management in banking

7/30/2019 Management in Banking

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A PROJECT REPORT ON

RISK MANAGEMENT IN BANK

SUBMITTED TO

ALL INDIA MANAGEMENT ASSOCIATION-CENTRE FOR

MANAGEMENT EDUCATION

MANAGEMENT HOUSE, 14 INSTITUTIONAL AREA,LODHI ROAD, NEW DELHI-110002

OCTOBER, 2010

BY

ABHIJEET KUMARREGISTRATION NO.

750621607

GUIDED BY

MR. RAKESH SINGHSR. MANAGER (ACCOUNT)

FOR THE PARTIAL FULFILLMENT OF

POST GRADUATION DIPLOMA IN MANAGEMENT

(FINANCE)


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To

The Manager Evaluation

AIMA CME

14, Institutional AreaLodhi Road, New Delhi

Dear Sir,

I have sent the synopsis and it has been approved but I havent received the

copy of the approval synopsis, instead has collected the control number

from the Delhi Office. The synopsis control number is 8973 and dated 9

th

April 2010.

Therefore, I am sending the project report along with a copy of the

synopsis with the expectation of earliest consideration from your side.

Thanking you

Abhijeet Kumar

Reg. No. 750621607

Date: 25 October, 2010


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Project Report

RISK MANAGEMENT IN BANK

Submitted By

Abhijeet Kumar

Reg. No. 750621607

Date: 25 October 2010


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DETAILS OF THE PROJECT

1. Name : Abhijeet Kumar

2. Reg. No. : 750621607

3. Name of the Course : PGDM

4. Address : 17/8, Indra Vikas Colony,

Mukherjee Nagar, New Delhi

5. Title of the project : Risk Management in Bank

6. Name of the project Supervisor : Rakesh Singh

Sr. Manager (Account)

Date: 25 October 2010 Abhijeet Kumar


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STUDENTS DECLARATION

I hereby declare that the project report on Risk Management in Bank submitted toAll India Management Association Centre for Management Education,New Delhi

in partial fulfillment of the requirement forPost Graduate Diploma in Management

completed is my original work and not submitted for the award of any other Degree/

Diploma or other prizes.

Place: Delhi

Date: 25 October 2010

Abhijeet Kumar


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CERTIFICATE

This is to certify that the dissertation titled Risk Management in Bank is a faithfullybonafide work done by Mr. Abhijeet Kumar under my guidance and each completed as

a part of training done during 4th semester for the fulfillment of the requirement ofPost

Graduate Diploma in Management (PGDM).

Rakesh Singh

Sr. Manager (Account)


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ACKNOWLEDGEMENT

I have had considerable help and support in making this project report a reality.

I am thankful to ICICI Bank from where I got the relevant information regarding my

project. I am also thankful to Mr. Rakesh Singh, Sr. Manager (Account) who provides

us all the relevant information regarding my project. I would also like to thank my

friend and family member.

Thanks are also due to the staff of AIMA-CME Library and Information Centre.

In the end I am thankful to that almighty god who gave me inspiration to complete this

project.

Abhijeet Kumar

Reg. No. 750621607

PGDM

New Delhi

25 October, 2010


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INDEX

Executive Summary 1

Chapter-1 2-5

Introduction to risk management in banking 3

Problem in study 4

Objectives in study 4

Research methodology 4

Limitation 5

Scope of the Study 5

Chapter-2 6-29

Conceptual Framework of ALM 7

Guidelines for Asset Liability Management (ALM)

System in Financial Institutions (FIS) 17

Review of existing literature summary 28

Chapter-3 30-39

History and Growth of the bank 20

Risk Management at ICICI 37

Chapter-4 40-93

Performance evaluation of bank 41

Risk Management Guidelines for Commercial Banks 52

Inter-Bank Exposure and Country Risk 68

Foreign Exchange (FOREX) Risk 87

Conclusion & Recommendation 94

Bibliography 95


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EXECUTIVE SUMMARY

In normal course Fis are expose to several major risk in the course of their

business- Generally classified as credit risk, market risk, operational risk- whichunderlines the need of effective risk management system in Fis. The Fis needs

to address these risks in a structure manner by upgrading the quality of their

risk management and adopting more comprehensive ALM practices.

In order to give some giving to above lines we have made a project report on

ICICI bank. The project is divided into three phases in first phase we have

highlighted the introduction of risk management in banking sector, the problem

and objective of the project. Secondly we have also shown the research

methodology of the whole project.

Second phase consist of conceptual framework of risk management and ALM it

is also include some existing literature review on risk management. Third phase

consist of history and growth of the bank also its include the performance

evaluation of the bank.

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INTRODUCTION TO RISK MANAGEMENT

Risk management is recognised in todays business world as an integral part of

good management practice. In its broadest sense, it entails the systematicapplication of management policies, procedures and practices to the tasks of

identifying, analysing, assessing, treating and monitoring risk.

The past decade has also heralded enormous developments in new financial

products. Mortgages and residential mortgages have given institutional and

individual investors powerful new tools with which to disperse risk both

domestically and internationally. Advances in complex financial products,

together with improvements in technology, have lowered the cost of and

expanded opportunities for hedging risk. With the raid growth in new tools,

quantifying risk and interpreting risk measurements have never been more

important.

These developments have enabled all companies to take a more proactive

view towards risk. Instead of only associating risk as a potential downside of

their operations, increasing numbers of firms are considering how risk can be

managed positively to enhance the firms value.

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PROBLEM

Bank in the process of financial intermediation are confronted with various

kinds of financial and non financial risk viz,credit risk,liquidity risk,forex risk

etc.These risk are highly interdependent and event that affect one area of risk

can have ramification for a range of other risk categories so based on this

problem we are going to do our research that how commercial banks monitor

such risk and controll the overall level of risk.

OBJECTIVES

To know the concept of risk management in banking.

To know the guidelines setup by R.B.I for commercial banks

To know whether the banks are following those guidelines or not.

To know the banks performance.

RESEARCH METHODOLOGY

To get the conclusion from the undertaken project one should must go through

a proper methodology. Here in this project our methodology is based on two

source, primary and secondary source

Secondary source

Under secondary source we have data collected from outside the bank such asinternet, stock exchange ,ficci library.

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SCOPE OF THE STUDY

Through effective and efficient asset-liability management, the banks can

increase their productivity and reduce cost-inefficiency.

If inefficient banking firms have a tendency to remain inefficient, it would be of

interest for the policy makers to investigate how these banks can remain

economically viable and not be driven out of the banking market and this can

be done through asset-liability management.

The asset-liability management plays a very important role in the banks and

has a very vital scope in these institutions.

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CHAPTER 2

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CONCEPTUAL FRAMEWORK

An Overview

Historical Background

In the context of present days rapidly changing business environment, asset

liability management in the financial sector especially banking refers to a

holistic approach to risk management, concerning not only individual trading or

balance sheet positions but with overall balance sheet perspective. It requires

assessing all available avenues for managing risks through natural methods,

diversification, pricing, exposure control, and use of derivatives.

Risk can be categorized into credit and market risk. Historically, credit risk

constituted the major challenge to the banking sector. However, during the last

two decades market risk has gained prominence and especially after the Basle

Committee Accord of 1988, which was instrumental in framing broad guidelines

for determining the various risks associated with financial sector. Asset Liability

Management (ALM) encompasses the effects of market risk.

Concept of ALM

ALM has gradually gained currency in Indian conditions in the wake of the

financial sector reforms during the last decade with particular emphasis on

interest rate deregulation. The technique of managing both assets and liabilities

has come into being as a strategic response of banks to inflationary pressure,

volatility in interest rates and adverse business environments including the

recessionary trends in global economy, if any.

Simply put, asset-liability management is the management of total balance

sheet dynamics with regard to its size and quality. It involves,

a) Quantification of risk and

b) Conscious decision making with regard to asset-liability structure in order to

maximize interest earnings within the framework of perceived risk. The

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profitable growth and at times survival of a financial institution depends on

effective ALM.

Scope and objectives of ALM

The primary objectives of ALM is not to eliminate risk ; but to manage it in such

a way that volatility of net interest income is minimized in the short term time

horizon and net economic value of the organization is protected in a long term

time horizon. In banking scenario, this would controlling the volatility of net

income, net interest margin, capital adequacy, and liquidity risk and finally

ensuring an acceptable balance between profitability, growth, and risk.

A sound ALM system should focus on

Review of interest rate outlook

Fixation of interest/product pricing on both assets and liabilities

Examining loan portfolio

Examining investment portfolio

Measuring foreign exchange risk

Managing liquidity risk

Review of actual performance vis--vis projections in respect of net

profit, interest spread and other balance sheet ratios

Budgeting and strategic planning

Examine the profitability of new products

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ALM-An Exercise for Risk Return Trade-Off

Risk is an inherent part of banking business and in simple words may be

defined as a profitability of loss or damage. Given the complexities of banks

balance sheets and rapidity of changes, chances of loss or risks are only

complex in nature but also varied in dimension. Broadly speaking, banks are

exposed to both categories of risk viz.credit risk and market risk. While credit

risk which is mainly on account of the counter party failure in performing the

repayment obligation on due date i.e. loan defaults are managed by the credit

policy of the bank, the market risk is related to the Asset Liability Management

process and is caused by changes in market variables, involving one or more

of the following:

Interest rate risk

Foreign exchange risk

Commodity price risk

Stock market risk

ALM as a process not only encompasses market risk but also involves liquidity

management, funding and capital planning, profitability growth and at times

management of certain credit risks which are caused by market risk variables

for e.g. in a highly volatile interest rate environment, loan defaults may increase

thereby deteriorating the credit quality.

Interest Rate Risk

The Basle Committee on Banking Supervision whose recommendations have

been accepted by the Banking Community throughout the world has called for

the Banks to have a comprehensive risk management process in place that

effectively identifies, measures, monitors and control interest rate risk exposure

and that is subject to appropriate board and senior management oversight

(source-www.bis.org; Amendment to the Capital Accord to Incorporate Market

Risks, January 1996).

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Traditionally, interest rate risk means changes in the interest income due to

changes in the rate of interest. While this focus is not misplaced, it is definitely

incomplete in as much as it overlooks an important aspect-changes in interest

rate resulting in the value of assets/liabilities. Thus, interest rate risk may be

viewed from two different complementary perspectives- earning sensitivity to

rate fluctuations and price sensitivity of instruments/products to changes in

interest rate.

Changes in interest rates can affect banks with regard to changes in

a) Market value of assets/liabilities and off balance sheet (OBS) items;

ultimately having impact on the value of net worth.

b) Net interest income arising out of mismatch in the repricing terms of the

assets and liabilities;

c) Net income as a result of changes in interest income;

d) Net income margin owing to changes in interest income and sensitivity

of non-interest income to rate changes and

e) Capital-asset ratio due to changes in net margin.

The supervisory capital requirements established by Basle Committee from the

end of 1997 covers interest rate risks in the trading activities of banks.

Accordingly, interest

Rate risks in the trading activities of banks. Accordingly, interest rate risk

management process has been constituted to include development of businessstrategy, the assumption of assets and liabilities in banking and trading

activities, as well as a system of internal controls. The focus has been on the

need for effective interest rate risk measurement, monitoring, and control

functions within the interest rate risk management process (Source- Principles

for management of interest rate risk by BIS).

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According to the studies conducted by Basle Committee based on working

experience of Banks in more than 100 countries, the banks are normally

exposed to following forms of interest rate risk.

a) Repricing risk

b) Yield curve risk

c) Basis risk

d) Optionally

Repricing risk: arises from timing differences in the maturity (for fixed rate)

and repricing (for floating rate) of banks assets , liabilities and off balance

sheet (OBS) positions while such repricing mismatches are fundamental to the

business of banking , they can expose a banks income and underlying

economic value to unanticipated fluctuations as interest rate varies. For

instance, a bank that funded a long term fixed

rate loan with a short term deposit could face a decline in both the future

income arising from the position and its underlying value if the interest rate

increases. These declines arises because the cash flows on the loan are fixed

over its lifetime , while the interest paid on the funding is variable, andincreases after the short term deposits matures.

Yield Curve Risk: arises when unanticipated shifts of the yield curve have

adverse effects on a banks income or underlying economic value. For

example, the underlying economic value of a long position in 10 yr government

bonds hedged by a short position in 5yr government notes could decline

sharply if the yield curve steepens, even if the position is hedged against

parallel movements in the yield curve.

Basis Risk: arises from imperfect correlation in the adjustment of the rates

earned and paid on different instruments with otherwise similar repricing

characteristics. When interest rates changes, these differences can give rise to

unexpected changes in the cash flows and earnings spread between assets,

liabilities and OBS instruments of similar maturities or repricing frequencies for

example a strategy of funding one year loan that reprices monthly based on

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one month LIBOR, exposes the institution to the risk that the spread between

the two index rates may change unexpectedly.

The concept of basis risk is applicable for any set of two different interest rates.

For example, basis risk between thee following the following rates can be

analyzed:

Prime/LIBOR

Treasury Bill/LIBOR

Certificate of deposits/LIBOR

LIBOR/Commercial Paper

Prime/Certificate of Deposit

The reasons for basis risk depend on particula4r set of rates, for example,

Prime/LIBOR basis risks are as follows:

a) Prime is an administered rate while LIBOR is market rate. The LIBOR

changes everyday, but the prime changes infrequently.

b) In US context, prime is a rate applicable for loans in the US_LIBOR is

applicable for intermediated outside the US. Thus other things remaining

the same, costs of certain types of regulation (e.g. Deposit Insurance

Premium Change) may impact prime only and not LIBOR.

c) During a declining rate environment, Prime tends to lag changes in

LIBOR, leading to wider spread. In an increasing rate environment, there

is an urgency to increase Prime Rate, resulting in declining spread.

This kind of pricing is usual in products market also when costs are increasing,

prices go up quickly, when costs are declining, and prices go down slowly. The

rate of change is different in different environments.

Optionality: option provides the holder the right but not the obligations to buy,

sell or in some manner alter the cash flow of an instrument or financial contract.

Options, may be in the form of standard alone instruments such as exchange

traded options or embedded within an otherwise standard instrument like the

various type of bonds and notes with caller put provisions, loans which give

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borrowers the right to repay balances and various type of non-maturity deposit

instruments which give depositors the right to withdraw funds at any time, often

without any penalties. If not adequately managed, the asymmetrical pay off

characteristic of options held both explicit and embedded are generally

exercised to the advantage of the holder and disadvantage of seller.

Effects of Interest Rate Risk:

Interest rate risk effects both on banks earning as well as its economic value.

Earnings, comprising of net interest income i.e., difference between total

interest income and total interest expense has been the focus of main attention

traditionally, and the impact of interest rate change on net interest income has

been accepted from time to time. However, in the emerging new scenario

increasing focus on fee-based income and other non-interest bearing income

and expenses have led to changes in the dimension of the game. The non-

interest income arising from many activities can also be highly sensitive to

market interest rates. In international arena, banks are providing the servicing

and loan-administration function for mortgage loan pools in return for a fee-

based on the volume of assets it administers. When interest rates fall, the

servicing bank may experience a decline in its fee income as the underlying

mortgages get prepared. In addition, even traditional sources of non-interest

income such as transaction processing fee are becoming more interest rate

sensitive. This increased sensitivity has led both bank management and

supervisors to take a broader view of potential effects of changes in market

interest rates on bank earnings and to factor these broader effects into their

estimated earnings under different interest rates environment.

The economic value, of a banks assets, liabilities, and OBS position can get

affected due to fluctuation in interest rates. The economic value of a bank can

be viewed as the present value of banks expected net cash, defined as the

expected cash flow on liabilities plus the expected net cash flows on OBS

positions. Since economic value considered the potential impacting interest

rate changes on the present value of all future cash flows, it provides a

comprehensive view of the potential long term effects of changes in interestrates. Than is offered by the earlier earnings perspectives.

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While the above two perspectives focus on the impact of changes in future

interest rates on a banks future performances, evaluation of impact past

interest rate changes may have on future performance is also of great

significance. In particular instruments that are not marked to market may

already contain embedded gains or losses due to past rate movements and

may ultimately affect bank earnings. For example, a long term fixed rate loan

entered into when interest rates were low and refunded more recently with

liabilities bearing a higher rate of interest will over its remaining, represent a

drain on banks resources

Foreign Exchange Risk:

It refers to potential impact of movement in foreign exchange rates. The risk

here is that the adverse fluctuations in exchange rates may result in a loss.

Foreign exchange risk arises when there are unhedged current mismatches in

an institution assets and liabilities. This risk persists until the open position is

covered by means of hedging transactions. The amount at risk is a function of

the magnitude of the potential exchange rate changes and the size and

duration of the foreign currency exposures. Indian banks normally do not

undertake currency exposure for funding operation (i.e. unhedged conversion

of resources in one currency for funding assets in another currency). Currency

position in Indian banks is concentrated in dealing rooms and these are

subjected to constant monitoring through separate daylight and overnight limits

and exception reporting.

Commodity Risk

It is a risk associated with trading in commodities. Commodity trading is not

practiced by Banks and Financial Institutions in India.

Stock Market Risk

Arises primarily because of movement of portfolio value, which may have an

overall impact on Banks financial position in adverse condition. The liquidation

of Barings and Daiwa Bank is related to the market related risk associated with

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over exposure to stock market to influence their profitability and long term

viability.

In addition to market risk associated with Asset and Liability Management

process the two other important aspects which are also of importance while

discussing asset liability management include

a) Liquidity Risk Management

b) Capital risk and capital planning

Liquidity Risk

It is the potential inability to generate cash to cope with the decline in deposits

or increase in assets. Liquidity risk originates from mismatches in the maturity

patterns of assets and liabilities since banks deal with assets and liabilities with

varied maturity patterns and risk profile, they need to strike a trade-off between

been overtly liquid and relatively liquid. An effective measurement and

monitoring process assessing all of banks cash inflows against its outflow to

identify the potential for any net shortfalls going forward forms an essential

ingredient to overall liquidity risk management. This includes funding

requirements for off balance sheet commitments. As all banks are affected by

changes in the economic climate and market conditions, the monitoring of

economic and market trends is also a key to liquidity risk management.

Traditionally, banks have been relying on core deposits for their funding.

However, in todays environment, banks have resorted to other means of

sources also for managing the liquidity on ongoing basis. Cash inflows arise

from such things as maturing assets, saleable non-maturing assets, access to

deposit liabilities, established credit lines that can be tapped and in developed

world through asset securitization also. These need to be matched against

cash flows stemming from liabilities and contingent liabilities falling due,

especially committed lines of credit that can be drawn down. A maturity ladder

is therefore a useful device to compare cash outflows and cash inflows both on

a day to day basis and over a period of time. The banks historical experience of

the patterns of flows and knowledge of market conventions can also guide a

banks decision on liquidity risk management especially in a difficult scenario.

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Use of what if analysis situations can also help in building different liquidity

scenarios for practical applications. An effective system of internal control in

banks against liquidity risk will involve:-

A strong control environment

An adequate process for identifying and evaluating liquidity risk

Establishment of policy and procedure for handling such risks

An adequate information system

Control review of adherence to established policies and procedures.

Capital Risk

Maintaining adequate capital on a continuous basis is the sine quo-non for

sound banking practice. In a business situation, banks require capital to

insulate themselves from the risks of business that they undertake. The capital

accord of 1988 calls for detailed guidelines for maintaining adequate capital by

banks to mitigate themselves from problems arising in business development

on account of inadequate capital structure.

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GUIDELINES FOR ASSET LIABILITY MANAGEMENT (ALM)SYSTEM IN FINANCIAL INSTITUTIONS (FIS)

In the normal course, FIs are exposed to credit and market risks in view of the

asset-liability transformation. With liberalisation in Indian financial markets over

the last few years and growing integration of domestic markets with external

markets, the risks, particularly the market risks, associated with FIs operations

have become complex and large, requiring strategic management. FIs are

operating in a fairly deregulated environment and are required to determine

interest rates on various products in their liabilities and assets portfolios, both in

domestic as well as foreign currencies, on a dynamic basis. Intense

competition for business involving both the assets and liabilities, together with

increasing volatility in the domestic interest rates as also in foreign exchange

rates, has brought pressure on the management of FIs to maintain a good

balance amongst spreads, profitability and long-term viability. These pressures

call for structured and comprehensive measures for institutionalising an

integrated risk management system and not just ad hocaction. The FIs are

exposed to several major risks in the course of their business generically

classified as credit risk, market risk and operational risk which underlines theneed for effective risk management systems in FIs. The FIs need to address

these risks in a structured manner by upgrading the quality of their risk

management and adopting more comprehensive ALM practices than has been

done hitherto.

The envisaged ALM system seeks to introduce a formalised framework for

management of market risks through measuring, monitoring and managing

liquidity, exchange rate and interest rate risks of a FI that need to be closely

integrated with the FIs business strategy. This note lays down broad

guidelines for FIs in respect of liquidity, exchange rate and interest rate risk

management systems which form part of the ALM function. The initial focus of

the ALM function would be to enforce the discipline of market risk management

viz. managing business after assessing the market risks involved. The objective

of a good risk management systems should be to evolve into a strategic tool for

effective management of FIs.

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The ALM process rests on three pillars:

ALM Information System

Management Information System

Information availability, accuracy, adequacy and expediency

ALM Organisation

Structure and responsibilities

Level of top management involvement

ALM Process

Risk parameters

Risk identification

Risk measurement

Risk management

Risk policies and tolerance levels.

ALM Information System

ALM has to be supported by a management philosophy which clearly specifies

the risk policies and tolerance limits. This framework needs to be built on

sound methodology with necessary supporting information system as the

central element of the entire ALM exercise is the availability of adequate

and accurate information with expedience. Thus, information is the key to the

ALM process. There are various methods prevalent world-wide for measuring

risks. These range from the simple Gap Statement to extremely sophisticated

and data intensive Risk Adjusted Profitability Measurement methods. The

present guidelines would require comparatively simpler information system for

generating liquidity gap and interest rate gap reports.

ALM Organisation

Successful implementation of the risk management process would require

strong commitment on the part of the senior management in the FI, to integrate

basic operations and strategic decision making with risk management. TheBoard should have overall responsibility for management of market risks and

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should decide the risk management policy of the FI and set limits for liquidity,

interest rate, exchange rate and equity price risks.

The ALCO is a decision-making unit, consisting of the FI's senior management

including CEO, responsible for integrated balance sheet management from

risk-return perspective including the strategic management of interest rate and

liquidity risks. While each FI will have to decide the role of its ALCO, its powers

and responsibilities as also the decisions to be taken by it, its responsibilities

would normally include:

monitoring the market risk levels of the FI by ensuring adherence to the

various risk-limits set by the Board;

articulating the current interest rate view and a view on future direction of

interest rate movements and base its decisions for future business strategy

on this view as also on other parameters considered relevant.

deciding the business strategy of the FI, both - on the assets and liabilities

sides, consistent with the FIs interest rate view, budget and pre-

determined risk management objectives. This would, in turn, include:

determining the desired maturity profile and mix of the assets and liabilities

product pricing for both - assets as well as liabilities side;

deciding the funding strategy i.e. the source and mix of liabilities or sale of

assets; the proportion of fixed vs floating rate funds, wholesale vs retail

funds, money market vs capital market funding , domestic vs foreign

currency funding, etc.

reviewing the results of and progress in implementation of the decisions

made in the previous meetings

The ALM Support Groups consisting of operating staff should be responsible

for analysing, monitoring and reporting the risk profiles to the ALCO. The staff

should also prepare forecasts (simulations) reflecting the impact of various

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possible changes in market conditions on the balance sheet and recommend

the action needed to adhere to FI's internal limits.

Composition of ALCO

The size (number of members) of ALCO would depend on the size of each

institution, business mix and organisational complexity. To ensure commitment

of the Top Management and timely response to market dynamics, the

CEO/CMD/DMD or the ED should head the Committee. Though the

composition of ALCO could vary across the FIs as per their respective set up

and business profile, it would be useful to have the Chiefs of Investment,

Credit, Resources Management or Planning, Funds Management / Treasury

(forex and domestic), International Business and Economic Research as the

members of the Committee. In addition, the Head of the Technology Division

should also be an invitee for building up of MIS and related computerisation.

Some FIs may even have Sub-committees and Support Groups.

Committee of Directors

The Management Committee of the Board or any other Specific Committee

constituted by the Board should oversee the implementation of the ALM system

and review its functioning periodically.

ALM PROCESS

The scope of ALM function can be described as follows:

Liquidity risk management

Management of market risks

Trading risk management

Funding and capital planning

Profit planning and growth projection

The guidelines contained in this note mainly address Liquidity and Interest Rate

risks.

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Liquidity Risk Management

Measuring and managing liquidity needs are vital for effective operation of FIs.

By assuring a FI's ability to meet its liabilities as they become due, liquidity

management can reduce the probability of an adverse situation

developing. The importance of liquidity transcends individual institutions, as

liquidity shortfall in one institution can have repercussions on the entire

system. FIs management should measure not only the liquidity positions of FIs

on an ongoing basis but also examine how liquidity requirements are likely to

evolve under different assumptions. Experience shows that assets commonly

considered to be liquid, such as Government securities and other money

market instruments, could also become illiquid when the market and players

are unidirectional. Therefore liquidity has to be tracked through maturity or cash

flow mismatches. For measuring and managing net funding requirements, the

use of a maturity ladder and calculation of cumulative surplus or deficit of funds

at selected maturity dates is adopted as a standard tool. The format of the

Statement of Liquidity is furnished in Annexure I.

The Maturity Profile, as detailed in Appendix I, could be used for measuringthe future cash flows of FIs in different time buckets. The time buckets, may

be distributed as under:

i) 1 to 14 days

ii) 15 to 28 days

iii) 29 days and upto 3 months

iv) Over 3 months and upto 6 monthsv) Over 6 months and upto 1 year

vi) Over 1 year and upto 3 years

vii) Over 3 years and upto 5 years

viii) Over 5 years and upto 7 years

ix) Over 7 years andupto 10 years

x) Over 10 years.

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The investments are assumed as illiquid due to lack of depth in the secondary

market and are, therefore, generally shown, as per their residual maturity,

under respective time buckets. However, some of the FIs may be maintaining

securities in the Trading Book, which are kept distinct from other investments

made for retaining relationship with customers. Securities held in the 'Trading

Book should be subject to the following preconditions:

i)The composition and volume of the Trading Book should be clearly defined;

ii)Maximum maturity/duration of the trading portfolio should be restricted;

iii)The holding period of the trading securities should not exceed 90 days;

iv)Cut-loss limit(s) should be prescribed;

v) Product-wise defeasance periods (i.e. the time taken to liquidate thepositionon the basis of liquidity in the secondary market) should be prescribed;

vi) Such securities should be marked-to-market on a daily/weekly basis andtherevaluation gain/loss should be charged to the profit and loss account;etc.

FIs which maintain such Trading Books consisting of securities that comply

with the above standards, are permitted to show the trading securities under 1-

14 days, 15-28 days and 29-90 days buckets on the basis of the defeasance

periods. The Board/ALCO of the banks should approve the volume,

composition, maximum maturity/duration, holding/defeasance period, cut loss

limits, etc., of the Trading Book . FIs, which are better equipped, will have the

option of evolving with the approval of the Board / ALCO, an integrated Value

at Risk (VaR) limit for their entire balance sheet including the Banking Book

and the Trading Book, for the rupee as well as foreign currency portfolio. A

copy of the approved policy note in this regard, should be forwarded to theDepartment of Banking Supervision, FID, RBI.

Within each time bucket there could be mismatches depending on cash inflows

and outflows. While the mismatches upto one year would be relevant since

these provide early warning signals of impending liquidity problems, the main

focus should be on the short-term mismatches viz., 1-14 days and 15-28 days.

FIs however, are expected to monitor their cumulative mismatches (runningtotal) across all time buckets by establishing internal prudential limits with the

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approval of the Board / ALCO. The negative gap during 1-14 days and 15-28

days time-buckets, in normal course, should not exceed 10 per cent and 15 per

cent respectively, of the cash outflows in each time bucket. If a FI in view of its

current asset-liability profile and the consequential structural mismatches needs

higher tolerance level, it could operate with higher limit sanctioned by its

Board / ALCO giving specific reasons on the need for such higher limit. The

discretion to allow a higher tolerance level is intended for a temporary period,

i.e. till March 31, 2001. While determining the tolerance levels, the FIs may

take into account all relevant factors based on their asset-liability base, nature

of business, future strategy, etc. The RBI is interested in ensuring that the

tolerance levels are determined keeping all necessary factors in view and

further refined with experience gained in Liquidity Management.

The Statement of Liquidity may be prepared by placing all cash inflows and

outflows in the maturity ladder according to the expected timing of cash flows.

A maturing liability will be a cash outflow while a maturing asset will be a cash

inflow. It would also be necessary to take into account the rupee inflows and

outflows on account of forex operations. Thus, the foreign currency resources

raised abroad but swapped into rupees and deployed in rupee assets, would be

reflected in the rupee liquidity statement. Some of the FIs have the practice of

disbursing rupee loans to their exporter clients but denominating such loans in

foreign currency in their books which are extinguished by the export proceeds.

Such foreign currency denominated loans too would be a part of rupee liquidity

statement since such loans are created out of rupee resources. As regards the

foreign currency loans granted out of foreign currency resources on a back-to-

back basis, a currency-wise liquidity statement for each of the foreign

currencies in which liabilities and assets have been created.

Currency Risk

Floating exchange rate arrangement has brought in its wake pronounced

volatility adding a new dimension to the risk profile of FIs balance sheets.

The increased capital flows across free economies following deregulation havecontributed to increase in the volume of transactions. Large cross border flows

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together with the volatility has rendered the FIs' balance sheets vulnerable to

exchange rate movements.

Dealing in different currencies brings opportunities as also risks. If the liabilities

in one currency exceed the level of assets in the same currency, then the

currency mismatch can add value or erode value depending upon the currency

movements. Mismatched currency position, besides exposing the balance

sheet to movements in exchange rate, also exposes it to country risk and

settlement risk. FIs undertake operations in foreign exchange such as

borrowings and making loans in foreign currency, which exposes them to

currency or exchange rate risk. The simplest way to avoid currency risk is to

ensure that mismatches, if any, are reduced to zero or near zero. However,

irrespective of the strategies adopted, it may not be possible to eliminate

currency mismatches altogether.

At present, only five FIs (viz. EXIM Bank, ICICI, IDBI, IFCI and IIBI) have been

granted by RBI (ECD) restricted authorisation to deal in foreign exchange

under FERA 1973 while other FIs are not authorised to deal in foreign

exchange. The FIs are, therefore, unlike banks, are not subject to the full rigour

of the reporting requirements under Exchange Control regulations. Hence, the

MAP and SIR statements prescribed for banks vide AD (MA Series) circular no.

52 dated 27 December 1997 issued by RBI (ECD), are not applicable to FIs. In

order, however, to capture the liquidity and interest rate risk inherent in the

foreign currency portfolio of the FIs, it would be necessary to compile, on an

ongoing basis, currency-wise Statement of Liquidity and IRS Statement,

separately for each of the currencies in which the FIs have an exposure.

Interest Rate Risk (IRR)

Interest rate risk is the risk where changes in market interest rates might

adversely affect a FI's financial condition. The immediate impact of changes in

interest rates is on FI's earnings (i.e. reported profits) by changing its Net

Interest Income (NII). A long-term impact of changing interest rates is on FI'sMarket Value of Equity (MVE) or Net Worth as the economic value of banks

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assets, liabilities and off-balance sheet positions get affected due to variation in

market interest rates. The interest rate risk when viewed from these two

perspectives is known as earnings perspective and economic value

perspective, respectively. The risk from the earnings perspective can be

measured as changes in the Net Interest Income (NII) or Net Interest Margin

(NIM). There are many analytical techniques for measurement and

management of Interest Rate Risk. In the context of poor MIS, slow pace of

computerisation in FIs, the traditional Gap analysis is considered to be a

suitable method to measure the Interest Rate Risk in the initial phase of the

ALM system. However, the FIs, which are better equipped, would have the

option of deploying

advanced IRR management techniques with the approval of their Board /

ALCO, in addition to the Gap Analysis prescribed under the guidelines. It is the

intention of RBI to move over to the modern techniques of Interest Rate Risk

measurement like Duration Gap Analysis, Simulation and Value at Risk over

time when FIs acquire sufficient expertise and sophistication in acquiring and

handling MIS.

The Gap or Mismatch risk can be measured by calculating Gaps over different

time intervals as at a given date. Gap analysis measures mismatches between

rate sensitive liabilities and rate sensitive assets (including off-balance sheet

positions). An asset or liability is normally classified as rate sensitive if:

i) within the time interval under consideration, there is a cash flow;

ii) the interest rate resets/reprices contractually during the interval;

iii) it is contractually pre-payable or withdrawable before the stated maturities;

iv) It is dependent on the changes in the Bank Rate by RBI.

The Gap Report should be generated by grouping rate sensitive liabilities,

assets and off-balance sheet positions into time buckets according to residual

maturity or next re-pricing period, whichever is earlier. All investments,

advances, deposits, borrowings, purchased funds, etc. that mature/re-price

within a specified timeframe are interest rate sensitive. Similarly, any principalrepayment of loan is also rate sensitive if the FI expects to receive it within the

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time horizon. This includes final principal repayment and interim instalments.

Certain assets and liabilities carry floating rates of interest that vary with a

reference rate and hence, these items get re-priced at pre-determined intervals.

Such assets and liabilities are rate sensitive at the time of re-pricing. While the

interest rates on term deposits and bonds are generally fixed during their

currency, the interest rates on advances could be re-priced any number of

occasions, on the pre-determined reset / re-pricing dates and the new rate

would normally correspond to the changes in PLR.

The interest rate gaps may be identified in the following time buckets:

i) 1-28 days

ii) 29 days and upto 3 months

iii) Over 3 months and upto 6 months

iv) Over 6 months and upto 1 year

v) Over 1 year and upto 3 years

vi) Over 3 years and upto 5 years

vii) Over 5 years and upto 7 years

viii) Over 7 years and upto 10 years

ix) Over 10 yearsx) Non-sensitive

The various items of rate sensitive assets and liabilities and off-balance sheet

items may be classified into various time-buckets,

The Gap is the difference between Rate Sensitive Assets (RSA) and Rate

Sensitive Liabilities (RSL) for each time bucket. The positive Gap indicates that

it has more RSAs than RSLs whereas the negative Gap indicates that it has

more RSLs. The Gap reports indicate whether the institution is in a position to

benefit from rising interest rates by having a positive Gap (RSA > RSL) or

whether it is in a position to benefit from declining interest rates by a negative

Gap (RSL > RSA). The Gap can, therefore, be used as a measure of interest

rate sensitivity.

Each FI should set prudential limits on interest rate gaps in various time

buckets with the approval of the Board/ALCO. Such prudential limits shouldhave a relationship with the Total Assets, Earning Assets or Equity. In

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addition to the interest rate gap limits, the FIs which are better equipped would

have the option of setting the prudential limits in terms of Earnings at Risk

(EaR) or Net Interest Margin (NIM) based on their views on interest rate

movements with the approval of the Board/ALCO.

The classification of various components of assets and liabilities into different

time buckets for preparation of Gap reports (Liquidity and Interest Rate

Sensitivity) as indicated in Appendices I & II is the benchmark. FIs which are

better equipped to reasonably estimate the behavioural pattern, embedded

options, rolls-in and rolls-out, etc of various components of assets and liabilities

on the basis of past data / empirical studies could classify them in the

appropriate time buckets, subject to approval from the ALCO / Board. A copy of

the note approved by the ALCO / Board may be sent to the Department of

Banking Supervision, Financial Institutions Division.

The impact of embedded options (i.e. the customers exercising their options for

premature closure of term deposits, premature encashment of bonds and pre-

payment of loans and advances) on the liquidity and interest rate risks profile of

FIs and the magnitude of embedded option risk during the periods of volatility in

market interest rates, is quite substantial. FIs should therefore evolve suitablemechanism, supported by empirical studies and behavioural analysis, to

estimate the future behaviour of assets, liabilities and off-balance sheet items

to changes in market variables and estimate the impact of embedded options.

In the absence of adequate historical database, the entire amount payable

under the embedded options should be slotted as per the residual period to the

earliest exercise date.

A scientifically evolved internal transfer pricing model by assigning values onthe basis of current market rates to funds provided and funds used is an

important component for effective implementation of ALM System. The transfer

price mechanism can enhance the management of margin i.e. lending or credit

spread, the funding or liability spread and mismatch spread. It also helps

centralising interest rate risk at one place which facilitate effective control and

management of interest rate risk. A well defined transfer pricing system also

provide a rational framework for pricing of assets and liabilities.

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REVIEW OF EXISTING LITERATURE SUMMARY

The article is remark from Wlliam J McDonough on risk management,

supervision and the new Basel Accord. According to the article in recent times

the are fail to develop the commitment to manage risk appropriately to avoid

this recent past requires a clear and consisted message, as well as transparent

pattern of behaviour. Also according to william the work of financial

supervision is moving away from a purely retrospective,rules based

approach.this is particularly in banking world.Banks supervisor in many

countries around the world are assessing the safety and soundness of banks

based les on the strength of the balance sheet today, and more on the strength

of controls that will safeguard bank financial health tomorrow but William J

believed that evaluating the strength of control is, in itself, not enough in deed

financial sector required innovation in the good and services offered. Also the

member of basel committee believes that public policy can best support the

enhancement of risk management by building incentives directly to their system

of supervision. According to William J the whole article based on how

supervisor have worked to embrace and encourage the developments, how

enhancement in banks risk management processes, driven by business

imperatives, have concurrently led supervisor to move to a more process-

oriented, risk focused approach to supervision. Secondly how provision in New

Basel Accord support further changes in there supervisory approach, and

promote further enhancement in risk management of market risk and thirdly

how those development will be coming together in there supervisory approach

going forward-particularly in terms of there supervisory expections for

management of market risk, credit risk and operational risk by large banking

organization.

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Summary of article

The following article has been delivered by Dr Rakesh Mohan, Deputy

Governer of the Reserve Bank of India. The article highlight the need to work

toward reducing the real lending rates of banks. Also it focused on the need to

increase credit to SMEs as also look into aspects of creating an enabling

environment for long term financing. The article also state about the NPAs level

,the absolute amount of NPAs continues to be a major drag on the performance

of banks. The large volume of NPAs reflects both an overhang of past dues

and on-going problems of fresh accretion. Therefore reducing in NPA level and

appropriate risk management by banks would go a long way in improving

efficiency of banks and inculcating a sound credit culture

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CHAPTER 3

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HISTORY AND GROWTH OF ICICI BANK

ICICI Bank Ltd. was formed in 1994 as a new private sector bank. Its initial

equity capital of Rs 150 crores was fully subscribed by ICICI, and as a result,ICICI Bank became a wholly owned subsidiary of ICICI.

In May 1994, when ICICI obtained its commercial banking license to establish

ICICI Bank, the Reserve Bank of India (RBI) imposed a condition regarding

dilution of promoters holding in the bank. This condition required ICICI to

reduce its shareholding in ICICI Bank in stages, first to not more than 75% of its

equity share capital, and ultimately to not more than 40%. This took place in the

following ways:

Year

(FY) Event

Amount

Raised (Rs.) Holding of ICICI

1998

IPO of 15 million equity shares

of Rs. 10 each at a price of

Rs. 35 per share 52.5 crores 74.80%

2000

ADR issue on NYSE for

US$175 million 763.4 crores 62.20%

2001 Acquisition of Bank of Madura

(BOM): 2 equity shares in lieu

of every 1 share of BOM

236 crores 55.60%

Disinvestment of shares by

ICICI 19.39 crores 46.40%

2002

Disinvestment of shares by

ICICI 0.88 crores

46%(on August

2002)

During 2001, the senior managements of ICICI and ICICI Bank explored the

possibility amalgamation of ICICI with ICICI Bank. As a bank, ICICI would have

the ability to accept low-cost demand deposits and offer wider range on

products and services. In view of such benefits and RBIs guidelines on

universal banking, ICICI explored various corporate restructuring alternatives

for its transformation into a universal bank. Subsequently, the shareholders ofboth the institutions approved such amalgamation and the exchange ratio

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determined was 1 fully paid-up equity share of ICICI Bank in lieu of 2 fully paid-

up equity shares of ICICI. As a result of such amalgamation, which was

approved by RBI on April 26, 2002, the paid-up capital increased to Rs. 613

crores. The scheme of amalgamation became effective on May 3, 2002.

RBI approved the merger subject to the following major conditions:

Compliance with Reserve Requirements: ICICI Bank would comply with

the Cash Reserve Requirements (CRR) and Statutory Liquidity Reserve

(SLR) Requirements as applicable to banks on the net demand and time

liabilities of the bank, inclusive of the liabilities pertaining to ICICI from

the date of merger.

Other Prudential Norms: ICICI Bank will continue to comply with all

prudential requirements and other instructions as applicable to banks

issued by RBI from time to time on the entire portfolio of assets and

liabilities of the bank after the merger.

Priority Sector Lending: considering that the advances of ICICI were not

subject to the requirement applicable to banks in respect of prioritysector lending, ICICI Bank would after merger, maintain an additional

10% over and above the requirement of 40%, i.e., a total of 50% of the

net bank credit on the residual portion of the banks advances. This

additional 10% will apply until such time as the aggregate priority sector

advances reaches a level of 40% of the total net bank credit.

Equity Exposure Ceiling of 5%: The investments of ICICI acquired by

way of project finance as on the date of merger would be kept outside

the exposure ceiling of 5% of advances towards exposure to equity and

equity-linked instruments for a period of 5 years. ICICI Bank should,

however, mark-to-market the above instruments and provide for any loss

in their value in the manner prescribed for investments.

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Following the amalgamation, ICICI Bank has become the second largest

among all scheduled commercial banks (SCBs) in India, ranked on the basis of

their total assets, coming after the State Bank of India.

At end-FY2002, ICICI Bank had a network of 359 branches and 44 extensioncounters in 251 centers across several India states. Nearly 51% (183

branches) of ICICIs branches are in urban/metropolitan areas. The balance is

in rural/semi-urban areas. Till this time ICICI Bank had also installed 1,000

ATMs.

SUBSIDIARIES

At end-FY2001, ICICI Bank had no subsidiaries. Consequent to the merger,

ICICIs subsidiary companies have become subsidiaries of ICICI Bank. At end-

FY2002, ICICI Bank had 11 subsidiaries. The major subsidiaries are described

below:

1. ICICI Securities and Finance Co. Ltd. - performs key merchant baking

activities including underwriting, placement of debt and equity, issue

management and corporate advisory services.

2. ICICI Brokerage Services Ltd. engaged in security brokerage activities

on NSE and BSE.

3. ICICI Securities Holdings Inc. incorporated in the US, this arm has

been set up to provide investment banking services to investors in the

US who wish to enter the Indian financial market and to investors in

India who wish to enter the financial markets in the US.

4. ICICI Securities Inc. incorporated in the US, this subsidiary has been

set up to provide brokerage, research and investment banking services

to investors in the US who wish to enter the Indian financial markets.

5. ICICI Venture Funds Management Co. Ltd. provides venture capital

funding to a wide spectrum of industrial sectors.

6. ICICI Prudential Life Insurance Co. Ltd. carries out the business of Life

Insurance. This subsidiary has entered into an MoU with ICICI Bank for

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distribution of its life insurance policies through the banks branch

network.

7. ICICI Lombard General Insurance Co. Ltd. carries out the business of

general insurance.

8. ICICI Home Finance Co. Ltd. provides finance for housing.

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MANAGEMENT

The management team of ICICI Bank consists of the following individuals who

are very well qualified, possess rich experience and are competent

professionals from their field.

Name Designation

Mr. K.V. Kamath Managing Director & CEO

Mr. H.N. Sinor Joint Managing Director; In charge of domestic banking

Ms. Lalita D. Gupte

Joint Managing Director; In charge of international

business

Ms. Kalpana Morparia Executive Director; In charge of legal department

Mr. S. Mukherji Executive Director; In charge project finance

Ms. Chanda D.

Kochhar Executive Director, In charge of retail banking

Dr. Nachiket Mor Executive Director, In charge of wholesale banking

BUSINESS & OPERATIONS

ICICI Banks asset base of Rs. 1,041 billion (at end FY2002) places it as the

second largest scheduled commercial bank in India behind only State Bank of

India (SBI). ICICI Banks asset base is nearly 4.4 times larger than the second-

largest new private sector bank in India HDFC Bank (assets of Rs. 238 billion

as end-FY2002).

ICICI Banks principal activities include corporate banking, retail banking and

treasury operations.

RELATIONSHIP WITH THE GOVERNMENT

The GoI has never directly held any shares of ICICI Bank. However, GoIs

controlled institutions held a 20.8% stake in ICICI Bank at end August 2002.

These include the LIC (8.6%), the GIC and its subsidiaries (7.3%), UTI (3.3%),

and others (1.6%). Under the terms of the loan and guarantee facilitiesprovided by the GoI to ICICI that have been transferred to ICICI Bank, the GoI

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is entitled to appoint and has appointed one representative to the BoD of ICICI

Bank. Comparison of key ratios is done on the basis of previous year and the

current year.

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RISK MANAGEMENT AT ICICI

Risk is an inherent part of ICICI Banks business, and effective Risk

Compliance & Audit Group is critical to achieving financial soundness and

profitability. ICICI Bank has identified Risk Compliance & Audit Group as one of

the core competencies for the next millennium. The Risk Compliance & Audit

Group Group (RC & AG) at ICICI Bank benchmarks itself to international best

practices so as to optimise capital utilisation and maximise shareholder value.

With well defined policies and procedures in place, ICICI Bank identifies,

assesses, monitors and manages the principal risks:

Credit risk (the possibility of loss due to changes in the quality of

counterparties)

Market Risk (the possibility of loss due to changes in market prices and

rates of securities and their levels of volatility)

Operational risk (the potential for loss arising from breakdowns in

policies and controls, human error, contracts, systems and facilities)

The ability to implement analytical and statistical models is the true test of a risk

methodology. In addition to three departments within the Risk Compliance &

Audit Group handling the above risks, an Analytics Unit develops quantitative

techniques and models for risk measurement.

CREDIT RISK MANAGEMENT

Credit risk, the most significant risk faced by ICICI Bank, is managed by the

Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk

at the transaction level as well as in the portfolio context. The industry analysts

of the department monitor all major sectors and evolve a sectoral outlook,

which is an important input to the portfolio planning process. The department

has done detailed studies on default patterns of loans and prediction of defaults

in the Indian context. Risk-based pricing of loans has been introduced.

The functions of this department include:

Review of Credit Origination & Monitoring

Credit rating of companies/structures

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Default risk & loan pricing

Review of industry sectors

Review of large exposures in industries/ corporate groups/

companies

Ensure Monitoring and follow-up by building appropriate

systems such as CAS

Design appropriate credit processes, operating policies & procedures

Portfolio monitoring

Methodology to measure portfolio risk

Credit Risk Information System (CRIS)

Focussed attention to structured financing deals

Pricing, New Product Approval Policy, Monitoring

Monitor adherence to credit policies of RBI

During the year, the department has been instrumental in reorienting the credit

processes, including delegation of powers and creation of suitable control

points in the credit delivery process with the objective of improving customer

response time and enhancing the effectiveness of the asset creation and

monitoring activities.

Availability of information on a real time basis is an important requisite for

sound risk management. To aid its interaction with the strategic business units,

and provide real time information on credit risk, the CRC & AD has

implemented a sophisticated information system, namely the Credit Risk

Information System. In addition, the CRC & AD has designed a web-based

system to render information on various aspects of the credit portfolio of ICICI

Bank.

MARKET RISK COMPLIANCE & AUDIT GROUP

ICICI Bank is exposed to all categories of Market Risk, viz.,

Interest Rate Risk (risk due to changes in interest rates)

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Exchange Rate Risk (risk due to changes in exchange rates)

Equity Risk (risk due to change in equity prices)

Liquidity Risk (risk due to deterioration in market liquidity for tradable

instruments)

The Market Risk Compliance & Audit Department evaluates, tests and

approves market risk methodologies developed by the Treasury. It also

participates in the new product approval process on a firm-wide basis and

evaluates all new products from a market risk perspective

OPERATIONAL RISK MANAGEMENT

ICICI Bank, like all large banks, is exposed to many types of operational risks.

These include potential losses caused by events such as breakdown in

information, communication, transaction processing and settlement systems/

procedures.

The Audit Department, an integral part of the Risk Compliance & Audit Group,

focusses on the operational risks within the organisation. In recent times, there

has been a shift in the audit focus from transactions to controls. Some

examples of this paradigm shift are: Adherence to internal policies, procedures

and documented processes Risk Based Audit Plan Widening of Treasury

operations audit coverage Use of Computer Assisted Audit Techniques

(CAATs) Information Systems Audit Plans to develop/ buy software to capture

the workflow of the Audit Department

The Audit Department conceptualised and put into operation a Risk Based

Audit Plan during the year 1998-99. The Risk Based Audit Plan envisages

allocation of audit resources in accordance with the risk constituents of ICICI

Banks business.

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CHAPTER 4

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PERFORMANCE OF ICICI BANK

1) Credit-Deposit (%): This ratio is compared as under:

We notice that in the year 1997 credit deposit ratio is 69.8% which fell to

21.37% in the year 1998. In 1999 it further drop to 11.22%. In 2000 it drop

to 1.03%. In the year 2001 it rose to 4.55%. In the year 2002 it rose to

70.83%.

2) Investment/Deposit (%): This ratio is compared as under:

We notice that in the year 1997 investment ratio is 33.64% it rose to 3.04%

in the year 1998. In the year 1999 again it rose to 7.96%. In the year 2000 it

rose to 1.02%. In the year 2001 it rose to 2.36%.In the year 2002 it rose to42.93% which is a significant increase.

3) Cash /Deposit(%) : This ratio is compared as under:

We notice that in the year 1997 Cash /deposit ratio is 12.27% which fell to

0.69% in the year 1998. In the year 1999 it again fell to 2.66%. In the year

2000 it fell to 1.47%.In the year 2001 it again fell to 0.01%.In the year 2002

it fell to 1.24%.

4) Interest Expended/Interest Earned(%): this ratio is compared as under :

We notice that In the year 1997 interest earned(%) is 64.1% which rose

to7.78%.in the year 1998. again it rose to 6.33%. in the year 1999. in the

year 2000 it fell to 0.01%. in the year 2001 again it fell to 10.76%. in the

year 2002 it fell to 5%.

5) Other Income/Total Income(%) : this ratio is compared as under:

We notice that in the year 1997 percentage of other income/total income is

18.93% which rose to 5.75% in the year 1998. In the year 1999 it fell to

10.6%. In the year 2000 there is a significant increase of 4.47%. in the year

2001 it fell to 3.1%. in the year 2002 It rose to 6.5%.

6) Operating Expenses/Total Income(%) : This ratio is compared as under :

We notice that the percentage of operating expenses in the year 1997 is

17.98% which fell to 1.26% in the year 1998.In the year 1999 again it fell to

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3.6%.In the year 2000 it rose to 0.59%.in the year 2001 it rose to 8.36%.in

the year 2002 it rose to 0.71%.

7) Interest Income/Total funds(%): this ratio is compared as under:

We notice that percentage of interest income in the year 1997 is 12.43%

which fell to 2.17% in the year 1998.In the year 1999 it rose to 0.34%.in the

year 2000 it fell to 1.65%.in the year 2001 it fell to 1.14%.in the year 2002 it

further fell to 4.33%.

8) Interest Expended/Total Funds(%) : this ratio is compared as under

1997:- 7.97%

1998:-0.59%(decrease)

1999: 0.91%(increase)

2000:1.29%(decrease)



9) Net interest income/Total funds(%) : This ratio is compared as under

1997 : 4.46%

1998 : 1.57%(decrease which take it to 2.89%)

1999 : 0.58%(decrease which take it to 2.31%)

2000 : 0.36%( decrease)

2001 : 0.59%(increase)

2002 : 1.58%(decrease)

10) Non interest income/total funds(%) : this ratio is compared as under

1997 :2.9%

1998:0.46%(increase)


2000: 0.3%(increase)

2001 :0.61%(decrease)


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11. Operating expense/Total funds(%) : this ratio is compared as under :

1997 :2.76%

1998 :0.48%(decrease)

1999:0.66%(decrease further)




12.) Profit before provisions/total funds(%) : comparison of this I s done as

under:

1997 : 4.61%

1998 :0.64%(decrease)





13.) Net Profit/Total funds(%): comparison of this is given as under:

1997: 2.73%

1998 :0.75%(decrease)



2001:0.1%(decrease)


14.) RONW(%) : Comparison of this is done as under :

1997:23.7%



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GAP ANALYSIS

Outflow 1-14days

15-28days

29-3months

3-6months

6-1 year 1-3 year 3-5 year Above 5 Total

Deposits 315206 92177 481706 277906 579855 1289359 40318 14421 3090948

Borrowings 99649 149971 441520 322932 894286 1416256 395130 284823 4004567

Total 414855 242148 923226 600838 1474141 2705615 435448 299244 7095515

Inflow

Loans/adv. 82564 35692 255294 233150 371087 1322562 763733 1370069 4424151

Invest/Sect. 131998 68624 289018 267530 521877 736576 447461 1155706 3618790

Total 214562 104316 544312 500680 892964 2059138 1211194

2525775 8052941

Mismatch(B-A)

-200293 -137832 -378914 -100158 -581177 -646477 775746 2226531 1603903

Gap report indicates that there is a mismatch in the maturity buckets of 1-14

days to 1-3 years. However this means RSL>RSA this shows the bank in a

position to benefit from declining interest rate by a negative gap.

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ICICI BANK

FINANCIALOVERVIEW

2002-03 2001-03 2000-03 1999-03 1998-03 1997-03

Equity Paid Up 220.36 196.82 196.82 165 165 150

Networth 5855.9 1289.08 1149.51 308.33 266.75 181.88

Capital Employed 104109.92 19736.59 12072.63 6981.68 3279.43 1781.87

Gross Block 4494.29 589.67 315.14 261.57 218.97 110.58

Sales 2151.93 1242.13 852.87 544.05 259.7 182.68

PBIDT 1912.31 1100.57 823.64 536.41 271.67 178.86

PBDT 353.39 262.9 156.69 110.89 84.99 61.77

PBIT 1848.22 1063.82 798.85 518.88 257.2 170.62PBT 289.3 226.15 131.9 93.36 70.52 53.53

PAT 258.3 161.1 105.3 63.36 50.22 40.13

CP 322.39 197.85 130.09 80.89 64.69 48.37

Revenue earningsin forex

0 0 0 0 0 0

Revenue expensesin forex

0 0 0 0 0 0

Book Value (UnitCurr)

265.74 65.5 58.4 18.69 16.17 12.13

MarketCapitalisation

2732.46 3255.4 5117.32 452.1 755.7 0

CEPS (annualised)(Unit Curr)

14.43 9.82 6.47 4.78 3.82 3.22

EPS (annualised)(Unit Curr)

11.52 7.96 5.21 3.72 2.95 2.68

Dividend(annualised%)

20 20 15 12 10 10

Payout (%) 17.36 28.14 24.13 32.26 33.4 37.38

Cash Flow FromOperating Activities

2241.2 -394.02 1091.57 662.9 568.37 281.8

Cash Flow FromInvesting Activities

-23.68 -78.39 -56.03 -47.69 -105.9 -60.11

Cash Flow FromFinancing Activities

131.4 -27.47 741.37 150.15 37.5 -11.73

Rate of Growth (%)

Net Worth (%) 354.27 12.14 272.82 15.59 46.66 16.03

Capital Employed(%)

427.5 63.48 72.92 112.89 84.04 53.97

Gross Block (%) 662.17 87.11 20.48 19.45 98.02 110.75

Sales (%) 73.25 45.64 56.76 109.49 42.16 57.31

PBIDT (%) 73.76 33.62 53.55 97.45 51.89 68.83

PBDT (%) 34.42 67.78 41.3 30.47 37.59 193.86

PBIT (%) 73.73 33.17 53.96 101.74 50.74 68.21

PBT (%) 27.92 71.46 41.28 32.39 31.74 224.23

PAT (%) 60.34 52.99 66.19 26.16 25.14 143.06

CP (%) 62.95 52.09 60.82 25.04 33.74 130.11Revenue earnings 0 0 0 0 0 0

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in forex (%)

Revenue expensesin forex (%)

0 0 0 0 0 0

MarketCapitalisation (%)

-16.06 -36.38 1031.9 -40.17 0 0

Key RatiosCredit-Deposit(%) 111.56 40.73 36.18 37.21 48.43 69.8

Investment /Deposit (%)

90.95 48.02 45.66 44.64 36.68 33.64

Cash / Deposit (%) 6.2 7.44 7.45 8.92 11.58 12.27

Interest Expended /Interest Earned (%)

72.44 67.44 78.2 78.21 71.88 64.1

Other Income /Total Income (%)

21.95 15.45 18.55 14.08 24.68 18.93

OperatingExpenses / TotalIncome (%)

22.78 22.07 13.71 13.12 16.72 17.98

Interest Income /Total Funds (%)

3.48 7.81 8.95 10.6 10.26 12.43

Interest Expended /Total Funds (%)

2.52 5.27 7 8.29 7.38 7.97

Net InterestIncome / TotalFunds (%)

0.96 2.54 1.95 2.31 2.89 4.46

Non InterestIncome / TotalFunds (%)

0.98 1.43 2.04 1.74 3.36 2.9

OperatingExpenses / TotalFunds (%)

1.01 2.04 1.51 1.62 2.28 2.76

Profit beforeProvisions / TotalFunds (%)

0.92 1.93 2.48 2.43 3.97 4.61

Net Profit / Totalfunds (%)

0.42 1.01 1.11 1.23 1.98 2.73

RONW (%) 7.23 13.21 14.45 22.04 22.39 23.7

BS

200203 200103 200003 199903 199803 199703

CAPITAL ANDLIABILITIES

Capital + 220.36 196.82 196.82 165 165 150Reserves andSurplus +

5635.54 1092.26 952.69 143.33 101.75 31.88

Deposits + 32085.11 16378.21 9866.02 6072.94 2629.02 1347.6

Borrowings + 48681.21 1032.79 491.47 199.89 192.23 92.99

Other Liabilities &Provisions +

17487.7 1036.51 565.63 400.52 191.43 159.4

TOTAL

104109.92 19736.59 12072.63 6981.68 3279.43 1781.87

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ASSETS

Cash & Balanceswith RBI

1774.47 1231.66 721.89 465.81 310.09 150.34

Balances with

Banks & money atCall & Short Notice

11011.88 2362.03 2693.27 1172.44 562.79 222.58

Investments + 35891.08 8186.86 4416.68 2861.23 1023.39 435.35

Advances + 47034.87 7031.46 3657.35 2110.12 1127.87 798

Fixed Assets + 4239.34 384.75 222.12 199.64 183.7 96.37

Other Assets + 4158.28 539.83 361.32 172.44 71.59 79.23

TOTAL 104109.92 19736.59 12072.63 6981.68 3279.43 1781.87

ContingentLiabilities +

39446.59 13848.01 9780.47 5013.97 2906.24 1495.76

Bills for collection 1323.42 1229.8 761.44 438.46 218.19 123.01

PL

200203 (12) 200103 (12) 200003 (12) 199903 (12) 199803 (12) 199703 (12)

I. INCOME :

Interest Earned + 2151.93 1242.13 852.87 544.05 259.7 182.68

Other Income + 605.02 226.96 194.19 89.14 85.09 42.65

TOTAL 2756.95 1469.09 1047.06 633.19 344.79 225.33

II.EXPENDITURE :Interest expended

+

1558.92 837.67 666.95 425.52 186.68 117.09

OperatingExpenses +

628.09 324.28 143.54 83.08 57.65 40.51

Provisions &Contingencies +

311.64 146.04 131.27 61.23 50.24 27.6

TOTAL 2498.65 1307.99 941.76 569.83 294.57 185.2

III. PROFIT/LOSS

Net Profit for theyear

258.3 161.1 105.3 63.36 50.22 40.13

Prior YearAdjustments +

0 0 0 0 0 0

Profit broughtforward

0.83 0.8 0.13 0.39 0.02 0.39

TOTAL 259.13 161.9 105.43 63.75 50.24 40.52

IV.APPROPRIATIONSTransfer toStatutory Reserves

65 80 25 20 27 25.5

Transfer to OtherReserves +

126 32.5 52.82 21.84 5 0

Proposed Dividend /Transfer toGovernment +

48.57 48.57 27.47 21.78 17.85 15

Balance c/f toBalance Sheet

19.56 0.83 0.14 0.13 0.39 0.02

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TOTAL 259.13 161.9 105.43 63.75 50.24 40.52

Equity Dividend 44.07 44.07 24.75 19.8 16.23 15

Corporate DividendTax

4.5 4.5 2.72 1.98 1.62 0

Equity Dividend (%) 20 20 15 12 10 10

Earning Per Share(Rs.)(Unit Curr.)

11.52 7.96 5.21 3.72 2.95 2.68

Book Value(UnitCurr.)

265.74 65.5 58.4 18.69 16.17 12.13

Extraordinary Items+

-0.03 -0.09 -0.1 -0.07 -0.03 -0.03

BS SCHEDULES

200203 200103 200003 199903 199803 199703

CAPITAL ANDLIABILITIES

Capital

Equity Authorised 300 300 300 300 300 300

Preference CapitalAuthorised

0 0 0 0 0 0

UnclassifiedAuthorised

0 0 0 0 0 0

Equity Issued 220.36 196.82 196.82 165 165 150

Equity Subscribed 220.36 196.82 196.82 165 165 150

Equity Called Up 220.36 196.82 196.82 165 165 150

Less : Equity Callsin Arrears

0 0 0 0 0 0

Equity Forfeited 0 0 0 0 0 0

Equity Suspense 392.67 23.54 0 0 0 0

Adjustments toequity

0 0 0 0 0 0

Equity Paid Up 220.36 196.82 196.82 165 165 150

Preference CapitalPaid Up

0 0 0 0 0 0

Unclassified Sharespaid -up

0 0 0 0 0 0

TOTAL CAPITAL 220.36 196.82 196.82 165 165 150

Equity convertedduring the year

0 0 0 0 0 0

GDRs IssuedDuring the Year

0 0 0 0 0 0

Bonus in Equity 0 0 0 0 0 0

Reserves andSurplusContingencyReserve

0 0 0 0 0 0

Other StatutoryReserve

249.43 184.43 103.86 78.86 58.86 31.86

Capital Reserves 0 0 0 0 0 0

Capital Redemption

Reserve

0 0 0 0 0 0

Debt Redemption 0 0 0 0 0 0

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Reserve

DebentureRedemptionReserve

10 0 0 0 0 0

Exchangefluctuation Reserve

0 0 0 0 0 0

AmalgamationReserve

0 0 0 0 0 0

Share Premium 804.54 804.54 769.03 37.5 37.5 0

Revenue & otherReserves

4524.67 91.12 79.66 26.84 5 0

Other Reserves 27.34 11.34 0 0 0 0

Profit & Loss A/c 19.56 0.83 0.14 0.13 0.39 0.02TOTAL RESERVESEXCLUDINGREVALUATIONRESERVE

5635.54 1092.26 952.69 143.33 101.75 31.88

RevaluationReserve

0 0 0 0 0 0

TOTAL RESERVESAND SURPLUS

5635.54 1092.26 952.69 143.33 101.75 31.88

Deposits

Demand Deposits 2736.15 2621.86 1587.47 576.62 363.17 316.33

Saving Deposits 2497 1880.64 533.26 227.12 103.74 49.67

Term & OtherDeposits

26851.96 11875.71 7745.29 5269.2 2162.11 981.6

TOTAL DEPOSITS 32085.11 16378.21 9866.02 6072.94 2629.02 1347.6

Borrowings

Borrowings in India

- RBI

140.89 301.24 218.67 148.48 0 0

Borrowings in India-Other Banks

2687.6 397.8 192.18 41.77 29.29 80.04

Borrowings in India-Other agencies

9265.09 333.75 80.62 9.64 162.94 12.95

Borrowings outsideIndia

22709.97 0 0 0 0 0

ConvertibleDebentures

0 0 0 0 0 0

Non ConvertibleDebentures

13744.47 0 0 0 0 0

Partly ConvertibleDebentures

133.19 0 0 0 0 0

Less : DebenturesCalls in arrears

0 0 0 0 0 0

TOTALBORROWINGS

48681.21 1032.79 491.47 199.89 192.23 92.99

Secured Borrowingsincluded above

0 0 0 0 0 0

Other Liabilities &ProvisionsBills Payable 817.33 380.56 142.2 112.19 107.81 68.79

Inter OfficeAdjustment (Net)

33.05 0 0 0 0 0

Interest Accrued 2289.51 55.65 33.52 23.49 17.56 5.67Share Application 1280.12 23.54 0 0 0 0

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Money

Unclaimed Dividend 0 0 0 0 0 0

Other Liabilities(IncludingProvisions)

13067.69 576.76 389.91 264.84 66.06 84.94

TOTAL OTHER

LIABILITIES ANDPROVISIONS

17487.7 1036.51 565.63 400.52 191.43 159.4

TOTAL 104109.92 19736.59 12072.63 6981.68 3279.43 1781.87

ASSETS

Cash & Balanceswith RBI

1774.47 1231.66 721.89 465.81 310.09 150.34

Balances with Banks &

money at Call & ShortNotice

11011.88 2362.03 2693.27 1172.44 562.79 222.58

Investments

Quoted GovernmentSecurities

22722.31 4070.44 2814.94 1527.36 704.67 313.36

Other ApprovedSecutires

70.46 41.49 0 0 0 0

Shares 1908.65 125.12 160.95 138 47.03 10.47

Debentures &Bonds

6436.36 3070.08 1137.22 666.61 216.51 69.34

Investment inSubsidiaries

608.18 0 0 0 0 0

Units 0 0 0 0 0 0

Other Investments 4145.12 879.73 303.57 529.26 55.18 42.18

TOTALINVESTMENTS

35891.08 8186.86 4416.68 2861.23 1023.39 435.35

Market Value ofQuoted Investments

0 0 0 0 0 0

Advances

Bills Purchased &Discounted

2484.7 1087.04 701.3 454.96 140.92 76.4

Cash Credits,Overdraft & Loans

Repayable onDemand

2402.51 4970.91 2577.67 1383.5 841.59 632.1

Term Loans 42147.66 973.51 378.38 271.66 145.36 89.5

TOTAL ADVANCES 47034.87 7031.46 3657.35 2110.12 1127.87 798

Fixed Assets

Premises 1443.17 203.09 144.74 130.21 106.62 28.82

Other Fixed Assets 3051.12 386.58 170.4 131.36 112.35 81.76

Gross Block 4494.29 589.67 315.14 261.57 218.97 110.58

AccumulatedDepreciation

254.95 204.92 93.02 61.93 35.27 14.21

Net Block 4239.34 384.75 222.12 199.64 183.7 96.37

Capital Work-in-Progress

0 0 0 0 0 0

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TOTAL FIXEDASSETS

4239.34 384.75 222.12 199.64 183.7 96.37

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RISK MANAGEMENT GUIDELINES FOR COMMERCIAL BANKS

Introduction

Banks in the process of financial intermediation are confronted with various

kinds of financial and non-financial risks viz., credit, interest rate, foreign

exchange rate, liquidity, equity price, commodity price, legal, regulatory,

reputational, operational, etc. These risks are highly interdependent and events

that affect one area of risk can have ramifications for a range of other risk

categories. Thus, top management of banks should attach considerable

importance to improve the ability to identify, measure, monitor and control the

overall level of risks undertaken.

The broad parameters of risk management function should encompass:

i) organizational structure;

ii) comprehensive risk measurement approach;

iii) risk management policies approved by the Board which should be

consistent with the broader business strategies, capital strength,

management expertise and overall willingness to assume risk;

iv) guidelines and other parameters used to govern risk taking including

detailed structure of prudential limits;

v) strong MIS for reporting, monitoring and controlling risks;

vi) well laid out procedures, effective control and comprehensive risk

reporting framework;

vii) separate risk management framework independent of operational

Departments and with clear delineation of levels of responsibility for

management of risk; andviii) periodical review and evaluation.

RISK MANAGEMENT STRUCTURE

A major issue in establishing an appropriate risk management organisation

structure is choosing between a centralised and decentralised structure. The

global trend is towards centralising risk management with integrated treasury

management function to benefit from information on aggregate exposure,

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natural netting of exposures, economies of scale and easier reporting to top

management. The primary responsibility of understanding the risks run by the

bank and ensuring that the risks are appropriately managed should clearly be

vested with the Board of Directors. The Board should set risk limits by

assessing the banks risk and risk-bearing capacity. At organisational level,

overall risk management should be assigned to an independent Risk

Management Committee or Executive Committee of the top Executives that

reports directly to the Board of Directors. The purpose of this top level

management in banking

Documents