KMB UT2

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25800
Company name	Kotak Mahindra Bank Limited
Country	India
Sector	Finance & Insurance
Environmental category	FI
Department	Global Financial Markets Group
Status	Active

Date SPI disclosed	February 7, 2007
Projected board date	March 14, 2007
Previous Events	Invested: March 22, 2007 Signed: March 21, 2007 Approved: March 16, 2007

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project consists of a 15-year subordinated debt of up to $45 million for Kotak Mahindra Bank (KMB or the Bank). The IFC investment qualifies as Upper Tier II Capital per the guidelines recently issued by the Reserve Bank of India permitting banks to raise subordinated debt in foreign currency from foreign investors. KMB is an existing client of IFC and is a medium sized bank with total assets of $2.3 billion (unconsolidated figure for year ended March 31, 2006). It was founded by Mr. Uday Kotak as a Non Banking Finance Company in 1986 and converted into a full fledged commercial bank in 2003. It has built up a network of 100 branches across 69 cities and towns, offering financial services to SMEs, retail individuals and corporates. This investment is part of IFC’s strategy of supporting professionally run, medium sized private banks to emerge as strong players in the Indian financial sector.

Anticipated development impact of the project

The project is expected to:

- increase access to finance for the SME sector by supporting a bank with a focus on the SME sector;
- have a demonstration effect which will encourage international and domestic investors to come forward in providing such quasi-equity instruments to the medium to small sized private banks in India; and
- strengthen the presence of the private sector banks in India by helping increase the capitalization, and hence assets of private banks in a market where public banks are still dominating.

IFC's expected development contribution

- Maintaining Capital Adequacy:

KMB, as a private sector bank, has no explicit or implicit government support. One of the main requirements for KMB to maintain a high credit rating is to maintain a high capital adequacy ratio. IFC’s $45 million investment in KMB is critical for the Bank to maintain its CAR at above 12%.

- Provide long-term financing on terms otherwise not available:

It would be difficult for KMB to raise UT2 capital from the domestic market due to limited investor appetite for long tenor deeply subordinated loans for small and medium sized banks. The IFC transaction is thus expected to provide long-term funding with a tenor and of amount that is currently not available in the capital markets to this segment.

- Broadening Future Funding Source:

Although KMB is a domestically AA+ rated bank, its funding sources are at present limited to traditional ones, namely: shareholders’ funds, deposits, senior debt and lower tier II funds. It has not yet tapped into the quasi-capital markets (such as UT2), domestically or internationally, to take advantage of this product that allows the Bank to leverage up, improve capital adequacy, and enhance the return on equity. This would be the first time that the Bank obtains the UT2 from a foreign investor. Having a track-record of being able to tap into the market would pave the ground for the Bank to build such funding channels in the future.

- Leverage:

The $45 million UT2 to be provided by IFC will be counted as the Bank’s statutory capital that will enable KMB to leverage up at a ratio of up to 10-15 times, i.e., about $650 million of incremental assets can be put on the balance sheet from the $45 million IFC investment. In comparison to KMB’s total asset size of about $2.3 billion (standalone entity, financial year ended March 2006), the assets that IFC’s investment could help mobilize for this medium sized private sector bank is significant. Thus, this IFC investment would help address the funding needs of the Bank to sustain its asset growth and to maintain and increase its market share.

Environmental and social issues - Category FI

This project has been classified as a Category FI project according to IFC’s Environmental and Social Review Procedure.

During appraisal, IFC analyzed KMB’s portfolio, for types of transactions, size, tenor and industry sectors and determined the Applicable Requirements based on an analysis of the potential social and environmental risks associated with KMB’s portfolio and considering IFC’s investment. The Applicable Requirements are:

- The IFC FI Exclusion List; and
- The applicable Indian National Social and Environmental Laws and regulations.

IFC also reviewed KMB’s existing social & environmental review procedures and capacity to implement the same.

Based on the Applicable Requirements and procedure and capacity review, KMB will be required to:

- Develop a Social & Environmental Management System (SEMS), prior to disbursement to the satisfaction of IFC.
- Identify responsible, qualified persons to manage and implement the SEMS.
- Commit to implement the SEMS, to ensure that its investments/activities are in compliance with the Applicable Requirements.
- Commit to take action to remedy any gaps in SEMS implementation on an ongoing basis.
- Submit a periodic report to IFC as per a format to be provided by IFC.

IFC PROJECTS