Capital Small Finance Bank Ltd Directors Report

2Return on Assets is calculated with reference to monthly average working funds (Working funds taken as total of assets excluding accumulated losses, if any)

The Indian economy grew at a robust pace of 7% in FY23, driven by strong private consumption and investment. This growth led to an increase in demand for credit, which benefited banking sector and Small Finance Banks (SFBs) the most. The incomes of Indian households have been rising in recent years, which has also led to an increase in demand for loans from SFBs. Additionally, the government has been supportive of SFBs, this has helped SFBs to grow and expand their reach, particularly in underserved areas.

Capital Small Finance Bank Limited has demonstrated a robust financial performance for the financial year ending March 3, 2023. The Bank has achieved remarkable growth across key performance indicators, encompassing total assets, deposits, and loans disbursed. Through its prudent risk management practices, the Bank has effectively maintained a healthy loan portfolio, while minimising the occurrence of non-performing assets.

The Bank has demonstrated a notable rise in net profit, reflecting through its relentless focus on operational efficiency and the optimisation of its product and service offerings. These achievements are a testimony to the exceptional talent of our team,

who continually endeavour to excel in their respective roles.

Capital Small Finance Bank Limited continues to expand its presence across regions, aiming to provide inclusive banking services to underserved communities, enabling it to serve a broader customer base and contribute to financial inclusion. Capital Small Finance Bank Limited acknowledges that its success is intricately linked to the satisfaction of customers. Therefore, it remains dedicated to understanding the evolving needs and expectations.

Talking about the Companys liability profile, it is dedicated to strengthening its existing relationships to ensure the maintenance of high levels of Current Account and Savings Account (CASA) deposits. The Banks CASA Ratio has shown consistent improvement over the past three financial years, reaching 41.88% for the year ending March 3, 2023, 42.16% for the year ending March 3, 2022, and 40.07% for the year ending March 3, 202. The focus on cost management is evident in its favourable cost of funds, which stood at 5.Rs.Rs.% for the financial year ended March 3, 2023, and 5.20%

for financial year ending March 31,2022. Additionally, its retail deposits constitute a significant proportion, accounting for 97.90% as on March 31, 2023. Going forward, the Bank remains committed to further increasing its CASA and retail deposits to optimise its cost of funds.

Turning to Assets, the Bank takes pride in maintaining a high proportion of secured lending, which constitutes 99.82% of the loan book. This focus on secured lending, coupled with robust credit assessment processes and diligent risk management practices, has contributed to a strong asset quality. As of March 31, 2023, its Gross Non-Performing Assets (GNPA) stood low at 2.77%, and Net Non-Performing Assets (NNPA) at 1.36%. This achievement is a testament to a deep understanding of its target customer base and extensive experience across various business cycles during our two decades of banking operations.

Furthermore, the Banks loan portfolio diversification is noteworthy, with advances in agriculture, MSME & trading, and mortgages segments amounting to Rs.137.45 crores, Rs.004.56 crores, and Rs.434.48 crores, respectively, as of March 31, 2023. In the previous year, as of March 31, 2022, these segments accounted for Rs.780.74 crores, Rs.092.62 crores and Rs.128.45 crores, respectively. The average ticket size for these segments as of March 31, 2023, stood at Rs..23 mn, Rs..91 mn and Rs..16 mn respectively.

In order to gain a foothold in new markets where the branch network is not yet established, the Bank is actively seeking partnerships to expand geographical presence and better understand these markets. By forging strategic alliances, it aims to mitigate associated risks while diversifying the range of products and services. Such collaborations will not only enhance the offerings but also contribute to the overall growth of Capital Small Finance Bank Limited.

The Banks profitability and operational metrics have showcased a consistent upward trend, reflecting

its commitment to excellence. Over the years, the operating profit before provisions has grown at a remarkable compound annual growth rate (CAGR) of approximately 44%, from Rs.4.28 crores in FY19 to Rs.48.71 crores in FY23. Furthermore, profit before taxes has increased from Rs.6.92 crore in the year ended March 31, 2019, to Rs.24.16 crores for year ended March 31,2023. Similarly, profit after taxes has risen from Rs.9.42 crores in the financial year ended March 31, 2019, to Rs.3.60 crores for year ended March 31, 2023. This exceptional performance is a testament to the trust the Bank has built over the years, supported by its professional and experienced leadership team and reputed shareholders with a strong commitment to corporate governance.

Moving forward, the focus remains on strengthening of operational and profitability metrics through several key strategies. Firstly, the aim is to optimise asset-liability mix in favour of asset creation while increasing the credit to deposit ratio. Secondly, it continue to emphasise on cost optimisation and efficiency improvement. Lastly, it intends to enhance its fee income and leverage cross-selling opportunities to further diversify our revenue streams.

Cost optimisation is a key area of focus and it is proud to have improved operating expense (opex) ratio as a percentage of average assets, which stood at 2.90% in FY23 compared to 3.33% in FY 2020. The cost-to- income ratio is expected to continue its improving trajectory and reach approximately 59.97% in FY23, building on the achievements of 63.42% in FY22 and 70.75% in FY21.

The Board is confident that the continued focus on maintaining strong liabilities and assets positions will contribute to the sustained growth and success of Capital Small Finance Bank Limited.

The below table shows improving profitability ratios as a result of margin expansion and improved efficiencies:

2. Dividend:

Based on the robust financial performance and profitability of Capital Small Finance Bank Limited, the Board of Directors has recommended a Final Dvidend of Rs. 1.20 per equity share (face value of Rs. 10 each) for

the financial year ending March 31,2023. This dividend payout demonstrates the Banks commitment to delivering value to its esteemed shareholders. The Board believes in sharing the success of the institution with those who have placed their trust and invested

in Capital Small Finance Bank Limited. The Board remains dedicated to maintaining a healthy dividend payout ratio while carefully considering the need for reinvestment in the Banks growth initiatives. The support and confidence of shareholders are greatly appreciated, and the Board is pleased to reward their trust through this dividend declaration.

3. Capital Adequacy Ratio (CAR):

The Capital Adequacy Ratio (CAR) plays a vital role in maintaining the stability and soundness of banks. It is a regulatory requirement that ensures banks have sufficient capital to absorb potential losses and meet their obligations to depositors and creditors. By maintaining an adequate capital buffer, banks can mitigate the risk of insolvency and contribute to the overall resilience of the financial system.

The Bank has developed a well-thought-out capital adequacy plan that considers both systematic and idiosyncratic risks. Systematic risks are those that affect the entire banking industry, such as changes in interest rates or economic conditions. Idiosyncratic risks are those that are specific to a particular bank, such as problems with its lending or investment activities. Capital Small Finance Bank Limited has made arrangements to maintain sufficient buffer capital to address any potential stress and to provide ample growth capital to keep its growth trajectory on track.

The Bank has consistently maintained a strong and healthy Capital Adequacy Ratio, which reflects its robust capital position and adherence to regulatory requirements. As of the financial year ending March 31, 2023, Capital Adequacy Ratio stood at 18.87%, demonstrating its commitment to prudential capital management. This solid capital base provides a solid foundation for the Banks operations, supports its growth aspirations, and instills confidence in our stakeholders. The Bank will continue to prioritise capital adequacy, ensuring that it has the necessary buffers to navigate any future challenges and capitalise on emerging opportunities in the dynamic banking landscape.

a) Authorised Share Capital:

The Bank had authorised capital of Rs.0.00 crores and during the year under review, there has been no change in the authorised share capital.

b) Issued and Subscribed Share Capital:

The Bank has issued, subscribed and paid up Share Capital of Rs.4.25 crores as on March 31, 2023. The Bank during the current year has issued and allotted 2,08,363 equity shares to the employees detailing 27,323 Employee Stock Options on April 22, 2022, 1,56,273 Employee Stock Options on May 12, 2022 and 18,350 Employee Stock Option on September 30, 2022 of Rs.0/- each at a premium of Rs.8/- (i.e. at the total issue price of Rs.8/-) per share and 6417 Equity Shares have been allotted to Material Risk Takers (MRTs as identified by the Board in terms of Compensation policy) on May 12, 2022 of Rs.0/- each at face value.

5. Disclosure regarding Employee Stock Option schemes

Capital Small Finance Bank Limited - Employees Stock Option Plan 2018 ("CSFB ESOP Plan 2018") was approved by the shareholders of the Bank in the Annual General Meeting held on August 18, 2018, amended further on October 22, 2021, for granting equity options to its employees. Further the Capital Small Finance Bank Limited - Employees Stock Option Plan for Material Risk Takers ("CSFB ESOP Plan MRT") was approved by the shareholders of the Bank through Postal Ballot on July 11, 2020, amended further on October 22, 2021, for granting equity options to Material Risk Takers (MRTs as identified by the Board in terms of Compensation policy). The details of the said ESOP schemes as required under Rule 12 (9) of the Companies (Share Capital and Debentures) Rules, 2014 is as under:

The options have been granted basis fair value calculated as per Discounted Cash Flow Methods.

Further the during the current year,

• The Bank has issued and allotted 3,217 Unsecured Unlisted Redeemable NonConvertible (Lower Tier-II) BASEL II Compliant Bonds 2022 - 23 (SERIES XX) in the nature of debentures on May 12, 2022 of Rs.,00,000 each at par aggregating to Rs.2,17,00,000/- on private placement basis with coupon rate of 9.25% p.a. (Simple Interest) and redemption date of May 12, 2032.

• The Bank has redeemed 604 11%Unsecured Redeemable Non-Convertible Subordinated Bond (Lower Tier II) in the nature of Debenture Series - VII (ISIN number: INE646H08087), on August 25, 2022 and the interest amount along with principal amount due thereon was credited to the accounts of debentures holders as on August 25, 2022.

4. Disclosure regarding Sweat Equity Shares

In respect of the disclosure as per Rule 8(13) of the Companies (Share Capital and Debenture) Rules, 2014, the Bank has not issued any Sweat Equity Shares during the financial year under review.

5. Issue of Equity Shares with Differential Rights

Pursuant to Rule 4(4) of Companies (Share Capital and Debentures) Rules, 2014, the Bank has not issued any Equity shares with differential right during the financial year under review.

6. Listed Securities, Debenture Trustee Detail and Credit Rating

The debt securities of the Bank issued in the form of Upper Tier-II Bonds which are listed on the BSE Limited and detail of the same is as under:

Contact details of Debenture Trustee:

Name: IDBI Trusteeship Services Limited Address: Asian Building, 17, R Kamani Marg, Ballard Estate, Mumbai - 400 001.

E-mail: itsl@idbitrustee.co.in Tel No. 91-22-40807000.

7. Dematerialisation of Securities

The Bank has been issued ISIN for all the Equity Shares and debt securities by NSDL and CDSL. The equity Shares of all the Directors, KMPs and Promoters have been dematerialised and the Bank is making all possible efforts to make the security holders aware and get their securities converted into Dematerialised form.

8. Compliances as per the Reserve Bank of India and the Government of India

The Bank has made statutory compliances with respect to all the applicable rules/regulations/ guidelines/notifications issued by the Reserve Bank of India and the Government of India.

(i) The information with regard to employees who are in receipt of remuneration in excess of Rs.02.00 Lakh per annum or Rs..50 lakhs per month for a part of the year is enclosed as Annexure - A

(ii) No employee in the Bank was in receipt of the remuneration in excess of that drawn by the Managing Director and holds by himself or

along with his spouse or dependent children 2% or more equity shares of the Bank.

10. Information pursuant to Section 197(12) of the Companies Act, 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014

The information under Section 197(12) of the Companies Act, 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 in respect of Directors and employees of the Bank is enclosed as Annexure - B to this report.

11. Transfer of unclaimed dividend to Investor Education and protection fund

Pursuant to the relevant provisions of Section 125 of the Companies Act, 2013 and the relevant rules made thereunder, the amount of unpaid dividends that are lying unclaimed for a period of 7 years from the date of its transfer to the unpaid dividend account, is liable to be transferred to Investor Education and Protection Fund (IEPF).

Accordingly, Unclaimed Dividends for and up to the financial year ended March 31, 2015 have already been transferred to the IEPF. Further, please note that the Unclaimed Dividend in respect of the financial year ended March 31, 2016 must be claimed by the concerned Shareholders on or before October 30, 2023 failing which it will be transferred to IEPF in accordance with the Rules. The data for the same is available on the website of the Bank at https://www. capitalbank.co.in/unclaimed-dividends.html

The details of Unclaimed Dividends as on March 31, 2023 and the last date for claiming the same, prior to its transfer to the IEPF, are as under:

Transfer of Underlying Equity shares in respect of the unclaimed Dividend to IEPF.

Pursuant to the relevant provisions of Section 124 and Section 125 of the Companies Act, 2013 read with the IEPF (Accounting, Audit, Transfer and Refund) Rules, 2016, as amended from time to time, the unclaimed Dividend and the underlying Equity Shares of the Bank for the Financial Year 2014 -15 (in case where the Dividend for subsequent 7 financial years have not been claimed by the concerned Shareholder), were liable to be transferred by the Bank to IEPF Authority and the same has been transferred, pursuant to the notification issued by the Ministry of Corporate Affairs (MCA) Dated October 16, 2017.

12. Explanation or comments on qualifications, reservations or adverse remarks or disclaimers made by the auditors and the practicing company secretary in their reports

There are no qualifications, reservations or adverse remarks made by the Statutory Auditors and by Secretarial Auditors in their respective Audit reports.

13. Annual Return pursuant to sub- section 3(a) of Section 134 and sub- section (3) of Section 92 of the Companies Act, 2013 read with Rule 12 of the Companies (Management and Administration) Rules, 2014,

The Annual Return of the Bank is available on the website of the Bank at www.capitalbank.co.in in the format (MGT-7) prescribed under the Act.

14. Requirement for maintenance of cost records

The cost records as specified by the Central Government under section 148(1) of the Companies Act, 2013, are not required to be maintained by the Bank.

Energy Conservation: Being a Banking Company, energy consumed during this period is only in the form of electricity and diesel used in generators. The Bank has allocated specific cost budgets for this purpose and to reduce electric waste for Head Office and all its branches. The same is also monitored on periodical basis. Other measures like use of LEDs, power saver air conditioning equipments etc. are being installed for conserving the energy. There is no capital investment on energy conservation equipment other than specified.

Technology Absorption: We at CAPITAL SMALL FINANCE BANK LIMITED (CSFB) believe that the banks with the ability to adopt and integrate information technology will dominate in the highly competitive domestic market. Accordingly, the Bank continues to leverage information technology as a strategic tool in business operations for customer delight by offering efficient and improved services with low cost and using it as a tool to improve staff productivity, increasing efficiency and more efficient & effective control over banking operations.

We are convinced that investing in IT is critical and also understand that its potential and consequences on the banking is enormous. That is why the Bank since its inception is equipped with a full-fledged Information Technology Department with required manpower to strengthen develop, maintain and support IT infrastructure.

Foreign exchange earnings and outgo: There was no foreign exchange earning or outgo during the year under review.

16. Disclosures Under Section Sec 134(3)(l) of the Companies Act, 2013

There are no material changes and commitments, affecting the financial position of the Bank, which has occurred between the end of the financial year of the Bank to which the financial statements relates and date of this report.

17. Details of significant & material orders passed by the regulators or courts or tribunals

There are no significant material orders passed by the Regulators or Courts or Tribunal which would impact the going concern status of the Bank and its future operations.

18. Disclosure of Penalties imposed on the Bank during the Financial Year

There has been no penalty imposed by the Reserve Bank of India on the Bank except that of Rs..06 crores during the year ended March 31, 2023 for nonreplenishment of ATMs in normal course of action in terms of RBI circular no. RBI/2021-22/84 DCM (RMMT) No. S153/11.01.01/2021-22 on Monitoring of Availability of Cash in ATMs dated August 10, 2021.

19. Compounding Fees paid to SEBI

Pursuant to a voluntary settlement application filed by the Bank before the Securities and Exchange Board of India on September 2, 2021 (which was physically submitted on September 8, 2021) in

respect of allotments made by the Bank to more than 49 investors during the Financial Year 2004 - 05, the Bank has paid an amount of Rs.,80,000 to SEBI as compounding fee.

20. Transfer to reserves in terms of Section 134(3)(j) of the Companies act, 2013

For the financial year ended March 31,2023, the Bank had transferred Rs. 23.40 crores to the Statutory Reserve Fund (maintained under section 17(1) of the Banking Regulation Act, 1949. The Bank has transferred Rs..45 crores to Special Reserve maintained under section 36(viii) of the Income Tax Act, 1961.

21. Deposits

Being a Banking company, the disclosures required as per Rule 8(5)(v) & (vi) of the Companies (Accounts) Rules, 2014 read with Section 73 and 74 of the Companies Act, 2013 and Companies (Acceptance of Deposits) Rules, 2014 are not applicable. The details of the deposits received and accepted by your Bank as a Banking company have been disclosed in the financial statements for the financial year ended March 31, 2023

22. Asset-Liability and Risk Management pursuant to section 134 (3)(n) of Companies Act, 2013

The Bank has formulated and adopted a robust risk management framework. Whilst the Board is responsible for framing, implementing and monitoring the said risk management framework, it has delegated its powers relating to monitoring and reviewing of risk associated with the business of the Bank to the Risk Management Committee. Bank follows an integrated approach to managing risks and the processes are embedded in the fundamental business model. The Risk Management Landscape in the Bank covers the stages of identifying, assessing, measuring, managing, controlling and reporting risk concerns across all the risk classes viz. Credit, Market and Operational Risks and Liquidity Risk. The Risk Management Policies adopted and reviewed periodically articulate, codify the strategy, structure, processes and systems to manage bank wide risks. Expanding business arenas, deregulation and globalisation of financial activities, emergence of new financial products and increased level of competition has necessitated the need for an effective and structured risk management practice in financial institutions.

The Bank has adopted an integrated approach for the management of risk. Effective internal policies are

developed in tune with the business requirements and best practices. Capital Bank has formulated ‘Risk Management Policy which also includes Internal Capital Adequacy Assessment Policy (ICAAP) for identifying and measuring various operational, credit, market and solvency risks. Operational risks are managed through comprehensive systems of internal control, establishing systems and procedures to monitor transactions, maintaining key back-up procedures and undertaking regular contingency planning. We constantly strive to enhance the risk management capabilities in accordance with the emerging regulatory guidelines and the broad risk management principles. The Bank reviews the risk management system and the progress made in implementing the RBI guidelines on risk management, on a quarterly basis. The Asset Liability Management Committee (ALCO), consisting of the Banks senior management and the Managing Director, is responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the Bank (on the assets and liabilities sides) in line with the Banks budget and decided risk management objectives. The Committee actively manages and controls the structure of assets and liabilities and interest rate sensitivities with a view of optimising profits besides maintaining capital adequacy and sufficient liquidity. Statements for Structured Liquidity, Liquidity Coverage and Interest Rate Sensitivity of the bank is being prepared in line with the RBI guidelines to actively manage the liquidity and interest rate risks.

Liquidity Risk Management has been at the core of sound risk management practices of banking industry in the modern age. The Liquidity risk is the potential inability to meet the Banks liabilities as they become due. It arises when the Banks are unable to generate cash to cope with a decline in deposits or increase in assets.

The Bank gives utmost importance to manage various risks in most efficient way and has articulated comprehensive structure for liquidity risk management through various policy including Contingency Funding Plan (CFP) which aims to address the adverse liquidity scenarios. It is recommended by ALCO to Risk Management Committee of Board (RMCB) on annual basis for approval and is reviewed quarterly by the ALCO. In case, any review by the ALCO results in the funding gap, ALCO will be responsible to establish an action plan on the same which shall be approved by the

RMCB. Further the decision to use the lines of defence as per the CFP lies with the ALCO. The contingency is defined in various scenarios. The comprehensive CFP endeavours to monitor liquidity on real time basis, with a wide and unrelated range of lines of defence, along with proper channel of reporting, escalation and decision making.

Further, the Bank has formulated Stress Testing Framework for evaluation of Banks financial position under a severe but plausible scenario to assist in decision making within the Bank. It enables the Bank in forward looking assessment of risks. It facilitates internal and external communication and helps senior management understand the condition of the Bank in the stressed situations. Stress testing outputs are extremely useful in decision making process in terms of potential actions like risk mitigation techniques, contingency plans, capital and liquidity management in stressed conditions.

Stress testing forms an integral input of the internal capital adequacy assessment process (ICAAP), which requires the Bank to undertake forward-looking stress testing that identifies severe events or changes in market conditions that could adversely impact the Bank. The stress testing reports provide the senior management with a thorough understanding of the material risks to which the Bank may be exposed and to help in potential actions like mitigation techniques, contingency plans, capital and liquidity management in stressed conditions etc. Further, stress testing is an important input in identifying, measuring and controlling funding liquidity risks, in particular for assessing the Banks liquidity profile and the adequacy of liquidity buffers in case of both bank- specific and market-wide stress events.

The Bank has a strong impetus on risk management and it realised that risk management is backbone of banking industry and being an evolving topic, the bank attempts to keep evolving various newer avenues to manage risk effectively and efficiently as per the risk management policy and framework of the bank so that the whole structure is well aligned with the risk appetite, risk assessment and risk mitigation strategy of the Bank.

23. Independent Directors Declaration in terms of Section 134(3)(d); Section 149(6) of Companies Act 2013

The composition of Board of Directors of the Bank is governed by the provisions of the Companies Act, 2013 and the Banking Regulation Act, 1949. The Board of the Bank as on March 31, 2023 consisted

of twelve Directors, out of which seven directors are independent Directors.

The Bank has obtained declaration of Independence from Mr. Rakesh Soni, Ms. Harmesh Khanna, Mr. Sham Singh Bains, Mr. Navin Kumar Maini, Mr. Gurdeep Singh, Mr. Gurpreet Singh Chug and Mr. Nageswara Rao Yalamanchili and they meet the criteria of independence as laid down under Section 149(6) of the Companies Act, 2013. Further, all the Independent Directors have complied with the Code for Independent Directors prescribed in Schedule IV to the Act. The separate meeting of Independent Directors was conducted on December 13, 2022.

Pursuant to the Rule 8(5) (iiia) of the Companies (Accounts) Rules, 2014, the Board opines that all the Independent Directors of the Bank adhere to corporate integrity, possess the requisite expertise, experience and qualifications to discharge the responsibilities as an Independent Director as mandated by the Companies Act, 2013 and other applicable laws.

All the Independent Directors of the Bank have been registered and are members of the Independent Directors Databank maintained by the Indian Institute of Corporate Affairs (IICA). Six Independent Directors were already granted exemption from appearing for the Online Proficiency Self-Assessment test conducted by IICA. One Independent Director, Mr. Gurpreet Singh Chug has appeared for the online Proficiency Self-Assessment test during the year and passed the same.

24. Companys Policy on Directors Appointment & Remuneration including criteria for determining Qualifications, Attributes, Independence etc. in terms of Section 134(3)(e); Section 178(1) & (3) of the Companies Act 2013

Basis the ‘Fit and Proper criteria laid down by the Reserve Bank of India, the Nomination and Remuneration Committee (NRC) conducts the due diligence of the Board members on yearly basis except for the Directors who are member of the NRC.

Further Board also conducts due diligence of all the Directors on yearly basis. The due diligence process involves considering the appointment and remuneration of Directors and Key Managerial Personnel as per the guidelines issued by Reserve Bank of India and the Companies Act, 2013. The process contains detailed procedures for determining qualifications , positive attributes, due diligence mechanism and reference checks for appointment of Directors and Key Managerial Personnel.

The Bank has put in place the Compensation Policy for Employees including MD & CEO, WTD and other Material Risk Takers (MRTs) and Comprehensive Compensation policy for Non-Executive Directors with a key objective to support organisational strategy by helping to build a competitive, high performance and accompany with an entrepreneurial culture that attracts, retains, motivates and rewards high performing employees as well as properly compensate the employees vis-a-vis their risk and performance involvement. The policies are available on the website of the Bank at www.capitalbank.co.in.

25. Performance Evaluation of Board in terms of Section 134(3)(p) of the Companies Act, 2013

The Nomination and Remuneration Committee (NRC) and the Board has approved the evaluation process for evaluating the performance of the Board and Committees as whole and individual director. A separate meeting of Independent Directors was held on December 13, 2022 which carried out the annual evaluation of the performance of NonExecutive Non-Independent Directors, Executive Directors, Chairperson, Board as a Whole and Board Committees. Further the Board of Directors in its meeting held on February 9, 2023 had also conducted the Annual evaluation of performance of Board as a whole, Board Committees, Chairperson, Managing Director, Non-Executive Directors.

26. State of the Companys Affairs in terms of Section 134(3)(i) of the Companies Act 2013

The state of affairs of the Company in details has been given separately in different sections of the Board Report and also under Management Discussion and Analysis. There was no change in status of the Bank during the year ended March 31, 2023.

27. Name of the companies which have become or ceased to be Subsidiaries/ Associates or Joint Ventures during the year in terms of Section 134(3) (q) read with Rule 8(5)(iv) of Companies (Account) Rules, 2014

No Company have become or ceased to be the Subsidiary, Joint venture or Associate Company of the Bank during the financial year.

28. Disclosure Under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 in terms of the Sexual Harassment of Women at the workplace (Prevention, Prohibition & Redressal) Act, 2013

The Bank has formulated Internal Compliant Committees at Head office level and at Cluster level (for Branches). The composition of the committees is in consonance with the provisions of the Sexual Harassment of women at the workplace (Prevention, Prohibition & Redressal) Act, 2013. These committees are formulated for redressal of complaints for Sexual Harassment of women at the workplace and take all necessary measures to ensure a harassment-free workplace. The Bank believes that all employees, including other individuals who are dealing with the bank have the right to be treated with dignity.

The cases reported to the Bank, if any were duly addressed and resolved. There is no pending complaint under the said act.

The following is the summary of the complaints received and disposed off during the Financial Year 2022 - 23

In Head Office (including Regional Offices)

a) No. of SH complaints received: Nil

b) No. of SH complaints disposed off: Nil In Branches:

a) No. of SH complaints received: Nil

b) No. of SH complaints disposed off: Nil

The Committee believes in ethics and takes appropriate action against the employees who have violated the norms, which includes disciplinary action such as warning letter and in some cases termination of employment depending upon the gravity of violation.

29. Adequacy of Internal Financial Controls Related to Financial Statements

The Companies Act, 2013 has introduced a reasonably advanced reporting concept for auditors i.e. Internal Financial Control (IFC) over financial reporting. Auditors of the Company are required to report on adequacy and operating effectiveness of internal financial controls of the Company with report on financial statements prepared under section 143 of the Companies Act, 2013.

The Bank as per the requirement of section 134(5) (e) has adopted the policies and procedures to ensure orderly and efficient conduct of its business, including adherence to the Companys policies, safeguarding of its assets prevention and detection of frauds and errors, accuracy and completeness of accounting records, timely preparation of reliable financial information.

During the year under review, the Statutory Auditors and the Secretarial Auditors have not reported any instances of frauds committed in the Bank by its Officers or Employees to the Audit Committee under section 143(12) of the Companies Act, 2013, details of which needs to be mentioned in the Report.

30. Directors

The Board of the Bank is duly constituted in accordance with the provisions of Banking Regulation Act, 1949, the Companies Act, 2013 and other applicable law/guidelines.

Mr. Sarvjit Singh Samra has held the office as Managing Director & CEO of the Bank w.e.f. April 24, 2019 for a period of three years. He has been further reappointed as Managing Director and CEO of the Bank w.e.f. April 24, 2022 for a period of three years. Mr. Sarvjit Singh Samra has been instrumental in taking key decisions from day one that have contributed to the Bank emerging as the most preferred Bank in its area of operation. His vision to serve common man and the local touch has given the Bank a competitive edge over other banks operating in the area and the Bank is able to provide safe, efficient and service oriented repository of savings to the local community while reducing their dependence on moneylenders by making need-based credit easily available

Appointment of Part-time Chairman

During the year under review, the Reserve Bank of India conveyed the approval for the appointment of Mr. Navin Kumar Maini (DIN: 00419921) as Part-time Chairman of Capital Small Finance Bank Limited for a period of three years w.e.f. April 24, 2022.

Retirement/Appointment of Directors in compliance to Section 10(2A)(i) of the Banking Regulation Act, 1949

The Board is duly constituted as per the provisions of Banking Regulation Act, 1949, Companies Act, 2013, RBI guidelines for Small Finance Banks and SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, as may be applicable.

During the year Mr. Madan Gopal Sharma (DIN: 00398326) ceased to be the Director and Part - time Chairman of the Bank w.e.f April 23, 2022 on completion of his tenure. Further Mr. Sarvjit Singh Samra (DIN: 00477444) has been re-appointed as Managing Director and Chief Executive Officer (CEO) w.e.f April 24, 2022 till the completion of the three years. Further during the year under review,

the Board of Directors in its meeting held on June 29, 2022, on the recommendation of Nomination and Remuneration Committee, had appointed Mr. Nageswara Rao Yalamanchili as Additional Director (Independent) w.e.f. June 29, 2022 and reappointed Mr. Sham Singh as Independent Director w.e.f. November 9, 2022 subject to the approval of Shareholders of the Bank. Further the Shareholders of the Bank in the Annual General Meeting held on August 05, 2022 had approved the appointment of Mr. Nageswara Rao Yalamanchili (DIN: 06651230) as Independent Director w.e.f. June 29, 2022 and Mr. Balbir Singh as Non - Executive Director (Nominee Director) w.e.f march 09, 2022 and re-appointed Mr. Sham Singh as Independent Director w.e.f. November 9, 2022

Directors Retiring by Rotation

In terms of Section 152 of the Companies Act, 2013, Mr. Dinesh Gupta, director being longest in the office shall retire at the forthcoming Annual General Meeting and being eligible for re- appointment, offers himself for re- appointment.

Appointments/Resignations of the Key Managerial Personnel

The Bank had following key managerial personnel as on April 1, 2022:

The Board in its meeting held on February 9, 2023 has reclassified KMPs. Accordingly, as on March 31,2023 following are the KMPs of the Bank:

Further, there was no appointment/resignation of any Key Managerial Personnel during the financial year.

31. Corporate Governance

Corporate governance is the combination of rules, processes or laws by which businesses are operated, regulated or controlled and that aims at effective, transparent, and responsible management of a company within the applicable statutory and regulatory structures.

Over the last several years, the external environment in which public companies operate has become increasingly complex for companies and shareholders alike. The increased regulatory burdens imposed on public companies in recent years have added to the costs and complexity of overseeing and managing a corporations business and bring new challenges from operational, regulatory and compliance perspectives. Many cases of Management failures and financial crisis have been reported in the finance industry during the financial year and all these are the cause of poor corporate governance.

Your Bank has formulated a Corporate Governance framework which ensures timely disclosures and

filing of correct information regarding our financials and performance, as well as the leadership and governance of the Bank. The Board is constituted professionally with a strong commitment to shareholder value, transparency, accountability, ethical standards and regulatory compliances.

The Boards supervisory role is independent and separate from the executive management and the Board Committees. The Composition of the Board of Directors as on March 31,2023 comprised of majority of Independent directors and this is a great step of the Bank towards better Corporate Governance.

The Board presently comprises of twelve Directors including one woman director and it provides diverse combination of professionalism, knowledge, expertise and experience as required in the banking business for long-term success. The Board has seven Independent Directors constituting more than one-half of its total membership strength including one women Director and 3 Nominee Directors. The Directors have distinguished themselves in different walks of life through experience and expertise.

MEETINGS OF THE BOARD AND COMMITTEES OF THE BOARD > Board of Directors

The Board of Directors of the Bank meets regularly to discuss and decide on various business policies, strategies and other businesses. The Board meetings are convened in compliance with the provisions of the Companies Act, 2013, Secretarial Standard and other laws applicable to the Bank. The Board met 7 times during the year under review and the requisite quorum was present in all the meetings.

Details of the composition of the Board, dates of the meetings of the Board held during the Financial Year 2022 - 23 and details of attendance of Directors at the meetings of Board and Annual General Meeting ("AGM") held during the Financial Year 2022-23 are as follows:

> Committees of Directors

The Bank has several committees which have been established as a part of best Corporate Governance practices and are in compliance with the requirements of the relevant provisions of applicable laws and statutes. The Bank has following Committees of the Board as on March 31, 2023

COMPOSITION OF COMMITTEES OF DIRECTORS AS ON MARCH 31, 2023

1. Nomination and Remuneration Committee

Brief Terms of Reference and Responsibilities:

1. To consider ‘Fit and proper criteria for directors at the time of appointment/renewal of appointment of the Bank

2. The consider the remuneration proposed to be paid to Managing Director/Whole Time Director as per Compensation Policy of the Bank and recommendation of same to the Board.

3. Take into account, financial position of the company, trend in the industry, appointees qualification, experience, past performance, past remuneration etc.

4. To consider to be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the Bank and the shareholders.

2. Securities Committee

Brief Terms of Reference and Responsibilities:

1. To consider and approve the share/bond transfers lodged by the members with the Bank.

2. To verify the compliance of RBI and other legal regulations for allotment of securities.

3. To consider manner, holding and other credentials of holder of securities.

4. To consider the basis of allotment of securities as per authorisation of the Board and all other aspects with regard to the Issue.

6. Risk Management Committee

1. To review the Credit Risk Management System - Exposure Norms, Concentration of Advances, Credit wise & segment wise classification of Advances, Quality of Loan Portfolio, independent validation of credit rating, risk pricing of assets.

2. To review the Market Risk - present market positions, liquidity risk, interest rate risk and minutes of ALCO, Review and approval of market risk limits.

3. To review the report on Internal Capital Adequacy Assessment.

4. To review IT risk assessment.

5. To review operation Risk assessment with special attention to KYC, Re KYC, AML aspects.

6. To Review the Risk Management and Asset & Liability Policy.

7. To review the Contingency Plan.

8. To review the Risk Appetite Statement.

7. IT Strategy Committee

The Company Secretary acts as a Secretary to the Committee.

Brief Terms of Reference and Responsibilities:

1. Perform oversight functions over the IT Steering Committee (at a senior management level).

2. Investigate activities within this scope.

3. Seek information from any employee.

4. Obtain outside legal or professional advice.

5. Secure attendance of outsiders with relevant expertise, if it considers necessary.

6. Work in partnership with other Board committees and Senior Management to provide input, review and amend the aligned corporate and IT strategies.

8. Stakeholders Relationship Committee

1. Formulation of procedures in line with the statutory guidelines to ensure speedy disposal of various requests received from shareholders from time to time;

2. Review of adherence to the service standards adopted by our Bank in respect of various services being rendered by the Registrar and Share Transfer Agent;

3. Consider and resolve grievances of security holders of our Bank.

4. Review of measures taken for effective exercise of voting rights by shareholders.

5. Review of the various measures and initiatives taken by our Bank for reducing the quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices by the shareholders of our Bank;

6. Carrying out any other functions contained in the Companies Act, 2013 and/or equity listing agreements (if applicable).

3. Audit Committee

1. The Audit Committee has the powers to investigate any activity, seek information from any employee of the Bank, obtain outside legal or other professional advice; Such powers as may be prescribed under the Companies Act, 2013 (together with the rules thereunder) and SEBI Listing Regulations.

2. Oversight of the Banks financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

3. Recommendation for appointment, replacement, reappointment and approval for remuneration and terms of appointment of statutory auditors of the Bank.

4. Monitoring the end use of funds raised through public offers and related matter.

5. Evaluation of internal financial controls and risk management systems.

6. Approval or any subsequent modification of transactions of the Bank with related parties.

7. To formulate, review and make recommendations to the Board to amend the Audit Committee charter from time to time.

8. To review the functioning of the whistle blower mechanism.

9. To review the working of compliance and Vigil Department division.

10. Carrying out any other function as may be required / mandated as per the provisions of the Companies Act, 2013, the SEBI Listing Regulations, any directions, circulars, notification issued by the Reserve Bank of India and/or any other applicable laws.

4. Corporate Social Responsibility Committee

The Company Secretary acts as a Secretary to the Committee.

1. To formulate and recommend to the Board of Directors, the CSR Policy, indicating the CSR activities to be undertaken as specified in Schedule VII of the Companies Act, 2013, as amended.

2. To recommend to the Board of Directors, the amount of expenditure to be incurred on the CSR activities.

3. To monitor the CSR Policy and its implementation by the Bank from time to time.

4. To approve the CSR projects of the Bank.

5. To perform such other functions or responsibilities and exercise such other powers as may be conferred upon the CSR Committee in terms of the provisions of Section 135 of the Companies Act, 2013, as amended and the rules framed thereunder.

5. Management Committee

1. To consider and review the Financial Statements.

2. To review the performance of the Bank against projections as per Business Plan.

3. To review and approve the business plan.

4. To consider and approve Half yearly budget.

5. To review non-performing borrower accounts.

6. To review the operations/ payment channels/ issue of debit cards.

7. To review investment portfolio of the bank as well as Investment Exposure Norms.

8. To reviews limits of Money Market Instruments (Call/Term/Notice) Limits as per the RBI guidelines.

9. To approve yearly Investment Strategy, appointment of Investment Officers and approve Securities Broker

10. To review Internal Auditors remarks in Concurrent Audit of Investments.

Attendance Record of Committee meetings

Details of attendance of Directors at the meetings of Committee of the Directors during the Financial Year 2022 - 23 are as follows:

32. Meeting of independent directors

Pursuant to the Part VII of the Schedule IV of Companies Act, 2013 (Code for Independent Directors), the independent directors of the Company shall hold at least one meeting in a financial year, without the attendance of non-independent directors and members of management. Accordingly, a meeting of Independent Directors of the Bank was held on December 13, 2022.

33. Details of General Body Meetings

34. Corporate Social Responsibility

As a responsible citizen, Capital Small Finance Bank Limited strongly believes in the idea of paying back to the society in order to run a sustainable business. Accordingly, in Capital Small Finance Bank Limited Corporate Social Responsibility is considered as an important function. Our Corporate Social Responsibility (CSR) activities include encouraging education, promoting sports and improving health care. We are managing education centres for underprivileged children.

The Companys CSR policy and programmes are in accordance with Section 135 of Companies Act, 2013, the Bank takes multiple initiatives in the areas of education, Rural Sports Development and health. Corporate Social Responsibility Policy of the Bank can also be accessed from the website of the Bank https://www.capitalbank.co.in/codes-policies.html

The Annual Report on CSR activities as required to be given under Section 135 of the Companies Act, 2013 and Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 has been provided as Annexure - C which forms part of the Boards Report.

The Bank undertakes its Corporate Social Responsibility activities through Capital Foundation (a Society Registered under the Societies Registration Act, 1860). During the Year under Societies review the Bank has disbursed the entire amount of its CSR obligation to the Capital Foundation. As per the report received from the Capital Foundation Rs.0,574,051/- including the interest thereon has remained unspent as some of the Ongoing Projects has not been fully matured. Accordingly, as approved by the CSR Committee, the Capital Foundation has transferred the said unspent amount to Unspent Corporate

Social Responsibility Account in accordance with the provisions of Section 135 (6) of the Companies Act, 2013.

35. Green Initiatives

"Unite to make this planet green and clean"

Deforestation is one of the most pressing environmental issues and a harsh reality of the present times. Large-scale deforestation and various other human activities have drastically added to the Global warming and Have caused a major shift in weather patterns across the world. Usage of paper is one of the major reasons for cutting down of trees which in long term is unsustainable.

Keeping in view the harsh reality the MCA Took a Great action towards it by coming out with the "Green Initiative in the Corporate Governance" through its circular No. 17/2011 dated April 21, 2011 and No. 18/2011 dated April 29, 2011 dated April 29, 2011.

Under this MCA has provided a welcoming facility of serving notices / documents by companies to its shareholders through electronic mode. After this great initiative taken by the MCA, companies are no longer required to give Notice including the Annual Return in physical form to its stakeholders. They can provide in electronic mode at the Registered E-mail Id of the stakeholders.

In view of the said concern we request all the stakeholders to get their E-mail registered with the Bank so to get the annual Reports at the E-mail ids instead through paper mode.

Also, registering your e-mail address with us will ensure that we can directly connect with you and no important communication from our side will be missed by you as a shareholder of the Bank.

36. Vigil Mechanism

The Bank has implemented a Whistleblower Policy, which is periodically reviewed, pursuant to which safeguards are being provided against victimisation of employees and directors. The Policy allows to raise concerns on Reportable Matters (as defined in the policy) such as breach of Banks Code of Conduct, fraud, bribery, corruption, employee misconduct, illegality, health & safety, environmental issues and wastage/ misappropriation of bank funds/assets, etc. and also provides for direct access to the Ombudsperson, in exceptional cases. The policy is available on the Banks intranet and website of the Bank. The Whistleblower Policy complies with all the requirements of Vigil mechanism as stipulated under Section 177 of the Companies Act, 2013, and other applicable laws, rules and regulations, as may be applicable. The updated Whistleblower Policy is also available on the website of the Bank at link www. capitalbank.co.in.

The Bank has also appointed Chief of Internal Vigilance to ensure compliance with all the internal guidelines issued by the Bank from time to time.

The functioning of the Policy is reviewed by the Audit Committee from time to time. During the review period, no concern has been reported in accordance with the said policy Neither the complainants have been denied access to the Audit Committee of the Board.

37. Loans, Guarantees or Investments in securities

Pursuant to Section 186 (11) of the Companies Act, 2013, the provisions of Section 186 of Companies Act, 2013, except sub-section (1), do not apply to any loan made, guarantee given or security provided or investment made by a banking company in the ordinary course of business. Therefore, the said provision is not applicable to the Bank.

38. The details of application made or any proceeding pending under the Insolvency and Bankruptcy Code, 2016 (31 of 2016) during the year along with their status as at the end of the financial year:

During the year, no application was made/ proceeding is pending against the Bank.

39. The details of difference between amount of valuation done at the time of one-time settlement and the valuation done while taking loan from the banks or financial institutions along with the reason thereof:

There was no instance of one-time settlement with

any other bank/financial institution during the year ended March 31, 2023.

40. Contracts or Arrangements with Related Parties

All related party transactions that were entered during the Financial Year 2022 - 23 were in the ordinary course of the business of the Bank and were on arms length basis and the same is enclosed as Annexure- D in the prescribed format AOC-2 to this Report. There were no materially significant related party transactions entered by the Bank with Promoters, Directors, Key Managerial Personnel or other persons which may have a potential conflict with the interest of the Bank. All such Related Party Transactions are being placed before the Board/Audit Committee for approval, wherever applicable.

Members can also refer the disclosure of transactions with related parties during the financial year under review as set out in the note no. 12 of the Schedule 18 of the Financial Statements of the Bank.

Moreover, the disclosures required under Regulation 53(f) of SEBI (Listing Obligations and Disclosures Requirement), 2015 is not applicable on Banking Companies.

41. Disclosure pursuant to Section 197(14) of the Companies Act, 2013

The Bank does not have any holding or subsidiary companies, therefore no disclosure is required to be made pursuant to the provisions of Section 197(14) of the Companies Act, 2013 and as per the relevant rules thereunder.

42. Disclosure pursuant to Section 177(8) of the Companies act, 2013

During the Financial Year 2022- 2023 there was no recommendation of the Audit Committee which was not accepted by the Board.

43. Change in Nature of Business

Pursuant to the relevant provision of Rule 8(5) of the Company (Accounts) Rules, 2014, there is no change in the nature of Business of the Bank.

44. Auditors & Auditors Report Statutory Auditors and Audit

The members at the 22^nd Annual General Meeting (AGM) of the Bank held on August 20, 2021 had, subject to the approval of RBI, had appointed M/s. T.R Chadha & Co. LLP, Chartered Accountants as Statutory Auditors for a period of three (3) years to hold office till the conclusion of 25^th AGM in connection with the audit of the books of account of

the Bank. However, their appointment was subject to the approval from Reserve Bank of India as per the resolution passed in the AGM. The Reserve Bank of India gave approval of appointment for Financial Year 2022 - 23 vide its letter dated June 8, 2022.

Secretarial Auditor

Pursuant to the provisions of Section 204 of the Companies Act, 2013 and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Bank had appointed M/s Deepak Arora & Associates, Practicing Company Secretaries through its partner Mr. Deepak Arora (FCS No. 5104 and COP No. 3641) to conduct Secretarial Audit of the Bank.

The Secretarial Audit Report is annexed herewith as Annexure- E to this report.

No qualifications, reservations or adverse remarks are reported by M/s Deepak Arora & Associates, Practicing Company Secretaries, Secretarial Auditors of the Bank, in their Secretarial Audit report.

45. Directors Responsibilities Statement

The Board of Directors acknowledge the responsibility for ensuring compliance with the provisions of Section 134(3)(c) read with Section 134(5) of the Companies Act, 2013, in preparation of annual accounts for the financial year ended March 31, 2023 and state that:

1. In the preparation of the annual accounts for the financial year ended March 31, 2023 the applicable accounting standards had been followed along with proper explanation relating to material departures;

2. The Directors had selected accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent to give a true and fair view of the state of affairs of the Company as at March 31, 2023 and of the profit of the Company for that period;

3. The Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

4. Directors had prepared the annual accounts on a going concern basis;

5. The Directors had laid down internal financial controls to be followed by the Bank and that such internal financial controls are adequate and were operating effectively.

6. The Directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

46. Details in respect of frauds reported by auditors under subsection (12) of section 143 other than those which are reportable to the Central Government;

There are no frauds reported by Auditors under sub section (12) of section 143 of the Companies Act, 2013

47. Compliance with Secretarial Standards

The Bank has complied with the all applicable Secretarial Standards issued by the Institute of Company Secretaries of India on regular basis.

48. Acknowledgment

The Board of Directors is grateful to the Government of India, Reserve Bank of India, various State Governments, SEBI, IRDA and regulatory authorities in India and overseas for their valuable guidance, support and cooperation.

The Directors record their sincere gratitude to the Banks shareholders, esteemed customers and all other well-wishers for their continued patronage. The Directors express their appreciation for the contribution made by every member of the staff in ensuring high level of growth that the Bank has achieved during the year.

The Board also places on record its gratitude to the Shareholders, Bankers, Customers, Suppliers and other stakeholders who have extended their valuable sustained support, co- operation and encouragement.

The Directors wish to express their gratitude to Investment Banks, rating agencies and Stock Exchanges for their wholehearted support. The Directors look forward to their continued contribution in realisation of the corporate goals in the years ahead. We wish to apprise our worthy members who have entrusted their trust and confidence in the Bank that Capital Small Finance Bank will venture to strive hard to take long strides ahead with freshly instilled energies.

For and on behalf of the Board of Directors Sarvjit Singh Samra

Managing Director & CEO DIN: 0047744

Gurpreet Singh Chug

Independent Director DIN:01003380