1.0 Risk Management 1.1 Risk is inherent part of Banks business.

Effective Risk Management is critical to any Bank for achieving financial soundness. In view of this, aligning Risk Management to Banks organizational structure and business strategy has become integral in banking business. Over a period of year, Union Bank of India (UBI) has taken various initiatives for strengthening risk management practices. Bank has an integrated approach for management of risk and in tune with this, formulated policy documents taking into account the business requirements / best international practices or as per the guidelines of the national supervisor. These policies address the different risk classes viz., Credit Risk, Market Risk and Operational Risk. 1.2 The issues related to Credit Risk are addressed in the Policies stated below; 1.2.1 Loan Policy. 1.2.2 Credit Monitoring Policy. 1.2.3 Real Estate Policy. 1.2.4 Credit Risk Management Policy. 1.2.5 Collateral Risk Management Policy. 1.2.6 Recovery Policy. 1.2.7 Treasury Policy. 1.3 The Policies and procedures for Market Risks are articulated in the ALM Policy and Treasury Policy. 1.4 The Operational Risk Management involves framework for management of operational risks faced by the Bank. The issues related to this risk is addressed by; 1.4.1 Operational Risk Management Policy. 1.4.2 Business Continuity Policy. 1.4.3 Outsourcing Policy. 1.4.4 Disclosure Policy. 1.5 Besides, the above Board mandated Policies, Bank has detailed Internal Control Principles communicated to the business lines for ensuring adherence to various norms like Anti-Money Laundering, Information Security, Customer complaints, Reconciliation of accounts, Bookkeeping etc. 2.0 Oversight Mechanism:

2.1 Our Board of Directors has the overall responsibility of ensuring that adequate structures, policies and procedures are in place for risk management and that they are properly implemented. Board approves our risk management policies and also sets limits by assessing our risk appetite, skills available for managing risk and our risk bearing capacity. 2.2 Board has delegated this responsibility to a sub-committee: the Supervisory

Committee of Directors on Risk Management & Asset Liability Management. This is the Apex body / Committee is responsible for supervising the risk management activities of the Bank. 2.3 Further, Bank has the following separate committees of top executives and dedicated Risk Management Department: 2.3.1 Credit Risk Management Committee (CRMC): This Committee deals with issues relating to credit policies and procedure and manages the credit risk on a Bank-wide basis. 2.3.2 Asset Liability Management Committee (ALCO): This Committee is the decisionmaking unit responsible for balance sheet planning and management from the angle of risk-return perspective including management of market risk. 2.3.3 Operational Risk Management Committee (ORMC): This Committee is responsible for overseeing Banks operational risk management policy and process. 2.3.4 Risk Management Department of the Bank provides support functions to the risk management committees mentioned above through analysis of risks and reporting of risk positions and making recommendations as to the level and degree of risks to be assumed. The department has the responsibility of identifying, measuring and monitoring the various risk faced the bank, assist in developing the policies and verifying the models that are used for risk measurement from time to time. 3.0 Credit Risk

3.1 Credit Risk Management Policy of the Bank dictates the Credit Risk Strategy. 3.2 These Polices spell out the target markets, risk acceptance / avoidance levels, risk tolerance limits, preferred levels of diversification and concentration, credit risk measurement, monitoring and controlling mechanisms. 3.3 Standardized Credit Approval Process with well-established methods of appraisal and rating is the pivot of the credit management of the bank. 3.4 Bank has comprehensive credit rating / scoring models being applied in the spheres of retail and non-retail portfolios of the bank. 3.5 The Credit rating system of the Bank has eight borrower grades for standard accounts and three grades for defaulted borrowers. 3.6 Proactive credit risk management practices in the form of studies of rating-wise distribution, rating migration, probability of defaults of borrowers, Portfolio Analysis of retail lending assets, periodic industry review, Review of Country, Currency, Counterparty and Group exposures are only some of the prudent measures, the bank is engaged in mitigating risk exposures. 3.7 The current focus is on augmenting the banks abilities to quantify risk in a

consistent, reliable and valid fashion, which will ensure advanced level of sophistication in the Credit Risk Measurement and Management in the years ahead. 4.0 Market Risk

4.1 Bank has well-established framework for Market Risk management with the Asset Liability Management Policy and the Treasury Policy forming the fulcrum for procedures, processes and structure. It has a major objective of protecting the banks net interest income in the short run and market value of the equity in the long run for enhancing shareholders wealth. The important aspect of the Market Risk includes liquidity management, interest rate risk management and the pricing of assets and liabilities. Further, Bank views the Asset Liability Management exercise as the total balance sheet management with regard to its size, quality and risk. 4.2 The ALCO is primarily entrusted with the task of market risk management. The Committee decides on product pricing, mix of assets and liabilities, stipulates liquidity and interest rate risk limits, monitors them, articulates Banks interest rate view and determines the business strategy of the Bank. 4.3 Bank has put in place a structured ALM system with 100% coverage of data on both assets and liabilities. To measure liquidity and interest rate risk, Bank prepares various reports such as Structural Liquidity, Interest Rate Sensitivity, Fortnightly Dynamic Statement etc. Besides RBI reporting many meaningful analytical reports such as Duration Gap analysis, Contingency Funding Plan, Contractual Maturity report etc. are generated at periodic intervals for ALCO, which meets regularly. Statistical and mathematical models are used to analyze the core and volatile components of assets and liabilities. 4.4 The objective of liquidity management is to ensure adequate liquidity without affecting the profitability. In tune with this, Bank ensures adequate liquidity at all times through systematic funds planning, maintenance of liquid investments and focusing on more stable funding sources. 4.5 The Mid Office group positioned in treasury with independent reporting structure on risk aspects ensure compliance in terms of exposure analysis, limits fixed and calculation of risk sensitive parameters like VaR, PV01, Duration, Defeasance Period etc. and their analysis. 5.0 Operational Risk

5.1 Operational Risk, which is intrinsic to the bank in all its material products, activities, processes and systems, is emerging as an important component of the enterprise-wide risk management system. Recognizing the importance of Operational Risk Management, Bank has adopted a Comprehensive Operational Risk Management Policy. This would entail the bank to move towards enhanced level of sophistication in the years ahead and to capture qualitative and quantitative measures of Operational Risk indicators in

management of operational risk. 5.2 Bank has comprehensive system of internal controls, systems and procedures to monitor and mitigate risk. Bank has also institutionalized new product approval process to identify the risk inherent in the new product and activities. 5.3 The Internal audit function of the Bank and the Risk Based Internal Audit, compliments the banks ability to control and mitigate risk. 6.0 Banks Preparedness to meet Basel II norms

6.1 Bank carried out a comprehensive Self-Assessment exercise spanning all the risk areas and evolved a road map to move towards implementation of Basel II as per RBIs directions. The program in implementation of Risk Management, Organizational Structure, Risk measures, risk data compilation and reporting etc. is as per this laid down road map. 6.2 The Polices framed and procedures / practices adopted are benchmarked to the best in the industry on a continuous basis and the Bank has a clear intent to reach an advanced level of sophistication in management of risks in the coming year. 6.3 The ever-improving risk management practices in the Bank will result in Bank emerging stronger, which in turn would confer competitive advantage in the Market. 6.4 Bank will implement New Capital Accord w.e.f. 31/03/2008. The parallel run, till implementation, is currently underway.