Submitted in fulfillment of the Requirements of the Risk Management Course of Post Graduate programme (PGP).

Submitted By -:Mr. Abhay Pratap

Submitted to -:Prof. Vandana Mehrotra

Contents

1. About ICICI 2. Shareholding pattern 3. Risk-An Introduction 4. Key Risks 5. Risk management framework 6. Managing Credit Risk 7. Managing market Risks Interest rate risk Foreign Exchange risk Equity price risk 8. Managing liquidity Risk 9. Managing operational Risk 10. Initiatives taken by the bank to minimize the risk

About ICICI
ICICI Bank is India's second- largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010. The Bank has a network of 2,518 branches and 5,808 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'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).ICICI Bank is India's second- largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010. The Bank has a network of 2,518 branches and about 5,808 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's equity shares are listed in India on Bombay Stock Exchange and the Natio nal Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

Shareholding Pattern
The shareholding pattern of a bank refers to the scenario of a banks equity capital among various entities from whom the bank has financed its capital. These include Individuals, Insurance companies, MFs, Bodies Corporate and the most important are the depository receipts through which the bank can finance its capital by issuing shares in other countries through listing in the foreign exchange .

2009 Shareholder Pattern

Foreign Insts/ Banks 0% MFs 7% Depository Reciepts 27%
Insurance Companies 15%

Individuals 9% FIIs 36% Bodies Corporates 6%

The pie charts above show that only 9% is the individual holding in comparison to 11% of last year along with decrease in FIIs holdings from 57% to 36%.The holding in shares by insurance companies is the same. Also the holding by the mutual funds is only 7% as compared to 9% of earlier year. The bank has gone for the Depository Receipts for funding of the capital in 2009 i.e. American Depository Receipts and Global Depository Receipts.

Risk an Introduction
Risks are usually defined by the adverse impact on profitability of several distinct sources of uncertainty. While the types and degree of risks an organization may be exposed to depend upon a number of factors such as its size, complexity business activities, volume etc, it is believed that generally the banks face Credit, Market, Liquidity, Operational, Compliance ,legal ,regulatory and reputation risks. Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks to ensure that a) The individuals who take or manage risks clearly understand it. b) The organizations Risk exposure is within the limits established by Board of Directors. c) Risk taking Decisions are in line with the business strategy and objectives set by BOD. d) The expected payoffs compensate for the risks taken e) Risk taking decisions are explicit and clear. f) Sufficient capital as a buffer is available to take risk

Key risks
We have included statements in this annual report which contain words or phrases such as will, expected to,etc., and similar expressions or variations of such expressions, may constitute forward- looking statements. These forward- looking statements involve a number of risks, uncertainties and other factors that could cause actual results, opportunities and growth potential to differ materially from those suggested by the forward- looking statements. These risks and uncertainties include, but are not limited to, the actual growth in demand for banking and other financial products and services in the countries that we operate or where a material umber of our customers reside, our ability to successfully implement our strategy, including our use of the Internet and other technology, our rural expansion, our exploration of merger and acquisition opportunities both in and outside of India, our ability to integrate recent or future mergers or acquisitions into our operations and manage the risks associated with such acquisitions to achieve our strategic and financial objectives, our ability to manage the increased complexity of the risks we face following our rapid international growth, future levels of impaired loans, our growth and expansion in domestic and overseas markets, the adequacy of our allowance for credit and investment losses, technological changes, investment income, our ability to market new products, cash flow projections, the outcome of any legal, tax or regulatory proceedings in India and in other jurisdictions we are or become a party to, the future impact of new accounting standards, our ability to implement our dividend policy, the impact of changes in banking regulations and other regulatory changes in India and other jurisdictions on us, the state of the global financial system and other systemic risks, the bond and loan market conditions and availability of liquidity amongst the investor community in these markets, the nature of credit spreads, interest spreads from time to time, including the possibility of increasing credit spreads

or interest rates, our ability to roll over our short-term funding sources and our exposure to credit, market and liquidity risks.

Risk management framework

The Banks risk management strategy is based on a clear understanding of various risks, disciplined risk assessment and measurement procedures and continuous monitoring. The policies and procedures established for this purpose are continuously benchmarked with international best practices. The key principles underlying our risk management framework are as follows: The Board of Directors has oversight on all the risks assumed by the Bank. Specific Committees of the Board have been constituted to facilitate focused oversight of various risks. The Risk Committee reviews risk management policies of the Bank in relation to various risks and regulatory compliance issues. It reviews key risk indicators covering areas such as credit risk, interest rate risk, liquidity risk, and foreign exchange risk and the limits framework, including stress test limits, for various risks. It also carries out an assessment of the capital adequacy based on the risk profile of the Banks balance sheet and reviews the status with respect to implementation of Basel II norms. The Credit Committee reviews developments in key industrial sectors and Banks exposure to these sectors as well as to large borrower accounts. The Audit Committee provides direction to and also monitors the quality of the internal audit function. The Asset Liability Management Committee is responsible for managing the balance sheet and reviewing asset- liability position of the Bank. Policies approved from time to time by the Board of Directors/Committees of the Board form the governing framework for each type of risk. The business activities are undertaken within this policy framework. Independent groups and sub-groups have been constituted across the Bank to facilitate independent evaluation, monitoring and reporting of various risks. These groups function independently of the business groups/sub-groups. The Bank has dedicated groups namely the Global Risk Management Group (GRMG), Compliance Group, Corporate Legal Group, Internal Audit Group and the Financial Crime Prevention and Reputation Risk Management Group (FCPRRMG), with a mandate to identify, assess and monitor all of the Banks principal risks in accordance with well-defined policies and procedures. GRMG is further organized into the Global Credit Risk Management Group, the Global Market Risk Management Group and the Global Operational Risk Management Group. These groups are completely independent of all business operations and coordinate with representatives of the business units to implement ICICI Banks risk management methodologies. The internal audit and compliance groups are responsible to the Audit Committee of the Board.

Managing credit risk

In a banks portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively losses may result from reduction in portfolio value due to actual or perceived deterioration in credit quality. Credit risk emanates from a banks dealing with individuals, corporate, financial institutions or a sovereign. For most banks, loans are the largest and most obvious source of credit risk; however, credit risk could stem from activities both on and off balance sheet. In addition to direct accounting loss, credit risk should be viewed in the context of economic exposures. This encompasses opportunity costs, transaction costs and expenses associated with a non-performing asset over and above the accounting loss. Total credit risk exposures (March 31, 2010) Credit risk exposures include all exposures as per RBI guidelines on exposure norms subject to credit risk and investments in held-to- maturity category. Direct claims on domestic sovereign which are risk-weighted at 0% and regulatory capital instruments of subsidiaries which are deducted from the capital funds have been excluded. Rupees in billion Category Credit exposure Fund-based Non-fund based Total 3,355.66 2,109.75 5,465.41

Credit risk monitoring process of ICICI Bank

For effective monitoring of credit facilities, a post-approval authorisation 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 busine ss 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 percentage of the Banks consolidated capital funds and are regularly monitored. The utilization against specified limits is reported to the Committee of Executive Directors and Credit Committee on a periodic basis.

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.Inte rest rate 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 banks net interest income, while a long term impact is on banks net worth since the economic value of banks assets, liabilities and off-balance 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 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. Interest rate risk occurs due to Differences between the timing of rate changes and the timing of cash flows (re-pricing risk) changing rate relationships among different yield curves effecting bank activities (basis risk) Changing rate relationships across the range of maturities (yield curve risk) Interest-related options embedded in bank products (options risk). 2.Foreign Exchange Risk: It is the current or prospective risk to earnings and capital arising from adverse movements in currency exchange rates. It refers to the impact of adverse movement in currency exchange rates on the value of open foreign currency position. The banks are also exposed to interest rate risk, which arises from the maturity mismatching of foreign currency positions. Even in cases where spot and forward positions in individual currencies are balanced, the maturity pattern of forward transactions may produce mismatches. As a result, banks may suffer losses due to changes in discounts of the currencies concerned. In the foreign exchange business, banks also face the risk of default of the counter parties or settlement risk. Thus, banks may incur replacement cost, which depends upon the currency rate movements. Banks also face another risk called time-zone risk, which arises out of time lags in settlement of one currency in one center and the settlement of another currency in another time zone. The forex transactions with counter parties situated outside Pakistan also involve sovereign or country risk. 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 portfolios 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 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 bank's financial monitoring system as a downward trend with potential long-term consequences for earnings or capital. Given below are some early warning indicators that not necessarily always lead to liquidity problem for a bank; however these have potential to ignite such a problem. Consequently management needs to watch carefully such indicators and exercise further scrutiny/analysis wherever it deems appropriate. Examples of such internal indicators are: a) A negative trend or significantly increased risk in any area or product line. b) Concentrations in either assets or liabilities. c) Deterioration in quality of credit portfolio. d) A decline in earnings performance or projections. e) Rapid asset growth funded by volatile large deposit. f) A large size of off-balance sheet exposure. g) Deteriorating third party evaluation about the bank A liquidity risk management involves not only analyzing banks on and off-balance sheet positions to forecast future cash flows but also how the funding requirement would be met. The formality and sophistication of risk management processes established to manage liquidity risk should reflect the nature, size and complexity of an institutions activities. Sound liquidity risk management employed in measuring, monitoring and controlling liquidity risk is critical to the viability of any institution. Institutions should have a thorough understanding of the factors that could give rise to liquidity risk and put in place mitigating controls. Liquidity risk is the risk of inability to meet financial commitments as they fall due, through available cash flows or through sale of assets at fair market value. It is the current and prospective risk to the Banks earnings and equity arising out of inability to meet the obligations as and when they become due. It includes both, the risk of unexpected increases in the cost of funding an asset portfolio at appropriate maturities as well as the risk of being unable to liquidate a position in a timely manner at a reasonable price. The goal of liquidity risk management is to be able, even under adverse conditions, to meet all liability repayments on time and to fund all investment opportunities by raising sufficient funds either by increasing liabilities or by converting assets into cash expeditiously and at reasonable cost. The Bank has diverse sources of liquidity to allow for flexibility in meeting funding requirements. For the domestic operations, current accounts and savings deposits payable on demand form a significant part of the Banks funding and the Bank is working with a concerted strategy to sustain and grow this segment of deposits along with retail

term deposits. These deposits are augmented by wholesale deposits, borrowings and through issuance of bonds and subordinated debt from time to time. Loan maturities and sale of investments also provide liquidity. The Bank holds unencumbered, high quality liquid assets to protect against stress conditions. For domestic operations, the Bank also has the option of managing liquidity by borrowing in the inter-bank market on a short-term basis. The overnight market, which is a significant part of the inter-bank market, is susceptible to volatile interest rates. To limit the reliance on such volatile funding, the ALM Policy has stipulated limits for borrowing and lending in the inter-bank market. The Bank also has access to refinancing facilities extended by the RBI. For the overseas operations too, the Bank has a well-defined borrowing program. The US dollar is the base currency for the overseas branches of the Bank, apart from the branches where the currency is not freely convertible. In order to maximize the borrowings at reasonable cost, liquidity in different markets and currencies is targeted. The wholesale borrowings are in the form of bond issuances, syndicated loans from banks, money market borrowings, inter-bank bilateral loans and deposits, including structured deposits. The Bank also raises refinance from banks against the buye rs credit and other forms of trade assets. The loans that meet the criteria of the Export Credit Agencies are refinanced as per the agreements entered with these agencies. Apart from the above the Bank is also focused on increasing the share of retail deposit liabilities, in accordance with the regulatory framework at the host countries. Frameworks that are broadly similar to the above framework have been established at each of the overseas banking subsidiaries of the Bank to manage liquidity risk. The frameworks are established considering host country regulatory requirements as applicable. In summary, the Bank follows a conservative approach in its management of liquidity and has in place robust governance structure, policy framework and review mechanism to ensure availability of adequate liquidity even under stressed market conditions.

Managing Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and system or from external events. Operational risk is associated with human error, system failures and inadequate procedures and controls. It is the risk of loss arising from the potential that inadequate information system; technology failures, breaches in internal controls, fraud, unforeseen catastrophes, or other operational problems may result in unexpected losses or reputation problems. Operational risk exists in all products and business activities. The objective of operational risk management is the same as for credit, market and liquidity risks that is to find out the extent of the financial institutions operational risk exposure; to understand what drives it, to allocate capital against it and identify trends internally and externally that would help predicting it. The management of specific operational risks is not a new practice; it has always been important for banks to try to prevent fraud, maintain the integrity of internal controls, and reduce errors in transactions processing, and so on. The Banks operational risk management governance and framework risk is defined in the Policy. While the Policy provides a broad framework, detailed standard operating procedures for operational risk management processes are established. For the purpose of robust quality of operational risk management across the Bank, the operational risk management processes of the Bank have been certified for ISO 9001 standard. The Policy specifies the composition, roles and responsibilities of Operational Risk Management Committee(ORMC). In line with the RBI guidelines, an independent Operational Risk Management Group (ORMG) was set up in 2006. The key elements in the operational risk management framework include: 1. Identification and assessment of operational risks and controls; 2. New products and processes approval framework; 3. Measurement through incident and exposure reporting; 4. Monitoring through key risk indicators; and 5. Mitigation through process and controls enhancement and insurance

Initiatives taken by the bank to minimize the Risk

In each type of business to reap out maximum profits an organization has to leverage itself so that it can achieve targeted and projected growth, which cannot be achieved without taking risk. So it does not mean that by increasing some extent of risk there will be higher possibility of more profit since higher risk does not mean higher profit. Hence the company will have to take some steps bring the risks to which it is exposed to its minimum level. Under each category of risks ICICI bank has taken some initiatives which are as follows:The institutions plan to grant credit based on various client segments and products, economic sectors, geographical location, currency and maturity. Target market within each lending segment, preferred level of diversification/concentration. Ensure that the bank implements sound fundamental principles that facilitate the identification, measurement, monitoring and control of credit risk. It is essential that banks give due consideration to their target market while devising credit risk strategy. The credit procedures should aim to obtain an in depth understanding of the banks clients, their credentials & their businesses in order to fully know their customers. Devise policies and guidelines for identification, measurement, monitoring and control for all major risk categories. The committee also ensures that resources allocated for risk management are adequate given the size nature and volume of the business and the managers and staff that take, monitor and control risk possess sufficient knowledge and expertise. The bank has clear, comprehensive and well-documented policies and procedural guidelines relating to risk management and the relevant staff fully understands those policies. Reviewing and approving market risk limits, including triggers or stop losses for traded and accrual portfolios. Ensuring robustness of financial models and the effectiveness of all systems used to calculate market risk. The bank has robust Management information system relating to risk reporting.