FINAL REPORT ON

“A STUDY OF CREDIT RISK MANAGEMENT IN ICICI BANK”
SUBMITTED BY: K.R.AKSHAYAA RAJESWARI

ICICI BANK

A Report On

“A STUDY OF CREDIT RISK MANAGEMENT IN ICICI BANK”
By K.R.AKSHAYAA RAJESWARI

A report submitted in Partial Fulfillment of the requirements of MBA Program

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ACKNOWLEDGEMENT

The report and analysis details which are being presented here are a tiresome and fruitiest effort of many unseen hands that were continuously being a helping hand in all kind of conditions. At this onset I would like to pay my sincere gratitude and thankfulness to all. Everyone’s stimulating suggestions and encouragement helped me in completing this project. I want to take this opportunity to extend my sincere thanks to my college mentor Prof.mrs shenbagavalli mam for guiding me throughout the tenure of my project and giving me valuable support throughout my project. I want to acknowledge with great respect to entire Loan department which have been extremely helpful to complete my project. I take this opportunity to thank SRM SCHOOL OF MANAGEMENT for providing me all facilities and helping me to carry out my project successfully.

K.R.AKSHAYAA RAJESWARI

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the process Risk Management in ICICI Bank • • • • • Risk Rating Sources Of Risks Considered In The Tool Credit Risk Mitigation Various Techniques Of Credit Risk Mitigation Credit Scoring Model At ICICI Bank 1 3 3 4 4 5 8 9 15 16 5 8 .TABLE OF CONTENTS Serial Number Particulars Page Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Introduction Objective Research Methodology Benefit to the organization Limitations About ICICI Bank Indian banking industry Risks in Banking Credit risk management.

17 18 19 20 21 22 23 Data Description Analysis Of The Data Through Discriminant Analysis Classification Verification of the Model Conclusion Recommendations References 36 38 49 51 53 55 56 5 8 .

I have tried to address how banks assess the creditworthiness of borrowers which forms a vital part in the success and better performance of any bank across the globe. interest rate risk. The paper deals with the credit risk management of ICICI bank. with new risks. in this paper. the need is felt for more sophisticated and versatile instruments for risk assessment. but there has been very little study to compare such ratings with the final asset classification and also to fine-tune the rating system. It explains as to what is the importance of credit risk as compared to many other risks in banks such as liquidity risk. As banks move in to a new high powered world of financial operations and trading. With margin levels going down. In this project I have also dealt with ICICI Bank specific credit risk management techniques also 5 8 . Also risks peculiar to each industry are not identified and evaluated openly. Most of the banks have developed internal rating systems for their borrowers. therefore. Hence. It is. banks are unable to absorb the level of loan losses. vital that the banks have adequate systems for credit assessment of individual projects and for evaluating risk associated therewith as well as the industry as a whole. This project tries to analyze the reasons of bank failure. monitoring and controlling risk exposures. market risk.ABSTRACT The basic function of a bank is the acceptance of deposits from public and lending funds to public/corporate and this business of lending has brought trouble to individual banks and entire banking system. etc.

Retail banking. The Indian banking has come from a long way from being a sleepy business institution to a highly proactive and dynamic entity.e. it is the latter which is a revenue generation activity for the bank. assessing management capabilities and prescribing a ceiling for an industry exposure. which is designed to meet the requirements of individual customers and encourage their savings. ATMs. caters to the needs of corporate customers like bills discounting. transferring funds between accounts and the like. public sector banks have long been the supporters of agriculture and other priority sectors. the need is felt for more sophisticated and versatile instruments for risk assessment. banking may be classified as retail and corporate banking. checking account balances. thereby lending the industry a stamp of universality. Commercial Banking mainly has two functions. vital that the banks have adequate systems for credit assessment of individual projects and for evaluating risk associated therewith as well as the industry as a whole. So. dominated by public sector banks. Corporate banking. It is. therefore.INTRODUCTION Banking system in India is one of the most important ingredients in the Indian financial market. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i. 5 8 . The world of banking has assumed a new dimension at the dawn of the 21st century with the advent of tech banking. and they also attract most of the savings from the population. monitoring and controlling risk exposures. Generally. borrowing and lending). In general. consumer loans. Driven by the socialist ideologists and the welfare state concept. Banking industry. Banks in India evaluate a proposal through the traditional tools of project financing. has so far acted as an efficient partner in the growth and development of the Indian economy. on the other hand. opening letters of credit and managing cash. Banks are the biggest purveyors of credit. computing maximum permissible limits. it is imperative that banks carry out this function with utmost efficiency and due diligence. Out of these two. credit cards. includes payment of utility bills. which are a) Accepting deposits and b) Granting credit. with new risks. As banks move in to a new high powered world of financial operations and trading.

among other factors. Hence. the current and prospective profitability. we try to address how banks assess the creditworthiness of borrowers which forms a vital part in the success and better performance of any bank across the globe.  To study the importance of banks Non-Performing Assets in the economy of a country. Out of 46 banks. as well as its industrial sector and how the borrower is positioned in it. Credit risk can be defined as potential losses from the refusal or instability credit customer to pay what is owed in full and on time. the borrower's history.Credit risk exists because an expected payment might not occur.  To improve the current predicting power of financial risk factors of banks and thereby reduces Non-Performing Assets in banks. Rest 6 banks have been used to verify the model developed in this paper. in this paper. They are used to develop the co-efficient for the discriminant analysis and to test the accuracy of the model. Trade credit involves a supplier providing a buyer with goods or services for which payment is deferred. 5 8 . Bank lending involves a bank providing a loan in return for the promise of interest and capital repayment in the future. Then various information has been obtained regarding these banks for the purpose of the study. They are secondary databases and no aid of primary data has been taken. All the data collected in this project is sourced from various web sites and database sites such as the RBI web site and database. We understand that banks consider. OBJECTIVE OF THE PROJECT  To study the importance of credit risk in ICICI banks and its management. In this paper a total of 46 Indian banks have been taken for the purpose of study. 40 banks are then divided into two groups of 20 each both having equal number of companies. All the banks belong to either public sector or the private sector.

where the objectives are clearly established. Also. TYPE OF DATA: SECONDARY DATA Required data for study will be collected from Secondary data sources. what. are able to get more financial debt than the firms in the other countries and that is the reason why they are able to develop much rapidly 5 8 . In Descriptive Studies. it comes under formal research. REVIEW OF LITERATURE Financial sector is of pioneering importance for growing economies and any variation in its performance can affect the economy in either way. DATA INTERPRETATION AND ANALYSIS Use of research analysis tools such as SPSS software in order to run the data and develop the model for risk management along with fundamental analysis of banking sector using financial & internet data. researchers have found that the firms in countries which are more financially developed. when. published reports and study of research papers for extensive analysis. Descriptive research seeks to determine the answers to who. and how questions. have active financial market. where. Internet. Secondary data include some external sources such as company internal sources.METHODOLOGY For undertaking the project. books and periodicals. and large intermediary sector. a researcher gathers details about all aspects of problem situation. Many researchers have disclosed the fact that the financial development of the country contributes to the growth of the economy. following research methodology are adopted: TYPE OF RESEARCH: Descriptive Studies.

Also the problems faced by the Asian banks were only due to the bad lending practices adopted by them which were being carried on for years. Christine 1995. 1998). Bloem and Gorters. 2002). We can take the example of the Asian crisis during the second half of the 1990s.(Demirguc-Kunt and Maksimovic. 2003). There were sufficient events which showed that the weak financial system and inadequate macroeconomic policies (The weakness in one area causing problems in the other) were the reasons in aggravating the crises. Sometimes when the managers obtain a reasonable return on their equity shareholdings. Gourinchas et. 1963). He concluded that good risk management is good banking. most lending booms are not followed by a banking crisis.e. Several studies in the banking literature agree to the fact that banks’ lending policy is a major driver of non-performing loans (McGoven. The problem of NPAs is related to several internal and external factors dealing with the borrowers (Muniappan. A proper approach to risk identification. while most banking crisis may be preceded by a lending boom. over expansion of credit) in order to increase the social presence of the bank managers in an organization (Williamson. al. Similarly. Its importance can be seen from the fact that economic downfalls of the countries occur as a result of the banking crisis of that country. Sergio. they involve in activities that is against the firm's value maximization. 2001). (2001) emphasizes that. Since they have limited liability. To expand their profits bank sometimes indulge in increasing loan growth without taking much into consideration the credit evaluation standards. Strong competition among the banks also decreases their profits margins and forces them to take risky measures. measurement and control will safeguard the interests of banking institution in long run. It focuses too much on 5 8 . Although this caused rapid growth in lending activities but it also increase the risk of the banks (Lindgren et al..The role of banks in the financial sector is a crucial for the economy. 1996. 1996. they can adopt high risk-return strategies (i. Rajagopal (1996) made an attempt to overview the bank’s risk management and suggests a model for pricing the products based on credit risk assessment of the borrowers. Caprio and Klingebiel. which ultimately leads to profitable survival of the institution. 1993.

thereby causing greater problem loans. He says that in an increasing rate system. This leads to bad loans and increasing NPAs of banks (Gabriel et al. During much of the second half of the 5 8 . 1994) that. At the same time. Dilip K. later on. factors. there is a decline in the assets values thereby leading to decline in the collateral values. Now as the upturn recedes and recession creeps in. 2006). such as low operating efficiency and uncontrolled branch expansion. This could be due to two reasons: First. Sometimes the collaterals offered at the time of taking loans also play a major role in the creating bad loans. In a downturn. and the ones retire. He says that problem loans are caused due to both macroeconomic and microeconomic factors. Santanu das (2002) focuses on the increasing rate system to examine the reason of NPAs. could become non-performing loans. might also lead to an increase in problem loans. In India. due to these reasons there is an overall decrease in institutional memory also leading to formation of groups that are less skillful at evaluating risk.its short-term objectives. but also microeconomic variables are important in explaining problem loans in banks. What generally happens is during the upturn period of the economy the prices of the assets generally increase forcing the banks to accept those properties as collaterals since it has a much worthier asset to back the loans. some of the experienced officers might not be able to recollect properly the previous default. 2004). resulting in the increase of problem loans (Berger and Udell. leading to an overall loss of experience. Hence the bank managers finance negative NPV projects during expansions (Rajan. the percentage of loan officers that experienced the last default declines as the bank hires new officers. banks have no option but to dilute the quality of borrowers thereby increasing the probability of generation of NPAs. borrowings generally decrease. internal accruals for their requirement of funds. quality Borrowers more often than not switch over to other avenues such as capital markets. The problems that troubled the Indian banking sector were also due to decades of “directed credit” policies of successive Indian governments. The increased time period since the last loan default can lead to an increase in the problem loans of banks. Under such circumstances. Second. This would mean that not only macroeconomic conditions. Das (2000) has examined the aspect of the non-performing loan problem.

combined with poor monitoring. of late. several institutional mechanisms have been developed in India to deal with NPAs. It takes about 70% and 30% remaining is shared between the other two primary risks. failure of internal controls (Prof. Rekha Arunkumar). the Indian banking sector became saddled with huge folios of non-performing loans. Only those banks that have efficient risk management system will survive in the market in the long run. the Indian government has allowed Banks and Financial Institutions to securitize non-performing assets. the Indian government has embarked upon major regulatory reform in the last decade. NPAs are an inevitable burden on the banking industry. 2008). 2005). still remains the most important risk to manage till date. and a host of other factors. Credit Risk. economic and financial harms.twentieth century.. the Indian banking sector had characteristics of social control. Most recently. default by the borrower to repay lent money. The power of credit risk is even reflected in the composition of economic capital.e. because of inefficient lending practices. Hence the success of a bank depends upon methods of managing NPAs and keeping them within tolerance level. (Anshu S K Pasricha. In order to clean up its banking system. The supposed role that banking sector played in the economy was that of providing financial support for preferred sectors which would lead to development of the country. Since credit risk includes the possibility of social. Rekha Arunkumar. 2007) Hence. corruption. that is. Such a process requires defining and measuring the combinations of events that are likely to cause a bankruptcy (Hayette Gatfaoui. which banks are required to keep aside in order to protection themselves from various risks. However. The future of banking will therefore undoubtedly rest on risk management dynamics. some control setting and some credit risk management policies have to be determined in order to minimize the harmful effects of disastrous risky events such as failures. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution (Prof. namely Market risk (change in the market price) and operational risk i. Edward I Altman in his paper “Predicting Financial Distress of Companies: Revisiting the Z score and Zeta model” has used this model to examine the unique characteristics of business 5 8 .

Non-Performing Assets which is a major concern in today’s hi-tech competitive world of real business. Janet Mitchell and Patrick Van Roy in their working paper research “Failure prediction models: performance. and internal rating systems” has used Altman’s Z Score model to in the ranking of firms. we try to address how banks assess the creditworthiness of borrowers. the borrower's history.failure in order to specify and quantify the variables which are effective indicators and predictors of corporate distress. He has explored not only the quantifiable characteristics of potential bankrupts but also the utility of a much-maligned technique of financial analysis: ratio analysis through the help of this technique. the current and prospective profitability. Since exposure to credit risk continues to be the leading source of problems in banks worldwide. BENEFIT TO THE ORGANIZATION Following are the benefits that will accrue to the ICICI Bank: • The paper through the help of entire calculations and analysis has helped a lot in improving the current predicting power of financial risk factors of banks and thereby reduce Non-Performing Assets in banks. Hence. as well as its industrial sector and how the borrower is positioned in it. For this purpose we are using Altman’s Z score model in this paper. banks and their supervisors should be able to draw useful lessons from past experiences. We understand that banks consider. She also analyzes the design of bank internal rating systems by looking at the performance of systems with differing numbers of classes and distributions of borrowers across classes with the help of this model. among other factors. disagreements. and the design of internal rating systems. 5 8 . in this paper. In this paper we have tested Altman’s Z-score model approach in Indian context.

• All the data has been taken from reliable sources such as company website and sites such as India infoline & kotak securities but still their can be some Manipulation that can change our results. web sites etc. Bank has total assets of about USD 100 billion (at the end of March 2008). ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and specialized subsidiaries and affiliates in the areas of investment banking. articles. is India's largest private sector bank in market capitalization and second largest overall in terms of assets.399 branches. Mumbai and the National Stock Exchange of India Limited. The primary drawback of the project is the lack of the primary data. ICICI Bank is also the largest issuer of credit cards in India. journals. The project is totally based on the secondary data collected from various source such as books. and it’s ADRs on the New York Stock Exchange (NYSE). formerly Industrial Credit and Investment Corporation of India . ICICI Bank has got its equity shares listed on the stock exchanges at Kolkata and Vadodara. venture capital and asset management.485 ATMs and 24 million customers. LIMITATIONS OF THE STUDY: The study has the following limitations:• • Period of study under consideration is 6 years.• Project helps the banks in increasing its efficiency. about 4. life and non-life insurance. ABOUT ICICI Bank ICICI Bank. 22 regional offices and 49 regional processing centres. 5 8 . a network of over 1. research papers.

15% rise in net profit to Rs. including an offshore unit in Mumbai. China. Malaysia. Thailand. 5 8 . 1. Russia and the offshore banking units in Bahrain and Singapore. the United Arab Emirates and USA. ICICI Bank now has wholly-owned subsidiaries.29% increase in total income to Rs. South Africa. an advisory branch in Dubai. Hong Kong and Sri Lanka.Source: The Bank is expanding in overseas markets and has the largest international balance sheet among Indian banks. the Bank is targeting the NRI (Non-Resident Indian) population in particular.712.014. This includes wholly owned subsidiaries in Canada. branches and representatives offices in 18 countries. Indonesia. Overseas. 9.31 crore in Q2 September 2008 over Q2 September 2007. branches in Belgium. and representative offices in Bangladesh.21 crore on a 1. ICICI reported a 1. The bank's current and savings account (CASA) ratio increased to 30% in 2008 from 25% in 2007.

Source: Diversified Portfolio of ICICI Bank The asset composition change on account of statutory requirements and increase in retail assets is contributing to de-risking the portfolio 5 8 .

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INDIAN BANKING INDUSTRY
The Banking sector in India is all set to witness path breaking changes. While the decade of 90s has witnessed a sea change in the way banking is done in India, Technology has made tremendous impact in banking then provisioning norms for NPAs have considerably reduced banks net NPAs and also made them strong financially. The future trends in Indian banking can be captured through following points.

• Basel II and risk management

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To strengthen the capital base of the banks the Bank of International Standards (BIS) has come up with Basel Accords. As per the recommendations of these accords every bank having an international presence has to set aside capital as a percentage of its Risk Weighted Assets (RWAs) Bank’s capital adequacy ratio = Total Capital

-------------------------------------------------------RWAs of Credit Risk+ Market Risk+ Op. Risk

• Consolidation
With the opening up of the banking sector in 2009 week/ small banks will find it tough to compete with the large banks. Hence, it is likely that consolidation will soon catch up with the banks. A recent example in this context is the merger of Centurion bank of Punjab with HDFC bank. Though there is no confirmation yet, speculative signals arising from the market point to the prospect of consolidation involving banks such as Union Bank of India, Bank of India, Bank of Baroda, Dena Bank, State Bank of Patiala, and Punjab and Sind Bank. Further, the case for merger between stronger banks has also gained ground — a clear deviation from the past when only weak banks were thrust on stronger banks.

• Globalization
Indian Banking sector is all set to open up for foreign players with effect from April’09 which will allow them to operate in India through wholly owned subsidiaries. Also Indian banks are increasingly going Global.

RISKS AND BANKING
Banks face the following main risks • • • Credit Risks Operational Risks Market Risks 5 8

o Liquidity Risk o Interest rate Risk o Foreign exchange Risk o Commodities and Equity Risk Keeping in view the scope of the project, I will be discussing only Credit risk and its management in detail

CREDIT RISK
Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counter-parties. In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter-party to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality. The credit risk of a bank's portfolio depends on both external and internal factors. The external factors can be economy wide as well as company specific. Some of the economy wide factors are: • State of the economy • Wide swings in commodity prices • Fluctuations in foreign exchange rates and interest rates • Trade restrictions • Economic sanctions. • Government policies, etc. Some company specific factors are: • Management expertise • Company policies • Labour relations The internal factors within the bank, influencing credit risk for a bank is: 5 8

) determine the profit that accrues to the bank from that loan. If the terms are decided without proper assessment of the credit risk.e. the bank might be charging low interest rates from poor quality customers’ thereby sustaining losses due to default.• Deficiencies in loan policies/administration • Absence of prudential credit concentration limits • Inadequately defined lending limits for Loan Officers/Credit Committees • Deficiencies in appraisal of borrowers' financial position • Excessive dependence on collateral without ascertaining its quality/reliability • Lack of risk pricing mechanisms • Absence of loan review mechanism • Ineffective system of monitoring of accounts The goal of credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. In this increasingly competitive situation a sound credit risk management system can be a source of competitive advantage for the bank. and charging high rates from good quality customers thereby driving them away to other banks. • The increasing pressure on spreads in the banking industry as well as competition on both sides of the balance sheet makes an efficient credit risk management system essential for banks. the maturity. the form of credit etc. Banks should also consider the relationships between credit risk and other risks. WHY CREDIT RISK MANAGEMENT? • The liberalization of the Indian economy has brought about sweeping changes in the economic environment. The assessment of these risks is essential to facilitate prudent credit decisions. 5 8 . Changes in economic environment have induced new anticipated and unforeseen risks in lending. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. the price. • The terms and conditions of loans & advances sanctioned to borrowers (i.

The purpose of Basel II is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.ssrn.BASEL II Basel II is the second of the Basel Accords. The credit risk component can be calculated in three different ways of varying degree of sophistication.Based Approach".com The Second Pillar 5 8 . namely standardized approach. IRB stands for "Internal Rating. operational risk and market risk. Foundation IRB and Advanced IRB. Basel II accords are based on three pillars: The First Pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk. Other risks are not considered fully quantifiable at this stage.2 Source: www.

which the accord combines under the title of residual risk. liquidity risk and legal risk.The second pillar deals with the regulatory response to the first pillar. CAPITAL ADEQUACY RATIO RECOMMENDED BY BASEL II The Basel II accord has recommended the following method of calculating the capital adequacy ratio of the banks. The Third Pillar The third pillar greatly increases the disclosures that the bank must make. giving regulators much improved 'tools' over those available to them under Basel I. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. 5 8 . Banks find out their capital requirement by putting the values of their RWAs and minimum CAR in the above formula With respect to capital. CAR= Capital Adequacy Ratio MR= Market Risk RWA= Risk Weighted Assets OR = Operational Risk The Minimum Capital Adequacy as prescribed by the Basel II Accord is 9% of Risk weighted Asset. such as systemic risk. reputation risk. concentration risk. the Basel II accord permits banks to adopt one of two methods for risk weighting of assets: the “standardized approach” and the “internal ratings based” (IRB) model. pension risk. Total Capital Bank’s CAR = ---------------------------------------------------RWAs of Credit Risk+ MR+ OR Here. It also provides a framework for dealing with all the other risks a bank may face. strategic risk.

iv. iii. The other two approaches are based on bank’s internal rating systems. i. ii.The IRB model provides for two alternatives: “Foundation” and “Advanced. Exposure at Default (EAD) It measures the amount of the facility that is likely to be drawn if a default occurs. ICICI Bank has adopted both the ‘Standardized’ as well as the ‘IRB’ approach wherein it sources the credit ratings country wise and industry wise from the ECAIs and also has an in house mechanism for assigning the credit risk ratings to the individual borrowers based upon various risk rating models. Loss given Default (LGD) It measures the proportion of the exposure that will be lost if a default occurs. the values for certain risk parameters for its exposures. The standardized approach is the simplest of the three broad approaches to credit risk.THE PROCESS 5 8 . Maturity (M) It measures the remaining economic maturity of the exposure. Probability of Default (PD) It measures the likelihood that the borrower will default over a given time-horizon.” Standardized Approach towards Credit Risk Management Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk. CREDIT RISK MANAGEMENT.e foundation IRB and Advanced IRB Internal Ratings Based (IRB) Approach towards Credit Risk Management A characteristic of the IRB approach is that the institution itself shall be able to determine. Permission to use such an approach is conditional on the institution demonstrating that it possesses such capability. in a reliable manner. Under IRB approach the bank has to calculate the following for the purpose of capital requirements i.

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20 lakhs) are linked to the credit risk ratings. • Various policies like entry level benchmark. Market Risk and Operational Risk. Inputs to the tool are the financial data of the borrower. SOURCES OF RISKS CONSIDERED IN THE TOOL Signals for credit risks can be picked up from a number of sources. Delegation of loaning powers according to risk. industry information and the evaluation of the borrower on various objective and subjective parameters. Pricing (for all accounts availing total limits above Rs. • The approval process of the credit risk rating is independent of the credit approval process. This rating tool is applicable to all large corporate borrowal accounts availing total limits (fund based and nonfund based) of more than Rs. The credit risk-rating tool considers the following broad areas in evaluating the default risk of a borrower 5 8 . The division looks after management of all the three risks namely Credit Risk. 100 crore.RISK MANAGEMENT ICICI BANK The Bank has taken major initiatives in putting in place the Risk Management Systems in order to adopt advanced approaches prescribed in Basel II and detailed operational guidelines for these initiatives have been issued through various circulars from time to time. There are broadly seven types of rating which are assigned to the borrower ranging from AAA to D. 12 crore or having total sales/ income of more than Rs. Some of such initiatives are: • Separate Risk Management Division has been established. A committee approach has been adopted for all accounts falling under the powers of DGM and above. RISK RATING The credit risk rating tool has been developed with a view to provide a system for assigning a credit risk rating to the borrowers of the bank according to their risk profile.

They are discussed in brief as following: Financial Strength These parameters are taken normally from the annual financial statements of the company i. The financials are evaluated under four broad areas as under: Past financial performance • Turnover Growth • OPBDIT/Sales • Short term bank borrowings / Net sales • Operating Cash Flow/Total Debt • Debt Equity Ratio • TOL/TNW • Interest Coverage • Return on Capital Employed Business Performance This section measures operational efficiency and core competence of a company vis-à-vis its competitors. Profit & Loss Statement and the Cash Flow statement. The performance of a company is influenced both by its own set up as well as its 5 8 .• Financial Strength • Business Performance • Industry Outlook • Quality of Management • Conduct of account These parameters are further evaluated under various sub-parameters. Past performance is taken as a guide to realistically assess future performance.e. Balance Sheet.

Net Sales/Operating Assets • Net Sales/ Current Assets Market Position Can be gauged through following parameters • Competitive Position • Input Related Risk • Product Related Risk • Price Competitiveness • Marketing Industry Outlook Industry performance very often has a direct bearing on the performance of a company. The industry P/E ratio is an useful indicator in this regard. Thus the two broad sub-areas used to assess the business performance of a company are: • Operating Efficiency • Market Position Operating efficiency can be gauged from the following parameters • Operating leverage • Inventory Turnover • Credit Period allowed/ availed .competitive position within the industry. Expected industry growth rate 2. Regulatory framework • Tax Concessions • Tariff Protection 4. 1. Two companies in different industries would have different credit worthiness depending on the outlook for their industries. Industry cyclicality 5 8 . 3. Capital market perception. The outlook and performance of an industry depend on a number of parameters.

The two sub-areas considered for this purpose are: • Achievement of past targets by the company • Subjective assessment of management quality Conduct of Account The conduct of account refers to as to how the borrower’s existing accounts with our Bank as also with other banks are being conducted and whether any problems are being faced. the ability as well as the willingness of the borrower to repay its debts. Financial performance of industry 7. but also from the point of view of its integrity. which determines its capability to repay. Evaluation of management is done to determine both their competence as well as their integrity.5. The following areas and factors are taken into consideration: Status of Documentation/Security Creation/Terms of Sanction • Delay in creation of primary security 5 8 . Demand-supply mismatch 6. Threat from environmental factors 9. Technology used in the industry and its rate of obsolescence 8. The management quality thus influences both aspects of default risk. Threat from globalization 10. This is because the intentions of the management determine the willingness of the company to repay its debts. Structural attractiveness • Supplier power • Buyer power • Threat of product substitution • Threat of new entrants and entry barriers • Competition within the industry Management Evaluation Evaluation of management is important not only due to its impact on the company’s performance.

asset securitization. Other techniques include buying a credit derivative to offset credit risk at transaction level. by first priority claims or obtaining a third party guarantee. Basel – II Accord allows a wider range of credit risk mitigants to be recognized for regulatory capital purposes. At transaction level. are used to mitigate risks in the portfolio. VARIOUS TECHNIQUES OF CREDIT RISK MITIGATION 5 8 .• Delay in creation of personal/corporate guarantees • Delay in creation of collateral security • Non-compliance of terms & conditions of sanction Status of Financial Discipline • Credit summations in Cash Credit account being less than the sales realisations • Returning of cheques • Devolvement of LCs • Invocation of LGs • Requests for adhoc limits Status of Feedback by the Borrower • Delay in submission of stock/book debt statements • Delay in submission of QMS forms • Delay in submission of audited balance sheet • Delay in submission of CMA data and other papers necessary for renewal of credit limits • Delay in renewal of credit limits CREDIT RISK MITIGATION Credit Risk Mitigation (CRM) refers to the process through which credit risk is reduced or is transferred to counterparty. Strategies for risk reduction at the transaction level differ from that at the portfolio level. the most common technique used by the bank is the collateralization of the exposures. credit derivatives etc. At portfolio level.

Process of Collateral Management: Collateral Management process covers the entire gamut of activities comprising interalia the following aspects. Banks may operate under either. Mismatches in the maturity of the underlying exposure and the collateral will only be allowed under the comprehensive approach.• Defining the criteria on acceptability of various forms of collaterals • Level/extent of collateralization. Banks may opt for either the simple approach. 5 8 . approaches in the banking book. by effectively reducing the exposure amount by the value ascribed to the collateral. or for the comprehensive approach. but not both. Before capital relief will be granted to any form of collateral.Balance Sheet Netting • Guarantees Collateral Management The collateralized transaction are the one in which banks have a credit exposure and that credit exposure is hedged in whole or in part by collateral posted by a counter party or by a third party on behalf of the counter party. Partial collateralization is recognized in both approaches. Supervisors will monitor the extent to which banks satisfy these conditions. both at the outset of a collateralized transaction and on an on-going basis. • Guidelines for valuation & periodical inspection of collateral • Measures for security and protection of collateral value • Legal aspects to ensure enforceability and reliasability of collateral in a timely and efficient manner. which.• Collateral Management • On. which allows fuller offset of collateral against exposures. but only under the comprehensive approach in the trading book. the standards set out in this section must be met. substitutes the risk weighting of the collateral for the risk weighting of the counterparty for the collateralized portion of the exposure (generally subject to a 20% floor).

the Committee may be prepared to consider other circumstances under which banks might be allowed to net on-balance-sheet claims in calculating capital adequacy. Moreover there is NO HAIRCUT APPLICABLE to the deposit. • There is no time mismatch • There is no Currency Mismatch • The Credit balances (Deposit) and Debit Balances (Advance) should relate to the same customer or the customer in the same company group. in the case of a guarantee from a sovereign. recognizing that netting can be a beneficial part of the risk management process. the Basle Committee is inclined to restrict the scope for on-balancesheet netting to loans and deposits only. a bank may substitute the risk weight of the protection provider for that of the obligor. However. Conditions • The bank should have a proper legal basis for affecting such an offsetting and such right should be enforceable. At the present juncture. central 5 8 . Guarantees For the protected portion of an exposure. In such a case it is possible that the bank treats the deposit as collateral. However. This technique is applicable in cases where a borrower has a deposit with the bank.On Balance Sheet Netting On balance sheet netting is another technique of credit risk mitigation. The advantage to the bank under this technique is that the capital requirement for that loan will be calculated after offsetting the value of the deposit.

w is zero).e.5 to 2 times < 1.5 times <= 4 4 to 6 6 to 7 7 to 8 8 to 10 > 10 <= 30 days Scale and 30% 8% Total Weight Weight s 4% Parameter Range Interest coverage ratio >=5 times 4 to 5 times 3 to 4 times 2 to 3 times 1. Range >= 5 times 4 to 5 times 3 to 4 times 2 to 3 times 1.5 times 5 4 3 2 1 0 5 4 3 2 1 0 Total debt to net cash accruals <=4 4 to 6 6 to 7 7 to 8 8 to 10 >10 4% Ratio Analysis Debtors & Inventory turnover period <=90 days 5 22% 4% 5 8 . there will be no additional capital requirement (i.bank or bank.5 to 2 times <1. this equates to . CREDIT SCORING MODEL AT ICICI BANK Details of parameters respective weightage FINANCIAL RISK Coverage Manufacturing Nonmfgrs.pure substitution.

15 to 1.90 to 120 120 to 150 150 to 210 210 to 270 >270 days TOL/TNW <= 1 1 to 1.33 to 1.33 to 1.5 to 2 2 to 3 3 to 4 >4 >= 1.0% 5 4 3 2 1 4% Up to 25% Up to 20% 5 4 4% 5 8 .75 times 1.75 1.75 1.5 2.5 1.33 1.5 to 2 2 to 2.25 to 1.75 times 1.25 1 to 1.33 1.5 to 3 >3 Current ratio >=1.15 to 1.25 to 1.5 1.15 <1 Sales Trend* Increase in sales /gross receipts over last two available audited years Up to 25% Up to 20% Up to 15% Up to 10% 10-0% EBIDTA Trend* Increase in EBIDTA over last two available audited years Up to 25% Up to 20% 30 to 45 45 to 60 60 to 90 90 to 120 >120 days <= 1 1 to 1.15 <1 4 3 2 1 0 5 4 3 2 1 0 5 4 3 2 1 0 4% 4% Up to 25% Up to 20% Up to 15% Up to 10% 10% .25 1 to 1.

Up to 15% Up to 10% 10% .0% TNW Trend* Increase in TNW over last two available audited years Up to 25% Up to 20% Up to 15% Up to 10% 10-0% *In case the trends are not available. the score would be allocated to other Financial Performance norms in proportion to the present respective assigned scores MANAGEMENT RISK Parameter Business vintage (years) Range > =10 years Above 5 years but up to 10 yrs Above 2 years but up to 5 years Below 2 years Personal net worth of promoters providing PG (Rs. in mn) More than 50 mn Between 25 mn to Rs 50 mn Between 25 mn and Rs 10 mn Below Rs 10 mn Constitution of the entity Public limited company Up to 15% Up to 10% 10% .0% 3 2 1 Up to 25% Up to 20% Up to 15% Up to 10% 10% -0% 5 4 3 2 1 2% 25% Scale 5 4 Weight 5% 3 1 5 4 3 2 5 5% 5% 5 8 .

but negligible business compared to main entity More than one firm/ company but not in exactly same line of business. all entities have comparable business volume More than one firm/company in exactly same line of business & all entities have comparable business volume Promoters’ legal descendent(s) is/are adult and is/also also Partner/Director in the business 4 3 2 1 5 5% 4 3 2 Succession Risk 5 5% 5 8 .Private limited company Registered partnership firm Sole proprietorship concern HUF Business Commitment & Fund Diversion Risk Sole business interest of promoter Promoter has other firm/companies .

Promoters’ legal descendents is/are adult and is/are involved in business only in executive capacity Promoters’ legal descendent(s) is/ are adult but not involved in the business (borrowing entity) in any way Promoter’s legal descendents have lot reached 18 years of age Promoters don’t have any legal descendent TRANSACTION HISTORY 4 3 2 0 25% Parameter Inward Cheque Returns Range Up to 1 Up to 2 Up to 3 Up to 4 Up to 5 Scale 4 3 2 1 0 Weight 5% Average Balance in 6 month period (For Current Account Customers Only) In case of Cash Credit and Overdraft Accounts . 200.000 – High 150.000 – 5 4 10% 5 8 .Refer next point.

000 100.000 – 150. percentages reduced by 50%) Up to 40% 5 5% 5 4 3 2 1 0 10% 3 2 1 0 Up to 35% Up to 30% Up to 25% Up to 20% Up to 15% 4 3 2 1 0 No.200.000 75.000 50.000 < 50000 Overdrawings in the last six months in case of Cash Credit and Overdraft Account Customers Up to 1 event Up to 2 events Up to 3 events Up to 4 events Up to 5 events Up to 6 events Credit summation in 6 month period As a percentage of latest audited turnover (As 6 months is compared with One year.000 – 75.000 – 100. of Credits in 6 month period 101 – High 26 – 100 11 – 25 3 – 10 5 4 3 1 5% 5 8 .

Cash Credit account or Overdraft account with ICICI Bank. 5 8 . where customer does not has the respective Current Account. the respective score would be proportionately allocated in the scoring model.0–2 0 30 **In case.

This information includes:  Working Capital to Total Assets  Retained Earnings to Total Assets  Earnings before Interest and Tax to Total Assets  Market Capitalization3 to Book Value of Debt  Sales to Total Assets 5 8 . All the banks belong to either public sector or the private sector. They are secondary databases and no aid of primary data has been taken. In this paper a total of 40 Indian banks have been taken for the purpose of study.DATA DESCRIPTION: All the data collected in this project is sourced from various web sites and database sites such as the RBI database web site and various database. The other group is used to test the accuracy of the model. The total group of 40 banks is then divided into two groups of 20 each both having equal number of companies. Then various information have been obtained regarding these banks for the purpose of the study. The first group is used to develop the co-efficient for the discriminant analysis.

ICICI Bank has three centralized groups: • the Global Risk Management Group • the Compliance Group and • the Internal Audit Group . assess and monitor all of ICICI Bank's principal risks in accordance with well-defined policies and procedures. ICICI Bank is primarily exposed to credit risk. measure and monitor the various risks that arise and that the organization adheres strictly to the policies and procedures. we are exposed to risks that are particular to our lending. Our goal in risk management is to ensure that we understand. • • The Global Risk Management Group. with a mandate to identify. The Compliance Group reports to the Audit Committee of the board of directors and the Managing Director and CEO. which are established to address these risks. In addition. Middle Office Groups and Global Operations Group report to a whole time Director. liquidity risk. operational risk and legal risk. policies and internal approvals. market risk.ANALYSIS & FINDINGS RISK MANAGEMENT As a financial intermediary. The Global Risk Management Group is further organized into: • • the Global Credit Risk Management Group the Global Market and Operational Risk Management Group. 5 8 . transaction banking and trading businesses and the environment within which we operate. the Credit and Treasury Middle Office Groups and the Global Operations Group monitor operational adherence to regulations.

The rating factors in quantitative. all products. We have standardized credit approval processes.• The Internal Audit Group reports to the Audit Committee of the board of directors. The rating serves as a key input in the approval as well as post-approval credit processes. qualitative issues and credit enhancement features specific to the transaction. and regulatory and compliance issues in relation thereto. has been well internalised within the Bank. The Asset Liability Management Committee is responsible for managing the balance sheet and reviewing the asset-liability position to manage ICICI Bank's liquidity and market risk exposure The Compliance Group is responsible for the regulatory and anti-money laundering compliance of ICICI Bank. We measure. policies and authorisations are approved by the Board or a Board Committee or pursuant to 5 8 . The Risk Committee reviews risk management policies in relation to various risks including portfolio. regulatory bodies and industry experts. as a concept. We have developed internal credit rating methodologies for rating obligors. CREDIT RISK Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender. investment policies and strategy. These groups are independent of the business units and coordinate with representatives of the business units to implement ICICI Bank's risk management methodologies. Industry knowledge is constantly updated through field visits and interactions with clients. Committees of the board of directors have been constituted to oversee the various risk management activities. interest rate. Credit rating. liquidity. In our retail credit operations. The Audit Committee provides direction to and also monitors the quality of the internal audit function. The rating for every borrower is reviewed at least annually. which include a well-established procedure of comprehensive credit appraisal and rating. The Credit Committee reviews developments in key industrial sectors and our exposure to these sectors as well as to large borrower accounts. monitor and manage credit risk for each borrower and also at the portfolio level.

Credit approval authority lies only with our credit officers who are distinct from the sales teams. External agencies such as field investigation agencies and credit processing agencies are used to facilitate a comprehensive due diligence process including visits to offices and homes in the case of loans to individual borrowers.Review of industry sectors . Before disbursements are made.Ensure Monitoring and follow-up by building appropriate systems such as CAS Design appropriate credit processes. is managed by the Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at the transaction level as well as in the portfolio context. The functions of this department include: Review of Credit Origination & Monitoring . the most significant risk faced by ICICI Bank. We continuously refine our retail credit parameters based on portfolio analytics. Credit scoring models are used in the case of certain products like credit cards.Review of large exposures in industries/ corporate groups/ companies . The department has done detailed studies on default patterns of loans and prediction of defaults in the Indian context. The industry analysts of the department monitor all major sectors and evolve a sectoral outlook.Default risk & loan pricing .Methodology to measure portfolio risk .Credit Risk Information System (CRIS) 5 8 .Credit rating of companies/structures . operating policies & procedures Portfolio monitoring . Risk-based pricing of loans has been introduced. Our credit officers evaluate credit proposals on the basis of the approved product policy and risk assessment criteria. CREDIT RISK MANAGEMENT BY ICICI BANK Credit risk. It also draws upon reports from the Credit Information Bureau (India) Limited (CIBIL). the credit officer conducts a centralised check on the delinquencies database and review of the borrower’s profile.authority delegated by the Board. which is an important input to the portfolio planning process.

Borrower risk is evaluated by considering: • the financial position of the borrower by analyzing the quality of its financial statements. including delegation of powers and creation of suitable control points in the credit delivery process with the objective of improving customer response time and enhancing the effectiveness of the asset creation and monitoring activities. Monitoring Monitor adherence to credit policies of RBI During the year. In addition. namely the Credit Risk Information System. Credit Risk Assessment Procedures for Corporate Loans In order to assess the credit risk associated with any financing proposal. Availability of information on a real time basis is an important requisite for sound risk management. the CRC & AD has implemented a sophisticated information system. the department has been instrumental in reorienting the credit processes. payment record and financial conservatism. its financial flexibility in terms of ability to raise capital and its cash flow adequacy. 1. ICICI Bank also uses RAM to manage its credit risk. New Product Approval Policy. To aid its interaction with the strategic business units.Focused attention to structured financing deals . and • the quality of management by analyzing their track record. the CRC & AD has designed a webbased system to render information on various aspects of the credit portfolio of ICICI Bank. and provide real time information on credit risk.Pricing. • the borrower's relative market position and operating efficiency. Industry risk is evaluated by considering: 5 8 . its past financial performance. ICICI Bank assesses a variety of risks relating to the borrower and the relevant industry.

2. ICICI Bank has a scale of 10 ratings ranging from AAA to B. cyclicality and government policies relating to the industry. The credit rating for every borrower is reviewed at least annually.Corporate Finance Procedures 4. an additional default rating of D and short-term ratings from S1 to S8. It also reviews the completeness of documentation. Every proposal for a financing facility is prepared by the relevant business unit and reviewed by the appropriate industry specialists in the Global Credit Risk Management Group before being submitted for approval to the appropriate approval authority. 5 8 . its growth outlook. including return on capital employed. All borrower accounts are reviewed at least once a year. and • certain industry financials.Credit Monitoring Procedures for Corporate Loans . At the end of the 12 month validity period (18 months in case of borrowers rated AA. ICICI Bank reviews the loan arrangement and the credit rating of the borrower and takes a decision on continuation of the arrangement and changes in the loan covenants as may be necessary. operating margins and earnings stability. The approval process for non-fund facilities is similar to that for fund-based facilities. After conducting an analysis of a specific borrower's risk. the Global Credit Risk Management Group assigns a credit rating to the borrower.Working Capital Finance Procedures 5. ICICI Bank also reviews the ratings of all borrowers in a particular industry upon the occurrence of any significant event impacting that industry.and above). such as the importance of the industry to the economy. • the competitiveness of the industry.Project Finance Procedures 3.• certain industry characteristics. creation of security and insurance policies for assets financed. Working capital loans are generally approved for a period of 12 months. Credit rating is a critical input for the credit approval process.The Credit Middle Office Group monitors compliance with the terms and conditions for credit facilities prior to disbursement. ICICI Bank determines the desired credit risk spread over its cost of funds by considering the borrower's credit rating and the default pattern corresponding to the credit rating.

2007 are given below: 5 8 .• • • • Retail Loan Procedures Small Enterprises Loan Procedures Rural and Agricultural Loan Procedures Credit Approval Authorities CREDIT RATINGS ICICI Bank’s credit ratings by various credit rating agencies at March 31.

32. pending 5 8 .60 billion) of foreign currency bonds raised for Upper Tier II capital have been excluded from the above capital adequacy ratio computation.CAPITAL ADEQUACY (1) USD 750 million (Rs.

5 8 . have been reduced from Tier I capital while computing the capital adequacy ratio. Commercial real estate exposure and investments in venture capital funds have been considered at a risk weightage of 150%. including Tier I capital adequacy ratio of 7.50 billion at year-end fiscal 2007. other consumer loans and capital market exposure at a risk weightage of 125%. 6. the total capital adequacy ratio would be 12.81%.0%. which are primarily based on the capital adequacy accord reached by the Basel Committee of Banking Supervision. The risk-weighted assets at year-end fiscal 2006 and year end fiscal 2007 also include the impact of capital requirement for market risk on the held for trading and available for sale portfolio. Bank of International Settlements in 1988.69%. It is required to maintain a minimum ratio of total capital to risk adjusted assets of 9. Its total capital adequacy ratio calculated in accordance with the RBI guidelines at year-end fiscal 2007 was 11.27%.10 billion and unamortised amount of expenses on Early Retirement Option Scheme amounting to Rs. ICICI Bank is subject to the capital adequacy requirements of the RBI.42% and Tier II capital adequacy ratio of 4. Deferred tax asset amounting to Rs. If these bonds were considered as Tier II capital. In accordance with the RBI guidelines. at least half of which must be Tier I capital. 0. Classification of gross assets (net of write-offs and unpaid interest on non-performing assets). the risk-weighted assets at year-end fiscal include home loans to individuals at a risk weightage of 75%.clarification required by RBI regarding certain terms of these bonds.

(1) Includes loans. debentures. NON-PERFORMING ASSETS 5 8 . lease receivables and excludes preference shares. (2) All amounts have been rounded off to the nearest Rs. 10.0 million.

(1) Net of write-offs and interest suspense. (4) All amounts have been rounded off to the nearest Rs.0 million. (3) Customer assets include advances and credit substitutes like debentures and bonds. (2) Excludes preference shares. 10. 5 8 .

5 8 .0792 .04007 .01075 .0879 . Deviation .812 -47.000 40 40.000 20 20.02627 .000 40 40.000 40 40.000 Fin_health Bad Fin_Health Good Fin_Health Total liquidity leverage profitability solvency activity liquidity leverage profitability solvency activity liquidity leverage profitability solvency activity Mean . From the group statistics table it is clear that the mean and standard deviation of the variables is not very high.000 20 20.00956 .0855 .00758 .000 20 20.514 -45.0002 .00063 This table provides the mean and standard deviation for the variables for two groups.ANALYSIS OF THE DATA THROUGH DISCRIMINANT ANALYSIS Group Statistics Valid N (listwise) Unweighted Weighted 20 20.01860 .000 20 20.000 40 40.00022 .0047 .000 40 40.00086 .0063 .0055 .000 20 20.03277 .000 20 20.01118 .00798 .885 The ranks and natural logarithms of determinants printed are those of the group covariance matrices.000 20 20.0965 .1327 .0432 .000 20 20. Log Determinants Fin_health Bad Fin_Health Good Fin_Health Pooled within-groups Rank 5 5 5 Log Determinant -49.0746 .0856 .16347 .0823 .12414 .00728 .0001 Std.000 20 20.0000 .

but the order is otherwise the same. Larger log determinants correspond to more variable groups. Each test displays the results of a one-way ANOVA for the independent variable using the grouping variable as the factor.515 df1 1 1 1 1 1 df2 38 38 38 38 38 Sig.021 . Standardized Canonical Discriminant Function Coefficients Function liquidity leverage profitability solvency activity 1 1.068 The standardized coefficients allow you to compare variables measured on different scales.Log determinants are a measure of the variability of the groups. Tests of Equality of Group Means Wilks' Lambda .886 . The table suggests that solvency is best.516 .477 liquidity leverage profitability solvency activity The tests of equality of group means measure each independent variable's potential before the model is created.033 . . Wilks' lambda is another measure of a variable's potential. only liquidity.847 .907 .220 . According to the results in this table. profitability and solvency variable in the discriminant model is significant.615 .637 5.989 .430 3. It indicates the importance of the independent variables in predicting the dependent variables. the variable probably does not contribute to the model. 5 8 .064 .10.867 .987 F 4. If the significance value is greater than 0.959 .195 . Large differences in log determinants indicate groups that have different covariance matrices. Smaller values indicate the variable is better at discriminating between groups.913 . This table downgrades the importance of leverage ratio. Coefficients with large absolute values correspond to variables with greater discriminating ability.

104*X3+8.19*X4+108. Calculating the discriminant scores The canonical standardized coefficients are the coefficients of the discriminant function and are used in forming the discriminant equation THE DISCRIMINANT EQUATION Discriminant score = -9.495 -9.835*X2+59.495*X5 Classification of companies Now the next step is deciding the range which will categorize the company as of sound financial health or of bad financial health. 5 8 .104 8.258*X1+ 28.835 59.258 28.033+38. This is done by taking out the mean of group Centroids.190 108.Canonical Discriminant Function Coefficients Function liquidity leverage profitability solvency activity (Constant) 1 38.033 Unstandardized coefficients The co-efficients given in this table is used to develop the actual equation used for predicting and help to classify new variables.

986 mean (Non - Therefore any positive (greater than zero) value of the discriminant score will lead to classification as defaulters. and any negative (less than zero) value of the discriminant score will lead to classification as non-defaulters banks So in future when we want to predict whether a company has a bad or good health.Functions at Group Centroids Original Group Function Critical Value Bad Financial Health -.0 +.986. this means that the midpoint of these two is zero.986 Mean of group 1 of group 2 (Defaulters) Defaulters) 0. we can simply use the discriminant equation to calculate the discriminant scores and predict the group membership.986 Unstandardized canonical discriminant functions evaluated at group means 0 The range comes out to be Bad financial health company< 0 < good health financial company Thus the new means for group 1 (performing banks) is -0.986 Good Financial Health 0. This is clear when the two means are plotted on a straignt line. 5 8 . Therefore the model helps us in evaluating the financial health of a company and see if its position is in good or dire state so that we can manage our risk.986 and for group 2(non-performing banks) is 0. and their mid points are located as shown below: -0.

CONCLUSION In this paper. From all the above calculations it is now very easy for the banks to identify their future defaulters. The ratio analysis done in this project gave us some valuable insights regarding the banks. profitability. It gives some valuable insights to the banks as to how to enhance their performance in the present situation. The country thus needs to strengthen its financial system. Presently the financial system of the entire world is passing through a very sensitive phase. an attempt has been made to study the ‘Credit Risk Management Framework’ of ICICI BANK and also to arrive at a model that can help other indian banks to manage their credit risk in a better way. Hence there is a need to strengthen the Indian banks and this paper can help in doing so. Banks form a major part of the Indian financial system. The paper can be of immense use in the Indian scenario as it takes into consideration the current positions of the Indian banks. 5 8 . The banks through the help of this paper can identify their defaulters and then can lay down their strategies accordingly. activity and leverage positions of the banks. There is a global financial turmoil prevalent in the world economy which is affecting the Indian economy as well. it helped in clearly viewing the solvency. liquidity. Hence the paper helps the banks in increasing its efficiency.

K.RECOMMENDATIONS: Following are some of the recommendations based on the study done on credit risk management in banks: • The use of derivatives in banks for credit risk management is almost negligible.. An objective and reliable database has to be built up for which bank has to analyze its own past performance data relating to loan defaults. Its use should be implemented meticulously as it is a very effective method to reduce risk. computerization and networking of the branch activities. • Banks should sharpen their credit assessment skills by providing better training to enhance their conceptual understanding of credit risk and improving their skills in handling it which lay more emphasis in providing finance to the wide range of activities in the services sector. If it implemented properly in the banks can lead to increased efficiency of the banks. Risk Management in Indian Banks. Mumbai: Himalaya Publishing House Pvt.. 5 8 . • The effectiveness of risk management depends on efficient information system. this can lead to efficient credit risk management in banks. Bhattacharya. operational losses etc. • The Indian banks should use this technique of enhancing its performance as it uses some very strong calculations and interpretations which can prove to be of immense help. REFERENCES: Books • Dr. 2003. Ltd. 2nd Edition. • This paper uses some very logical calculations.M.

dfid. Robert E Stevens.pdf • • • • • • • • • http://papers.ssrn. Bruce Wrenn) • Business Research Methods: Using SPSS in Business Research – ICMR Publications.com www.nseindia.ssrn.org/en/docs/dp_152.cfm?abstract_id=565343 http://www. G.ssrn.icici.gov.pdf http://papers.com/sol3/papers. Websites • www.ssrn.org.• “Risk Management In Commercial Banks” (A Case Study Of Public And Private Sector Banks) (Rekha Arunkumar.unctad.com http://www.com/sol3/papers.cfm?abstract_id=636119 5 8 .uk/Pubs/files/finsecworkingpaper.in www.org.com/sol3/papers.in www. ( David L Loudon.iba. Kotreshwar) • Marketing Research: Texts and Cases.en.cfm?abstract_id=139825 http://papers.

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APPENDIX 5 8 .

00 27.407.28 7.72 0.51 3.76 39.75 1.883.30 0.101.99 11.946.089.12 0.51 33.605.333.50 0.785.533.24 5.552.00 5.32 0.60 0.59 17.00 0.00 1.40 5.78 0.42 0.79 236.98 0.37 5.33 85.10 38.725.03 0.673.45 36.85 1.63 0.98 2.18 0.53 2.00 17.00 19.766.747.00 115.024.58 109.082.21 7.600.13 0.995.61 9.00 12.23 544.07 0.224.616.467.00 22.461.77 3.83 0.857.00 17.32 23.440.148.00 28.00 0.79 0.66 619.227.30 7.078.77 9.78 -13.09 9.983.00 32.33 8.13 3.00 0.85 29.93 5.250.517.63 4.110.00 39.91 28.925.17 100.ICICI Bank Ltd.90 1.37 28.992.00 -253.00 901.747.092.61 0.17 9.67 34.727.00 2.00 3.00 38.68 578.00 0.15 17.971.58 3.57 -12.69 0.30 5.00 1.132.70 669.00 1.532.00 2.45 16.45 3.22 0.467.95 120.35 0.22 0.898.916.00 17.56 20.50 0.475.703.92 0.702.62 17.05 5.00 0.70 110.Annualised (Rs) 32.00 1.611.36 0.256.24 28.57 4.00 0.00 1.49 556.20 8.00 -421.41 623.592.157.83 0.464.540.55 5 8 .741.13 1.00 1.13 0.13 0.73 0.00 33.00 -509.238.5 0.740.269.95 7.36 0.Profit & Loss .00 28.979.49 678.94 13.50 3.92 0.25 984.73 4. Mar'10 Mar'09 Mar'08 Mar'07 Mar'06 12 Months 12 Months 12 Months 12 Months 12 Months INCOME: Sales Turnover Excise Duty NET SALES Other Income TOTAL INCOME EXPENDITURE: Manufacturing Expenses Material Consumed Personal Expenses Selling Expenses Administrative Expenses Expenses Capitalised Provisions Made TOTAL EXPENDITURE Operating Profit EBITDA Depreciation Other Write-offs EBIT Interest EBT Taxes Profit and Loss for the Year Non Recurring Items Other Non Cash Adjustments Other Adjustments REPORTED PAT KEY ITEMS Preference Dividend Equity Dividend Equity Dividend (%) Shares in Issue (Lakhs) EPS .709.33 11.00 28.830.51 -0.447.00 11.25 2.00 -511.52 0.89 22.12 65.33 1.750.767.00 38.39 0.571.758.68 4.29 840.052.358.00 759.793.00 1.349.00 0.337.86 0.39 0.10 134.678.00 4.126.706.87 37.597.581.484.00 0.457.457.250.592.00 39.517.60 6.

5 8 .

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