to the existing ten were operationalised to expand the Bank's outreach in the Middle East and boost remittance business. A tie up with Arab National Bank for remittances from Saudi Arabia was entered into in 2007-08.

Overseas Expansion:

SBI became the first Indian bank to receive approval from Monetary Authority of Singapore for Qualifying Full Bank licence, which enables a foreign bank to open up to 25 offices/ branches in Singapore. During the year 200708, SBI received approval from local regulators to open one more branch each in New York, USA and Male. Besides, process of opening of a branch at Jeddah, Saudi Arabia was initiated in 2007-08.

Domestic Operations:

Export Credit:

The Bank's outstanding export credit stood at Rs.26,531 crore, thereby registering a growth of more than 21% over previous year.

Project Export Finance:

State Bank of India is an active participant in financing project export activities involving bidding and execution of turnkey / civil construction contracts and export of engineering goods on deferred payment basis, as also service exports.

During the period April 2007 to March 2008, the Bank supported 31 project export proposals with contract value aggregating Rs.13,489 crore, in 13 countries. Bank's aggregate exposure as at the end of March 2008 was Rs.993 crore.

Merchant Banking:

The Bank further intensified its thrust in the area of syndicated foreign currency loans and participated in corporate syndicated loan deals amounting to USD 27,575 million during April 2007 to March 2008, besides extending several bilateral facilities aggregating US$ 933 million.

Bank has participated to the extent of US $3,038 million in 31 Merger and Acquisition deals aggregating US $22,561 million in 2007-08 as against participation to the extent of US $1,073 million in 13 deals aggregating US $5,375 million during the previous year.

The Bank was ranked No. 1 in the Asia Pacific (excluding Japan and Australia) in the mandated arranger/book runner league table for syndicated loans by IFR Asia.

Global Link Services Activities (GLS):

GLS of the Bank facilitates export payments, other overseas collections and inward remittances, thereby improving the profitability of the Bank's foreign exchange operations. During the fiscal year 2007-08, GLS, on behalf of domestic branches of the Bank, handled 153715 export bills and 232468 foreign currency checks aggregating USD 19.55 billion during the year against USD 13.30 billion in the previous year. In addition, GLS handled 764,341 transactions amounting to USD 914.84 million under inward remittance facility.

Correspondent Relations:

To cater to the needs of a large customer base of the Bank and also to supplement the efforts of our foreign offices in the area of international banking, the Bank has developed a network of correspondent banks numbering 523, consisting of reputed international banks spread over 124 countries. The Bank also has about 1100 Bilateral Key Exchange (BKE) arrangements for SWIFT, which facilitates a seamless flow of financial messages covering trade, remittances, etc.

Country Risk & Bank Exposures:

Country risk management policy was formulated in line with the RBI guidelines. Detailed countrywise and bank-wise risk analysis is undertaken to arrive at respective exposure limits. Both country and bank exposure limits (product wise) are being monitored on a regular basis.

H. ASSOCIATES AND SUBSIDIARIES:

H.1 The State Bank Group with a network of 15118 branches including 4932 branches of its seven Associate Banks dominates the banking industry in India. In addition to banking, the Group, through its various subsidiaries, provides a whole range of financial services, which include Life Insurance, Merchant Banking, Mutual Funds, Credit Card, Factoring, Security trading and primary dealership in the Money Market.

H.2 Associate Banks:

SBI's seven Associate Banks had a market share of 7.29% in deposits and 7.44% in advances in March 2008.

Table-9 Performance Highlights of Associate Banks (ABs):

As on Growth 31.03.2008 (%)

Agg. Assets 289642 21.07Agg. Deposit 234167 19.07Agg. Advances 178375 21.64Operating profit 4336 1.03Net profit 2277 -12.11

Growth % Growth % As on As on 31.03.2007 31.03.2008

Credit Deposit Ratio 74.57 76.17Capital Adequcy Ratio 12.22 12.50Gross NPA 1.83 1.48Net NPA 0.76 0.61Return on Equity 17.71 18.50

H.3 SBI Commercial & International Bank Ltd. (SBICI):

As at the end of March 2008, the aggregate deposits and total advances of SBICI stood at Rs. 446.07 crore and Rs. 363.75 crore respectively. The Bank recorded an operating and net profit of Rs.12.37 crore and Rs.12.85 crore respectively. The net NPA as at the end of March 2008 was Nil.

Performance Highlights of Non-Banking Subsidiaries/Joint Ventures:

H.4 SBI Capital Markets Limited (SBICAP):

SBICAP has successfully positioned itself as a full service investment banking outfit offering Project Advisory Services, arrangement of Structured Finance, Capital Market Services like Equity issuances, Mergers and Acquisitions Advisory Services, arrangement of Private Equity, etc. The company consolidated further its dominant position as arrangers of debt for the corporate sector both in the infrastructure as well as non-infrastructure sectors. The following achievements are some of the many recognitions won by the Company during the year:

* Ranked No. 1 Mandated Lead Arranger for the third consecutive year in the Asia Pacific Region by Thomson Financial's Project Finance International (Global Ranking No.9).

* Ranked No.1 Loans Mandated Arranger in Asia Pacific Region by Bloomberg and IFR Asia.

* Syndication of credit facilities to Guru Gobind Singh Refineries Ltd., lead arranged by the Group, adjudged best Petrochemical deal in Asia Pacific by Thomson Financial's Project Finance International.

* Company's league table ranking for IPOs improved from 9th position last year to 3rd position in 2007-08.

The company has posted a PAT of Rs.142.19 crore in March 2008 as against Rs.71.18 crore last year.

H.5 SBICAP Securities Limited (SSL):

SSL, which commenced its operations in June 2006, is a broking company offering equity broking services to retail and institutional clients both in the cash as well as in the Futures and Options segments. It is also engaged in Sales & Distribution of other financial products like Mutual Funds, etc. It launched E-broking services to the clients of SBI and 5 of the Associate Banks during the year. The Company's net profit for the year increased three folds to Rs.12.21 crore from Rs.4.04 crore last year.

H.6 SBICAPS Ventures Limited (SVL):

SVL has set up a USD 100 million Knowledge Sector Fund, jointly with SBI Holding Inc. Softbank, Japan.

H.7 SBICAP (UK) Ltd.:

SBICAP (UK) Ltd. has been aggressively marketing for potential clients and arranging for them Foreign Currency Convertible Bonds (FCCBs), Private Equities (PEs) and Cross-border Mergers and Acquisitions(M&As) transactions.

H.8 SBI DFHI LTD.:

SBI group holds 67.01% of the Company's Paid Up Capital, while other Nationalized Banks hold 22.46%. i All India Financial Institutions and Private Sector Banks hold 5.84% and the Asian Development Bank holds 4.69% as on March 31, 2008.

For the period upto March 2008, the Company had earned a PAT of Rs.85.68 crore. The Company prudently diversified into profitable Non-SLR avenues resulting in better profits this year.

Total Secondary market turnover of the company was Rs.49491.26 crore. The market share under Proprietary trading was 3.10%.

H.9 SBI Cards & Payments Services Pvt. Ltd. (SBICSPL):

During the year 5.3 lac additional cards were issued increasing the Cards in Force (CIF) to 32 lacs as at the end of March 2008. The total receivables stood at Rs.2666 crore as at the end of March 2008 and were 5.25% higher than receivables of Rs.2533 crore as at the end of March 2007.

Table-10: The Performance Highlights of the Associate Banks as at March 2008 are as under:

(Amount in Rs. crore)Name of the Bank A B C D E

State Bank of Bikaner & Jaipur 75.00 32701 25319 661.18 315.00Hyderabad 100.00 51796 35915 991.19 556.99Indore 98.05 24076 18352 451.20 234.01Mysore 92.33 26781 21315 567.52 318.86Patiala 100.00 48186 36706 779.33 413.73Saurashtra 100.00 15968 12325 176.85 51.99Travancore 75.00 34658 28442 709.09 386.11All 7 Banks - 234167 178375 4336.36 2276.69

A = SBI's share in the Capital (%)B = DepositsC = Advances D = Operating ProfitE = Net Profit H.10. SBI LIFE INSURANCE COMPANY LIMITED (SBILIFE):

SBI Life has a unique multi- distribution model comprising Bancassurance, Retail Agency & Institutional Alliances and Group Corporate Channels for distribution of Insurance products. Gross premium income was over Rs.5,622 crore for the period ended March 2008. The Company has added 19 lac new lives during the year. SBI Life has been rated as 'The Most Trusted Private Sector Life Insurance Company' according to a survey conducted by Brand Equity in association with AC Nielsen ORG-MARG and the Economic Times. It has also received the highest financial rating AAA' from CRISIL. SBI Life has achieved the prestigious CMMI Level 3 certification for Information Systems Group (ISG) and has recently been awarded ISO 9001:2000 certification for Claims department. It has been ranked 51 across the world in terms of number of Million Dollar Round Table members for 2007.

H.11. SBI Funds Management (P) Ltd. (SBIFMPL):

SBIFMPL was conferred with CNBC AWAAZ Consumer Award 2007 for the most preferred Brand of Mutual fund and also received the Outlook Money and NDTV Profit Awards for the Best Equity Fund House and the Overall Best Fund House for 2007. The Lipper Global Ranking study rated two schemes managed by SBIFMPL, namely SBI Magnum Tax Gain and SBI Magnum COMMA Fund among the best performing 100 schemes across the world for the period ended 31st December, 2007. Magnum Balanced Fund, Magnum Taxgain Scheme and Magnum Sector Funds Umbrella-Contra Fund were ranked Seven Star Funds by ICRA and won ICRA Mutual Fund 'Gold Awards: for best performance in their respective categories for the period ended 31st December, 2007 ICRA Mutual Fund 'Silver Awards' was also won by five of the schemes managed by SBIFMPL for performance among the top 10% for the period ended 31st December, 2007 in various categories. Ranking in terms of Assets Under Management improved by one notch from 7th to 6th position as on 31.03.2008

The total net assets under management stood at Rs. 26490 crore as on 31.03.2008 as against Rs17,016 crore as on 31.03.2007. The value of portfolio assets managed was Rs.5,003 crore as on 31.03.2008 as against Rs.1,372 crore as on 31.03.2007. SBIFMPL reported a net profit of Rs.70.37 crore after tax as on 31.03.2008 as against Rs.29.78 crore for the previous year.

H.12 SBI Factors and Commercial Services Pvt. Ltd. (SBIFACTORS):

Asset level of the Company increased by 56% (from Rs.1,220 crore to Rs.1,908 crore). It recorded a growth of 53% (year-on-year) in total income and ended the year with a PBT of Rs. 43.17 crore as against Rs.20.36 crore last year and PAT of Rs.28.38 crore, as against Rs. 13.17 crore last year.

H.13 Global Trade Finance Ltd (GTFL):

State Bank of India acquired 91% stake in GTFL, by acquiring shareholdings held by EXIM Bank (40%), International Finance Corporation, Washington (12.50%), and FIM Bank (38.50%) in GTFL. Due to further infusion of capital, present shareholding of SBI in GTFL is 92.03%.

GTFL is one of the leading Factoring Companies in India and has the highest market share (85%) in Export & Import Factoring. The NBFC, which is into trade financing in the business-to-business (B2B) segment, has reported a 155% jump in its net profit to Rs.73.60 crores for the financial year ended March 31, 2008, as against Rs.28.90 crores in the corresponding period last year.

I. ASSET QUALITY:

NPA MANAGEMENT:

The position of NPA reduction as on 31.03.2008 is given in the table below:

Table No-11: Asset Quality

(Amount in Rs. crore)Particulars Amount

1. Gross NPA 12,837.342. Gross NPA Percentage 3.04%3. Net NPA 7,424.344. Net NPA Percentage 1.78%5. Cash Recovery in NPA 1,732.156. Upgradation to Standard Assets 1,516.847. Write Off 1,242.528. Gross Reduction (3+4+5) 4,491.519. Recovery in written off account 838.64

I.1.2. Restructuring of impaired Standard Assets as well as viable non performing assets, both under CDR mechanism as well as under Bank's own scheme, has been given top priority for arresting new additions and reducing the existing level of NPAs. The machinery for identification and monitoring of Special Mention Accounts as per the guidelines of RBI by making prompt review and taking quick corrective action has also been geared up for the purpose.

CDR system has done well as a resolution option for stressed assets which are seen to have the potential for revival. Out of 165 companies brought under CDR from the entire Banking System, SBI has an exposure in 61% cases (i.e. in 101 companies with exposure of Rs. 7,649 crore).

Out of these, 21% of CDR cases i.e. 22 companies carrying 29% exposure (Rs. 2196 crore) have been revived and have since exited CDR due to improved performance - a few of these being now high growth companies. 23 other cases have been withdrawn from CDR system. Live cases under CDR as on 31.03.2008 number 56, amounting to Rs. 4,409 crore, of which, 34 cases with Rs.3,408 crore (77%) exposure are classified as 'Standard'.

I.1.3. Two Financial Assets involving principal outstanding of Rs.25.22 crore have been sold to other banks / ARCIL during the year.

I.1.4. One asset with an exposure of Rs.9.00 crore has been purchased with which a beginning has been made in purchase of NPAs by the Bank.

J. INFORMATION TECHNOLOGY.

Our IT initiatives have played a major role in transforming the Bank into a highly responsive organization to meet the challenges of a globalised economy. The Bank is pursuing an aggressive IT policy as a strategic initiative to meet the growing competition for business, achieve efficiency in internal operations and meet customer expectations. With this end in view, the reach of our IT initiatives was expanded to cover more banking touch points and overall business.

J.1. Core Banking:

Core Banking Solution (CBS) presently covers 9390 domestic branches transacting more than 98% of the Bank's domestic business. CBS offers anytime anywhere banking through Multicity Cheques and other products. Our 407 branches have been enabled for Core integrated Trade Finance solution. We have provided to our customers a full featured internet front-end e-Trade SBI' for their trade related transactions.

J.2. Internet Banking:

Internet Banking has been implemented at 9112 domestic branches, and is used by retail banking as well as Corporate customers for enquiry, downloading account statements, e-rail, e-ticketing for Indian Airlines, e-tax, fee payment, e-pay (online utility bill payment), Bulk payments by corporates, funds transfer to customers of our Bank as well as of other banks through Visa Money Transfer, RTGS and NEFT. Our Corporate Internet Banking (CINB) enables our corporate customers to transact almost all of their banking transactions through internet. Through our fully featured CINB account Vistaar' (Freedom), corporates can make transactions upto an amount of Rs 500 crore per transaction from their own offices. CINB customers can also submit online requests for issue of drafts. They can also make payments to EPFO, DGFT and OLTAS besides making payments to their suppliers and vendors.

J.3. Foreign Offices Project:

Finacle software for Treasury and Core Banking Solution has been implemented at 82 foreign offices in 32 countries. Our 70 foreign offices have been enabled in 17 countries to offer Internet Banking. INR remittance facility through Internet Banking has been provided to branches in 11 countries. This facility will be extended to all the foreign branches soon. ATM facilities have also been provided in 7 of our foreign offices.

J.4. ATMs:

We have the largest ATM network in the country with 8460 ATMs of State Bank Group installed throughout the length and breadth of the country. Our ATMs are enabled for various value added services like payment of utility bills, mobile top up, SBI card bill payment, SBI Life premium payment, donation to

Trusts / Temples and funds transfer. Further, bilateral sharing of ATMs with thirteen banks has brought additional 10500 ATMs within the reach of our customers. We have plans to scale up our ATM network to 15000 by March 2009 and to 25000 by March 2010.

J.5. Payment Systems Group:

Through our Payment Systems Group (PSG), we have enabled 8817 branches for RTGS and 9425 branches for NEFT. We also introduced instant Inward Rupee remittances from Foreign Offices (FOs) for direct credit to CBS accounts in any of the State Bank Group branches. This facility has also been integrated with RTGS and NEFT enabling Foreign Offices to send Rupee remittances to any Bank in the country. On-line Rupee remittance facility to beneficiaries in Nepal from authorised CBS branches of SBI is another product introduced during the year. Other banks in the country can also effect Rupee remittances to Nepal through this facility by originating the transactions at their end and forwarding them through NEFT to the Payment Hub at PSG.

J.6. Information Security:

IT Policy and IS Security Policy have been implemented after being benchmarked against best global practices. The Bank's Information Systems are regularly reviewed to ensure that these are adequately secure.

J.7. Networking:

State Bank Connect, the Wide Area Networking (WAN) project of the Bank, is capable of carrying data, voice and video in a secure way. All Applications requiring connectivity now ride on the State Bank Connect backbone. A total of 14625 branches / offices have so far been brought under State Bank Connect. Miscellaneous Operations:

K Risk Management & Internal controlsL Business IntelligenceM Customer Service & Community Services Banking

K. RISK MANAGEMENT & INTERNAL CONTROLS:

RISK MANAGEMENT IN SBI:

K.1. Risk Management Structure:

* An independent Risk Governance structure in line with the international best practices has been put in place in the Bank. In view of the growing volume and complexity in business, risk management has assumed critical importance. Accordingly, the Bank has elevated the risk function to Board level by appointing the Managing Director as Chief Risk Officer to ensure this crucial function gets the importance it deserves.

* The Bank has Board approved policies and procedures in place to measure, manage, mitigate various risks such as Credit, Market, Operational, Liquidity, and Interest Rate Risks across all its portfolios.

* The Risk Management Committee of the Board oversees the policy and strategy for risk management. In addition, various Risk Committees, namely the Credit Risk Management, Asset Liability, Market Risk Management and Operational Risk Management Committees are in place to monitor risks in their respective areas on an ongoing basis.

K.2. Migration to Basel II:

* The Bank, as per RBI Guidelines, has migrated to Basel II as on 31st March 2008 with the Standardized Approach for Credit Risk and Basic Indicator Approach for Operational Risk, having already implemented Standardized Duration Method for Market Risk with effect from 31.03.2006. Simultaneously, processes have been set in train for fine-tuning Systems & Procedures, Information Technology capabilities and Risk Governance Structure to meet the requirements of the Advanced Approaches.

K.3. Credit Risk Management:

* Credit Risk Management processes encompass identification, assessment, measurement, monitoring and control of the credit exposures.

* The Bank has multiple Credit Risk Assessment models in place covering Manufacturing, Trade, Non-Banking Financial Corporations, Banks and Primary Dealers. The Credit Risk Models developed for Manufacturing and Trading sectors have been refined to conform to the requirements under Advanced Internal Based Approach of Basel II. The other models are also being reviewed.

* The Bank conducts Industry studies to assess the Risk prevalent in each industry and also gives guidelines to operating functionaries in lending to these industries. Industry wise exposure limits are fixed and monitored regularly.

* The Bank manages its portfolio of loan assets with a view to limiting concentrations in terms of risk quality, geography, industry, maturity and large exposure.

K.4. Market Risk Management:

* Market risk is the risk that the value of the 'on' & 'off' balance sheet positions of the Bank will be adversely affected by movements in market variables viz: interest rates, exchange rates, equity and commodity prices.

* Market Risk Management is governed by Board approved Policies for Investment and Trading in Bonds, Equities and Foreign Exchange. The identification, measurement, monitoring and reporting of Market Risk is done by the Market Risk Management Department which is a part of the independent Risk Governance Structure of the Bank.

* Exposure, Stop loss and Duration limits have been prescribed. These limits along with other management action triggers, are tracked daily and necessary action initiated as required to control and manage Market Risk.

* In addition, Value at Risk (VaR) is generated on a daily basis for the purpose of close monitoring. Back testing of VaR numbers is also carried out to validate these measurements. The portfolio is also subjected to Stress testing under various scenarios so that a proper understanding of the potential losses under extreme price movements is always kept in view.

K.5. Operational Risk Management:

* Operational risk is the risk of losses resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk includes legal and regulatory risk but excludes strategic

and reputational risks.

* The Bank manages Operational risks by putting in place and maintaining a comprehensive system of internal controls and policies. The Operational Risk Management Policy of the Bank establishes a consistent framework for systematic and proactive identification, assessment, measurement, monitoring, and mitigation of operational risk. The policy applies to all business and functional areas within the Bank, and is supplemented by operational systems, procedures and guidelines which are periodically updated.

* All key processes, risks and controls are documented and periodic assessments of risks and controls are carried out. The Bank has initiated steps for creation of a loss database with a view to graduate to Advanced Measurement Approaches under the Basel II Guidelines.

* The objective of the Bank's Operational Risk Management is to continuously review systems and control mechanisms, create awareness of operational risk throughout the Bank, assign risk ownership, alignment of risk management activities with business strategy, and ensuring compliance with regulatory requirements.

K.6. Asset Liability Management:

The Asset Liability Management (ALCO) of the Bank is engaged in evolving appropriate systems and procedures for ongoing identification and analysis of Market Risk which comprises mainly the Liquidity Risk Management and Interest Rate Risk Management. It also conducts a detailed Behavioural Analysis of the components of Assets & Liabilities besides Balance Sheet simulation, on an on-going basis.

The Market Related Funds Transfer Pricing (MRFTP), a scientific internal funds transfer pricing, evolved a a supplement to Assets Liability Management (ALM) has been rolled out to all branches under National Banking Group (NBG) from 1st April 2007, thus covering all branches of the Bank under the revised transfer pricing from 111 April 2007. The revised transfer pricing helps in ascertaining the true profitability of branches by comparing the product prices with the market rates.

K.7. Country Risk & Bank Exposure:

Prudent exposure risk management is being ensured by setting up appropriate bank exposure limits product-wise, on a large number of Foreign Banks. Substantial counterparty bank limits for handling letters of credit, bank guarantees, forex and money market activities are in place. Limits are also set up for Investment/ Lines of Credit related exposures on acceptable banks, in order to clear bankable propositions.

The Country Risk Management Policy, in line with RBI guidelines for setting up country exposure limits, is in place, and the overall country risk for the Bank as a whole is monitored on a regular basis.

K.8. Internal Controls:

K.8.1 The Bank has an in-built internal control system with well-defined responsibilities at each level. The Inspection & Management Audit Department of the Bank carries out 3 streams of audit, viz. Inspection and Audit, Credit Audit and Management Audit, covering different facets of the Bank's activities.

K.8.1.1 Inspection and Audit:

Risk Focused Internal Audit (RFIA), an adjunct to risk based supervision, as per RBI directives, was introduced in the Bank's audit system on 01.04.2003. A.11 domestic Branches have been segregated into 3 groups on the basis of business profile and risk exposures, and are being subjected to RFIA.

K.8.1.2 Credit Audit:

Credit Audit aims at achieving continuous improvement in the quality of the Commercial Credit portfolio with exposures of Rs.5 crore and above. Duly aligned with Risk Focused Internal Audit, it examines the probability of default, identifies risks and suggests risk mitigation measures.

K.8.1.3 Management Audit:

Management audit has been reoriented to focus on the effectiveness of risk

management in processes and procedures. Management Audit of six Circles was taken up and completed during the current year.

K.9. Vigilance:

Vigilance Department of the Bank oversees 3 primary aspects of vigilance: Preventive, Detective and Punitive. This is achieved through various means, Le through linkages with the training system, customer education, Inspection & Audit Department, as well as suitable incentive schemes.

L. BUSINESS INTELLIGENCE:

MIS in the Bank is being constantly assessed, upgraded and fine tuned to cater to the growing information requirements of various user departments and operational units. A Data Warehousing Project conceived as a single source for all data required for support in decision making, analysis, forecast and reporting is under progress.

M.1 Customer Service:

The Bank strongly believes that customer service will be the most important factor in maintaining and improving its leadership in India's Banking Industry. The Bank took several initiatives during the year to enhance awareness among staff on the importance of good customer service in enhancing market share and business growth. The training programmes for staff were revamped to focus on marketing, iattitudinal changes, business strategies and goals. All the staff of the Bank were exposed to a training programme called 'Parivartan' (Transformation). ,The Parivartan programme has been successful in bringing about attitudinal changes in employees at most of the branches.

Open customer meets were conducted regularly at all important centres. The Bank's customers, staff and senior Officials freely interacted at .these meets on issues relating to customer grievances and service.

The Bank's toll free Helpline number (1800 112 211) offers comprehensive product information to retail customers apart from being available 24x7 for enqiries and grievances relating to alternate channels. Besides, the Bank has dedicated helpline numbers available at all its 14 Local Head Offices for grievance redressal. A comprehensive analysis of customer grievances is done every quarter to identify common systemic issues that need rectification.

M.2 Community Services Banking:

Apart from the normal banking operations, the Bank, as a responsible and responsive corporate citizen, seeks to reinvest part of its profit in various community welfare projects to improve the quality of life of the poor, neglected, weaker and downtrodden sections of society.

In the financial year 2007-08, the Bank made donations aggregating Rs. 8.11 crore to various Relief Funds and also to NGOs / Trusts / Societies for their projects with social orientation. In recognition of its contribution to Rural Community Development, the Bank was awarded the prestigious Reader's Digest Pegasus Corporate Social Responsibilities Award 2007. In fact, it was the only Bank to have received this recognition.

Under a new scheme named Adoption of the Girl Child' over 8,300 poor girl children have been adopted by various branches throughout the country to meet their personal and educational expenses. This is not merely a financial assistance scheme but offers emotional and psychological support to the adopted girls' due to the active involvement and care of the SBI Ladies Clubs.

From the Research and Development Fund, the Bank has so far extended Rs.6.61 crore as research grants to 71 chairs / research projects at various Universities and Academic institutions. For the current year SBI has extended 100000 Sterling Pounds to London School of Economics for establishing an India Observatory and I.G. Patel Chair at their Asia Research Centre in participation with RBI.

Miscellaneous

N Corporate Communication & ChangeO Organisational PlanningP Right to Information Act (RTI Act 2005)Q Human Resources ManagementR Business Process re-engineeringS Official Language

N. CORPORATE COMMUNICATION & CHANGE:

During the year, the first Mass Internal Communication Programme named 'Parivartan' was rolled out across the Bank. Over 3300 inclusive Two Day workshops were conducted by over 360 specially trained Trainers in a span of 100 days covering 1,30,000 employees. Never in the history of the bank had so many been trained in so short a time. The workshops caught the imagination of all employees and unleashed a new positive energy.

A professional Study conducted by Xavier Institute of Management, Bhubaneswar, found that Parivartan had brought about a perceptible positive change in each of the 25 identified Customer Service parameters.

As a part of the Transformation process, special brain storming Conclaves were held for the Top Management of the Bank where various Transformational Initiatives were identified and discussed with fixed time lines, for each Business and Group Head in the Bank. Many of these initiatives were completed during the year and many are being closely followed up for implementation at grass root level.

O. ORGANISATIONAL PLANNING - CHANGES IN SENIOR POSITIONS IN THE BANK:

New Senior positions were created during the year as part of new initiatives for complying with RBI guidelines' relating to Risk Management, implementation of Basel-II accord, catering to the needs of large corporate customers, to drive business growth in non-farm sector in Rural & Semi Urban Centres and for targeting Private Equity, Realty and Venture Capital Fund Business.

The following new positions were created during the year:

1. Managing Director & Chief Credit and Risk Officer,

2. Deputy Managing Director & GE (Wholesale Banking Group),

3. Deputy Managing Director & GE (Mid Corporate Group), 4. Deputy Managing Director & GE (Subsidiaries Business Group),

5. Deputy Managing Director & GE (Global Markets),

6. Chief General Manager (Chief Information Officer - Global IT),

7. Chief General Manager (New Business Private Equity, Realty & Venture Funds),

8. Chief General Manager (Rural Business - Non-farm),

9. Chief General Manager (CPPD),

10. General Manager (New Business - Pension Funds & General Insurance),

11. General Manager (New business -Wealth Management & Private Banking),

12. Deputy General Manager (Alternate Channels),

13. Deputy General Manager (Group Risk Management Department)

P. RIGHT TO INFORMATION ACT 2005 (RTI ACT 2005):

Structure has been put in place for handling all matters relating to RTI Act 2005. All Branch Heads (except CAG), Assistant General Manager (COO) at GAG branches, all Heads of OAD at OLROs/RBOs/ ZOs/LHOs and Assistant General Manager (RTI) at Corporate Centre have been designated as Assistant Public Information Officers (ACPIOs). General Managers of Networks at Local Head Offices, Deputy General Managers & Branch Heads of Corporate Account Group, General Manager of Mid Corporate-Region, General Manager of Stressed Assets Management Group (SAMG) and General Manager (OL & CS) at Corporate Centres have been designated as Central Public Information Officers (CPIOs). The Chief General Managers of LHOs, Corporate Account Group, Mid Corporate Group, Stressed Assets Management Group have been designated as Appellate Authority under the Act in their respective area of control and Chief General Manager (Banking Operations) for Corporate Centres and its establishments. An exclusive RTI Department', has been created at Corporate Centre to handle and coordinate various issues under the Act. For the convenience of the public, the Bank has created an RTI link in its website http://sbi.co.in and assigned an e-mail address riacell@sbi.co.in.

Q. HUMAN RESOURCES:

Q.1 Learning & Development:

Bank has taken up several key initiatives to motivate and retain its manpower.

In order to channelize the energy created by the Parivartan campaign, the Bank has launched a landmark exercise for creation of the new Vision Mission & Values statement which will be in place shortly.

Young officers are being encouraged to takeup management education by way of sponsorship tie-up with the S.P. Jain Institute of Management. 50 officers have been enrolled in the programme on a trial basis.

Bank is strong in the areas of training & development through 4 apex level training colleges and 45 learning centres across the country. e-learning' project has been launched to enable any where, anytime learning.

Q.2. HRMS:

For leveraging technology in employee management area, the Bank has started automation of its HR processes through SAP-ERP-HRMS software. Once fully implemented, it will not only create a central repository of all employees data but also will make available a variety of services, like online request submission and viewing of individual data etc. to all the employees across the State Bank group on an online real time' basis. HRMS will bring efficiency in HR operations and help the Management in making employee related decisions faster. Pensioners of SBI, IBI and Associate Banks will also form a part of this initiative and their pension will be processed through HRMS.

Q.3. Personnel Management:

The Bank has launched Performance Linked Incentive Scheme for the Branch Managers/AGMs (Region)/ DGMs(Module) and Team Incentive Scheme for the staff members of the Branch. The incentive scheme was launched with the aim of enthusing and motivating the staff members of the Branch so that the bank is placed in a position to face the competition unleashed due to liberalization of economy and maintain its lead over others. The scheme has been successful in enthusing the staff and garnering business for the Bank.

Q.4. Employees Share Purchase Scheme (SBI ESPS-2008):

The Bank also launched Employees Share Purchase Scheme along with the Rights issue with the objective of providing incentive to Eligible Employees, to stimulate their efforts towards the continued success of the Bank and to provide a means to attract, reward and retain talent in the Bank, to reward eligible employees as also to encourage equity ownership by them.

The price was fixed at Rs.1590/- (the face value of 1 share is Rs.10/-) per equity share. The Scheme opened on 28.03.2008 and closed on 30.04.2008.

Q.5. Industrial Relations:

1. A number of HR initiatives such a payment of performance linked incentives to staff, rationalisation of promotion policies and improvement in various staff loan schemes were taken up during the year. Such initiatives have helped in increasing the motivation level of staff significantly.

2. To meet requirement of staff for an ongoing branch expansion programme, separate recruitment exercises were undertaken to recruit clerical staff for metro/urban centres, rural/semi-urban centres and also for marketing. This also helped in reducing the age profile of staff and posting of younger staff at the front line.

3. The process of consultation and discussion with both the staff and officers federations continued during the year.

4. The industrial relations climate of the Bank remained cordial during the year.

Q.6. Staff Strength:

The Bank had a total strength of 1,79,205 on the 31St March, 2008. Of this, 32.23% are officers, 42.87% clerical staff and the remaining 24.90% were sub-staff.

Q.7. Implementation of Persons with disabilities (PWD) Act 1995:

Our Bank provides reservation to persons with disabilities (PWDs) as per the guidelines of the Government of India and section 33 of the PWD Act 1995. The total number of persons with disabilities who were employed as on 31.03.2008 was as follows: Table: 12 Number of Persons with disabilities

Category Total No. of persons strength with Disabilities

Officers 57765 279Clerical 76818 584Sub-staff 44622 204Total 179205 1067

Q.8. Representation of Scheduled Castes and Scheduled Tribes:

As on the 31st March, 2008, 34802 (19.42%) of the Bank's total staff strength, belonged to Scheduled Caste and 11460 (6.30%) belonged to Scheduled Tribes.

In order to effectively redress the grievances of the SC/ST employees, Liaison Officers have been designated at all administrative offices of the Bank. Senior officials of the Bank hold regular meetings at periodic intervals with the representatives of SC/ ST Welfare Federation and SC/ST Welfare Association at Corporate Centre, LHOs and Zonal Offices. The Bank conducts workshops on reservation policy for SCs/STs/OBCs. So also, pre-recruitment and pre-promotion training programmes are conducted by the Bank to enable SC/ST candidates to achieve the prescribed standards to effectively compete with other candidates.

R. BUSINESS PROCESS RE-ENGINEERING (BPR):

The BPR Project aspires to transform the Bank into a world class financial institution by proactively reaching out to new customers, building strong and lasting relationships with existing customers and providing best quality service to all customers across multiple channels. Accordingly, a number of new initiatives have been designed, piloted and rolled out across the Bank, which resulted in the following benefits:

* Centralised Processing Centres for Retail loans, Small & Medium enterprise loans, and Trade Finance were set up and later most of them were converted into end state models, wherein the end to end processes have been taken over.

* Positioning Relationship Managers at strategic centres to extend personalized service to mass affluent and HNI (high networth individuals).Cross-selling of various products.

* Dedicated Sales Teams like Home Loans Sales Team and Multi Product Sales Team to target niche markets.

* Assured Standard Turn Around Time for various sanction processes.

* Improvement in quality of Assets and Documentation.

* Establishment of Clearing CPCs to Centralise clearing related activities and free up branches to focus on customer services

* Accurate and timely payment of pensions to pensioners through Centralised Pension Processing Centres.

* Creation of Document Archival Centre to free up valuable space in branches.

* Contact Centre with toll-free number for providing information on products to the customers on 24X7 basis.

* Delayering the organizational structure for increasing speed and efficiency and to improve customer sevice.

During the year the coverage of the above BPR initiatives has been considerably enlarged by opening:

* 113 Retail Assets Central Processing Centres and 113 Small & Medium Enterprises City Credit Centres both covering around 2400 branches each.

* 100 Stressed Assets Resolution Centres covering 2240 branches.

* 18 Trade Finance Central Processing Centres covering 966 branches.

* 14 Centralised Pension Processing Centres (CPPC) covering 5814 branches.

* 37 Centralised Clearing Processing Centres (CCPC) covering 938 branches.

* 4 Liability Central Processing Centres (LCPC) covering 3120 branches.

* 97 Currency Administration Cells (CAC) covering 1877 branches and 1221 off-site-ATMs.

* 2112 Branches have also been redesigned across the country to provide more convenience to customers.

* Mid Corporate Loan Administration Units have been set up in 8 centres covering 68 branches to take care of post sanction activities.

All these initiatives have helped the Bank in creating a new operating architecture capable of meeting global competition.

S. OFFICIAL LANGUAGES:

During the year statutory requirements relating to the official language policy were complied with by the Bank. Several initiatives were taken to increase use of Hindi. Some of them are:

SBI Gold International Debit Card (VISA) which was launched during the year is now being issued bilingual. This is first International debit card issued bilingual.

Publicity/Educational material are now being made in Hindi and regional languages.

Responsibility Statement:

The Board of Directors hereby states:

i. That in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

ii. That they have selected such accounting policies and applied them consistently and made judgements and estimates as are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Bank as on the 31st March 2008, and of the profit and loss of the Bank for the year ended on that date;

iii. That they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Banking Regulation Act, 1949 and State Bank of India Act, 1955 for safeguarding the assets of the Bank and preventing and detecting frauds and other irregularities; and

iv. That they have prepared the annual accounts on a going concern basis.

Acknowledgement:

During the year, Shri T.S. Bhattacharya, Managing Director, on his attaining the age of superannuation, laid down office on 31.01.2008. Further, Shri S.K. Bhatttacharyya was appointed as Managing Director with effect from 08.10.2007, in place of Shri. Yogesh Agarwal who resigned from the Board on 30.06.2007 on his appointment as Chairman and Managing Director of IDBI Bank Ltd. Prof. M.S. Swaminathan resigned from the Board on 11.04.2007, on his nomination to the Rajya Sabha. Shri Ajay G Piramal retired from the Board on 31.08.2007 on completion of his term. Shri Amar Pal, non-workmen Director on the Board, retired on attaining superannuation, as at the close of business on 31.03.2008. Further, Dr. Deva Nand Balodhi and Prof. Md. Salahuddin Ansari (both with effect from 09.07.2007) and Dr. (Mrs.) Vasantha Bharucha (with effect from 25.02.2008) were nominated to the Central Board under section 19(d) by the Government of India. Shri Arun Singh, Shri Rajiv Pandey and Sbri Piyush Goyal ceased to be members of the Board on completion of their term. Shri Arun Ramanathan, Secretary (Financial Services), was nominated to the Board with effect from18.01.2008, in place of Shri Vinod Rai, who resigned on 06.01.2008, on his appointment as Comptroller and Auditor General of India.

The Directors place on record their appreciation of the contributions made by Shri Vinod Rai, Shri. T.S. Bhattacharya, Shri Yogesh Agarwal, Prof. M.S. Swaminathan, Shri Ajay G. Piramal, Shri Amar Pal, Shri Arun Singh, Shri Rajiv Pandey and Shri Piyush Goyal to the deliberations of the Board.

The Directors express their gratitude for the guidance and co-operation received from the Government of India, RBI, SEBI, IRDA, and other government and regulatory agencies.

The Directors also thank all the valued clients, shareholders, banks and financial institutions, stock exchanges, rating agencies and other stakeholders for their patronage and support, and take this opportunity to express their appreciation of the dedicated and committed team of employees of the Bank.

For and on behalf of the Central Board of Directors O.P. BhattDate: 2nd May, 2008 Chairman