Valued shareholders and distinguished guests It is a privilege and pleasure to welcome all of you to the 68th Annual General Body Meeting of the Bank. I am deeply honoured to be here to present to you the performance of the bank during 2005-2006 and the future business strategy and outlook.

The J&K Bank is on the path to discover its uniqueness as the largest commercial institution in J&K and also as one of the fastest growing private banks in the country. Being the flagship institution of the state enjoins upon us to set the standards of professional excellence, be an example by delivering outstanding performance in growth and profitability, catalyse growth in the state economy, and create enabling conditions for the financial empowerment of the people of J&K.
Nationally, the rapidly changing business context and competition and the regulatory framework require that along with being fast growing, we have also to be the stable. In the larger social context, we have to be fervid because we are ambassadors of the state for the rest of the country: J&K Bank being the only institution of, and from the state, that has a presence in almost all the states in the country. To be all that is expected of us by our customers, our clients, our employees, our investors, our regulator and our promoters, the J&K bank must perform like a commercial bank, act like a development financial institution and think like a central bank. This will take some doing.

In this overall context, the business goals for the bank are clear; to perform like a commercial bank we have to generate and sustain high profits with international quality financial service and solutions; to act like a development financial institution we must lend much more in the state of J&K and to think like a central bank we have to have the stability and financial strength. Accordingly, the new vision of J&K Bank is to engender and catalyse economic transformation of Jammu and Kashmir and capitalize from the growth induced financial prosperity. The bank aspires to make Jammu and Kashmir the most prosperous state in the country, by helping create a new financial architecture for the J&K economy, at the epicenter of which will be the J&K Bank.

In the course of the last year, the management has set in motion a multi-pronged strategy to start this process. Moving away from the de-risking model - raising low cost deposits within J&K to lend outside the state -- that had been successfully followed by the bank in the last decade, it was decided to leverage the existing physical network to increase the regional lending and create a virtuous cycle of lending and saving within the J&K state. Undoubtedly, this change was catalysed by positive socio-economic developments within the state.

At the state level, which provides the operative economic context for the functioning of J&K Bank in the new strategy, the growth performance has been more than exceptional. The Gross State Domestic Product (GSDP), which is the total income of the economy, has seen a sharp turnaround in the last three years. The per capita income is estimated at Rs 16,000, which is an increase of 6% over the previous year. This level of per capita income is lower than the All India level of Rs 23,000. It is obvious that the decade and a half of turmoil has taken its toll on the economic prosperity of the people. For, there was a time when the state of J&K ranked above the national average in per capita income.

Even more significantly, the credit availability and absorption in J&K is much lower than national standards. Even though the share of the state's income (GSDP) in total national income (GDP) is about 0.70%, its share in the total credit disbursed by all financial institutions in the country is a measly 0.3%. Assuming that the credit intensity of state income is the same as that of the national income, the credit disbursed in the state is less than half of the national level for every unit of income. As such on a normative basis the potential for credit deployment in J&K is more than double of what it is today. This gives us a rough idea of the poor level of financial development and intermediation of the state and the resultant credit under-servicing. The implications of this on the overall development of the state are evident.

Looking at from a different perspective, J&K accounts for about 1% of India 's population and yet it absorbs only 0.3% of the total commercial credit of the country. Assuming that on an average for the same levels of income the credit appetite for a person in J&K is the same as that in the rest of the country, the potential demand for personal credit is 300% more than the existing levels. In other words, the potential for lending in J&K is very large. As the prime financial institution of the state, it makes immense business sense for us to tap this market for our own growth as well as the development of the state. Indeed, this is the new policy of the Bank.

The profitable business opportunity of credit deployment in J&K emerges from the fact the share of the main productive and income generating sectors (horticulture and agriculture) is under 5%. It is this that lies at the heart of the low credit-deposit ratio of the state. It is clear that the reason for this is a mismatch between what the entrepreneurs in J&K need and what the banks are willing to lend, or to put it more accurately, capable of lending. Our bank, and indeed the banking system has not adapted to the requirements of our entrepreneurs, and producers.

J&K is a rural based commodity economy with a very large service sector and an artisan sub-economy, unlike any other sub-national economy in the country. On the other hand, the banking sector is geared only to meet the needs of a manufacturing based corporatised economic system. It is for this reason, for instance, bulk of the horticulture business is funded outside of the banking sector. Or for that matter, the artisan unit, still runs on receipt based financing. It is this mismatch that has to be internalised and strategised by the J&K Bank before it can finance development of the state. The biggest hindrance in the Bank not being able to play its potential role in the development of the state is that a majority of our producers and businesses cannot leverage their assets in the present set up. To overcome this mismatch, we are focussing developing new financial products and processes, improving the quality of financial intermediation and developing a rural finance strategy.

In a phase of high growth, both within the state and also nationally, asset growth is not a problem. Indeed, with credit growth of almost 30%, the real issue is not growth but managing growth. Two aspects stand out - liability management and asset quality. On the liability side, better liability management was introduced in the bank. Starting from a new liability management department, a conscious decision was made to move away from high cost to low cost deposits. The strategy of meeting business targets with high-cost corporate term deposits led to a severe problem of high cost of funds and was the significant reason for decline in margins. Also, these deposits were usually garnered at the fag end of the financial year in a lumpy manner, which created deployment problems for at least two quarters thereafter. The bank has de-emphasized the role of corporate deposits - even at the cost of slowing down the balance sheet size growth - and an improvement in the current account saving account (CASA) ratio bears testimony to the better liability management. The simple mantra has been to increase balance sheet by 1% only if profits increase by more than 1%.

The changed business strategy has been supplemented by strengthening of the top management and restructuring the organisational set up of the Bank. We have converted the 32 odd departments of the Bank into 11 divisions headed by the Executive Director or the Executive President. Some new divisions, like Risk and Finance, Liability management, and Customer management have been created. Within these divisions, the departments are headed by General Managers. We are moving towards a private sector type of an organisational set- up to meet the challenges of new age banking.

In the new departmental restructure, we have redefined the core functions of human resources. We are moving towards a system where it will facilitate performance improvement, measured not only in terms of certain financial indicators of operational efficiency but also in terms of quality of financial services provided. The skill level, attitude and knowledge of the personnel play an important role in determining the competitiveness of a bank. While capital and technology which are considered to be the most important pillars of banking are replicable, human capital is not. We are of the view that it is an indispensable resource for the achievement of competitive advantage. The primary concern of the Bank is to bring in proper integration of human resource management strategies with the business strategies.

More than operational skills what we need in the Bank today are `soft skills' to attend the needs and requirement of the customers at the counter. The need to adopt global best practices for financial sector regulation and supervision and adopt them to the domestic environment, places a premium skills and expertise of the bank human resources. In this area we have a long way to go. I am acutely conscious of the need to improve our customer service and we have set in motion systems that will help us achieve our goal of total customer satisfaction along with our business goals.

The initial results of the new business strategy are quite encouraging both from the top-line as well as the bottom-line perspective. Net profits of the Bank increased by 54% from Rs 115 crores last year to Rs 176 crore. The overall business turnover is up by 14% to all time high of Rs 37,968 crore. The business per branch increased from Rs 66.32 crore to Rs 73.44 crores. The business per employee has gone up from Rs 4.82 crore to Rs 5.55 crores. The net worth of the bank has increased from Rs 1665.4 crore to Rs 1799.47 crore.

It is a vindication of the new strategy that every single financial ratio of the Bank has shown an improvement in the course of last one year. On the lending side, the credit-deposit ratio has improved from 55% to 62%. The net interest margins have improved to 2.75, the cost to income ratio of the bank has been brought down to 43% from 47%. The return on average assets has increased to 0.67% from 0.47%. On the liability side, the cost of deposits declined from 4.61% to 4.55%. This was largely because of changes in the deposit mix reflected in the CASA ratio improving from 32% to 34%. The asset quality has seen a further improvement and the gross NPA levels has declined to 2.5% of the gross advances of the Bank.

The greatest achievement of the bank in the course of last year has been to become a financially stronger and more stable bank. The direct indication of this is the increase in the NPA coverage ratio, from a low level of 50% in 2004-2005 to 64% in the course of one year. To achieve this the provisioning levels have been hiked by almost 200%. And it is targeted to go up to 80% within the next one year. This increase in the allowance for probable impairments and poor quality of assets has made the bank stronger. As a result of the high level of provisioning, which could have otherwise been shown as profits, the bank's net NPA is less than 1%. The management is of the firm view that till we reach internationally accepted levels of provisioning, prudence lies in beefing up provisions rather than profits.

As a result of consistent earning growth and capital adequacy at comfortable levels, the Bank has been continuously maximizing value to its shareholders by way of attractive dividend payouts and capital appreciation. The Bank has a consistent track record of dividend payment for more than four decades and after the listing of its Shares, the dividend payout has become more attractive and we would be amongst highest dividend yield stocks in the banking sector. Further, the stock of the Bank has yielded an appreciation of 953% to an investor, who subscribed to the IPO of the bank in the year 1998 on the basis of the current market price.

We have reviewed our dividend policy and focus has been shifted from 'quantum of dividends' to 'dividend payout ratio'. Owing to satisfactory performance recorded by the Bank during the period under review, Directors have recommended a dividend of 80% (free of tax) for the year ended 31st March 2006 , subject to the approval of the Shareholders. On the basis of strong fundamentals and unqualified balance sheet, Bank is meeting the prudential requirements laid down by RBI for declaration of dividend without seeking the permission of RBI.

The valuation of our stock has improved considerably in the recent past and the share price of our Bank, which was quoting at Rs 364 on April 1st, 2005 , touched an all time high of Rs 568 on 13th January, 2006 . As on March 31st, 2005 it closed at Rs 450 thereby registering an increase of about 25% between April 2005 and March 2006. The rise in the stock prices was almost entirely driven by the Foreign Institutional investors. Our new business and management strategy has been greatly appreciated by them and they have been increasing their stake in the Bank. The foreign institutional investors have now become the largest shareholders of the Bank after the Government of Jammu and Kashmir . Last year, the holding was 20% and by March 31st 2006 , this level was raised to 32%. In view of the strong appetite of FII's in our stock, the Board of Directors have recently enhanced the cap of FII's investment in our bank from the existing 33% to 40% subject to the approval of the RBI. The quality of investment is the best of the breed. This level of FII holding in the bank, enjoins upon us to move to international standards of conducting business.

An important landmark with respect to transparency of accounts was achieved in 2005-06. It was for the first time in the long history of the Bank that there is no auditor's qualification in this year's bank's balance sheet. This should be a great source of satisfaction to our investors, customers and the stakeholders in general.

All this has been possible with the guidance of the Board of Directors. I wish to put on record my appreciation and gratitude to them. I would also take this opportunity to thank the Reserve Bank of India for its support. I am grateful to the state government, stock exchanges, Department of Company Affairs, Registrar of Companies, Comptroller and Auditor General for their cooperation. I would also like to thank the shareholders for the continuing support and renewed confidence that they have shown in the Bank and its management. Above all, I would like to thank every one of our 6833 employees for their contributions to the growth and success of the Bank. It is because of them that the Bank is where it is today and it will be because of them that the bank will soar to newer heights.

This does not purport to be an exact record of the proceedings of the Company's Annual General Meeting held at Srinagar on 26 th August, 2006 .