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A DISSERTATION
REPORT ON
CREDIT RISK MANAGEMENT AT ICICI BANK

UNDER THE GUIDANCE OF:

Mrs.Sonia Gambhir
(Asst.Professor -
Finance)

SUBMITTED BY:
SALONI GUPTA
REGISTRATION NO: - 2061301133

Batch (2020-2022)

MASTERS OF BUSINESS ADMINISTRATION

IBCS, SOA UNIVERSITY,
BHUBANESWAR
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CERTIFICATE BY GUIDE

This is to certify that the project work entitled “Credit Risk Management at ICICI
Bank” is a record of bonafied work carried out by Candidate Saloni Gupta under my
supervision towards partial fulfillment of the management Programme course (MBA)
of IBCS, SOA University.

Place: Bhubaneswar
Project Guide
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DECLARATION

I, Saloni Gupta certify that the dissertation report entitled “Credit Risk Managemet
at ICICI Bank “is an original one and has not been submitted earlier either to IBCS,
SOA University or to any other institution for fulfillment of the requirement of a
course of Management Programme (MBA).

Place: Bhubaneswar Signature

Date: Saloni Gupta
Reg No: 2061301133
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PREFACE

In any organization, the two important financial statements are the Balance Sheet
and Profit & Loss Account of the business. Balance Sheet is a statement of
financial position of an enterprise at a particular point of time. Profit & Loss
account shows the net profit or net loss of a company for a specified period of
time. When these statements of the last few years of any organization are studied
and analyzed, significant conclusions may be arrived regarding the changes in the
financial position, the important policies followed and trends in profit and loss etc.
Analysis and interpretation of financial statement has now become an important
technique of credit appraisal. The investors, financial experts, management
executives and the bankers all analyze these statements. Though the basic
technique of appraisal remains the same in all the cases but the approach and the
emphasis in the analysis vary. A banker interprets the financial statement so as to
evaluate the financial soundness and stability, the liquidity position and the
profitability or the earning capacity of borrowing concern. Analysis of financial
statements is necessary because it helps in depicting the financial position on the
basis of past and current records. Analysis of financial statements helps in making
the future decisions and strategies. Therefore, it is very necessary for every
organization whether it is a financial or manufacturing, to make financial statement
and to analyze it.
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ACKNOWLEDGEMENT

I would like to take an opportunity to thank all the people who helped me in collecting

necessary information and making of the report. I am grateful to all of them for their

time, energy and wisdom.

Getting a project ready requires the work and effort of many people. I would like all

those who have contributed in completing this project. First of all, I would like to

send my sincere thanks to Mrs.Sonia Gambhir for her helpful hand in the

completion of my project.

SALONI GUPTA
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ABSTRACT

Risk is inherent in all aspects of a commercial operation; however for Banks and
financial institutions, credit risk is an essential factor that needs to be managed. Credit
risk is the possibility that a borrower or counter party will fail to meet its obligations
in accordance with agreed terms. Credit risk, therefore, arises from the bank’s
dealings with or lending to Corporates, individuals, and other banks or financial
institutions. Credit risk analysis needs to be a robust process that enables banks to
proactively manage loan portfolios in order to minimize losses and earn an acceptable
level of return for shareholders. Central to this is a comprehensive IT system, which
should have the ability to capture all key customer data, risk management and
transaction information including trade & Forex. Given the fast changing, dynamic
global economy and the increasing pressure of globalization, liberalization,
consolidation and dis- intermediation, it is essential that Retail banks have robust
credit risk management policies and procedures that are sensitive and responsive to
these changes. The purpose of this document is to provide directional guidelines to the
Retail banking sector that will improve the risk management culture, establish
minimum standards for segregation of duties and responsibilities, and assist in the
ongoing improvement of the retail banking sector. Credit risk analysis is of utmost
importance to Banks, and as such, policies and procedures should be endorsed and
strictly enforced by the MD/CEO and the board of the Bank.
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CONTENT

PREFACE...............................................................................................iv

ACKNOWLEDGMENT..........................................................................v

ABSTRACT.............................................................................................vi

1. INTRODUCTION.............................................................................................1

1.1 Indian banking sector….......................................................................01

1.2 Company profile.................................................................................10

2. LITERATURE REVIEW................................................................................38

3. RESEARCH OBJECTIVE & METHODOLOGY..........................................55

3.1 Research objective.............................................................................55

3.2 Research design…............................................................................55

3.3 Research method…...........................................................................56

4. PRIMARY FINDING AND ANALYSIS......................................................57

5. RECOMMENDATIONS.................................................................................66

6. CONCLUSION & IMPLICATIONS..............................................................67

7. BIBLIOGRAPHY...........................................................................................69

8. ANNEXURE - COPY OF THE QUESTIONNAIRE....................................70

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INTRODUCTION

1.1 Indian Banking sector:

The banking system in India is significantly different from that of other Asian nations
because of the country’s unique geographic, social, and economic characteristics. India has
a large population and land size, a diverse culture, and extreme disparities in come, which
are marked among its regions. There are high levels of illiteracy among a large percentage
of its population but, at the same time, the country has a large reservoir of managerial and
technologically advanced talents. Between about 30 and 35 percent of the population resides
in metro and urban cities and the rest is spread in several semi-urban and rural centers. The
country’s economic policy framework combines socialistic and capitalistic features with a
heavy bias towards public sector investment. India has followed the path of growth-led
exports rather than the “export- led growth” of other Asian economies, with emphasis on
self-reliance through import substitution. These features are reflected in the structure, size,
and diversity of the country’s banking and financial sector. The banking system has had to
serve the goals of economic policies enunciated in successive five- year development plans,
particularly concerning equitable income distribution, balanced regional economic growth,
and the reduction and elimination of private sector monopolies in trade and industry. In
order for the banking industry to serve as an instrument of state policy, it was subjected to
various nationalization schemes in different phases (1955, 1969, and 1980). As a result,
banking remained internationally isolated (few Indian banks had presence abroad in
international financial centers) because of preoccupations with domestic priorities,
especially massive branch expansion and attracting more people to the system. Moreover,
the sector has been as- signed the role of providing support to other economic sectors such
as agriculture, small-scale industries, exports, and banking activities in the developed
commercial centers (i.e., metro, urban, and a limited number of semi-urban centers). The
banking system ’ s international isolation was also due to strict branch licensing controls on
foreign banks already operating in the country as well as entry restrictions facing new
foreign banks. A criterion of reciprocity is required for any Indian bank to open an office
abroad. These features have left the Indian banking sector with weaknesses and strengths. A
big challenge facing Indian banks is how, under the current ownership structure, to attain
operational efficiency suit- able for modern financial intermediation. On the other hand, it
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has been relatively easy for the public sector banks to recapitalize, given the increases in
nonperforming assets (NPAs), as their Government- dominated ownership structure has
reduced the conflicts of interest that private banks would face.

History:

The evolution of the modern commercial banking industry in India can be traced to 1786
with the establishment of Bank of Bengal in Calcutta. Three presidency banks were set up in
Calcutta, Bombay and Madras. In 1860, the limited liability concept was introduced in
banking, resulting in the establishment of joint stock banks like Allahabad Bank Limited,
Punjab National Bank Limited, Bank of Baroda Limited and Bank of India Limited. In
1921, the three presidency banks were amalgamated to form the Imperial
Bank of India, which took on the role of a commercial bank, a bankers’ bank and a banker to
the government. The establishment of the RBI as the central bank of the country in 1935
ended the quasi-central banking role of the Imperial Bank of India. In order to serve the
economy in general and the rural sector in particular, the All India Rural Credit Survey
Committee recommended the creation of a state-partnered and state sponsored bank taking
over the Imperial Bank of India and integrating with it, the former state owned and state-
associate banks. Accordingly, the State Bank of India (“SBI”) was constituted in 1955.
Subsequently in 1959, the State Bank of India (Subsidiary Bank) Act was passed, enabling
the SBI to take over eight former state-associate banks as its subsidiaries. In 1969, 14
private banks were nationalized followed by six private banks in 1980. Since 1991 many
financial reforms have been introduced substantially transforming the banking industry in
India.

Reserve Bank of India:

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The RBI is the central banking and monetary authority in India. The RBI manages the
country’s money supply and foreign exchange and also serves as a bank for the GoI and for
the country’s commercial banks. In addition to these traditional central banking roles, the
RBI undertakes certain developmental and promotional activities. The RBI issues
guidelines, notifications, circulars on various areas including exposure standards, income
recognition, asset classification, provisioning for non-performing assets, investment
valuation and capital adequacy standards for commercial banks, long-term lending
institutions and non-banking finance companies. The RBI requires these institutions to
furnish information relating to their businesses to the RBI on a regular basis.

Commercial Banks:

Commercial banks in India have traditionally focused on meeting the short-term financial
needs of industry, trade and agriculture. At the end of June 2009, there were 286 scheduled
commercial banks in the country, with a network of 67,097 branches. Scheduled
commercial banks are banks that are listed in the second schedule to the Reserve Bank of
India Act, 1934, and may further be classified as public sector banks, private sector banks
and foreign banks. Industrial Development Bank of India was converted into a banking
company by the name of Industrial Development Bank of India Ltd. with effect from
October, 2008 and is a scheduled commercial bank. Scheduled commercial banks have a
presence throughout India, with nearly 70.2% of bank branches located in rural or semi-
urban areas of the country. A large number of these branches belong to the public sector
banks.

Public Sector Banks:

Public sector banks make up the largest category of banks in the Indian banking system.
There are 27 public sector banks in India. They include the SBI and its associate banks and
19 nationalized banks. Nationalized banks are governed by the Banking Companies
(Acquisition and Transfer of Undertakings) Act 1970 and 1980. The banks nationalized
under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 are
referred to as ‘corresponding new banks’. Punjab National Bank is a public sector bank
nationalized in 1969 and a corresponding new bank under the Bank Acquisition Act. At the
end of June 2004, public sector banks had 46,715 branches and accounted for 74.7% of the
aggregate deposits and 70.1% of the outstanding gross bank credit of the scheduled
commercial banks.
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Regional Rural Banks:

Regional rural banks were established from 1976 to 1987 jointly by the Central
Government, State Governments and sponsoring public sector commercial banks with a
view to develop the rural economy. Regional rural banks provide credit to small farmers,
artisans, small entrepreneurs and agricultural labourers. There were 196 regional rural banks
at the end of June 2009 with 14,433 branches, accounting for 3.6% of aggregate deposits
and 2.9% of gross bank credit outstanding of scheduled commercial banks.

Private Sector Banks:

After the first phase of bank nationalization was completed in 1969, the majority of Indian
banks were public sector banks. Some of the existing private sector banks, which showed
signs of an eventual default, were merged with state-owned banks. In July 1993, as part of
the banking reform process and as a measure to induce competition in the banking sector,
the RBI permitted entry by the private sector into the banking system. This resulted in the
introduction of nine private sector banks. These banks are collectively known as the ‘‘new’’
private sector banks. There are nine “new” private sector banks operating at present.

Foreign Banks:

At the end of June 2009, there were around 33 foreign banks with 200 branches operating in
India, accounting for 4.7% of aggregate deposits and 7.3% of outstanding gross bank credit
of scheduled commercial banks. The Government of India permits foreign banks to operate
through (i) branches; (ii) a wholly owned subsidiary or (iii) a subsidiary with aggregate
foreign investment of up to 74% in a private bank. The primary activity of most foreign
banks in India has been in the corporate segment. However, some of the larger foreign
banks have made consumer financing a significant part of their portfolios. These banks offer
products such as automobile finance, home loans, credit cards and household consumer
finance. The GoI in 2008 announced that wholly owned subsidiaries of foreign banks would
be permitted to incorporate wholly-owned subsidiaries in India. Subsidiaries of foreign
banks will have to adhere to all banking regulations, including priority sector lending norms,
applicable to domestic banks. In March 2008, the Ministry of Commerce and Industry, GoI
announced that the foreign direct investment limit in private sector banks has been raised to
74% from the existing 49% under the automatic route including investment by FIIs. The
announcement also stated that the aggregate of foreign investment in a private bank from all

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sources would be allowed up to a maximum of 74% of the paid up capital of the bank. The
RBI notification increasing the limit to 74% is however still awaited.

Cooperative Banks:

Cooperative banks cater to the financing needs of agriculture, small industry and
selfemployed businessmen in urban and semi-urban areas of India. The state land
development banks and the primary land development banks provide long-term credit for
agriculture. In light of the liquidity and insolvency problems experienced by some
cooperative banks in fiscal 2006, the RBI undertook several interim measures to address the
issues, pending formal legislative changes, including measures related to lending against
shares, borrowings in the call market and term deposits placed with other urban cooperative
banks. The RBI is currently responsible for supervision and regulation of urban co-operative
societies, the National Bank for Agriculture and Rural Development, state co-operative
banks and district central co-operative banks. The Banking Regulation (Amendment) and
Miscellaneous Provisions Bill, 2007, which was introduced in the Parliament in 2007,
proposed the regulation of all co-operative banks by the RBI. The Bill has not yet been
ratified by the Indian Parliament and is not in force.

Term Lending Institutions:

Term lending institutions were established to provide medium-term and long-term financial
assistance to various industries for setting up new projects and for the expansion and
modernization of existing facilities. These institutions provide fund-based and nonfund
based assistance to industry in the form of loans, underwriting, and direct subscription to
shares, debentures and guarantees. The primary long-term lending institutions include
Industrial Development Bank of India (converted into a banking company with effect from
October, 2008), IFCI Ltd., Infrastructure Development Finance Company Limited, and
Industrial Investment Bank of India and Industrial Credit Corporation of India Limited
(prior to its amalgamation).

Banking Sector Reforms:

In the wake of the last decade of financial reforms, the banking industry in India has
undergone a significant transformation, which has covered almost all important facets of the
industry. Most large banks in India were nationalized in 1969 and thereafter were subject to
a high degree of control until reform began in 1991. In addition to controlling interest rates
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and entry into the banking sector, the regulations also channeled lending into priority
sectors. Banks were required to fund the public sector through the mandatory acquisition of
low interest-bearing government securities or statutory liquidity ratio bonds to fulfill
statutory liquidity requirements. As a result, bank profitability was low, nonperforming
assets were comparatively high, capital adequacy was diminished, and operational flexibility
was hindered.

Opportunities and Challenges for Players:

The bar for what it means to be a successful player in the sector has been raised. Four
challenges must be addressed before success can be achieved. First, the market is seeing
discontinuous growth driven by new products and services that include opportunities in
credit cards, consumer finance and wealth management on the retail side, and in feebased
income and investment banking on the wholesale banking side. These require new skills in
sales & marketing, credit and operations. Second, banks will no longer enjoy windfall
treasury gains that the decade-long secular decline in interest rates provided. This will
expose the weaker banks. Third, with increased interest in India, competition from foreign
banks will only intensify. Fourth, given the demographic shifts resulting from changes in
age profile and household income, consumers will increasingly demand enhanced
institutional capabilities and service levels from banks industry utilities and service bureaus.
Management success will be determined on three fronts: fundamentally upgrading
organizational capability to stay in tune with the changing market; adopting value-creating
M&A as an avenue for growth; and continually innovating to develop new business models
to access untapped opportunities. Through these scenarios, we paint a picture of the events
and outcomes that will be the consequence of the actions of policy makers and bank
managements. These actions will have dramatically different outcomes; the costs of inaction
or insufficient action will be high. Specifically, at one extreme, the sector could account for
over 7.7 per cent of GDP with over Rs.. 7,500 billion n market cap, while at the other it
could account for just 3.3 per cent of GDP with a market cap of Rs. 2,400 billion. Banking
sector intermediation, as measured by total loans as a percentage of GDP, could grow
marginally from its current levels of -30 per cent to -45 per cent or grow significantly to
over 100 per cent of GDP. In all of this, the sector could generate employment to the tune of
1.5 million compared to 0.9 million today. Availability of capital would be a key factor —
the banking sector will require as much as Rs. 600 billion (US$ 14 billion) in capital to fund
growth in advances, non-performing loan (NPL) write offs and investments in IT and
human
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capital up-gradation to reach the high-performing scenario. Three scenarios can be defined
to characterize these outcomes:

• High performance: In this scenario, policy makers intervene only to the extent
required to ensure system stability and protection of consumer interests, leaving
managements free to drive far-reaching changes. Changes in regulations and bank
capabilities reduce intermediation costs leading to increased growth, innovation and
productivity. Banking becomes an even greater driver of GDP growth and
employment and large sections of the population gain access to quality banking
products. Management is able to overhaul bank organizational structures, focus on
industry consolidation and transform the banks into industry shapers. In this scenario
we witness consolidation within public sector banks (PSB5) and within private
sector banks. Foreign banks begin to be active in M&A, buying out some old private
and newer private banks. Some M&A activity also begins to take place between
private and public sector banks. As a result, foreign and new private banks grow at
rates of 50 per cent, while PSBs improve their growth rate to 15 per cent. The share
of the private sector banks (including through mergers with PSB5) increases to 35
per cent and that of foreign banks increases to 20 per cent of total sector assets. The
shares of banking sector value add in GDP increases to over 7.7 per cent, from
current levels of 2.5 per cent. Funding this dramatic growth will require as much as
Rs. 600 billion in capital over the next few years.

• Evolution: Policy makers adopt a pro-market stance but are cautious in liberalizing
the industry. As a result of this, some constraints still exist. Processes to create
highly efficient organizations have been initiated but most banks are still not best-in-
class operators. Thus, while the sector emerges as an important driver of the
economy and wealth in 2010, it has still not come of age in comparison to developed
markets. Significant changes are still required in policy and regulation and in
capability-building measures, especially by public sector and old private sector
banks. In this scenario, M&A activity is driven primarily by new private banks,
which take over some old private banks and also merge among themselves. As a
result, growth of these banks increases to 35 per cent. Foreign banks also grow faster
at 30 per cent due to a relaxation of some regulations. The share of private sector
banks increases to 30 per cent of total sector assets, from current levels of 18 per
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cent, while that of foreign banks increases to over 12 per cent of total assets. The
share of banking sector value adds to GDP increases to over 4.7 per cent.

• Stagnation: In this scenario, policy makers intervene to set restrictive conditions

and management is unable to execute the changes needed to enhance returns to
shareholders and provide quality products and services to customers. As a result,
growth and productivity levels are low and the banking sector is unable to support a
fast-growing economy. This scenario sees limited consolidation in the sector and
most banks remain sub-scale. New private sector banks continue on their growth
trajectory of 25 per cent. There is a slowdown in PSB and old private sector bank
growth. The share of foreign banks remains at 7 per cent of total assets. Banking
sector value add, meanwhile, is only 3.3 per cent of GDP.

Major Development:

The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine months
ended December 2009, up 14.43 per cent from US$ 175.4 million posted in the nine months
ended December 2008. The SBI is adding 23 new branches abroad bringing its foreign-
branch network number to 160 by March 2010. This will cement its leading position as the
bank with the largest global presence among local peers. Amongst the private banks, Axis
Bank's net profit surged by 32 per cent to US$ 115.4 million on 21.2 per cent rise in total
income to US$ 852.16 million in the second quarter of 2009-10, over the corresponding
period last year. HDFC Bank has posted a 32 per cent rise in its net profit at US$ 175.4
million for the quarter ended December 31, 2009 over the figure of US$ 128.05 million for
the same quarter in the previous year.

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1.2 COMPANY PROFILE

ICICI BANK

ICICI bank:

ICICI Bank is a major banking and financial services organization in India. It is the second-
largest bank by revenue, profit and assets
(behind State Bank of India) and the
largest private sector bank in India by
market capitalization. The bank also has a
network of 1,700+ branches (as on 31
March, 2010) and about 4,721 ATMs in
India and presence in 18 countries, as well as
some 24 million customers (at the end of
July 2007). ICICI Bank offers a wide
range of banking products and financial services to corporate and retail customers through a
variety of delivery channels and specialization subsidiaries and affiliates in the areas of
investment banking, life and non-life insurance, venture capital and asset management.
(These data are dynamic.) ICICI Bank is also the largest issuer of credit cards in India.ICICI
Bank has got its equity shares listed on the stock exchanges at Kolkata and Vadodara,
Mumbai and the National Stock Exchange of India Limited, and its ADRs on the New York
Stock Exchange (NYSE). The Bank is expanding in overseas markets and has the largest
international balance sheet among Indian banks. ICICI Bank now has wholly-owned
subsidiaries, branches and representatives offices in 18 countries, including an offshore unit
in Mumbai. This includes wholly owned subsidiaries in Canada, Russia and the UK (the
subsidiary through which the HiSAVE savings brand is operated), offshore banking units in
Bahrain and Singapore, an advisory branch in Dubai, branches in Belgium, Hong Kong and
Sri Lanka, and representative offices in Bangladesh, China, Malaysia, Indonesia, South
Africa, Thailand, the United Arab Emirates and USA. Overseas, the Bank is targeting the
NRI (Non-Resident Indian) population in particular. ICICI reported a 1.15% rise in net
profit to Rs. 1,014.21 crore on a 1.29% increase in total income to Rs. 9,712.31 crore in Q2
September 2008 over Q2 September 2007. The bank's current and savings account
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(CASA) ratio increased to 30% in 2008 from 25% in 2007. ICICI Bank is one of the Big
Four Banks of India, along with State Bank of India, Axis Bank and HDFC Bank — its
main competitors.

History of ICICI bank:

• 1955: The Industrial Credit and Investment Corporation of India Limited (ICICI) was
incorporated at the initiative of World Bank, the Government of India and
representatives of Indian industry, with the objective of creating a development financial
institution for providing medium-term and long-term project financing to Indian
businesses.

• 1994:ICICI established Banking Corporation as a banking subsidiary formerly Industrial

Credit and Investment Corporation of India. Later, ICICI Banking Corporation was
renamed as 'ICICI Bank Limited'. ICICI founded a separate legal entity, ICICI Bank, to
undertake normal banking operations - taking deposits, credit cards, car loans etc.

• 2001:ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiar bank,
and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank (established
1904) in the 1960s.

• 2002: The Boards of Directors of ICICI and ICICI Bank approved the reverse merger of
ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services Limited,
into ICICI Bank. After receiving all necessary regulatory approvals, ICICI integrated the
group's financing and banking operations, both wholesale and retail, into a single entity.
At the same time, ICICI started its international expansion by opening representative
offices in New York and London. In India, ICICI Bank bought the Shimla and
Darjeeling branches that Standard Chartered Bank had inherited when it acquired
Grindlays Bank.

• 2003: ICICI opened subsidiaries in Canada and the United Kingdom (UK), and in the
UK it established an alliance with Lloyds TSB. It also opened an Offshore Banking Unit
(OBU) in Singapore and representative offices in Dubai and Shanghai.

• 2004: ICICI opened a representative office in Bangladesh to tap the extensive trade
between that country, India and South Africa.

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• 2005: ICICI acquired Investitsionno-Kreditny Bank (IKB), a Russia bank with about
US$4mn in assets, head office in Balabanovo in the Kaluga region, and with a branch in
Moscow. ICICI renamed the bank ICICI Bank Eurasia. Also, ICICI established a branch
in Dubai International Financial Centre and in Hong Kong.

• 2006: ICICI Bank UK opened a branch in Antwerp, in Belgium. ICICI opened

representative offices in Bangkok, Jakarta, and Kuala Lumpur.

• 2007: ICICI amalgamated Sangli Bank, which was headquartered in Sangli, in

Maharshtra State, and which had 158 branches in Maharshtra and another 31 in
Karnataka State. Sangli Bank had been founded in 1916 and was particularly strong in
rural areas. With respect to the international sphere, ICICI also received permission
from the government of Qatar to open a branch in Doha. Also, ICICI Bank Eurasia
opened a second branch, this time in St. Petersburg.

• 2008: The US Federal Reserve permitted ICICI to convert its representative office in
New York into a branch. ICICI also established a branch in Frankfurt.

• 2009: ICICI made huge changes in its organization like elimination of loss making
department and retrenching outsourced staff or renegotiate their charges in consequent
to the recession. In addition to this, ICICI adopted a massive approach aims for cost
control and cost cutting. In consequent of it, compensation to staff was not increased and
no bonus declared for 2008-09

Controversy:

ICICI Bank has been in focus in recent years because of alleged harassment of customers by
its recovery agents. Listed below are some of the related news links:

• ICICI Bank was fined Rs. 55 lakh for hiring goons (known colloquially as "goodness")
to recover a loan. Recovery agents had, allegedly, forcibly dragged out a youth (who
was not even the borrower) from the car, beaten him up with iron rods and left him
bleeding as they drove away with the vehicle. "We hold ICICI Bank guilty of the
grossest kind of deficiency in service and unfair trade practice for breach of terms of
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contract of hire-purchase/loan agreement by seizing the vehicle illegally,” No civilized

society governed by the rule of law can brook such kind of conduct" said Justice J D
Kapoor, president of the consumer commission.

• Four ICICI loan employees arrested on theft charges in Punjab

• ICICI Bank told to pay Rs. 1 lakh as compensation for using unlawful recovery
methods.

• RBI warns ICICI Bank for coercive methods to recover loans

• ICICI Bank drives customer to suicide - Four men including an employee of ICICI Bank
booked under sections 452, 306, 506 (II) and 34 of IPC for abetting suicide. According
to the suicide note they advised him, "If you cannot repay the bank loan, sell off your
wife, your kids, yourself, sell everything at your home. Even then if you cannot not pay
back the due amount, then it's better if you commit suicide."India biggest private bank
has compensated the life by money

• ICICI Bank on huge car recovery scam in Goa - ICICI Bank invest in car-jackers to
recover loans in Goa. A half an hour investigative report on CNN-IBN's 30 Minutes.
The under cover report was executed by CNN-IBN's Special Investigations Team from
Mumbai, led by Ruksh Chatterji

• Family of Y. Yadaiah alleged that he was beaten to death by ICICI Bank’s recovery
agents, for failing to pay the dues. Four persons were arrested in this case.

• A father while talking to Times of India, alleged that "ICICI Bank recovery agents
visited his house and threatened his family. And his son Nikhil consumed poison
because of the tension".

• Oppressed by ICICI Bank's loan recovery agents, Shakuntala Joshi (38), committed
suicide by hanging. The suicide note stated that she was upset with the ill-treatment
meted out by ICICI Bank's recovery agents and had thus decided to end her life.

• In another case of a suicide it is alleged that ‘goondas’ sent by ICICI Bank abused
Himanshu and his wife in front of the entire residential colony before taking away his
vehicle. Feeling frustrated and insulted, he reportedly committed suicide.

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• C.L.N Murthy, a scientist with the Hyderabad-based Indian Institute of Chemical

Technology, was allegedly tortured by recovery agents of ICICI Bank after he defaulted
on his loan.“They humiliated me no end. They ripped my shirt, shaved my moustache,
cut my hair and gave electric shocks on my chest and even spat on my face" adds
Murthy.

• A dozen recovery agents of ICICI Bank, riding on bikes, allegedly forced a prominent
lawyer, Someshwari Prasad, to stop his car. They held Prasad at gunpoint and also
slapped him to force him. A manager of the ICICI Bank branch, Rakesh Mehta, along
with four other employees were arrested.

• In a landmark case, Allahabad High Court had ordered registration of an FIR against
ICICI Bank's branch manager, President, Chairman and Managing Director on a
complaint of 75-year-old widow Prakash Kaur. She had complained that “goondas”
were sent by the bank to harass her and forcibly took away her truck. When the Supreme
Court wanted to know about the procedure adopted by the Bank, ICICI Bank counsel
said notice would be sent to a defaulter asking him either to pay the instalments or hand
over the vehicle purchased on loan, failing which the agents would be asked to seize it.
When the Bench pointed out that recovery or seizure could be done only legally, ICICI
Bank counsel said, "If we have to go through the legal process it would be difficult to
recover the instalments as there are millions of defaulters".

• Taking strong exception to ICICI Bank's use of 'goondas' against a defaulter, the
president of Consumer Disputes Redressal Forum said, "The fact leaves us aghast at the
manner of functioning and goondaism in which the bank is involved for a petty amount
of Rs 1,889... such attitude is deplorable and sends chills down the spine The bank had
the option to recover dues through legal means. They have no legal right to snatch the
vehicle in such a manner which amounts to robbery,". In this case recovery agents
pointed a pistol at a defaulter when he tried to resist. ICICI bank argued that they had
taken peaceful possession of the vehicle "after due intimation to the complainant as he
was irregular in remitting the monthly instalments". But the court found out that the
records proved otherwise.

• Two senior ICICI Bank officials were booked for abducting one Vikas Porwal from his
house and keeping him hostage in the Bank's premises.
 lOMoARcPSD|14838289

• The credit card division of the ICICI Bank allegedly threatened a senior citizen in
Chandigarh with a fictitious arrest warrant on account of a default that never was.

• A Consumer Commission has asked ICICI Bank MD K V Kamath to appear before it in

respect a complaint. A borrower on protesting against the forceful dispossession of his
car, as seen in the post-incident photographs, was roughed up and sustained injuries.

• An 18-year-old boy was allegedly kidnapped and detained at the Pune branch of ICICI
Bank.

• There have been several other minor legal cases accusing harassment by ICICI Bank

• A consumer court imposed a joint penalty of Rs. 25 lakh on ICICI Bank and American
Express Bank for making unsolicited calls.

Corporate profile:

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 2,009 branches and about 5,219
ATMs in India and presence in 18 countries. 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 specialised subsidiaries and affiliates 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).

Awards:

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• ICICI Bank wins the Asian Banker Award for Best Banking Security System

• ICICI Bank is the first and the only Indian brand to be ranked as the 45th most valuable
global brand by BrandZ Top 100 Global Brands Report.

• ICICI Bank has been ranked 1st in the term money category, from a list of 38 leading
Banks by the German magazine, Euro. Since commencement of business two years ago
in the German market, this is the 5th certification/award including 2 certifications from
Stiftung warrenttest (for Savings and Term Deposits) and three "Best Bank" rankings by
Euro magazine.

• Forbes' 2000 most powerful listed companies' survey ranked ICICI Bank 4th among the
Indian companies and 282nd globally.

• ICICI Bank was awarded The Asian Banker Achievement Award 2009 for Cash
Management in India.

• The Economic Times-Corporate Dossier Annual Survey of India Inc's Most Powerful
CEOs featured Ms Chanda Kochhar, MD and CEO, as the most powerful women CEO
in India. She was ranked 13th in the overall power list.

• ICICI Group Global Private Clients (GPC) has won the coveted 'Euromoney Private
Banking Award 2010' for Best Bank in the Super-Affluent Category (USD 500,000 to
USD 1 million) - India. The other categories in which GPC picked up awards were:

o Fixed Income Portfolio Management o

Lending/Financing Solutions o

Precious Metals Investment o

Private Equity Investment o

Specialized Services - Entrepreneurs o

FX/Rates Derivatives Supplier

• ICICI Bank wins the Asian Banker Award for Excellence in SME Banking 2009
 lOMoARcPSD|14838289

• ICICI Bank won the second prize in the Six Sigma Excellence Awards, conducted by

Indian Statistical institute, Bangalore for "Improving Sales for TV Banking business" 

Mr.N. Vaghul, Former Chairman, ICICI Bank was awarded the "Padma Bhushan"

A leader in banking technology:

ICICI Bank seeks to be at the forefront of technology usage in the financial services sector.
Information technology is a strategic tool for business operations, providing the bank with a
competitive advantage and improved productivity and efficiencies. All the bank’s IT
initiatives are aimed at enhancing value, offering customer convenience, and improving
service levels. ICICI Bank (NYSE:IBN) is India's second largest bank and largest private
sector bank, with assets of USD 43 billion as of September 30,2005. 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 and affiliates.
Areas include investment banking, life and non-life insurance, venture capital, and asset
management. Specifically, ICICI Bank is a leading player in the retail banking market and
has over 14 million retail customer accounts. The bank has a network of 600 branches and
extension counters and 2,060 ATMs. ICICI Bank is growing rapidly, in part through its
online service offerings, and is considered a technology trendsetter in the Asian banking
industry.

A loyal Symantec customer for six years and counting:

The bank set the stage for its technology ascendancy in 1999 when it consolidated its IT
operations to a new data center in Mumbai. Pravir Vohra, Senior General Manager of ICICI
Bank’s Technology Management Group, was a key decision maker in the planning for the
new data center. “We took a hard look at the bank’s requirements well into the future,” he
says. “High availability for our customer-facing applications was on the top of the list. If my
customers cannot transact, nothing else matters. An outage can be highly detrimental to the
bank’s reputation.” As a result, the bank’s internal applications needed to meet high
availability requirements. And all banking data had to be protected and recovered in case of

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disaster. In building the bank’s Mumbai datacenter, Vohra looked first to establish
relationships with suppliers that could solve a whole class of problems, not just those
suppliers who offered point solutions. “To build a world- class infrastructure, we needed
world-class software to manage our applications and storage,” explains Vohra. “We
standardized on Symantec products for our data center because they have a well-deserved
reputation as being best in class. Also, Symantec supports all major platforms, so we can
deploy a single set of tools across the entire infrastructure, simplifying administration and
reducing training costs.” An additional decision factor was Symantec’s broad range of
services, from consulting to onsite education.

Targeting high availability for the end user:

To meet its datacenter availability goals, ICICI Bank runs its customer- facing services and
key enterprise applications such as Finacle Core Banking (Infosys), FinnOne Retail Loans
System (Nucleus Technologies), CTL Prime Credit Cards Processing System
(Card Tech Limited), and SAP on highly available servers. The data center has several Sun
Fire 15K, E6900, E2900, and E6500 enterprise- class servers and various Sun Fire mid-
range servers—25 in all— running the Solaris 9 Operating System. ICICI Bank deployed
Oracle 9i database and Oracle Real Application Clusters (RAC) to provide a robust database
component for its enterprise applications, while other applications such as Internet Banking
and Customer Relationship Management use Microsoft SQL Server 2000 Enterprise
Edition. The FlashSnap feature of Veritas Storage Foundation allows ICICI Bank to lower
its total cost of ownership through more efficient use of its storage infrastructure. “The data
for the Finacle application is stored on a new HP Storage Works
XP 12000 disk array,” Vohra relates. “We make periodic point-in-time copies of the data so
that we can restore the database in case there is a corruption. While the HP Storage Works
XP 12000 disk array permits such internally via its native asynchronous data replication
software, the FlashSnap option allows us to write copies of the data onto less expensive disk
arrays from Hitachi or Sun. We avoid buying more storage hardware and get the most from
our existing assets.”

Investor Relations:

ICICI Bank disseminates information on its operations and initiatives on a regular basis. The
ICICI Bank website serves as a key investor awareness facility, allowing stakeholders to
access information on ICICI Bank at their convenience. ICICI Bank's dedicated investor
 lOMoARcPSD|14838289

relations personnel play a proactive role in disseminating information to both analysts and
investors and respond to specific queries.

In June 2004, the Basel Committee on Banking Supervision (BCBS) issued a Revised
Framework on International Convergence of Capital Measurement and Capital Standards
(hereinafter Basel II or BIl). Even today, the new Basel Capital Accord is increasing the
concern felt among retail banks, ICICI regarding the effect that the new standard will have
on the credit policy. One of the goals of BIl is to establish capital requirements that are more
sensitive to risk, which could increase the risk premium that the ICICI bank charges on
retail customer. This would increase the rates of interest applied onto their loans, and as a
result, would exacerbate their very well-known financing difficulties. To improve the
companies’ credit access, ICICI bank is obliged to provide guarantees or collateral in most
of the cases. To mitigate risk, the new Framework allows companies to make use of
collateral, guarantees and credit derivatives, on-balance sheet netting, mortgages, etc. Thus,
it turns out to be interesting to banks to know the impact of such techniques on their capital
requirements, since this could mean that some types of creditrisk mitigation techniques are
more advisable than others. There are various studies in the literature analyzing the impact
of the financing of retail customer on the capital requirements of the ICICI bank, and its
possible effects on bank financing. Researcher analyzed the effects of BII on the capital
requirements of financial entities using data from the USA, Italy, and Australia. They
concluded that the ICICI bank would have significant benefits in terms of lower capital
requirements, when considering small- and medium-sized firms as retail customers,
provided the internal ratings-based (IRB) approach is applied. However, for SMEs treated as
corporate, the capital requirements are considered to be slightly greater than under the Basel
I Capital Accord. This leads to the assumption, in their opinion, that most financial entities
would apply both the systems simultaneously; i.e., they would consider one part of the
credits granted to SMEs as corporate and the other part as retail. Through a breakeven
analysis, they observed that the banks would be obliged to classify at least 2O/c of their
SME portfolio as retail to maintain the current capital requirement.

According to author, the adoption of the advanced IRB approach proposed in BII by large
credit entities in the USA may not signify a reduction in the interest rates applied to the
credits granted to SMEs as retail customer, but may be enough to produce a substitution
effect with respect to other credit entities of smaller size. Remarkable studies that have

18
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considered BII are those by them, among others. In their studied the techniques for credit
risk mitigation presented in the first consultative document of BII, and they analyzed the
consultative documents issued prior to the approval of BII, focusing their analysis on the
retail customer and their repercussions on the ICICI bank financing of Spanish companies.
They observed that the modifications made in 2002, considering part of the financing of
SMEs as retail or incorporating an adjustment for size in the curve corresponding to the
corporate category, substantially improved the figures of capital requirements demanded,
which were reduced on an average to 6.5/c for the IRB approach and 6/c for the
Standardized approach for those SMEs included in the retail category. The rest of the SMEs
included in the corporate category also saw that the capital required reduced to lO.23/c and
8/c for the IRB and Standardized approaches, respectively.

Thus, they concluded that at least at the level of the Spanish credit system as a whole, there
were no incentives for a change in the current pattern of bank financing provided to
companies, although the final effect will depend again on the percentage of financing
provided to SMEs considered as retail. It is worth stressing the point that these results
obtained did not take into consideration the latest modifications prior to the definitive
approval of the agreement. As a particular case, we will emphasize the guarantee provided
by the Loan Guarantee Associations (ICICI5). It is well known that to reduce the problems
derived from information asymmetries, there exist entities all over the world that mediate
with the banks to give guarantees supporting the operations of SMEs. The ICICI act as
guarantors of SMEs in dealings with banks, with the object of reducing the risks for the
financial entities in providing credits to small companies; such support helps small
companies to get financing under better conditions of rate, term, and guarantee. In parallel,
in many countries, with the aim of offering sufficient cover and guarantee for the risks
contracted by the ICICI, and to facilitate the reduction of the cost of the guarantee for their
partners, there exist reinsurance companies, whose objective is to provide a second or a
backup guarantee for the operations guaranteed by an ICICI. As an initial approach, They
considered the impact of the guarantees given to SMEs by the ICICI in relation to the capital
requirements demanded by BIl, as well as their possible effects on the risk premium that the
financial entities apply. They examined the effects on the credit risk premium that the banks
had to charge to their SME clients, and whether this foreseeable theoretical reduction in the
interest rates was compensated by the cost of the guarantee requested.

Credit-Risk Mitigation Techniques According to BII:

 lOMoARcPSD|14838289

Financial entities use a number of techniques to mitigate the credit risks to which they are
exposed. For example, exposures may be collateralized by first- priority claims (in whole or
in part with cash or securities), guaranteed by a third party, or a bank may buy a credit
derivative to offset various forms of credit risk. Additionally, financial entities may agree to
net loans owed to them against deposits from the same counterparty. The effect of this
reduction of risk is that lower requirements of capital requirements are imposed under BII.
Now the next question is whether all the types of guarantee offered by the borrower have
equal capacity to reduce the risk for the financial entities. BII presents several credit-risk
mitigation techniques, with acceptance of imperfect cover, which constitutes the basis for
the approximation between the regulatory capital and the economic capital requirements.
This basically means that the techniques with similar economic effects should also produce
similar reductions of capital requirements. Credit-risk mitigation techniques used in BII are:

a) Collateralized transactions;

b) Guarantees and credit derivatives

c) On-balance sheet netting.

In addition to the previous types, the following ones have an advantage of a differentiated
treatment:

d) Exposures secured by mortgage and

e) Asset securitization.

Although BII maintains the definition of regulatory capital unchanged, as established in

BI, the form of determining the assets weighted by risk has been changed considerably. In
relation to the credit risk, two main approaches are established: the Standardized approach
(based on external credit ratings provided by recognized rating agencies) and the IRB
approach, based on the internal credit ratings made by the banks. This latter approach is in
turn divided into foundation and advanced versions. It is the last version that gives the
financial entities the maximum scope for calculating and computing for themselves the
levels of regulatory capital associated with the credit risk. The specific treatment given to
each of the various types of credit-risk mitigation techniques, and hence, to the eligible
assets or guarantors may differ according to the approach employed by the financial entity

20
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(Standardized, Foundation IRB, and Advanced IRB), although there are features common to
all the three of them. In addition, the effect of the different credit-risk mitigation techniques
on the regulatory capital, based on eligible approaches is also described.

a) Collateralized transactions: The methodology described is the one applicable to assets

or collateral of financial nature (cash, gold, equities, etc.). The loans secured by property
assets (mortgage guarantees) are subjected to a differentiated treatment. Financial entities
are allowed to reduce their credit exposure to counterparty when calculating their capital
requirements to take into account the risk mitigating effect of the collateral. In the case of
the Standardized approach, banks may choose between the two approaches. The first one
is a simple approach which, similar to the 1988 Accord, substitutes the risk weighting of
the collateral for that of the counterparty, for the collateralized portion of the exposure
(generally subjected to a 2O/c floor). And the second one, a comprehensive approach
allows fuller offset of the collateral against exposures, by effectively reducing the
exposure amount by the value ascribed to the collateral. Financial entities may operate
under either one, but not both, of the approaches in the banking book. Although partial
collateralization is recognized in both the approaches, mismatches in the maturity of the
underlying exposure and the collateral are only allowed under the comprehensive
approach. If a bank employs the foundation IRB approach for the treatment of the credit
risk of its portfolio, the methodology for the recognition of eligible financial collateral
closely follows that outlined in the comprehensive approach to collateral in the
standardized approach. The financial entities that employ the advanced IRB approach
will normally take into account the collateral by using their own internal estimations with
the object of introducing an adjustment on the loss given default (LGD) of the exposure.

b) Guarantees and credit derivatives:

A range of guarantors and protection providers are recognized, and under the 1988 Accord, a
substitution approach would be applied. Thus, only guarantees issued by entities with a
lower risk weight than the counterparty will lead to reduced capital charges, since the
protected portion of the counterparty exposure is assigned the risk weight of the guarantor or
protection provider, whereas the uncovered portion retains the risk weight of the underlying
counterparty. Although the lower probability of suffering a “double default” is recognized, it
is not taken into account owing to the difficulty of determining the correlations between
debtor and guarantor. For the guarantee (or credit derivative) to be accepted as mitigate of
risks, it must be direct, explicit, irrevocable, and unconditional. BII demands a series of
 lOMoARcPSD|14838289

operational conditions aimed at ensuring the legal certainty of the cover (paragraphs 189—
193 of BII).

c) On-balance sheet netting:

BII allows the banks that have legally enforceable netting arrangements for loans and
deposits to calculate the capital requirements on the basis of the net credit exposures, subject
to a series of conditions. The assets (loans) will be considered as exposures to risks and the
liabilities (deposits) as collateral.

d) Exposures secured by mortgage:

In BII, the treatment of credits secured by property assets is different from that proposed
generally for credits secured by financial assets, particularly in the Standardized and
foundation IRB approaches.

e) Securitization:

The treatment of securitization exposures is presented separately in Section IV of BII.

Financial entities must apply the securitization framework for determining the regulatory
capital requirements on the exposures arising from traditional or synthetic securitizations or
similar structures that contain common features.

Since securitizations may be structured in many different ways, the capital treatment of a
securitization exposure must be determined on the basis of its economic substance rather
than its legal form.

The Treatment of SMEs as Retail Customer in BII:

Under BII, an SME is understood as a company where the reported sales for the
consolidated group of which the firm is a part is less than €50 million. Again, the way an
SME is treated will differ according to the approach chosen by the particular financial
entity, Standardized or IRB, and according to whether the bank includes the SME in the
corporate or retail category.

a) Standardized approach:

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The financial entities must classify their exposures to risk according to various groups, and
establish weights based on the credit rating given to the SME by an external
creditassessment institution. BII leaves it to the discretion of the national supervisor to allow
financial entities to risk-weight all corporate claims at 100%, without regarding the external
ratings. Finally, SMEs included in a regulatory retail portfolio may be riskweighted at 75/c,
except for the past due loans.

b) IRB Approach:

The IRB approach is based on the internal estimations made by the financial entity, which
allow the bank to calculate capital requirements that are more sensitive to the risk. The
Committee has made two IRB approaches available: a foundation and an advanced. Under
the foundation approach, banks provide their own estimates of probability of default (PD)
and rely on the supervisory estimates for other risk components: the loss given default
(LGD), the exposure at default (EAD), and the effective maturity of the operation (M).
Under the advanced approach, banks provide more of their own estimates of PD, LGD,
EAD, and their own calculation of M, subject to meeting minimum standards. For both the
foundation and advanced approaches, banks must always use the risk-weight functions
provided in BII for the purpose of deriving capital requirements.

With respect to the variables described, the following comments are relevant:

➢ Probability of default (PD): PD must be a long-run average of 1-year default rates

for borrowers in the grade. The length of the underlying historical observation period
used must be at least 5 years, and the bank is permitted to apply for its calculation by
one or more of the following techniques: i) internal default experience; ii) mapping
to external data; or iii) statistical default models. The PD is the greater of the 1-year
PD associated with the internal borrower grade to which that exposure is assigned,
or 0.03%.

➢ Loss given default or severity (LGD): LGD must be measured as a percentage of

the EAD. Under the foundation approach, senior claims on Corporates not secured
by recognized collateral will be assigned a 45% LGD, or 75% if the credit is
subordinated.
 lOMoARcPSD|14838289

➢ Exposure at default (EAD): Under the foundation IRB approach, for on- balance
sheet items, the EAD is equal to the nominal amount of the operation. All exposures
are measured as gross of the specific provisions or partial write-offs.

➢ Effective maturity of the operation (M): For banks using the foundation approach for
corporate exposures, M will be 2.5 years. In the case of advanced IRB approach, M
(in years) must be estimated, but this will not be >5 years.

The formulation to calculate the regulatory capital proposed by BII includes the unexpected
losses, for which capital is required to be assigned by the financial entity.

The function (Equations [3] and [5]) is derived from an adaptation of Merton’s (1974)
single-asset model to credit portfolios. The confidence level is fixed at 99.9%, i.e., an
institution is expected to suffer losses that exceed its level of capital on an average once in
1000 years. R is the coefficient of asset correlation and is introduced to reflect a “portfolio
effect,” such that the greater this coefficient, the greater the capital required for the same
PD. Correlations are adjusted to firm size, which is measured by annual sales. The linear
size adjustment, shown in Equation [4] as 0.04 x (1 — (S — 5)145), affects
Corporates with annual sales of less than €50 million (SME5). For SMEs with annual sales
of €5 million or less, the size adjustment takes the value of 0.04, thus lowering the asset
correlation from 24% to 2O% (best credit quality) and from l2% to 8% (worst credit
quality). The second part of Equation [3] shows the adjustment for the maturity of the loan.
Both the intuition and empirical evidences indicate that long-term credits are riskier than the
short-term ones. As a consequence, the capital requirement should increase with maturity.
The M is the effective term or maturity of each operation, and b = [0.11852— 0.05478.111
(PD)] With the aim of maintaining the current aggregate level of capital requirement in
general terms, the BCBS decided to apply a 1.06 scaling factor for credit risk-weighted
assets (calibration) in the IRB approach (May, 2006).

Once the capital requirement has been estimated, to derive risk-weighted assets (RWAs), it
must be multiplied by EAD and the reciprocal of the minimum capital ratio of 8/c, i.e. by a
factor of 12.5. It shows the capital requirement (CR), in %, for a loan to an SME according
to different probabilities of default (O.03% and 20%) and different levels of total annual
sales (less than €5 million, €30 million, and €50 million). It can be observed that the risk-
weighting ranges between ll.98/c and l99.72/c, l3.7g/c and 23O.24/c, and lS.3l/c and
2S2.S3/c, respectively. It has been assumed that the loss in the event of default is 4S/c, and

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that the effective maturity of the loan is 2.5 years (both the data fixed by the regulator for
the foundation approach). In the case when the financing granted to the SME is included in
the retail category, the formula given in Equation [5] is used for calculating the regulatory
capital. It should be observed that this function does not include an explicit maturity
adjustment. For the retail positions, banks must provide their own estimators of PD, LGD,
and EAD, i.e., there is no distinction between a foundation and an advanced approach for
this asset class. In addition, as in the case of financing provided to firms, a minimum PD of
O.O3/c is established. It shows a simulation of different levels of CR demanded (PD of
O.O3/c and 20%) for a loan to an SME included in the retail category. Again, the LGD is
assumed as 45%. From the examination of the different curves of capital, it can be observed
how the own funds required are reduced in line with the dropping levels of annual sales in
the borrower company — the differences between the curves being greater when the
probability of default increases. When the financing to the SME is considered as retail, the
CR in both the approaches, Standardized and IRB, drops considerably.

Quantification of the Credit Risk Premium:

The credit risk premium is the sum of two components:

Credit Risk Premium (%) = PD LGD + ROE CR [7]

Where:

PD: Probability of default

LGD: Loss given default, as a percentage of the EAD.

ROE: Return on Equity.

CR: Regulatory capital “consumed” by the credit (i.e., the capital requirement specific to the
loan), as a percentage of the EAD.

Analysis of each component of the credit risk premium:

The expected loss (EL) represents an average value of the expected losses owing to credit
risk in 1 year from an economic perspective. It is estimated as the product of three variables
already known:

Expected loss (EL) = EAD x PD x LGD [8]

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Financial institutions view EL as a cost component of doing business, and manage them by
a number of means, including through the pricing of credit exposures and provisioning.
With respect to this, the amount imputable to the borrower in terms of “foreseen loss,” as a
percentage of the exposure to the risk, would be equal to PD x LGD. ii) The cost of the
regulatory capital’ that the loan in question “consumes,” is obtained by multiplying this
capital by any variable representative of the return required from it, for example, by the
ROE ratio.

The financial entity must also consider the possibility of a “not expected loss” (unexpected
loss or UL), derived from the volatility associated with the probability of default. This UL
will be reflected in the assignment of own funds that constitutes the regulatory capital.
Capital is needed to cover the risks of such losses, and therefore, it has a loss- absorbing
function. Interest rates, including credit risk premium, charged on credit exposures, should
absorb the cost of these capital requirements. Once the components that comprise the credit
risk premium have been analyzed, its amount for the SME as a function of the new capital
requirements demanded by BII is quantified. According to the data from the Bank of Spain,
the average ROE of Spanish financial entities during 2007 was 19.9%. If the LGD is 45%,
then the credit risk premium is quantified for the Standardized and IRB approaches

It can be observed that at higher rates of insolvency, the financial entities need a higher CR,
and the higher rates of interest are applied to loan operations with SMEs.

➢ Standardized approach: The banks should charge the SME borrower (without
credit rating) a higher credit risk premium, if the IRB approach was chosen in the
lower sections of the curve, with lower probabilities of default.

➢ IRB approach: At a similar probability of default, the SME borrowers with lower
annual sales will benefit more in terms of differential of interest, although it should
be remembered that, in principle, the lower the annual sales volume of the SME, the
higher is its probability of bankruptcy, ceteris paribus. In this way, Bli tries to
alleviate the burden represented by the new capital requirements for companies of
small size as much as possible, by not excessively increasing the consequent risk
premium.

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The ICICI in BII:

The study conducted by researcher on a sample of 400 Spanish SMEs revealed that about
70% of the SMEs were required to present some type of credit-risk mitigation when
requesting a loan. This requirement is more frequent for the smallest companies (85% of the
micro companies, as against 51% of the companies of medium size). With respect to the
type of credit-risk mitigation required, the most frequent are the guarantees (mainly
monetary) not associated with the principal activity of the business. The collateralized
transactions (mostly mortgages) hardly accounted for 20%. The importance of the guarantee
in financing appears to be strengthened under BII. As we analyzed previously, for the loans
guaranteed by any entity, the capital requirements are generally lower than for those
collateralized by some type of asset, by mortgage or otherwise. Thus, for example, in the
Standardized approach, the loans guaranteed by an entity of recognized creditworthiness
will usually be weighted by 20%, against 35% for the credits secured by the residential
mortgage (or by 50%, in exceptional cases, if the property mortgaged is commercial). It is in
this context that the guarantee awarded by ICICI becomes important. BII allows the effect
of this cover to be taken into account, although both the guarantee and the ICICI must meet
a series of requirements for a reduction in the CR to be obtained. The treatment given to the
loans guaranteed by ICICI is similar to that generally established for the guarantees and
credit derivatives analyzed. In these cases, BII establishes two options, which the national
supervisors must apply to all the entities over which they have the jurisdiction.

Option 1: A risk-weighting corresponding to a category less favourable than that assigned to

the sovereign debt of that country is applied to the ICICI.

Option 2: The second option bases the risk-weighting on the external credit assessment of
the ICICI itself with claims on unrated ICICI being risk-weighted at 5O%. Under this
option, a preferential risk-weight that is one category more favourable may be applied to
claims with an original maturity of <3 months, subjected to a floor of 20%.

Therefore, for a loan to an SME that is not rated and wholly guaranteed by an ICICI
possessing the status of credit institutions, if the supervisor opts for the first of the two
options in countries with a sovereign debt rating of AA or better, the CR will be:

20% x 8% = l.6% of the amount financed, against:

100% x 8% = 8.0% or 6 % depending on whether the SME is treated as corporate or retail.

 lOMoARcPSD|14838289

In this case, the amount guaranteed by the ICICI is lesser than the amount of the loan, the
bank and the ICICI share losses on a pro-rata basis, and the capital relief will be afforded on
a proportional basis. An adjustment will also be applicable when the systems of guarantees
only provide protection for a period less than the maturity of the loan.

b) IRB approach:

The treatment of the guarantee provided by an ICICI differs depending on whether the
financial entities utilize the values provided by the supervisors for the loss in the event of
default, or employ their own internal estimations (advanced IRB). Under either of the
approaches, credit risk mitigation in the form of guarantees must not reflect the effect of
double default. Thus, if the ICICI recognizes the guarantee, the adjusted risk-weight must
not be less than that of a comparable direct exposure to the guarantor, in this case, the
ICICI.

b.1) Foundation IRB:

The financial entities that utilize the foundation IRB approach for calculating their
regulatory capital will recognize the guarantees provided by the ICICI in the following way:

The risk-weighting will be derived from the covered portion of the loan utilizing:

➢ The risk-weighting function appropriate for the ICICI and

➢ The PD corresponding to the ICICI or any intermediate rating between

that of the SME and ICICI, if the bank deems a full substitution treatment
not to be warranted.

The bank may replace the LGD of the underlying transaction with the LGD applicable to the
guarantee, taking into account the seniority and any collateralization of a guaranteed
commitment. The risk-weighting and the LGD associated with the SME will be assigned to
the part not covered by the guarantee. The protection is thus partially recognized, as it
would occur in the Standardized approach. At the same time, any mismatch between the
term of the operation and the duration of the guarantee will be taken into consideration.

b.2) Advanced IRB:

Banks using the advanced approach for estimating LGDs may reflect the risk-mitigating
effect of guarantees through either adjusting PD (the same treatment outlined previously for
lOMoARcPSD|14838289

28
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banks under the foundation IRB approach) or LGD estimate. However, in contrast to the
foundation approach, guarantees prescribing conditions under which the guarantor may not
be obliged to perform (conditional guarantees) may be recognized under certain conditions.

b.3) Retail Exposures:

The treatment proposed under BII for mitigating retail risks in the event of guarantees is
very similar to that proposed for those financial entities that choose to make their own
estimations of the LGD. Banks may reflect the risk- reducing effects of guarantees, either in
support of an individual obligation or a pool of exposures, through an adjustment of either
the PD or LGD estimate, if a series of minimum requirements are met and with the prior
approval of the competent authorities. There are no restrictions on the types of eligible
guarantors, if they meet the conditions established by the regulation, which are the same as
under the advanced IRB approach.

c) Reinsurance systems:

In Europe,’ rather more than half of the guarantee systems (56%) have some kind of
counter-guarantee, although in most cases this does not cover 100% of the operation14, a
requirement demanded under BII to alleviate the capital requirements in the Standardized
approach. However, it is clear that the backup guarantee represents a significant support to
the creditworthiness of the ICICI, and this fact is even recognized by the Spanish
regulations15. In particular, it is recognized that, when a series of conditions are met,
reinsurance is an instrument that reduces the credit risk, and consequently should lead to a
reduction of the own resources (of the ICICI) required with respect to those commitments
that benefit from general contracts of second guarantees or reinsurance. This signifies that
the counter-guarantee constitutes a variable to be considered when the bank estimates the
PD or LGD applicable under the internal rating or IRB approach, except where the national
legislation stipulates to the contrary. Thus, those SMEs endorsed by an ICICI whose
guarantees are indirectly counter-guaranteed to a significant percentage by any reinsurance
company should benefit from the lower capital requirements by the lender financial entity.
Thus, having analyzed the impact of the ICICI guarantee on the CR demanded of financial
entities for loans to SMEs, the next step is to determine its effect on the credit risk premium
previously calculated. It has already been shown how the reduction of risk (as a
consequence of the existence of the guarantee of the ICICI) is translated into reduced capital
 lOMoARcPSD|14838289

requirements and, ultimately, into lower risk premiums (interest rates) chargeable to the
SMEs, thus reducing the cost of credit for the SMEs. The precise quantification of the new
credit risk premium will depend not only on the value taken by the basic variables of the
risk (mainly the PD and the LGD) for the endorsing ICICI, but also on the approach that the
bank employs for risk management (Standardized, foundation IRB, or advanced IRB
approach) with respect to the component of “not expected losses.” It is almost certain that
the probability of default of the ICICI will be lower than that of the borrower SME; hence,
the amount of the EL (the first component of the credit risk premium) should be
considerably reduced. If the possible existence of reinsurance is added to this, and since
both the SME and its endorsing ICICI would need to become insolvent for the financial
entity not to recover its money, the expected value of any loss would be even lower. For the
average values of the Spanish market for credit and different values of the PD of the
guaranteeing company16, the element of EL to be included in the credit risk premium has
been simulated. Assuming the average rates of default for SMEs as 2.64%, and as 2.92% for
those companies with the due amount of more than (or less than) €1 million17, the
differences in the expected losses for credits guaranteed by an ICICI range from 1.17%
(1.30%), for very creditworthy ICICI, to positive differences for those ICICI with worse
credit assessments. With respect to the second component of the credit risk premium, which
is representative of the cost of the capital required, its amount does differ now according to
the approach that the financial entity chooses for the management of the risk. In countries
like Spain (with AAA rating), the factor for UL of the credit risk premium would be reduced
by 1.27% and O.88% for the SMEs included in the corporate and the retail category,
respectively, in the event of opting for the Standardized approach and assuming that: i) the
ICICI is classified as a credit institution; ii) the loan operation is guaranteed for l00% of the
amount, during the full life of the loan; and, finally, iii) the option chosen by the supervisor
for claims on banks is the first.

If the bank opts for the IRB approach, the quantification of the second element of the credit
risk premium will depend, as we already know, on the PD of the ICICI in question. It is
assumed, as we already noted, that this should be lower than that of the SME guaranteed,
causing a bigger reduction in the premium with the bigger difference between the two PD5.
Thus, for an average rate of insolvency for the SME of 2.64%, and ICICI of 0.03% (lower
limit of the PD), the difference in the component of UL will be l.36% for an SME with the
annual sales of less than or equal to €5 million, and l.8S/c if the annual sales of the company
are around €50 million. When the SME is treated as retail for the purposes of calculating the

30
 lOMoARcPSD|14838289

regulatory capital, for an average rate of default of 2.92%, the component of the premium
for UL is reduced to l.06%, and this factor could be reduced to 0.82% for an SME endorsed
by an ICICI. As the PD of the ICICI takes higher values (meaning that its credit rating gets
worse), the differences become lower to the point where an average rate of default for the
ICICI of l.O7/c makes the element of UL of the credit risk premium of an endorsed SME
(with annual sales lower than €5 million and active risk of more than €1 million) equal to
that of another without guarantee. Although the differences with respect to the SMEs that
are not endorsed depend on the approach employed by the bank for calculating its CR, these
are about 2— 3/c for operations supported by an ICICI with PD of 0.03%. When the
creditworthiness of the ICICI is worse, the differences narrow, to the point where, if the
ICICI has a PD of more than 2.64% (the average PD for the SME5), the new credit risk
premiums will exceed those for the SMEs that are not endorsed, in the IRB approach.

Determining the Cost of the ICICI Guarantee:

Having reached this point, the subsequent questions are: What is the cost of the guarantee
for the SME, and is this cost compensated by the reduction of the risk premium previously
calculated that, in theory, the financial entity should translate into a lower rate of interest for
an operation guaranteed by an ICICI? In guarantee systems of mutual type, like the Spanish
one, those SMEs that are inclined to obtain a guarantee from an ICICI must necessarily
become partners (i.e. must participate in the ownership). However, once the credit has been
amortized, the company can request the return of its participation. These recoverable
contributions (subscription quota or SQ) represent an opportunity cost for the SME
borrower. In addition, the SMEs that request a guarantee from an ICICI must do so against a
series of non-recoverable costs, specifically:

➢ The study commission (SC), charged as a percentage on the amount of guarantee

requested, which is intended to reimburse the ICICI for conducting a study of the
viability of the project; this cost is incurred irrespective of whether the guarantee is
finally conceded or not. It is paid only once, when the operation is requested.

➢ The commission in the concept of guarantee (GC), which is usually charged as a

percentage of the amount due at the beginning of each accounting period; this is
payable annually by the SME during the term of the guarantee. Its objective is to
cover the possible insolvency of the partner endorsed and will depend on the method
of amortization of the loan granted by the financial entity.
 lOMoARcPSD|14838289

The application of BII will bring important consequences for: i) the bank lenders, ii) the
SME borrowers, and iii) the ICICI, which are financial entity whose importance is
increasing and which appear, practically, all over the countries in the European Union.

➢ For the financial entities, BII means working in a more stable financial environment.
Once the financial entities have learnt how to measure, cover, and appropriately
manage the risks to which their operations are exposed, they should face fewer
situations of default; but if these situations do occur, they should be better placed to
deal with them.

➢ For the SMEs, BII means the payment of premiums according to the risk of their
business initiatives. In the past, the alternative involved restrictions in their access to
credit, arising specifically from the difficulty that calibrating that risk presented for
the financial entities. At the same time, the SMEs will need to be instructed in the
management of risk, knowing that the lender will assess them in that respect.

➢ In the face of the challenge of BII, the ICICI must accept that, like the SMEs they
guarantee, they may need to submit themselves to the same processes of
measurement of risk as those to which their associates are submitted, i.e., at a credit
rating.

The guarantee appears to be strengthened under BII. Generally, the loans guaranteed by
another financial entity, like ICICI, will need backing by reduced amounts of regulatory
capital when compared with those loans collateralized by assets (financial or not). Thus, if
the financial entity applies the Standardized approach, the loans guaranteed by ICICI will
usually be weighted by 20%, against 35% for the credits secured by a residential mortgage,
or 50% in exceptional cases, if the property mortgaged is commercial. Consequently, it is
clear that when the credit to the SME is conceded with the guarantee of ICICI, this will
reduce, in principle, the capital requirement demanded from the financial entity, although its
final effect on the credit risk premium will depend on both:

a) The values taken by the credit variables of the ICICI and

b) The approach that the financial entity employs for the management of the risk
(Standardized, foundation IRB, or advanced IRB).

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 lOMoARcPSD|14838289

Procedural Guidelines:

Approval Process:

The approval process must reinforce the segregation of Relationship

Management/Marketing from the approving authority. The responsibility for preparing the
Credit Application should rest with the RM within the corporate/commercial banking
department. Credit Applications should be recommended for approval by the RM team and
forwarded to the approval team within CRM and approved by individual executives. Banks
may wish to establish various thresholds, above which, the recommendation of the Head of
Corporate/Commercial Banking is required prior to onward recommendation to CRM for
approval. In addition, ICICI may wish to establish regional credit centres within the
approval team to handle routine approvals. Executives in head office CRM should approve
all large loans. The recommending or approving executives should take responsibility for
and be held accountable for their recommendations or approval. Delegation of approval
limits should be such that all proposals where the facilities are up to 15% of the ICICI’
capital should be approved at the CRM level, facilities up to 25% of capital should be
approved by CEO/MD, with proposals in excess of 25% of capital to be approved by the
EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO.

The following diagram illustrates the preferred approval process:

 lOMoARcPSD|14838289

1. Application forwarded to Zonal Office for approved/decline

2. Advise the decision as per delegated authority (approved /decline) to recommending

branches. A monthly summary of ZCO approvals should be sent to HOC and HOCB to
report the previous month’s approvals sanctioned at the Zonal Offices. The HOC should
review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank
policies.

3. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for
endorsement, and Head of Credit (HOC) for approval or onward recommendation.

4. HOC advises the decision as per delegated authority to ZCO

5. HOC & HOCB supports & forwarded to Managing Director

6. Managing Director advises the decision as per delegated authority to HOC & HOCB.

7. Managing Director presents the proposal to EC/Board

8. EC/Board advises the decision to HOC & HOCB

34
 lOMoARcPSD|14838289

Credit Administration:

The Credit Administration function is critical in ensuring that proper documentation and
approvals are in place prior to the disbursement of loan facilities. For this reason, it is
essential that the functions of Credit Administration be strictly segregated from Relationship
Management/Marketing in order to avoid the possibility of controls being compromised or
issues not being highlighted at the appropriate level.

➢ Security documents are prepared in accordance with approval terms and are legally
enforceable. Standard loan facility documentation that has been reviewed by legal
counsel should be used in all cases. Exceptions should be referred to legal counsel
for advice based on authorization from an appropriate executive in
CRM.

➢ Disbursements under loan facilities are only be made when all security
documentation is in place. CIB report should reflect/include the name of all the
lenders with facility, limit & outstanding. All formalities regarding large loans &
loans to Directors should be guided by ICICI Bank circulars & related section of
Banking Companies Act. All Credit Approval terms have been met.

Custodial Duties:

➢ Loan disbursements and the preparation and storage of security documents should be
centralized in the regional credit centres.

➢ Appropriate insurance coverage is maintained (and renewed on a timely basis) on

assets pledged as collateral.

➢ Security documentation is held under strict control, preferably in locked fireproof

storage.

Compliance Requirements:

➢ All required ICICI Bank returns are submitted in the correct format in a timely
manner.
 lOMoARcPSD|14838289

➢ ICICI Bank circulars/regulations are maintained centrally, and advised to all relevant
departments to ensure compliance. \

➢ All third party service providers (valuers, lawyers, insurers, CPAs etc.) are approved
and performance re viewed on an annual basis. Banks are referred to ICICI Bank
circular outlining approved external audit firms that are acceptable.

Credit Monitoring:

To minimize credit losses, monitoring procedures and systems should be in place that
provides an early indication of the deteriorating financial health of a borrower. At a
minimum, systems should be in place to report the following exceptions to relevant
executives in CRM and RM team:

➢ Past due principal or interest payments, past due trade bills, account excesses, and
breach of loan covenants;

➢ Loan terms and conditions are monitored, financial statements are received on a
regular basis, and any covenant breaches or exceptions are referred to CRM and the
RM team for timely follow -up.

➢ Timely corrective action is taken to address findings of any internal, external or

regulator inspection/audit.

➢ All borrower relationships/loan facilities are reviewed and approved through the
submission of a Credit Application at least annually.

Computer systems must be able to produce the above information for central/head office as
well as local review. Where automated systems are not available, a manual process should
have the capability to produce accurate exception reports. Exceptions should be followed up
on and corrective action taken in a timely manner before the account deteriorates further.

Early Alert process:

An Early Alert Account is one that has risks or potential weaknesses of a material nature
requiring monitoring, supervision, or close attention by management. If these weaknesses
are left uncorrected, they may result in deterioration of the repayment prospects for the asset
or in the Bank’s credit position at some future date with a likely prospect of being
downgraded to CG 5 or worse (Impaired status), within the next twelve months. Early

36
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identification, prompt reporting and proactive management of Early Alert Accounts are
prime credit responsibilities of all Relationship Managers and must be undertaken on a
continuous basis. An Early Alert report should be completed by the RM and sent to the
approving authority in CRM for any account that is showing signs of deterioration within
seven days from the identification of weaknesses. The Risk Grade should be updated as
soon as possible and no delay should be taken in referring problem accounts to the CRM
department for assistance in recovery. Despite a prudent credit approval process, loans may
still become troubled. Therefore, it is essential that early identification and prompt reporting
of deteriorating credit signs be done to ensure swift action to protect the Bank’s interest.
Moreover, regular con tact with customers will enhance the likelihood of developing
strategies mutually acceptable to both the customer and the Bank. Representation from the
Bank in such discussions should include the local legal adviser when appropriate. An
account may be reclassified as a Regular Account from Early Alert Account status when the
symptom, or symptoms, causing the Early Alert classification have been regularized or no
longer exist. The concurrence of the CRM approval authority is required for conversion
from Early Alert Account status to Regular Account status.

Credit Recovery:

The Recovery Unit (RU) of CRM should directly manage accounts with sustained
deterioration (a Risk Rating of Sub Standard (6) or worse). ICICI may wish to transfer EXIT
accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and
Retail Banking. Whenever an account is handed over from Relationship Management to
RU, a Handover/Downgrade Checklist should be completed.

The RU’s primary functions are:

➢ Determine Account Action Plan/Recovery Strategy

➢ Pursue all options to maximize recovery, including placing customers into

receivership or liquidation as appropriate.

➢ Ensure adequate and timely loan loss provisions are made based on actual and
expected losses.

➢ Regular review of grade 6 or worse accounts.

 lOMoARcPSD|14838289

The management of problem loans (NPLs) must be a dynamic process, and the associated
strategy together with the adequacy of provisions must be regularly reviewed. A process
should be established to s hare the lessons learned from the experience of credit losses in
order to update the lending guidelines.

LITERATURE REVIEW

Risk Management and Risk based Supervision in Banks has been the subject of study of
many Agencies and Researchers and Academicians. There is a treasure of literature
available on the subject. A careful selection of relevant material was a formidable task
before the Researcher. Efforts have been made to scan the literature highly relevant to the
Context. The main sources of literature have been the Website of the Reserve Bank of India,
the website of the Basle Committee on Banking Supervision and the websites of several
major Banks both in India and abroad. The publications of Academicians engaged in the
Risk Management and Central Banking Supervision sphere also throws valuable insights in
to the area. The occasional Research papers published by Reserve Bank, the speeches of the
Governor and the Deputy Governors of the Reserve Bank of India, the Publications of the
Reserve Bank of India, the Indian Banks Association have proved quite relevant to the study

(38)
Rekha Arunkumar and Koteshwar feel that the Credit Risk is the oldest and

biggest risk that Banks, by virtue of their very

38
 lOMoARcPSD|14838289

nature of business inherit. The pre-dominance of credit risk is the main component in

the capital allocation. As per their estimate credit risk takes the major part of the

Risk Management apparatus accounting for over 70 per cent of all Risks. As per

them the Market Risk and Operational Risk are important, but more attention needs

to be paid to the Credit Risk Management in Banks.

(39)
Reserve Bank of India, Volume 3, 1967-81 gives very valuable account of the

evolution of Central Banking in India. This third volume describes vividly the

background against which the Reserve Bank of India came into being on April 1,

1935. Before the establishment of the Reserve Bank, the Central Banking functions

were handled by the Imperial Bank of India. The Royal Commission on Indian

Currency and Finance (Hilton Young Commission) 1926 recommended that there is

conflict of interest in the Imperial Bank of India functioning as the controller of

currency while also functioning as a Commercial Bank. After detailed analysis on

the ownership, constitution and composition of the ownership, RBI was established

by a Bill in the Legislative Assembly. It was in 1948 that the Reserve Bank of India

was nationalised under the RBI(Transfer to Public Ownership) Act, 1948. The

earlier volumes viz., Volume I and Volume II covered the developments in Central

Banking up to 1967. Volume III covers the period

1967 to 1981. This is the most dynamic period in the history of Commercial

Banking. The Government was very critical of the attitudes of the Private Banks for

their failure to be socially responsible, which led the Govt. To impose social control

on Banks. Mrs. Indira Gandhi nationalised 14 Banks during July 1969. Reserve

Bank was given newer responsibilities in terms of the Developmental role.

 lOMoARcPSD|14838289

The RBI was assigned not only the role of maintaining monetary and fiscal stability

but also the developmental role of establishing institutional framework to

complement commercial banking to help agriculture, SSI and Export Sectors.

RBI, despite the criticism of not enjoying adequate autonomy due to the interference

of the Finance Ministry (with Govt. Ownership of most Banking Companies) has

been able to commendably discharge the regulatory functions.

True it was during this period that the performance of the Indian Banks deteriorated

with most Nationalised Banks wiping out their capital and their Balance Sheets

showing huge negativities in terms of quality of assets etc.

The period covered by the Volume III is the pre-liberalisation and pre-reform period

and the Reserve Bank had to compromise on its regulatory and supervisory role in

view of the Govt. Control over Banks.

Banking Law and Regulation 2005(40) published by Aspen Publishers looks at the

regulatory practices relating to Banks and Financial Institutions. The book analyses

the various provisions of the Gramm-Leach Baily Act, 1999, the Financial

Institutions Recovery and Enforcement Act 2002, the Federal Deposit Insurance

Corporation Improvement Act, and the Fair and Accurate Credit Transactions Act

2003.

(41)
S.K.Bagchi observed that in the world of finance more specifically in Banking,

Credit Risk is the most predominant risk in Banking and occupies roughly 90-95 per

cent of risk segment. The remaining fraction is on account of Market Risk,

Operations Risk etc. He feels that so much of concern on operational risk is

40
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misplaced. As per him, it may be just one to two per cent of Bank’s risk. For this

small fraction, instituting an elaborate mechanism may be unwarranted. A well laid

out Risk Management System should give its best attention to Credit Risk and

Market Risk. In instituting the Risk Management apparatus, Banks seem to be

giving equal priority to these three Risks viz., Credit Risk, Operational Risk and

Market Risk. This may prove counter-productive.

Securitization and Reconstruction of Financial Assets Enactment of Security Interest

Act, 2002. (SARFAESI ACT). Govt. Of India has taken the initiative of making the

legislation to help Banks to provide better Risk Management for their asset portfolio.

Risk Management of the Loan book has been posing a challenge to the Banks and

Financial Institutions which are helpless in view of the protracted legal processes.

The act enables Banks to realise their dues without intervention of Courts and

Tribunals. As a part of the Risk Management strategies, Banks can set up Asset

Management Companies (AMC) to acquire Non Performing Assets of Banks and

Financial agencies by paying the consideration in the form of Debentures, Bonds

etc. This relieves the Bank transferring the asset to concentrate on their loan book to

secure that the quality of the portfolio does not deteriorate. The act contains severe

penalties on the debtors. The AMC is vested with the power of issuing notices to the

Borrowers calling for repayment within 60 days. If the borrower fails to meet the

commitment, the AMC can take possession of the secured assets and appoint any

Agency to manage the secured assets. Borrowers are given the option of appealing

to the Debt Tribunal, but only after paying 75% of the amount claimed by the AMC.

There are strict provisions of penalties for offences or default by the securitisation or

reconstruction company. In case of default in registration of transactions, the

company officials would be fined upto Rs.5,000/- per day. Similarly non-

compliance of the RBI

 lOMoARcPSD|14838289

directions also attract fine up to Rs.5 lakhs and additional fine of Rs.10,000/-

per day. This has proved to be a very effective Risk Management Tool in the

hands of the Banks.

(43)
The Report of the Banking Commission 1972 – RBI Mumbai. The

Commission made several recommendations for making the Indian Banking

system healthier. The commission observed that the system of controls and

supervisory oversight were lax and underlined the need for closure supervision

of Banks to avoid Bank failures. However most of the recommendations of the

Commission lost their relevance in view of the priorities of the Government

which is more concerned with its political compulsions. The nationalisation

of Banks and the tight control on the Banks of the Govt. Left little scope for

implementation of the recommendations of the Commission. If only the

recommendations which are meant to restore tighter regulatory measures,

strengthening of the internal control systems and professionalization of the

Bank Boards were properly appreciated and implementation, Indian Banks

would not have ended in the mess of erosion of capital, mounting burden of

non-performing assets.etc.

A well known study analysing the performance of Commercial Banks in India

was conducted by Vashist (1991). Avtar Krishna Vashist: Public Sector Banks

in India – H,.K.Publishers & Distributors, New Delhi 1991.

1
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In order to find out relative performance of different Banks, composite

weighted growth index, relative growth index and average growth index of

Banks were constructed. The study revealed that Commercial Banks did well

with respect to Branch expansion, deposit mobilisation and deployment of

credit to the Priority Sectors. But they showed poor performance in terms of

profitability. After identifying the causes of the decline in profitability a

number of suggestions were made to improve the performance of Commercial

Banks in the Country.

(45)
Dr.Atul Mehrotra, Dean, Vishwakarma Institute of Management

emphasises the need for promotion of Corporate Governance in Banks in these

uncertain and risky times. This paper discussed at length Corporate

Governance related aspects in Banks as also touches upon the principles for

enhancing Corporate Governance in Banks as suggested by BCBS. The author

felt that despite the RBI’s initiatives on the recommendations of the

Consultative Group of Directors of Banks/Financial Institutions under the

Chairmanship of Dr.A.S.Ganguly, member of the Board for Financial

Supervision, there is more ground to be covered before Indian Banks are in a

position to attain good Governance Standards. As per the author he Public

Sector Banks with Government

ownership control almost over 80 per cent of banking business in India. This

complicates the role of the Reserve Bank of India as the regulator of the

financial system. The role of the Government performing simultaneously

multiple functions such as the manager, owner, quasi-regulator and sometimes

2
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even as super-regulator presents difficulties in the matter. Unless there is

clarity in the role of the Government, and unless Boards of the banks are given

the desired level of autonomy, it will be difficult to set up healthy governance

standards in the Banks.

As a part of the Review of literature, the Reports of various Committees and

Commissions have been perused. Important among them are given below:

The Report of the Committee on the Financial System 1991 Chairman Shri
(46)
M.Narasimham by far is the most important document while discussing

the Reform process in Indian Banking. The following recommendations made

by the Committee which were largely implemented put the Indian Banking

system on an even keel:

Main Recommendations:

1. Operational flexibility and functional autonomy

2. Pre-emption of lendable resources to be stopped

by progressively reducing the SLR and CRR

3. Phasing out of directed Credit Programmes

4. Deregulation of interest rates

5. Capital Adequacy requirements to be gradually stepped up

6. Stricter Income Recognition norms

3
 lOMoARcPSD|14838289

7. Provisioning requirements tightened

8. Structural Organisation

i) Three to four Large Banks (including State Bank of India)

which could become international in character

ii) Eight to ten national banks with a network of branches

throughout the country engaged in ‘universal’ banking

iii) Local Banks whose operations would be

generally confined to a specific region’

iv) Rural Banks including Regional Rural Banks confined to rural

areas

9) Level playing field for Public Sector and Private Sector Banks

10) No further nationalisation

11) Entry of Private Sector Banks recommended

12) Banks required to take effective steps to improve operational

efficiency through computerisation, better internal control

systems etc.

Committee on Banking Sector Reforms (1998) – Chairman Shri

(47)(popularly
M.Narasimham known as Narasimham Committee II) Report

discusses the steps required for further strengthening the Banking system by

concentrating on

4
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prudential management, introduction of technology etc. The main

recommendations of the committee are:

1. Capital Adequacy norms further tightened to include market risk

in addition to credit risk

2. Capital requirement for foreign exchange open positions

3. Capital adequacy to be increased to 10 per cent in a phased

manner

4. Further tightening of prudential norms

5. Ever greening of assets to be detected and errant Banks

punished

6. No recapitalisation from the Govt. Budgets

7. Transfer of Assets to Asset Reconstruction Co.

8. Introduction of Tier II Capital

9. Asset/Liability Management: Risk Management

10. Internal Systems

11. Human Resources Management

12. Technology Up gradation

5
 lOMoARcPSD|14838289

The Report laid emphasis on the strengthening of regulatory measures and

implement Risk Management strategies to secure the soundness of Banks.

(48)the
As per Dr.Rakesh Mohan, Deputy Governor, Reserve Bank of India

objective of reforms in general was to accelerate the growth momentum of the

economy defined in terms of per capital income.

The quality of functioning of the financial sector can be expected to effect the

functioning and productivity of all sectors of the economy. He discusses at

length the role of the Banking Sector and its influence over the rest of the

economy. As per him, the transformation of the Banking sector in India needs

to be viewed in the light of the overall economic reforms process along with

the rapid changes that have been taking place in the global environment within

which the Banks operate. The global forces of change include technological

innovation, the deregulation of financial services internationally, our own

increasing exposure to international competition and equally important,

changes in corporate behaviour such as growing disintermediation and

increasing emphasis on shareholder value. He cites the examples of recent

banking crises in Asia, Latin America and elsewhere having accentuated these

pressures.

India embarked on a strategy of economic reforms in the wake of a serious

balance of payments crisis in 1991. The main plank of the reforms was reform

in the financial sector, with banks being the mainstay of financial

intermediation, the Banking Sector. The main purpose of the reform process

6
 lOMoARcPSD|14838289

was aimed at promoting a diversified, efficient and competitive financial

system with the ultimate objective of improving the allocative efficiency

of resources through operational flexibility, improved financial viability and

institutional strengthening.

Dr.Y.V.Reddy, Governor, Reserve Bank of India(49) observed that the Indian

financial system in the pre-reform period (i.e., prior to Gulf Crisis on 1991)

was preoccupied with fulfilling the financial needs of the Planning process to

the neglect of the health of the Banks. Due to Government’s dominance of

ownership of Banks, large scale pre-emptions in terms of Statutory Liquidity

Ratio and Cash Reserve Ratio were resorted to and the Banks’ Managements

fell short of their professional attitude with the result they functioned at the

behest of the Finance Ministry. As per him the Reform process has created an

enabling environment for Banks to overcome the constraints faced by them.

For example deregulation of interest rates, bringing down the pre-emptions

viz., Statutory Liquidity Ratio and Cash Reserve ratio to workable levels in a

phased manner, dispensing with the system of directed lending have helped

Banks in restoring their financial health. The reserve Bank has initiated several

changes in their prudential oversight on Banks laying more emphasis on

improving the asset quality and earning. The changes brought about in terms

of ownership of Banks also had a salutary effect on the working of the Banks.

The share of the public sector banks in the aggregate assets of the Banking

Sector which was 90 per cent in 1991has gradually come down and by 2004

the same was around 75 per cent. He opined that as a result of the various

measures taken as a part of the Reforms, the Reserve Bank has been able to

7
 lOMoARcPSD|14838289

ensure overall efficiency and stability of the Banking System in India. The

capital adequacy of Indian Banks now is comparable to those at international

levels. The asset quality of the Banks has registered marked improvement. The

Non-Performing Assets to Gross advances for the Banking system have

reduced from 14.4 per cent in 1998 to 7.2 per cent in 2004. The return on

assets (ROA) was at a low of 0.4 per cent in the year 1991-92. By 2003-04 it

has improved to 1.2 per cent. In his concluding observations he expressed that

consolidation, competition and Risk Management are critical to the future of

the Banking system. Equally governance and financial inclusion also have to

be given top priority.

(50)
Mrudul Gokhale elaborately dealt with the subject of capital ad4quacy in

Banks. As per her Banks mostly give adequate focus for the credit risk aspect.

There is a shift from the qualitative risk assessment to the quantitative

management of risk. In tune with the regulatory insistence on capturing risks

for the purpose of capital charge, sophisticated risk models are being

developed. These models help Banks to near accurately quantify the potential

losses arising from different risks viz., credit risk, market risk and operations

risk. This will enable the Regulator to ascertain whether individual Bank has

accurately compiled the risk profile of assets.

Another important document which was made a part of the literature review

was Volume 27 No.1 and 2, Summer and Monsoon 2006 Occasional papers

published by the Reserve Bank of India on “Banking Sector Developments in

India 1980- 2005: What the Annual Accounts Speak?” Authored by

8
 lOMoARcPSD|14838289

(51)
Ramasastri A.S. and Achamma Samuel. The Authors are Director and

Assistant Adviser, respectively in the Department of Statistical Analysis and

Computer Services of the Reserve Bank of India.

As per them the Banking system is central to a nation’s economy and Banks

are special as they not only accept and deploy large amounts of

uncollateralised public funds in a fiduciary capacity, but also leverage such

funds through credit creation. They argue that large industries and big business

houses enjoyed major portion of the credit facilities to the neglect of

Agriculture, small-scale industries and exports. In fact the main inspiration for

nationalisation was the larger social purpose. The nationalisation in two

phases (14 banks in 1969 and 6 more in 1980). Since nationalisation Banking

system played pivotal role in the Indian economy, acting as an instrument of

social and economic change. They quote Tandon 1989: “Many bank failures

and crises over two centuries, and the damage they did under laissez faire

conditions, the needs of planned growth and equitable distribution of credit

which in privately owned banks was concentrated mainly on the controlling

industrial houses and influential borrowers, the needs of growing small scale

industry and farming regarding finance, equipment in inputs,; from all these

there emerged an inexorable demand for banking legislation, some

government control and a central banking authority, adding up, in the final

analysis, to social control and nationalisation”

Nationalisation resulted in several advantages to the economy. There was

stupendous growth in volumes. Banking network has spread to rural and

9
 lOMoARcPSD|14838289

hitherto uncovered areas. However, the nature of ownership of Banks

subjugated them to the control of the Government. There was very little

autonomy due to the fact that both lending and deposit rates were regulated

until the 1980’s. There was complete lack of competition and this has resulted

in overall inefficiency and low productivity. All the disadvantages of a

monopolistic regime were in play.

As per them the reasons for this sad state of affairs prior to the reform process

were:

• High reserve requirements

• Administered interest rates

• Directed credit and

• Lack of competition

• Political interference and corruption

As per the paper the recommendations of the Narasimham Committee Report

(1991) brought about the required changes to restore autonomy to Banks.

Among the measures introduced reduction of reserve requirements, de-

regulation of interest rates, introduction of prudential norms, strengthening of

Bank supervision and improving the competitiveness of the system,

particularly by allowing entry of private sector Banks were the most

10
 lOMoARcPSD|14838289

important. The authors make a reference to the Basel Committee (1988)

framework on capital adequacy norms. They feel that the efforts of the

Reserve Bank of India in directing the Banks to maintain risk-weighted capital

adequacy ratio initially at the lower level of 4 per cent and subsequently

raising it to 9 per cent were timely with a view to bringing about parity for

Indian Banks with international best practices.

As per the authors the period 1992-97 laid the foundations for reforms in the

Banking system(Rangarajan, 1998). References were made to the Second

Narasimham Committee Report (1998) which focussed on issues like

strengthening of the Banking system, upgrading of technology and human

resources development. “The report laid emphasis on two aspects of Banking

regulation viz., capital adequacy and asset classification

and resolution of NPA-related problems”.

The paper covered a period of 25 years (period from 1981 to 2005) The study

was based on the following indicators:

• Number of banks and offices

• Deposits and credit

• Investments

• Capital to risk-weighted assets ratio(CRAR)

• Nonperforming assets (NPAS)

11
 lOMoARcPSD|14838289

• Income composition

• Expenditure composition

• Return on Assets(ROAS) and

• Some select Ratios.

The study lead to very important revelations. As per the study there has been a

spurt in the number of banks during the late 1990s, which decreased during

the early period of the new millennium. The authors feel that this could be due

to the consolidation process and in particular, the mergers and acquisitions

that are the order of the banking system at present. After the consolidation

phase during the late 1980s and early 1990s, there has been a moderate.

V. Subbulaxmi and Reshma Abraham(52) discuss the common causes of

crises and their impact on the economic conditions. Banking crises may lead

to rapid change in the environment in which the Bank operates. Sooner the

restructuring programme is initiated, the faster the recovery and the lower the

cost of recovery. The two fundamental objectives behind every resolution

programme are:

1) Restoration of the functioning of the payments system and

2)Minimisation of the public funds used in the restructuring process

The authors discuss the various options of resolution available depending on

the intensity and the cause of the crises. As there is no single medicine that
12
 lOMoARcPSD|14838289

would cure the problem an analytical approach is suggested to deal with the

crises situations.

Addresses of the Governors of the Reserve Bank of India at various

conventions and Fora provide valuable insights into the Regulators views on

the Reform Process. SICOM Silver Jubilee Memorial Lecture delivered by

(53)
Mr.C.Rangarajan in 1998 at Mumbai gave a graphic account of the

maladies of the Indian Banking System and also outlined measures to be taken

for their better working. Most of his observations dealt with the financial

health of the Banks and the underlying need to bring the Indian Banks on par

with international standards.

Dr.Y.V.Reddy presented Papers at World Bank International Monetary Fund

and Brookings Institution (54) Conference on Financial Sector Governance, The

roles of Public and Private Sectors, Public Sector Banks and the Governance

Challenge: Indian Experience, Monetary and Financial Sector Reforms in

India: A Practitioner’s Perspective (Indian Economy Conference, Cornell

(55)
University, USA (2003), ‘Towards Globalisation in the Financial Sector in

India’ – Inaugural address at the Twenty Fifth Bank Economists Conference,

Mumbai. In these addresses Dr.Reddy discussed the various initiatives being

taken by the Reserve Bank of India to ensure financial health of the Banks.

The regulatory changes initiated by the Reserve Bank of India, the shift from

micro-prudential regulation to macro regulation have been discussed. The

changes initiated have brought about a sea change in the ownership of the

13
 lOMoARcPSD|14838289

Banks, a marked improvement in the soundness parameters like the return on

assets, staff productivity, technology, asset quality etc.

Mr.G.Ramathilagam and Ms.S.Preethi(56) attempted to evaluate the cost

efficiency of Indian Commercial Banks during the post reform period. They

used data for 10 years from 1992. They found that during the post reform

period Banks have improved their cost efficiency by as much as 10 per cent.

They suggested that Banks have to be more cost conscious. As per them the

Banks Auditors and internal audit machinery do not

attach much importance to the cost aspects. There is no proper utilization of

the resources of the Bank resulting in under utilisation of the same.

RESEARCH OBJECTIVE AND METHODOLOGY

3.1 RESEARCH OBJECTIVES:

➢ Analysis of Credit Risk Management.

➢ To know the various Parameters/Risks taken for consideration while loan

14
 lOMoARcPSD|14838289

➢ To know the process of the Back End Operation.

i) Payment System ii) C.L.P.U (Central Loan Processing Unit) iii) Internal Services

3.2 RESEARCH METHODOLOGY:

RESEARCHDESIGN

Descriptive research, also known as statistical research, describes data

and characteristics about the population or phenomenon being studied.
Descriptive research answers the questions who, what, where, when and
how.

In this report, exploratory and descriptive research design are used to fulfill the
objectives.

3.3 Research Method :-

The Project is consists of :-

1. Secondary Data

Secondary Data

Secondary Data is collected from the website of AXIS Bank and other concern
agencies as well as studies & research available.

• PreviousReport
• Magazines
• Journals
15
 lOMoARcPSD|14838289

• Website
• Balance sheet and Profit & LossAccount.

The information for the literature survey has been obtained mainly from: News
published in Indian & International news paper on the subject of Payment Systems
Sample Size: [Credit Risk analysis]
Traders 16
Companies
Contractors : 6 Companies
: 18
SME Companies.

PRIMARY FINDINGS AND ANALYSIS

Q1. From how many years you have been working in your organization?

Less than 2 years 35%

2 to less than 4 years 45%

4 to less than 6 years 15%

16
 lOMoARcPSD|14838289

More than 6 years 5%

Working period in the

organization
50 45
% %
45 35
% %
40
%
15
35 %
% 5
30 %
%
25 Less than 2 year2s to less tha4n4 to less tha6nMore than 6
% yearsyearsyears
20
%
35% respondents replied that they working in their organization from less than 2 years
15
but 45% respondents replied that they are working in their organization from 2 to less
%
than 4 years.
10
%
5%
0%
Q2. Are you involved in credit risk management process of your organization?

Yes 100%

No 0%

17
 lOMoARcPSD|14838289

Involved in credit risk management process

No 0%

Yes 100%

100% respondents replied yes that they are involved in the credit risk management
process of their organization.

Q3. In the following, which technique is mostly applied by your bank in case
of mitigating the risk?

Collateralization 25%

Guarantor 30%

Insurance 20%

18
 lOMoARcPSD|14838289

Securitization 25%

Technique for mitigating the

risk
35
30
%
%
25 25
30
% %
% 20
%
25
%
20
%
15
%
Collateralization GuarantorInsuranceSecuritization
10
%
25% respondents replied that collateralization is mostly applied by their bank in case
5%
of mitigating the risk but 30% respondents replied that guarantor is mostly applied by
their0%
bank in case of mitigating the risk.

Q4. In the following, which is the most import collateral instrument in your
bank?

Cash on deposit with bank 35%

Lending bank 25%

Equities 25%

19
 lOMoARcPSD|14838289

Mutual Funds 15%

Most import collateral

instrument
40% 35%
35%
30% 25% 25%
25%
20% 15%
15%
10%
5%
0%
Cash on deposit Lending bank Equities Mutual Funds
with bank

35% respondents replied that cash on deposit with bank is the most import collateral
instrument in their bank but 25% respondents replied that lending bank is the most
import collateral instrument in their bank.

Q5. In the following, which type of guarantee mostly accepted by your bank?

Guarantees from government 15%

Guarantees from director/trustees of the company 30%

Guarantees from inter-bank/inter-branch 35%

Guarantee from a third party 20%

20
 lOMoARcPSD|14838289

Guarantee mostly accepted by your

bank
40 35
% 30 %
35 %
% 20
30 15 %
% %
25
%
20
% Guarantees fromGuarantees fromGuarantees fromGuarantee
15 from
% governmentdirector/trusteeisnter-bank/inter- a third party of
10 the companybranch
%
30%5%respondents replied that guarantees from director/trustees of the company mostly
0% by their bank but 35% respondents replied that guarantees from inter-
accepted
bank/interbranch of the company mostly accepted by their bank.

Q6. In the following, which type of security mostly accepted by your bank?

Jewellery 10%

Debentures 15%

Life Insurance Policy 8%

Cash Deposit 9%

Land 20%

Assets 25%

21
 lOMoARcPSD|14838289

Shares 13%

Type of security mostly accepted by your

bank
30 25
25%20%
% %
20%15%
15% 13
10% 10 9% %
8%
%
5%
0%

Land Assets Shares

JewelleryDebenturesInLsiufreaP CDasehp
nocelicy osit

20% respondents replied that land mostly accepted by their bank as a security but 25%
respondents replied that assets mostly accepted by their bank as a security.

Q7. In the following, which credit reminder period used by your bank?

After 1-3 months default payment 25%

After 3-6 months default payment 40%

After 6-9 months default payment 35%

22
 lOMoARcPSD|14838289

Credit reminder period

45 40
% % 35
40 %
% 25
35 %
%
30
%
25
%
20 After 1-3 monthsAfter 3-6 monthsAfter 6-9 months
% default paymentdefault paymentdefault payment
15
%
40% respondents replied that after 3-6 months default payment used by their bank but
10
35% respondents replied that after 6-9 months default payment used by their bank.
%
5%
0%

Q8. In the following, which action is mostly applied by your bank to

recuperate loan?

Public auction 16%

Claim with insurance 25%

Use collateral as security 35%

Sue customer by court 9%

23
 lOMoARcPSD|14838289

Ask customer pay loan without interest 15%

Recuperate loan

40% 35%
35%
30% 25%
25%
16% 15%
20%
15% 9%
10%
5%
0% PublicClaim withUse collateral Sue customerAsk
auctioninsuranceas securityby courtcustomer pay
loan without interest

25% respondents replied that claim with insurance action is mostly applied by their
bank to recuperate loan but 35% respondents replied that use collateral as security is
mostly applied by their bank to recuperate loan.

Q9. In the following, which is the most important component of your credit
risk management strategy?

Credit reminder 15%

Guideline for loan 20%

Credit criteria 10%

Risk mitigation 35%

Training 20%

24
 lOMoARcPSD|14838289

Component of your credit risk management

strategy
40 35
% %
35
%
25%20%
20
30
20 %
15
%
% % 10
15 %
%
10
%
CreditGuideline forCredit Risk Trainin
5% reminderloancriteria mitigation g
0%

35% respondents replied that risk mitigation is the most important component of their
credit risk management strategy but 20% respondents replied that guideline for loan is
the most important component of their credit risk management strategy.

RECOMMENDATION

The need for Credit Risk Rating has arisen due to the following:

1. With dismantling of State control, deregulation, globalization and allowing things to

shape on the basis of market conditions, Indian Industry and Indian Banking face new
risks and challenges. Competition results in the survival of the fittest. It is therefore
necessary to identify these risks, measure them, monitor and control them.

2. It provides a basis for Credit Risk Pricing i.e. fixation of rate of interest on lending to
different borrowers based on their credit risk rating thereby balancing Risk & Reward
for the Bank.

25
 lOMoARcPSD|14838289

3. The Basel Accord and consequent Reserve Bank of India guidelines requires that the
level of capital required to be maintained by the Bank will be in proportion to the risk
of the loan in Bank's Books for measurement of which proper Credit Risk Rating
system is necessary.
4. The credit risk rating can be a Risk Management tool for prospecting fresh borrowers
in addition to monitoring the weaker parameters and taking remedial action.

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

• To gather key information about risk areas of a borrower and

• To arrive at a risk score that would reflect the borrower's

creditworthiness/degree of risk

CONCLUSION & IMPLICATIONS

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

26
 lOMoARcPSD|14838289

could be made in the event of default. Thus credit risk is a combined outcome of
Default Risk and Exposure Risk.

Today, the focus for many banks is to adopt an enterprise credit risk management
approach to achieve an integrated view of risk. Best practice in credit risk
management should demonstrate centralization, standardization, timeliness, active
portfolio management and efficient tools for managing exposures. This is encouraged
by the pressure from regulatory requirements such as Basel II. By constantly
enhancing existing tools and methods, banks are able to work toward achieving best
practice.

Furthermore, consistent, accurate and reliable data is required to achieve best practice
in credit risk management. Basel II was highlighted as one of the main drivers in
shaping the banks’ approach to credit risk management. It imposes disciplinary capital
charges for procedural errors, limit violations and other operational risks. It also
creates new pressures to ensure that effective credit risk management controls are in
place. A leading investment bank, for example, commented that regulations drive its
credit risk management procedures. The bank is forced to provide more detailed
disclosures in its annual reports. These may include information on its strategies,
nature of credit risk in its activities and how credit risk arises in those activities, as
well as information on how it manages credit risk. Basel II will affect a number of key
elements in another European bank, including a more rigorous assessment of the
bank’s credit risk appetite, more technical approach toward its counterparties and
better portfolio risk management. Another bank mentioned that the impact of Basel II
is largely dependent on the environment it is regulated under, as it is different for each
region.

27
 lOMoARcPSD|14838289

BIBLIOGRAPHY

1. Altman E. and Sabato, G. (2005) `Effects of the New Basel Capital Accord on
Bank Capital Requirements for SMEs´, Journal of Financial Services Research, 28
(1-3):
15-42.

2. Altman, E. I., Bharath, S. T. and Saunders, A. (2002) `Credit Ratings and the BIS
Capital Adequacy Reform Agenda´, Journal of Banking & Finance, 26 (5): 909-
921.

3. Basel Committee on Banking Supervision (2000) Range of Practice in Banks´

Internal Ratings Systems. Basel: Bank for International Settlements.

4. Basel Committee on Banking Supervision (2004) Basel II: International

Convergence of Capital Measurement and Capital Standards: a Revised
Framework. Basel: Bank for International Settlements.

5. Cardone, C., Casasola, Mª J. and Samartín, M. (2005) `Do banking relationships

improve credit conditions for Spanish SMEs?´ WP 05-28; Business Economics
Series 06, UCIIIM.

Website:

6. http://business.mapsofindia.com/banks-in-india/barclays-bank-plc.html

7. http://www.bank.barclays.co.uk

8. http://www.bis.org/publ/bcbs54.htm

9. http://ercim-news.ercim.eu/en78/special/improving-banks-credit-risk-management

28
 lOMoARcPSD|14838289

ANNEXURE

COPY OF THE QUESTIONNAIRE

Q1. From how many years you have been working in your organization?
Less than 2 years
2 to less than 4 years
4 to less than 6 years
More than 6 years

Q2. Are you involved in credit risk management process of your

organization? Yes
No

Q3. In the following, which technique is mostly applied by your bank in case of
mitigating the risk?
Collateralization
Guarantor
Insurance
Securitization

Q4. In the following, which is the most import collateral instrument in your bank?
Cash on deposit with bank
Lending bank
Equities
Mutual Funds

Q5. In the following, which type of guarantee mostly accepted by your bank?
Guarantees from government
Guarantees from director/trustees of the company
29
 lOMoARcPSD|14838289

Guarantees from inter-bank/inter-branch

Guarantee from a third party

Q6. In the following, which type of security mostly accepted by your bank?
Jewellery
Debentures
Life Insurance Policy
Cash Deposit
Land
Assets
Shares

Q7. In the following, which credit reminder period used by your bank?
After 1-3 months default payment
After 3-6 months default payment
After 6-9 months default payment

Q8. In the following, which action is mostly applied by your bank to recuperate loan?
Public auction
Claim with insurance
Use collateral as security
Sue customer by court
Ask customer pay loan without interest

Q9. In the following, which is the most important component of your credit risk
management strategy? Credit reminder
Guideline for loan
Credit criteria
Risk mitigation
Training

30
 lOMoARcPSD|14838289

Q10. Please provide your suggestion to improve the credit risk management in your
bank?

31
 lOMoARcPSD|14838289

SYNOPSIS
*Title of the project: Credit Risk Management at ICICI Bank
Project Area Finance
Abstract : Risk is inherent in all aspects of a commercial operation; however
for Banks and financial institutions, credit risk is an essential
factor that needs to be managed. Credit risk is the possibility that a
borrower or counter party will fail to meet its obligations in
accordance with agreed terms. Credit risk, therefore, arises from
the bank’s dealings with or lending to Corporates, individuals, and
other banks or financial institutions. Credit risk analysis needs to
be a robust process that enables banks to proactively manage loan
portfolios in order to minimize losses and earn an acceptable level
of return for shareholders.

Why is the particular topic The structure of the paper is three-fold, where we begin by
chosen : projecting the risk management scenario and its effects on internal
operations of a bank, followed by the changes brought about in the
banking sector of India and finally the macro effects on the
economy. This enables one to discern the complete scenario that
will emerge in the years ahead.

Objective: ➢ Analysis of Credit Risk Management.

➢ To know the various Parameters/Risks taken

for consideration while loan

➢ To know the process of the Back End Operation.

Scope: ICICI Bank has deep roots and a long heritage in international
banking. Have an extensive history in some of the world’s most
dynamic and fast-growing markets, such as Asia and the Middle
East. No one has a better understanding of the wealth management
needs of clients across these markets.

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 lOMoARcPSD|14838289

What contribution would the The project will cover “Credit Risk Management at ICICI
project make and to whom?: Bank”. The Indian Economy is booming on the back of strong
economic policies and a healthy regulatory regime. The effects of
this are far-reaching and have the potential to ultimately achieve
the high growth rates that the country is yearning for. The
banking system lies at the nucleus of a country’s development
robust reforms are needed in India’s case to fulfill that. The
BASEL II accord from the Bank of International Settlements
attempts tp put in the place sound frameworks of measuring and
quantifying the risks associated with banking operations. The
paper seeks to showcase the changes that will emerge as a result
of banks adopting the international norms.

Name of the organization ICICI Bank

Methodology: Secondary Data
Secondary Data is collected from the website of ICICI Bank and
other concern agencies as well as studies available.
The information for the literature survey has been obtained
mainly from: News published in Indian & International news
paper on the subject of Payment Systems.

Chapter scheme 1. Introduction

2. Company Profile
3. Objective & Scope of the Study
4. Research Methodologies
5. Literature Review
6. Data Analysis
7. Conclusions and Suggestions

33
 lOMoARcPSD|14838289

8. Bibliography
9. Annexure
References 10. Altman E. and Sabato, G. (2005) `Effects of the New
Basel Capital Accord on Bank Capital Requirements for
SMEs´, Journal of Financial Services Research, 28 (1-3):
15-42.
11. Altman, E. I., Bharath, S. T. and Saunders, A. (2002)
`Credit Ratings and the BIS Capital Adequacy Reform
Agenda´, Journal of Banking & Finance, 26 (5): 909-921.
*Name and designation of Mrs. Sonia Gambhir (Asst. Professor- Finance)
project guide:

34