CHAPTER 1 INTRODUCTION TO THE INDUSTRY

INTRODUCTION
The banking section will navigate through all the aspects of the Banking System in India. It will discuss upon the matters with the birth of the banking concept in the country to new players adding their names in the industry in coming few years. The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined under three separate heads with one page dedicated to each bank. However, in the introduction part of the entire banking cosmos, the past has been well explainedunder three different heads namely: History of Banking in India Nationalization of Banks in India Scheduled Commercial Banks in India The first deals with the history part since the dawn of banking system in India. Government took major step in the 1969 to put the banking sector into systems and it nationalized 14 private banks in the mentioned year. This has been elaborated in Nationalization Banks in India. The last but not the least explains about the scheduled and unscheduled banks in India. Section 42 (6) (a) of RBI Act 1934 lays down the condition of scheduled commercial banks. The descriptions along with a list of scheduled commercial banks are given on this page.

HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. The government's
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regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks. Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III. PhaseI The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority . PhaseII Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by
4

11,000%.Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. PhaseIII This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange. Nationalization of Banks in India In order to make the Reserve Bank of India more powerful, the Indian Government nationalized it on January 1 , 1949.With a view to have the coordinated regulation of Indian Banking, the Indian Banking Act was passed in March 1949.According to this Act, the Reserve Bank OF India was granted extended powers for the inspection of nonscheduled banks. For the development of the banking facilities in the rural areas the Imperial Bank of India was partially nationalized on 1 July , 1955 and it was named as the State Bank of India. Along with it 8 (at present 7) banks were converted as its associate banks which forms what is named as the State Bank Group. They are as followsThe State Bank Of Bikaner and Jaipur. (The State Bank of Jaipur + The State Bank Of Bikaner)
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The State Bank Of Hyderabad The State Bank Of Indore The State Bank Of Maysore The State Bank Of Saurashtra The State Bank Of Patiala The State Bank Of Travancore. In order to have more control over the banks, 14 large commercial banks whose reserves were more than Rs.50 crores each were nationalized on 19 July ,1969. The nationalized banks were as follows 1. The Central Bank of India 2. Bank of India 3. Punjab National Bank 4. Canara Bank 5. United Commercial Bank 6. Syndicate Bank 7. Bank of Baroda 8. United Bank OF India 9. Union Bank 10. Dena bank 11. Allahabad Bank 12. Indian Bank

13. Indian Overseas Bank 14. Bank Of Maharashtra After one decade, on April 15,1980, those 6 private banks whose reserves were more than Rs.200 crore each were nationalized . These banks are as: Andhra Bank Punjab and Sindh Bank New Bank OF India Vijaya Bank Corporation bank Oriental Bank Of Commerce. On 4th September, 1993 the Government merged the New Bank of India with Punjab National Bank and as a result of this the total number of nationalized . Scheduled Commercial Banks in India Unscheduled Banks in India. Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks.

"Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank". Banking System in India:In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players.In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players. Public Sector Bank:Among the Public Sector Banks in India, United Bank of India is one of the 14 major banks which were nationalised on July 19, 1969. Its predecessor, in the Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd. (1932).

Figure 1

Private Sector Bank:The first Private bank in India to be set up in Private Sector Banks in India was Indusind Bank. It is one of the fastest growing Private Sector Banks in India. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI' s liberalisation of the Indian Banking Industry. Co operative Banks in India:The Co operative banks in India started functioning almost 100 years ago. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India play an important role even today in rural financing. The businesses of cooperative bank in the urban areas also have increased phenomenally in recent years due to the sharp increase in the number of primary co-operative banks.

Rural Banking:Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focussed upon the agro sector. National Bank for Agriculture and Rural Development (NABARD) is a development bank in the sector of Regional Rural Banks in India. It provides and regulates credit and gives service for the promotion and development of rural sectors mainly agriculture, small scale industries, cottage and village industries, handicrafts. Foreign Banks in India:Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative.

Reserve Bank of India as a Regulatory Institution in Banking Sector:The RBI was established under the Reserve Bank of India Act, 1934 on April 1, 1935 as a private shareholders' bank but since its nationalization in 1949, is fully owned by the Government of India. The Preamble of the Reserve Bank describes the basic functions as 'to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally, to operate the currency and credit system of the country to its advantage'. The twin objectives of monetary policy in India have evolved over the years as those of maintaining price stability and ensuring adequate flow of credit to facilitate the growth process. The relative emphasis between the twin objectives is modulated as per the prevailing circumstances and is 24 articulated in the policy statements by the Reserve Bank from time to time. Consideration of macro-economic and financial stability is also subsumed in the mandate. The Reserve Bank is also entrusted with the management of foreign exchange reserves (which include gold holding also), which are reflected in its balance sheet. While the Reserve Bank is essentially a monetary authority, its founding
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statute mandates it to be the manager of market borrowing of the Government of India and banker to the Government. The Reserve Bank's affairs are governed by a Central Board of Directors, consisting of fourteen non-executive, independent directors nominated by the Government, in addition to the Governor and up to four Deputy Governors. Besides, one Government official is also nominated on the Board who participates in the Board meetings but cannot vote.

Important Functions Played by Reserve Bank of India 1. Main Functions Monetary Authority Regulation and Supervisor of Financial System Manager of Exchange Control Issuer of the Currency Developmental Role Banker to the Government 2. Supervisory Functions 3. Promotional Functions

RECENT INNOVATIONS IN INDIAN BANKING Foreign Direct Investment (FDI) Non-Performing Assets (NPAs) Priority Sector Lending Merger/Amalgamation of Banks Branch Expansion
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Gross Domestic Product (GDP) Online Banking Net Banking Real Time Gross Settlement (RTGS) Technology ATM

Banking Industry Overview

Although some form of banking, mainly of the money-lending type, has been in existence in India since ancient times; it was only over a century ago that proper banking began. The earliest institutions which undertook banking business under the British regime were agency houses which carried on banking business, in addition to their trading activities. With a view to bring commercial banks into the mainstream of economic development with definite social obligations and objectives, the Government issued ordinance on 19 July 1969 acquiring ownership and control of 14 major banks in the country, with deposits exceeding Rs 50 crores each. Six more commercial banks were nationalized from 15 April 1980. The objectives of public sector banking system were outlined on 21 July 1969.

The three decades after nationalization saw a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system, during the late eighties the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. In the post-nationalization era, no new private sector banks were allowed to be set up. However, in 1993, in recognition of the need to introduce greater competition, which could lead to higher productivity and efficiency of the banking system, new private sector banks were allowed to be set up in the Indian banking system.

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Commercial Banking System in India consisted of 302 scheduled banks (including foreign banks) and one non-scheduled bank at the end of March 1999. Over the period March 1998 to March 1999, the number of scheduled banks increased by three while that of non-scheduled banks remained unchanged at one. Of the scheduled banks, 223 are in public sector and these account for about 83 per cent of the deposits of all scheduled commercial banks. In the public sector banking system, there are 196 regional rural banks, specially set up to increase the flow of credit to small borrowers in the rural areas. These banks have specified areas of operations usually limited to two to three districts. They also undertake some other commercial banking business. The remaining 27 banks in the public sector are regular commercial banks and transact all types of commercial banking business. Some important indicators in regard to progress of commercial banking in India during the recent past are given in table 13.4. Amongst the public sector banks, as on March 1999, the State Bank of India (SBI) group (SBI and its seven associates) is the biggest unit with 13,290 offices and deposits exceeding 1,39,000 crore aggregating Rs 1,71,782.48 crore and advances of Rs 1,14,430.37 crore. In the associate banks, SBI owns either the entire or the majority of share capital. The SBI and its associate banks as a group account for around 31.9 per cent of aggregate banking business (aggregate of deposits and advances) conducted by the public sector banks and around 26.2 per cent of the aggregate business of the entire banking system. The remaining 19 banks in the public sector are more nationalized in 1969 and1980respectively

Current Situation:Today, the banking sector in India is fairly mature in terms of supply, product range and reach. As far as private sector and foreign banks are concerned, the reach in rural India still remains a challenge. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.

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The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate. Till now, there is hardly any deviation seen from this stated goal which is again very encouraging. With passing time, Indian economy is further expected to grow and be strong for quite some time-especially in its services sector. The demand for banking services, especially retail banking, mortgages and investment services are expected to grow stronger. Therefore, it is not hard to forecast few M&As, takeovers, and asset sales in the sector. Consolidation is going to be another order of the day. The significant change in the policy and attitude that is currently being seen is encouraging for the banking sector growth. In March 2006, the Reserve Bank of India allowed Warburg Pincus, a private foreign investor, to increase its stake in Kotak Mahindra Bank to 10%. Notably, this is the first time that a foreign individual investor has been allowed to hold more than 5% in a private sector bank since 2000. Earlier, RBI in 2005 announced that any stake exceeding 5% by foreign individual investors in the private sector banks would need to be vetted by them. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.3 Despite the current global slowdown, despite the fear of US economic recession, despite the volatility of Indian stock markets, every informed observer is more or less optimistic about the 8% to 10% growth per annum for the Indian economy till the next few years. Therefore, it can safely be said that the banking industry in India will only surge ahead in coming years. We can also expect to see many other sea changes in terms of their operations, funding and structures. As they say, this is just the beginning!

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INDIAN BANKING INDUSTRY: The Indian banking market is growing at an astonishing rate, with Assets expected to reach US$1 trillion by 2010. An expanding economy, middle class, and technological innovations are all contributing to this growth. The countrys middle class accounts for over 320 million People. In correlation with the growth of the economy, rising income levels, increased standard of living, and affordability of banking products are promising factors for continued expansion. The Indian banking market is growing at an astonishing rate, with Assets expected to reach US$1 trillion by 2010. An expanding economy, middle class, and technological innovations are allcontributing to this growth.

Figure 2

The Indian banking Industry is in the middle of an IT revolution, focusing on the expansion of retail and rural banking. Players are becoming increasingly customer - centric in their approach, which has resulted in innovative methods of offering new banking products and services. Banks a r e n o w r e a l i z i n g the importance of b e in g a b i g p la ye r a n d are beginning to focus their attention on Mergers and acquisitions to Basel II regulation.
15

take

advantage of economies of scale and/or comply with

Chapter 2 INTRODUCTION TO THE COMPANY

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HISTORY OF ICICI
* 1955 :- The Industrial Credit and Investment Corporation of India Limited (ICICI) was incorporated at the initiative of World Bank, the Government of India and representatives of Indian industry, with the objective of creating a development financial institution for providing medium-term and long-term project financing to Indian businesses. * 1994:- ICICI established Banking Corporation as a banking subsidiary. Formerly Industrial Credit and Investment Corporation of India. Later, ICICI Banking Corporation was renamed as 'ICICI Bank Limited'. ICICI founded a separate legal entity, ICICI Bank, to undertake normal banking operations - taking deposits, credit cards, car loans etc. * 2001:- ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiar bank, and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank (established 1904) in the 1960s. * 2002 :- The Boards of Directors of ICICI and ICICI Bank approved the reverse merger of ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, into ICICI Bank. After receiving all necessary regulatory approvals, ICICI integrated the group's financing and banking operations, both wholesale and retail, into a single entity. Also in 2002, ICICI Bank bought the Shimla and Darjeeling branches that Standard Chartered Bank had inherited when it acquired Grindlays Bank. ICICI started its international expansion by opening representative offices in New York and London. * 2003:- ICICI opened subsidiaries in Canada and the United Kingdom (UK), and in the UK it established an alliance with Lloyds TSB. It also opened an Offshore Banking Unit (OBU) in Singapore and representative offices in Dubai and Shanghai. * 2004 :- ICICI opens a rep office in Bangladesh to tap the extensive trade between that country, India and South Africa.

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* 2005:- ICICI acquired Investitsionno-Kreditny Bank (IKB), a Russia bank with about US$4mn in assets, head office in Balabanovo in the Kaluga region, and with a branch in Moscow. ICICI renamed the bank ICICI Bank Eurasia. Also, ICICI established a branch in Dubai International Financial Centre and in Hong Kong. * 2006:- ICICI Bank UK opened a branch in Antwerp, in Belgium. ICICI opened representative offices in Bangkok, Jakarta, and Kuala Lumpur. * 2007:- ICICI amalgamated Sangli Bank, which was headquartered in Sangli, in Maharashtra State, and which had 158 branches in Maharashtra and another 31 in Karnataka State. Sangli ICICI also received permission from the government of Qatar to open a branch in Doha. * 2008:- The US Federal Reserve permitted ICICI to convert its representative office in New York into a branch. ICICI also established a branch in Frankfurt. *2009:- ICICI Bank Canada received the prestigious Canadian Helen Keller Award at the Canadian Helen Keller Centre's Fifth Annual Luncheon in Toronto. The award was given to ICICI Bank its long-standing support to this unique training centre for people who are deaf-blind. *2010:- ICICI Bank takeovers to Bank Of Rajasthan. *2011:- ICICI Bank was ranked 1st in the Banking and Finance category and 9th in the "2010 Best Companies To Work For" by Business Today.

Corporate Profile
ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion (US$ 91 billion) at March 31, 2011 and profit after tax Rs. 51.51 billion (US$ 1,155 million) for the year ended March 31, 2011. The Bank has a network of 2,563 branches and about 7,440 ATMs in India, and has a presence in 19 countries, including India.

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ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

Present Scenario
ICICI Bank has its equity shares listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited. Overseas, its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). As of December 31, 2008, ICICI is India's second-largest bank, boasting an asset value of Rs. 3,744.10 billion and profit after tax Rs. 30.14 billion, for the nine months, that ended on December 31, 2008. Branches & ATMs ICICI Bank has a wide network both in Indian and abroad. In India alone, the bank has 1,420 branches and about 4,644 ATMs. Talking about foreign countries, ICICI Bank has made its presence felt in 18 countries - United States, Singapore, Bahrain, and Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The Bank proudly holds its subsidiaries in the United Kingdom, Russia and Canada out of which, the UK subsidiary has established branches in Belgium and Germany.

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Products & Services

Personal Banking

Deposits Loans Cards Investments Insurance Demat Services Wealth Management

NRI Banking

Money Transfer Bank Accounts Investments Property Solutions Insurance Loans

Business Banking

Corporate Net Banking Cash Management Trade Services FXOnline

INTERNATIONAL PRESENCE
ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion (US$ 91 billion) at March 31, 2011 and profit after tax Rs. 51.51 billion (US$ 1,155 million) for

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the year ended March 31, 2011. The Bank has a network of 2,563 branches and 7,440 ATMs in India, and has a presence in 19 countries, including India.

ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank recently expanded its branch networks in Britain and Canada as part of its strategy to beef up its overseas presence. The bank has unveiled its second branch in Leicester in Britain and fourth branch in Toronto, Canada.

ICICI Bank UK Ltd set up its first branch in Knightsbridge, London, in November 2003. It offers local banking products and services such as term deposits, loans against term deposits and corporate banking solutions.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). Corporate Profile.ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion (US$ 91 billion) at March 31, 2011.

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COMPETITORS AND OTHER PLAYERS IN THE FIELD

PERFORMING PUBLIC SECTOR BANK

1. Allahabad Bank 2. Allahabad Bank 3. Punjab National Bank 4. Dena Bank 5. Vijaya Bank

PERFORMING PRIVATE SECTOR BANK

1. HDFC Bank 2. AXIS Bank 3. Kodak Mahindra Bank 4. Centurion Bank

PERFORMING FOREIGN BANK

1. City Bank 2. HSBC Bank 3. American Express 4. Standard Charted

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FINANCIAL PERFORMANCE Profit & Loss - ICICI Bank Ltd.

Mar'11 12 Months INCOME: Sales Turnover Excise Duty NET SALES Other Income 32,369.69 0.00 32,369.69 0.00 32,747.36 0.00 32,747.36 0.00 33,052.72 38,250.39 0.00 38,250.39 0.00 38,581.03 39,467.92 0.00 39,467.92 0.00 39,533.50 28,457.13 0.00 28,457.13 0.00 28,766.30 Mar'10 12 Months Mar'09 12 Months Mar'08 12 Months Mar'07 12 Months

TOTAL INCOME 32,376.96 EXPENDITURE: Manufacturing Expenses Material Consumed Personal Expenses 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

2,816.93

1,925.79 236.28 7,440.42

1,971.70 669.21 7,475.63

2,078.90 1,750.60 6,447.32

1,616.75 1,741.63 4,946.69

Selling Expenses 305.79 Administrative Expenses Expenses Capitalized 4,909.00

0.00

0.00 -253.09 9,349.40 5,552.30 5,857.66 619.50 0.00 5,238.15 17,592.57 5,491.24 1,600.78

0.00 -511.17 9,605.37 5,407.91 5,738.55 678.60 0.00 5,059.96 22,725.93 5,571.13 1,830.51

0.00 -509.77 9,767.05 5,706.85 29,256.68 578.35 0.00 28,678.32 23,484.24 5,703.85 1,611.73

0.00 -421.30 7,883.77 3,793.56 20,461.23 544.78 0.00 19,916.45 16,358.50 3,979.25 984.25

Provisions Made 106.11 TOTAL EXPENDITURE Operating Profit EBITDA Depreciation Other Write-offs EBIT Interest EBT Taxes 8,137.83 7,380.82 7,388.08 562.44 0.00 6,825.65 16,957.15 6,719.54 1,609.33

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Profit and Loss for the Year Non Recurring Items Other Non Cash Adjustments Other Adjustments

5,110.21

3,890.47

3,740.62

4,092.12

2,995.00

41.17

134.52

17.51

65.61

115.22

-2.17

-0.0

-0.5

0.00

0.00

2.17

0.09 4,024.98

0.58 3,758.13

0.00 4,157.73

0.00 3,110.22

REPORTED PAT 5,151.38 KEY ITEMS Preference Dividend Equity Dividend Equity Dividend (%) Shares in Issue (Lakhs) EPS Annualized (Rs) 0.00 1,612.58 140.00

0.00 1,337.86 119.99

0.00 1,224.58 109.99

0.00 1,227.70 110.33

0.00 901.17 100.20

11,517.72

11,148.45

11,132.51

11,126.87

8,992.67

44.73

36.10

33.76

37.37

34.59

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Balance sheet - ICICI Bank Ltd. Particulars Liabilities Share Capital Reserves & Surplus Net Worth Secured Loans Unsecured Loans TOTAL LIABILITIES Assets Gross Block (-) Acc. Depreciation Net Block Capital Work in Progress. Investments. Inventories Sundry Debtors Cash And Bank Loans And Advances Total Current Assets Current Liabilities Provisions Total Current Liabilities NET CURRENT ASSETS Misc. Expenses TOTAL ASSETS (A+B+C+D+E) 9,107.47 4,363.21 4,744.26 0.00 134,685.96 0.00 0.00 34,090.08 232,713.37 266,803.45 12,691.89 3,294.46 15,986.35 250,817.10 0.00 390,247.32 7,114.12 3,901.43 3,212.69 0.00 120,892.80 0.00 0.00 38,873.69 200,420.53 239,294.22 12,563.22 2,937.96 15,501.18 223,793.04 0.00 347,898.53 7,443.71 3,642.09 3,801.62 0.00 103,058.31 0.00 0.00 29,966.56 242,474.47 272,441.03 40,934.58 2,811.85 43,746.43 228,694.60 0.00 335,554.53 7,036.00 2,927.11 4,108.90 0.00 111,454.34 0.00 0.00 38,041.13 246,190.71 284,231.84 40,067.37 2,828.02 42,895.38 241,336.45 0.00 356,899.69 6,298.56 2,375.14 3,923.42 189.66 91,257.84 0.00 0.00 37,121.32 212,165.86 249,287.18 35,881.71 2,346.92 38,228.64 211,058.55 0.00 306,429.48 Mar'11 12 Months 1,152.11 53,938.82 55,090.94 109,554.28 225,602.11 390,247.32 Mar'10 12 Months 1,114.89 50,503.48 51,618.37 94,263.57 202,016.60 347,898.53 Mar'09 12 Months 1,463.29 48,419.73 49,883.02 67,323.69 218,347.82 335,554.53 Mar'08 12 Months 1,462.68 45,357.53 46,820.21 65,648.43 244,431.05 356,899.69 Mar'07 12 Months 1,249.34 23,413.92 24,663.26 51,256.03 230,510.19 306,429.48

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CHAPTER 3 PROJECT PROFILE

26

"Ships are safe in harbor but they are not meant for that banking is business of taking informed and calculated risk"

The business of banking means "accepting of deposit for the purpose of onward lending"

Introduction
Credit risk is probably the oldest form of risk in financial markets. If credit can be defined as nothing but the expectation of a sum of money within some limited time then credit risk is the possibility that this expectation will not be fulfilled. Credit risk is as old as lending. There are written records from Sumer circa 3000 B.C., which indicate that interest rates were between 15% and 33%. This fact implies that commercial lending is the world's oldest profession (Durant (1917)). As far as neither commercial lending is something new, nor the statistical models developed to study its risks, the analysis using accounting ratios goes back at least in the 19th century (Dev (1974)). Although, the modern era of default prediction really begins with the innovative work of Beaver (1967) and Altman (1968). In recent decades credit risk has become pervasive. Companies borrow to make acquisitions and to grow, small businesses borrow to expand their capacity and individuals use credit to buy homes, cars, boats, clothing and even food. Therefore the effect of credit risk is present whenever someone buys a product or service without paying immediately for it. Consequently, in the question Who is interested in credit risk? the answer will be Almost everyone! Telephone corporations and electric utilities accept credit risk from their subscribers. The financial institutions that issue credit cards take this risk with all the cardholders. In the corporate sector, companies in every industry sell to customers on some kind of terms. Each time they do so, they accept credit risk. However

27

the traditional providers of credit and consequently the main bearers of credit risk, include banks, finance companies, life insurers, industrial companies and the government. Although statistical models developed almost 35 years ago, corporate lending is primarily a subjective process. There are no benchmarks in commercial lending with wide usage, which help explain why middle market portfolios are infrequently securitized and considered unusually opaque assets (Bergson (1995)). The financial statements of a borrower are invariably analyzed prior to the issuance of a loan, but the interpretation of this information depends on the analysts judgment. In contrast, consumer lending has evolved significantly over the past 35 years. In our days, a bureau score that captures at least 90% of the measurable risk inherent in a consumer relationship can be acquired for a few Euros. The main reason that consumer credit modeling developed faster than commercial credit modeling is the availability of data. All around the world there are thousands of bad credit card debts and millions of good ones making the statistical analysis more reliable. In contrast, if someone examines 30 of the major academic papers on commercial default models over the past 35 years, the median number of defaulting companies used in these studies is 40. However at this point it must be noticed that the last few years credit risk modeling has been evolving faster than ever and many commercially available models have appeared on the market. This phenomenon could be explained mainly by the two following reasons. The first reason is the Basel II Capital Accord. The three pillars of the recently reinforced Basel Capital Accord, which by the end of 2004 will be adopted by regulators in most industrialized countries are, (1) minimum capital requirements, (2) supervisory review of an institutions capital adequacy and internal assessment process, and (3) market discipline through disclosure of banking practices. In particular, with the Basel Capital Accord of 1998, banks around the world have been allowed to assess regulatory capital issues related to credit risk using internal models. The second reason is the development of the securitization of bond portfolios that has brought to light the need for quantitative estimation of credit risks. In the following sections the most well known approaches to credit risk measurement will be presented.

28

Risks in Business

Risk can be defined as any uncertainty about a future event that threatens the organizations ability to accomplish its mission. Business is a tradeoff between risk and return. There can be no risk-free or zero risk oriented business. Risk in its pragmatic sense, therefore, involves both threats that may be materialized and opportunities which can be exploited.

Credit Risk and Default

Credit Risk is the risk of loss to the Bank in the event of Default. Default arises due to counterparty's inability and/or unwillingness to meet commitments in relation to lending. Credit risk is the potential loss that a bank borrower or counter party will fail to meet its obligation in accordance with the agreed terms

Credit risk may be in the following forms:

* In case of the direct lending * In case of the guarantees and the letter of the credit * In case of the treasury operations * In case of the securities trading businesses * In case of the cross border exposure

Traditionally credit risk has 2 components a) Solvency aspects of the credit risk-the risk borrower is unable to pay.

b) Liquidity aspects of the risk-the risk that arise due to the delay in the repayment by the borrower leading to the cash flow problems for the leader

29

The need for Credit Risk Rating

The need for Credit Risk Rating has arisen due to the following: 1. With dismantling of State control, deregulation, globalization and allowing things to shape on the basis of market conditions, Indian Industry and Indian Banking face new risks and challenges. Competition results in the survival of the fittest. 2. It provides a basis for Credit Risk Pricing i.e. fixation of rate of interest on lending to different borrowers based on their credit risk rating thereby balancing Risk & Reward for the Bank. 3. The Basel Accord and consequent Reserve Bank of India guidelines requires that the level of capital required to be maintained by the Bank will be in proportion to the risk of the loan in Bank's Books for measurement of which proper Credit Risk Rating system is necessary. 4. The credit risk rating can be a Risk Management tool for prospecting fresh borrowers in addition to monitoring the weaker parameters and taking remedial action.

The Credit Risk Rating method is used by Bank's Credit officers,

* To gather key information about risk areas of a borrower and * To arrive at a risk score that would reflect the borrower's creditworthiness/degree of risk. The types of Risks Captured in the Bank's Credit Risk Rating Model The Credit Risk Rating Model provides a framework to evaluate the risk emanating from following main risk categorizes/risk areas: * Industry risk * Business risk * Financial risk * Management risk * Project risk
30

The Overall Rating is assigned on a 'A++' to 'C' scale presented below along with its meaning:
Rating Description Grade A++ Exceptionally high position of strength. Very High degree of sustainability. A+ High degree of strength on a factor among the peer group. High degree of sustainability. A B+ Moderate degree of strength with positive outlook. Moderate degree of strength with stable or marginally negative outlook. B Weakness on a parameter in comparison to peers. Unstable outlook. C Marginally Above Average Risk Modest Risk Average Risk Marginal Risk Minimum Risk Meaning

A fundamental weakness with regard to the factor. Unlikely Caution to improve under normal circumstances.

**

Default

. Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. There is always scope for the borrower to default from his commitments for one or the other reason resulting in crystallization of credit risk to the bank. These losses could take the form outright default or alternatively, losses from changes in portfolio value arising from actual or perceived deterioration in credit quality that is short of default. Credit risk is inherent to the business of lending funds to the operations linked closely to market risk variables. The objective of credit risk management is to minimize the risk and maximize bank's risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters. Credit risk consists of primarily two components, via Quantity of risk, which is nothing but the outstanding loan balance as on the date of default and the quality of risk, via, the severity of loss defined by both Probability of Default as reduced by the recoveries that could be made in the event of default.

31

Importance of Credit Risk Management for Banking

The importance of credit risk management for banking is tremendous. Banks and other financial institutions are often faced with risks that are mostly of financial nature. These institutions must balance risks as well as returns. For a bank to have a large consumer base, it must offer loan products that are reasonable enough. However, if the interest rates in loan products are too low, the bank will suffer from losses. In terms of equity, a bank must have substantial amount of capital on its reserve, but not too much that it misses the investment revenue, and not too little that it leads itself to financial instability and to the risk of regulatory non-compliance. Credit risk management, in finance terms, refers to the process of risk assessment that comes in an investment. Risk often comes in investing and in the allocation of capital. The risks must be assessed so as to derive a sound investment decision. Likewise, the assessment of risk is also crucial in coming up with the position to balance risks and returns. Banks are constantly faced with risks. There are certain risks in the process of granting loans to certain clients. There can be more risks involved if the loan is extended to unworthy debtors. Certain risks may also come when banks offer securities and other forms of investments. The risk of losses that result in the default of payment of the debtors is a kind of risk that must be expected. Because of the exposure of banks to many risks, it is only reasonable for a bank to keep substantial amount of capital to protect its solvency and to maintain its economic stability. The second Basel Accords provides statements of its rules regarding the regulation of the banks capital allocation in connection with the l evel of risks the bank is exposed to. The greater the bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves, so as to maintain its solvency and stability. To determine the risks that come with lending and investment practices, banks must assess the risks. Credit risk management must play its role then to help banks be in compliance with Basel II Accord and other regulatory bodies.
32

To manage and assess the risks faced by banks, it is important to make certain estimates, conduct monitoring, and perform reviews of the performance of the bank. However, because banks are into lending and investing practices, it is relevant to make reviews on loans and to scrutinize and analyze portfolios. Loan reviews and portfolio analysis are crucial then in determining the credit and investment risks. The complexity and emergence of various securities and derivatives is a factor banks must be active in managing the risks. The credit risk management system used by many banks today has complexity; however, it can help in the assessment of risks by analyzing the credits and determining the probability of defaults and risks of losses. Credit risk management for banking is a very useful system, especially if the risks are in line with the survival of banks in the business world.

Traditional Methods of Credit Risk Measurement

Traditional methods try to estimate the probability of default (denoted PD), rather than the potential losses in the event of default (denoted LGD). Furthermore, these models typically specify failure to be bankruptcy filing, default, or liquidation, the reby ignoring consideration of the downgrades and upgrades in credit quality that are measured in mark to market models. The three broad categories of traditional models used to estimate the probability of default are: (1) Expert systems, including artificial neural networks; (2) Rating systems (3) Credit scoring models. Expert Systems Historically, bankers have relied on expert systems to assess credit quality. These are based on, the Character (reputation), the Capital (leverage), the Capacity (earnings volatility), the Collateral, and the Cycle (macroeconomic) conditions. Evaluation of these variables is performed by human experts, who may be inconsistent and subjective in their
33

assessments. Moreover, traditional expert systems specify no weighting scheme that would order these systems in terms of their relative importance in forecasting the probability of default. Thus, artificial neural networks have been introduced to evaluate expert systems more objectively and consistently. The neural network is learning using historical repayment experience and default data. Structural matches are found that coincide with defaulting firms and then used to determine a weighting scheme to forecast the probability of default. Rating Systems External credit ratings provided by firms specializing in credit analysis were first offered in the U.S. by Moodys in 1909. Agency ratings are opinions based on extensive human analysis of both the quantitative and qualitative performance of a firm. Companies with agency-rated debt tend to be large and publicly traded. The credit opinions are statements about loss given default and default probability, specifically expected loss, and thus act as combined default prediction and exposure models. Credit Scoring Models The most commonly used traditional credit risk measurement methodology is the multiple discriminate credit scoring analysis pioneered by Altman (1968). Z-Score Model (Altman (1968)) This model is a multivariate approach built on the values of both ratio-level and categorical (Altman (1968, 1993)) univariate measures. These values are combined and weighted to produce a credit risk score that best discriminates between firms that default and those that do not. The Z-Score model was constructed using multiple discriminate analysis, a multivariate technique that analyzes a set of variables to maximize the between group variance while minimizing the within group variance. This is a sequential process in which the analyst includes or excludes variables based on various statistical criteria.

34

Modern Methods of Credit Risk Measurement Modern methodologies of credit risk measurement can be divided in two alternative approaches with respect to their relationship with the asset pricing literature of academic finance: the options-theoretic structural approach pioneered by Merton (1974) and a reduced form approach utilizing intensity-based models to estimate stochastic hazard rates, pioneered by Jarrow and Turnbull (1995), Jarrow, Lando, and Turnbull (1997), and Duffie and Singleton (1998, 1999). These two schools propose differing methodologies to accomplish the estimation of default probabilities. The structural approach models the economic process of default, whereas reduced form models decompose risky debt prices in order to estimate the random intensity process underlying default. Structural Models Merton (1974) models equity in a firm as a call option on the firms assets (denoted A) with a strike price equal to the liabilities of the firm (denoted D). If at expiration (coinciding to the maturity of the firms liabilities, (the firms liabilities are assumed to be comprised of pure discount debt instruments) the market value of the firms assets is greater than the value of its debt, then the firms shareholders will exercise the option to repurchase the companys assets by repaying the debt. However, if the market value of the firms assets is less than the value of its debt (A<D), then the option will not be exercised and the firms shareholders will default. Thus, the probability of default until expiration (set equal to the maturity date of the firms pure discount debt, typically assumed to be one year) is equal to the likelihood that the option will expire unexercised. To determine the probability of default the value the call option is calculated. An iterative method is used to estimate the unobserved variables that determine the value of the equity call option; in particular, A (the market value of assets) and A (the volatility of assets). These values for A and A are combined with the amount of debt liabilities D that have to be repaid at a given credit horizon in order to calculate the firms Distance to Default (denoted DD
A D ). A *

35

(Market Value of Assets) (Debt) = Distance to Default (Market Value of Assets) x (Volatility of Assets)

The Distance to Default which is illustrated in Figure 2 represents the number of standard deviations between current asset values and the debt liabilities. The higher the Distance to Default is, the lower the probability to default. To convert the DD into a probability to default estimate, Merton (1974) assumes that asset values are lognormally distributed. Since this distributional assumption is often violated in practice, proprietary structural models use alternative approaches to map the DD into a probability to default estimate Exposure Models These models estimate credit exposure conditional on a default event, and thus are complements to all of the above models. That is, they are statements about how much is at risk in a given facility, not the probability of default for these facilities. These are important calculations for lenders who extend 'lines of credit', as opposed to outright loans, as well as for derivatives such as swaps, caps, and floors. Exposure models also include estimations of the recovery rate, which vary by collateral type, seniority, and industry. Conclusions We are in front of an impressive evolution of more effective credit risk models. This development comes at a time when credit-related losses in the USA, Japan and perhaps in Europe in the near future, are approaching to record levels. Although much progress has been made in credit risk measurement, there is still much to be done. The need of improvement in credit-risk management has never been more urgent. The most important technical motivating factors for this development include refinements of traditional techniques to evaluate the probability of default of individual assets, new analytical solutions to credit portfolio management, larger and improved databases to translate risk
36

ratings into expected losses, and the dynamics of market mechanisms of risk mitigation techniques (Altman (2002)). In the near future further new development and more advanced techniques are expected to appear hoping that they will be able to manage credit risk more effectively.

Non-performing asset
Meaning Non-Performing Assets are popularly known as NPA. Commercial Banks assets are of various types. All those assets which generate periodical income are called as Performing Assets (PA). While all those assets which do not generate periodical income are called as NonPerforming Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus non-performing assets are basically non-performing loans. In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms. India and Non-Performing Assets In India, NPA were very high in the beginning of 90's. Over a period of time there is considerable decline in the NPA's of all banks. In the case of public sector banks, gross non-performing assets were 9.4% in 2002-03 and it declined to 7.8% in 2003-04. The net NPA during the same period declined from 4.5% to 3%. Types of NPA NPA have been divided or classified into following four types:37

1. Standard Assets : A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets. 2. Sub-Standard Assets : All those assets (loans and advances) which are considered as non-performing for a period of 12 months are called as Sub-Standard assets. 3. Doubtful Assets : All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. 4. Loss Assets : All those assets which cannot be recovered are called as Loss Assets.

Causes of NPA NPA arises due to a number of factors or causes like:1. Speculation: Investing in high risk assets to earn high income. 2. Default: Willful default by the borrowers. 3. Fraudulent practices: Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc. 4. Diversion of funds: Most of the funds are diverted for unnecessary expansion and diversion of business.

38

5. Internal reasons: Many internal reasons like inefficient management, inappropriate technology, labor problems, marketing failure, etc. resulting in poor performance of the companies. 6. External reasons: External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.

39

Credit risk monitoring process of ICICI Bank

For effective monitoring of credit facilities, a post-approval authorization structure has been laid down. For corporate, small enterprises and rural micro -banking and agribusiness group, Credit Middle Office Group verifies adherence to the terms of the approval prior to commitment and disbursement of credit facilities. Within retail, the Bank has established centralized operations to manage operational risk in the various back office processes of the Banks retail loan business except for a few operations, which are decentralized to improve turnaround time for customers. A fraud prevention and control group has been set up to manage fraud-related risks through fraud prevention and through recovery of fraud losses. The fraud control group evaluates various external agencies involved in the retail finance operations, including direct marketing associates, external verification associates and collection agencies. The Bank has a collections unit structured along various product lines and geographical locations, to manage delinquency levels. The collections unit operates under the guidelines of a standardized recovery process. The segregation of responsibilities and oversight by groups external to the business groups ensure adequate checks and balances.

Measurement of Credit Risk in ICICI Bank

Credit exposure for ICICI Bank is measured and monitored using a centralized exposure management system. The analysis of the composition of the portfolio is presented to the Risk Committee on a quarterly basis.ICICI Bank complies with the norms on exposure stipulated by RBI for both single borrower as well as borrower group at the consolidated level. Limits have been set by the risk management group as a perce ntage of the Bank s consolidated capital funds and are regularly monitored. The utilization against specified limits is reported to the Committee of Executive Directors and C redit Committee on a periodic basis.

40

Managing Market Risk

It is the risk that the value of on and off-balance sheet positions of a financial institution will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity prices, credit spreads and/or commodity prices resulting in a loss to earnings and capital. Financial institutions may be exposed to Market Risk in variety of ways. Market risk exposure may be explicit in portfolios of securities, equities and instruments that are actively traded. Conversely it may be implicit such as interest rate risk due to mismatch of loans and deposits. Besides, market risk may also arise from activities categorized as off-balance sheet item. Therefore market risk is potential for loss resulting from adverse movement in market risk factors such as interest rates, forex rates, equity and commodity prices. The risk arising from these factors have been discussed as following:-

1. Interestrate risk

Interest rate risk arises when there is a mismatch between positions, which are subject to interest rate adjustment within a specified period. The banks lending, funding and investment activities give rise to interest rate risk. The immediate impact of variation in interest rate is on bank s net interest income, while a long term impact is on banks net worth since the economic value of bank s assets, liabilities and offbalance sheet exposures are affected. Consequently there are two common perspectives for the assessment of interest rate risk.

a) Earning perspective: In earning perspective, the focus of analysis is the impact of variation in interest rates on accrual or reported earnings. This is a traditional approach to interest rate
41

risk assessment and obtained by measuring the changes in the Net Interest Income (NII) or Net Interest Margin (NIM) i.e. the difference between the total interest income and the total interest expense.

b) Economic Value perspective: It reflects the impact of fluctuation in the interest rates on economic value of a financial institution. Economic value of the bank can be viewed as the present value of future cash flows. In this respect economic value is affected both by changes in future cash flows and discount rate used for determining present value. Economic value perspective considers the potential longer-term impact of interest rates on an institution.

3. Equity price risk

It is risk to earnings or capital that results from adverse changes in the value of equity related portfolios of a financial institution. Price risk associated with equities could be systematic or unsystematic. The former refers to sensitivity of portfolio s value to changes in overall level of equity prices, while the later is associated with price volatility that is determined by firm specific characteristics.

Managing Liquidity Risk

Liquidity risk is considered a major risk for banks. It arises when the cushion provided by the liquid assets are not sufficient enough to meet its obligation. In such a situation banks often meet their liquidity requirements from market. Accordingly an institution short of liquidity may have to undertake transaction at heavy

42

cost resulting in a loss of earning or in worst case scenario the liquidity risk could result in bankruptcy of the institution if it is unable to undertake transaction even at current market prices. An incipient liquidity problem may initially reveal in the banks financial monitoring system as a downward trend with potential long-term consequences for earnings or capital.

43

CHAPTER 4 RESEARCH METHODOLOGY

44

Research Methodology

Research methodology:The success of the analysis mostly depends on the methodology on which it is carried out. The appropriate methodology will improve the validity of the findings.

Area of the study:The study was mainly concentrated on the credit department of ICICI Bank in Bikaner in which I have studied the working of that department and how they carry out different marketing and financial strategies to make their business grow and provide the satisfaction to the customers through its different services.

Research Design:Descriptive Research: Descriptive research includes survey and fact-findings enquire of different kinds. The major purpose of descriptive research is description of the state affairs, as it exists at present.

Data Collection:The study is based on the data collected through primary and secondary sources.

Sources of Data-: Primary Data:I have used questionnaire as a primary tool for collecting data.

45

 Secondary Data:Secondary data was collected from journals, magazines, web sites and from other relevant publications.

Sampling Design:The sampling design mainly consists of the sample taken for the study along with the sample size, sample frame and sampling method.

Sample Size:From the universe, sample sizes of 100 customers were selected for the purpose of the study.

Sample Frame:The customers were selected on a random basis from which the respondents were selected based on convenience. Sampling Method:Convenience sampling was used, based on the willingness and availability of the respondents. The study was conducted on customers with different type of accounts maintained in the bank.

46

CHAPTER 5 FACTS AND FINDING

47

Finding Project finding reveal that ICICI is sanctioning less credit to agriculture, as compared with its key competitors viz., Canara Bank, Corporation Bank, syndicate Bank. Recovery of credit:ICICI recovery of credit during the year 2006 is 62.5% compared to other banks ICICI recovery policy is very good, hence this reduce NPA. Total Advances: As compared total advances of ICICI is increased year by year. ICICI is granting credit in all sectors in equated monthly installments so that anybody can borrow money easily. Project finding reveal that ICICI is lending more credit or sanctioning more loans as compared to other banks. In case of indirect agriculture advances, ICICI is granting 3.1% of net banks credit, which is less as compared to Canara bank, Syndicate bank and Corporation bank. ICICI has to entertain indirect sector of agriculture so that it can have it can have more number of borrowers for the bank. ICICIs direct agriculture advances as compared to other banks is 10.5%of the net banks credit, which shows that bank has not lent enough credit to direct agriculture sector.
Credit risk management process of used is very effective as

compared with other banks.

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CHAPTER 6 ANALYSIS AND INTERPRETATION

49

Q.1 Does the organization have a risk treatment (action) plan? o Yes o No YES Respondents 15 NO 5

25% 75%

yes no

Q.2 Who is responsible for identifying the risk facing your organization? o The Chief Executive Officer o Board/Executive Management Team o Director of Finance o Internal Auditor o Risk Manager o Line Manager o All Staff o Other

The Chief Executive Officer

Board/Executive Director of Management Team Finance

Internal Auditor

Risk Manager

50

Respondents 2

10% 10% 40% 30% 10%

The Chief Executive Officer Board/Executive Management Team Director of Finance

Q.3 How important is effective risk management to the achievement of your organizations objective? o Strongly Disagree o Disagree o Neutral o Agree o Agree Strongly

Strongly Disagree

Disagree

Neutral

Agree

Agree Strongly

Respondents 0

10

51

0% 5%

5% Strongly Disagree Disagree

50% 40%

Neutral Agree Agree Strongly

Q.4 effective risk management can improve your organizations performance? o Strongly Disagree o Disagree o Neutral o Agree o Agree Strongly

Strongly Disagree

Disagree

Neutral

Agree

Agree Strongly

Respondents 1

5% 5% 40% 15% 35%

Strongly Disagree Disagree Neutral Agree Agree Strongly

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Q.5 To what degree has your organization developed a close link between its strategic objectives and management of risk? o Not at all o Some o Significant Not at all Respondents 2 Some 6 Significant 12

10% 30% Not at all some significant

60%

Q.6 Management has documented its attitude on risk management for the benefit of all staff? o Strongly Disagree

o Disagree o Neutral o Agree o Agree Strongly

Strongly Disagree

Disagree

Neutral

Agree

Agree Strongly

53

Respondents 1

5%

5% 10%

Strongly Disagree Disagree Neutral

50% 30%

Agree Agree Strongly

Q.7 The accountability (responsibility) for risk management within your organization is o Documented o Communicated o Both of them

Documented Respondents 8

Communicated 7

Both of them 5

35%

25% 40%

Documented Communicated Both of them

Q.8 Who is sponsor or champion for risk management with your organizationo The chief executive officer o Another senior executive o Head of finance o A committee o The risk manager
54

The Chief Executive Officer

Another senior executive

Head Finance

The Risk manager

The internal auditor

Respondents 2

10% 0% 15% 25% 40% 0% 10%

The Chief Executive Officer Another senior executive Head Finance The Risk manager The internal auditor

Q.9 your organization is able to allocate appropriate resources in support of risk management policy and practice o Strongly Disagree o Disagree o Neutral o Agree o Agree Strongly

Strongly Disagree

Disagree

Neutral

Agree

Agree Strongly

Respondents 1

55

5% 30%

10%

Strongly Disagree Disagree

20% 35%

Neutral Agree Agree Strongly

Q.10 If the answer in (a) above was negative what are the main barriers to o Budgetary o Cultural o Other

Budgetary Respondents 9

Cultural 6

Other 5

25%

45%

Budgetary Cultural

30%

Other

56

Q.11 Do you follow regular reporting concept to senior management in your organization? o Yes o No o Na

Yes Respondents 11

No 5

Na 4

20% 55%

Yes No

25%

Na

57

CHAPTER 7 SWOT ANALYSIS

58

SWOT ANALYSIS The SWOT Analysis enables a company to recognize its market standing and adopt Strategies accordingly. Here SWOT analysis of ICICI bank is made to understand the positioning of the bank better:

STRENGTHS 1. BRAND NAME: ICICI Bank has earned a reputation in the market for extending quality services to the market vis--vis its competitors. It has earned a strong Brand name in banking in a very short span of time. 2. MARKET SHARE: ICICI Bank has the largest market share of 34% in the IT & ITES industry in Hyderabad according to our survey (within the limitation of the sample size.) 3. HUGE NETWORK: ICICI Bank has the highest number of linked branches in the country. The bank operates through a network of 450 BRANCHES AND over 1800 ATMs across India, thus enabling them to serve customer in better way. 4. DIVERSIFIED PORTFOLIO: ICICI Bank has all the products under its belt, which help it to extend the relationship with existing customer. ICICI Bank has umbrella of products to offer their customers, if once customer has relationship with the bank. Some Products, which ICICI Bank is offering are: Retail Banking Business Banking
59

 Merchant Establishment Services (EDC Machine) Personal loans & Car loans Demat Services with E-Broking Mutual Fund (ICICI Bank is the Distributor of all Mutual Fund) Insurance Housing Loans 5. WORKING HOURS: ICICI is the only bank which is having its working hours from 8 to 8 which is one of the major strength of ICICI Bank with respect to IT & ITES Industry.

WEAKNESSES 1. TRANSACTION COST: ICICI Bank charges high cost for its transactions 2. FOCUS ONLY ON HIGH END CUSTOMERS 3. DEFENSIVE APPROACH IN LENDING 4. LITTLE PRESENCE OUTSIDE INDIA 5. POOR CUSTOMER CARE/SERVICE OPPORTUNITIES 1. NEW IT & ITES COMPANIES: IT & ITES sector is on a boom in the Indian market context, with new companies mushrooming in the market; it opens the door for ICICI bank to capture the huge untapped market. 2. Dissatisfied Customers of Other Banks:

60

The group from its survey and analysis of IT companies has found out that there are many companies which are not satisfied with its current bank, so ICICI with its superior service quality and long working hours can capture those customers. 3. Business advising for smaller Players: The analysis has also indicated that the concept of business advising though very popular with the higher end players is virtually nonexistent in the lower end of the market

THREATS 1. Dissatisfied Customers 2. Advent of MNC banks: Large numbers of MNC banks are mushrooming in the Indian market due to the friendly policies adopted by the government

61

CHAPTER 8 RECOMMENDATION AND SUGGESTIONS

62

Recommendation and Suggestions Based on the above study we could recommend that The bank should keep on revising its credit policy which will help bank efforts to correct the course of the policies. Debt collection software should be developed. Strong debt recovery team should be appointed. Proper credit risk manager should be appointed. Loans should be properly workout. Proper analysis of seasonal loan should be done. Projection analysis should be done Proper analysis of secured and unsecured credit debt recoveries and management turnover should be done properly. The chairman and managing director/executive director should make modification to the procedural guidelines required for implementation of the credit policy as they may become necessary from time to time on account of organizational needs. Bank has to grant the loans for the establishment of business at a moderate rate of interest because of this, the people can repay the loan amount to bank regularly and promptly. Bank should not issue entire amount of loan to agriculture sector at a time, it should releases the loan in installment. If the climatic conditions are good then they have to release remaining amount. ICICI has to reduce the interest rate. ICICI has to entertain indirect sectors of agriculture so that it can have more numbers of borrowers for the bank.

63

64

Conclusion

The project undertaken has helped a lot in gaining knowledge of the credit policy and credit risk management in private bank with special reference to ICICI bank. Credit policy and Credit risk policy of the bank has become very vital in the smooth operation of the banking activities. Credit policy of the bank provides the frame work to determine (a) whether or not to extend credit to a customer and (b) how much credit to extend. The Project work has certainly enriched the knowledge about the effectiveness of Credit Policy and Credit Risk management in banking sector. Credit Policy and Credit Risk Management is a vast subject and it is very difficult to cover all the aspects within a short period. However, every effort has been made to cover most of the important aspects, which have a direct bearing on improving the financial performance of banking industry. To sum up, it would not be out of way to mention here that the ICICI has given special inputs on Credit Policy and Credit risk management. In pursuance of the instructions and guidelines issued by the Reserve Bank of India, the ICIC is granting and expanding credit to all sectors. The concerted efforts put in by the Management and staff of ICICI has helped the bank in achieving remarkable progress in almost all the important parameters. The bank is marching ahead in the direction of achieving the Number-1 position in the banking Industry.

65

ANNEXURE

66

QUESTIONNAIRE
Personal information
Name Address.. Annual income Marital Status.. Age.. Sex. Occupation..

Q.1 Does the organization have a risk treatment (action) plan? o Yes o No

Q.2 Who is responsible for identifying the risk facing your organization? o The Chief Executive Officer o Board/Executive Management Team o Director of Finance o Internal Auditor o Risk Manager o Line Manager o All Staff o Other

Q.3 How important is effective risk management to the achievement of your organizations objective?
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o Strongly Disagree o Disagree o Neutral o Agree o Agree Strongly

Q.4 effective risk management can improve your organizations performance? o Strongly Disagree o Disagree o Neutral o Agree o Agree Strongly

Q.5 To what degree has your organization developed a close link between its strategic objectives and management of risk? o Not at all o Some o Significant

Q.6 Management has documented its attitude on risk management for the benefit of all staff? o Strongly Disagree

o Disagree o Neutral o Agree

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o Agree Strongly

Q.7 The accountability (responsibility) for risk management within your organization is o Documented o Communicated o Both of them Q.8 Who is sponsor or champion for risk management with your organizationo The chief executive officer o Another senior executive o Head of finance o A committee o The risk manager

Q.9 Does the sponsor/champion has a facilitative role in: yes no? o Increasing awareness of the benefits of risk management o Promoting the acceptance of risk management techniques o Developing risk management policies and procedures o Providing advice and support o Organizing training

Q.10 your organization is able to allocate appropriate resources in support of risk management policy and practice o Strongly Disagree o Disagree o Neutral o Agree
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o Agree Strongly

Q.11 If the answer in (a) above was negative what are the main barriers to o Budgetary o Cultural o Other

Q.12 As a credit risk manager, what will be your suggestions regarding the improvement of credit risk policies in the organization?

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BIBLIOGRAPHY

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 Reference Book -:
Research Methodology (2nd Revised Edition 2004) New age International (Pvt.) Ltd. Publications

Banks Publications -:
ICICI BANK Annual Report published by the bank.

Websites :
www.icicibank.com www.ampfi.com www.nse.com

News Papers-:
The Times of India The Economic Times The Business Standards 72

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