A Study of Management of Assets and Liabilities in Relation To Performance and Profitability in ICICI Bank

Project Report
A study of
Management of Assets and Liabilities
in relation to
performance and profitability
in ICICI bank
1
Contents:
Chapter 1: Introduction
 Introduction of Indian Banking System

 Structure of Banking Sector
 Concept of ALM
o ALM Objectives
 Risk Management and ALM
o Credit Risk
o Market Risk
o Operational Risk
 ALM System in Banks – RBI Guidelines 1999
Chapter 2: Review of Literature and Research Methodology
 Review of Literature
 Research Methodology
o Need of Study
o Objectives of Study
o Methodology
o Scope and Need
o Limitations
o Chapter scheme
Chapter 3: Overview & Performance of ICICI Bank
 Brief Profile of ICICI Bank

o Subsidiaries of ICICI Bank
 Credit Deposit Ratio
 Loans and Advances
 Deposit Mobilization
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 Investment
 Priority Sector Advances
 Net Interest Margin
 Non-Interest Income
 Conclusions
Chapter 4: Assets Management of ICICI Bank
 Areas of Asset Management

o Reserve Position Management
o Investment Management
o Liquidity Management
 Measuring and Managing Liquidity Risk
 Conclusions
Chapter 5: Liabilities Management of ICICI Bank
 Capital
 Reserves and Surplus
 Deposits
o Fixed Deposit/ Term Deposit
o Saving Bank Deposit
o Demand Deposit
o Borrowings
o Other Liabilities and Provisions
 Conclusions
Chapter 6: Profitability Analysis of ICICI Bank
 Analysis of Ratios
o Income
o Expenditure
o Spread Ratios
o Burden Ratios
o Net Profit Ratios
 Conclusions
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Chapter 7: Loan Portfolio Management of ICICI Bank
 Loan Portfolio Management

o Loan Portfolio Objectives
 Types of Loans
 Constituent of Loan Portfolio of Banks
 Conclusions
Chapter 8: Findings and Suggestions
 Findings
 Suggestions
Bibliography
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Chapter 1
Introduction
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Introduction:
Indian banking system, over the years has gone through various phases after
establishment of Reserve Bank of India in 1935 during the British rule, to function
as Central Bank of the country. Earlier to creation of RBI, the central bank
functions were being looked after by the Imperial Bank of India. With the 5-year
plan having acquired an important place after the independence, the Govt. felt
that the private banks may not extend the kind of cooperation in providing credit
support, the economy may need. In 1954 the All India Rural Credit Survey
Committee submitted its report recommending creation of a strong, integrated,
State-sponsored, State-partnered commercial banking institution with an
effective machinery of branches spread all over the country. The
recommendations of this committee led to establishment of first Public Sector
Bank in the name of State Bank of India on July 01, 1955 by acquiring the
substantial part of share capital by RBI, of the then Imperial Bank of India.
Similarly during 1956-59, as a result of re-organization of princely States, the
associate banks came into fold of public sector banking.
Another evaluation of the banking in India was undertaken during 1966 as the
private banks were still not extending the required support in the form of credit
disbursal, more particularly to the unorganized sector. Each leading industrial
house in the country at that time was closely associated with the promotion and
control of one or more banking companies. The bulk of the deposits collected,
were being deployed in organized sectors of industry and trade, while the
farmers, small entrepreneurs, transporters, professionals and self-employed had
to depend on money lenders who used to exploit them by charging higher
interest rates. In February 1966, a Scheme of Social Control was set-up whose
main function was to periodically assess the demand for bank credit from various
sectors of the economy to determine the priorities for grant of loans and
advances so as to ensure optimum and efficient utilization of resources. The
scheme however, did not provide any remedy. Though a no. of branches were
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opened in rural area but the lending activities of the private banks were not
oriented towards meeting the credit requirements of the priority/weaker sectors.
On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and
Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank
with paid up capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and
with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6
more banks were nationalized which brought 91% of the deposits and 84% of the
advances in Public Sector Banking. During December 1969, RBI introduced the
Lead Bank Scheme on the recommendations of FK Narasimham Committee.
Meanwhile, during 1962 Deposit Insurance Corporation was established to

provide insurance cover to the depositors.
In the post-nationalization period, there was substantial increase in the no. of

branches opened in rural/semi-urban centers bringing down the population per
bank branch to 12000 appx. During 1976, RRBs were established (on the
recommendations of M. Narasimham Committee report) under the sponsorship
and support of public sector banks as the 3rd component of multi-agency credit
system for agriculture and rural development. The Service Area Approach was
introduced during 1989.
While the 1970s and 1980s saw the high growth rate of branch banking net-work,
the consolidation phase started in late 80s and more particularly during early 90s,
with the submission of report by the Narasimham Committee on Reforms in
Financial Services Sector during 1991.
The banking sector in India consists of vast and diversified network operating at
several tiers, linked operationally to the international, multilateral financial
organization, national government machinery and other sectors of the economy
at various other points. Over the last three decades, however the role of banking
in the process of financial intermediation has undergone complete
metamorphosis due to changes in the global financial system. It is now clear that
a thriving and vibrant banking system requires a well developed financial
structure with multiple intermediaries operating in the market, with different risk
profiles. The present banking system in India was evolved to meet the financial
needs of trade and industry and also to satisfy the credit needs of the institutions
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of the country. The constituent of the present banking system in India are of
varying origin and sizes. At the apex is the Reserve Bank of India, the central bank
of the country.
1.1 Structure of Banking Sector:
Banking Structure
Scheduled Commercial Banks Non- scheduled Commercial Banks

(168) (4)
Public Sector Banks Private Sector Banks Foreign Banks Regional Rural Banks
(28) (22) (30) (88)
New Private Sector Banks Old Private Sector Banks

(7) (15)
SBI Group Other Public Sector Banks Nationalized Banks

(8) (1) (19)
SBI Subsidiary Banks

(1) (7)
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Scheduled Banks in India constitute those banks which have been included in the Second
Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks
in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.
The banks included in this schedule list should fulfill two conditions.
1. The paid capital and collected funds of bank should not be less than Rs. 5 lac.
2. Any activity of the bank will not adversely affect the interests of depositors.
Non-Scheduled Commercial Banks: The banks which are not under the purview of
second schedule of RBI Act.
A private sector bank is made up of all businesses and firms owned by ordinary
members of the general public whereas, public sector bank is owned and controlled by a
government while the banks owned by foreign entities are called as foreign banks.
Regional Rural Banks are special in there type. The banks provide credit to the weaker
sections of the rural areas, particularly the small and marginal farmers, agricultural
labourers, artisans and small entrepreneurs.
1.2 Concept of ALM
ALM is the process involving decision making about the composition of assets and
liabilities including off balance sheet items of the bank / FI and conducting the
risk assessment. In banking, asset liability management is the practice of
managing risks that arise due to mismatches between the assets and liabilities
(debts and assets) of the bank.
Banks face several risks such as the liquidity risk, interest rate risk, credit risk and
operational risk. Asset Liability Management is a strategic management tool to
manage interest rate risk and liquidity risk faced by banks, other financial services
companies and corporations.
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Banks manage the risks of Asset Liability mismatch by matching the assets and
liabilities according to the maturity pattern or the matching the duration, by
hedging and by securitization.
 ALM is concerned with strategic management of Balance Sheet by giving

due weightage to market risks viz. Liquidity Risk, Interest Rate Risk &
Currency Risk.
 ALM function involves planning, directing, controlling the flow, level, mix,
cost and yield of funds of the bank
 ALM builds up Assets and Liabilities of the bank based on the concept of
Net Interest Income (NII) or Net Interest Margin (NIM).
 ALM is concerned with strategic Balance Sheet management involving all

market risks
 It involves in managing both sides of balance sheet to minimize market risk
ALM Objectives:
 Liquidity Risk Management.

 Interest Rate Risk Management.
 Currency Risks Management.
 Profit Planning and Growth Projection.
Liquidity Risk:
Liquidity risk refers to the risk that the institution might not be able to generate
sufficient cash flow to meet its financial obligations. The factors affecting liquidity
risk are:
 Over extension of credit

 High level of NPAs
 Poor asset quality
 Mismanagement
 Non recognition of embedded option risk
 Reliance on a few wholesale depositors
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 Large undrawn loan commitments
 Lack of appropriate liquidity policy & contingent plan
Interest Rate Risk Management
 Interest Rate risk is the exposure of a bank’s financial conditions to

adverse movements of interest rates.
 Though this is normal part of banking business, excessive interest rate risk
can pose a significant threat to a bank’s earnings and capital base.
 Changes in interest rates also affect the underlying value of the bank’s
assets, liabilities and off-balance-sheet item.
 Interest rate risk refers to volatility in Net Interest Income (NII) or
variations in Net Interest Margin(NIM).
 Therefore, an effective risk management process that maintains interest
rate risk within prudent levels is essential to safety and soundness of the
bank.
Currency Risk Management
It is the risk that the value of an asset/ liability/ financial instrument will change
due to changes in FX rates. It has a direct relation with the volatility of currencies,
if the currencies are more volatile then the currency risk is higher. Currency risk is
evaluated using probability distributions. Capital investment in an external market
depends largely upon the expected rate of return on the investment as measured
relative to the investment currency. The expected return is derived almost
entirely from volume projections, expenditure estimates, and the resulting cash
flow in the operations currency. These projections are then translated into
the investment currency for comparison with other capital investment
opportunities on an equivalent basis. As a result, investment decisions rely almost
entirely on translations exposure when considering currency risk.
Profit Planning and Growth Projection
Profit planning is must for bank. It largely depends upon the growth of the sector
and the handling of deposits and investments by the bank. It is an organized
method of collecting and analyzing bank’s operating information for the purpose
of providing the bank manager with the information he needs to effectively
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manage the bank. It is a simple procedure by which information collected is used
to design strategies for the bank. It is based on the development of standards for
the key costs and revenues in the business and the regular comparison of actual
costs and revenues to the standards. Simple projections will provide a picture of
operating results daily. Bad news will be known almost immediately, while there
is time to correct the cause.
1.3 RISK MANAGEMENT AND ALM
Risk is the potentiality that both the expected & unexpected events may
have an adverse impact the bank’s capital & earnings. It is essential to have an
understanding of the risk faced by the bank so as to effectively manage & control
them.
As per RBI guidelines issued in 1999, there are 3 major types of risks encountered
by the banks:
1. Credit Risk
2. Market Risk
3. Operational Risk
(1) Credit Risk:

It is the risk related to the possibility of the default in the repayment obligation by
the borrowers of the funds. It is most simply defined as the potential of a bank
borrower or counter party to fail to meet its obligation in accordance with agreed
terms. For most banks, loans are the largest and most obvious source of credit
risk.
 Counter Party Risk: It is related to non performance of the trading partners
due to counterparty’s refusal and or inability to perform.
 Country Risk: It is also a type of credit risk where non performance by a
borrower or counterparty arises due to constrained or restrictions imposed
by a country.
(2) Market Risk:
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It is defined as the possibility of loss to a bank caused by the changes in the
market variables i.e. movement in equity and interest rate markets, currency
exchange rates and commodity prices.
(3) Operational Risk:

It is the risk of loss resulting from inadequate or failed internal processes, people
and systems or from external events. It may loosely be comprehended as any risk
which is not characterized as market or credit risk.
The Narasimham Committee reports on the banking sector reforms highlighted
the weakness in the Indian Banking system and suggested reforms based on the
Basel Norms.
ALM System in Banks – RBI Guidelines 1999
RBI has issued guidelines for ALM system in banks. RBI gave some instruction with
reference to the implementation of the guidelines. Banks should give adequate
attention to putting in place an effective ALM System. Banks should set up an
internal Asset-Liability Committee (ALCO), headed by the CEO/CMD or the ED.
The Management Committee or any specific Committee of the Board should
oversee the implementation of the system and review its functioning periodically.
Also in order to enable the banks to monitor their liquidity on a dynamic basis
over a time horizon spanning from 1-90 days, an indicative format is given. The
statement of short-term Dynamic Liquidity should be prepared as on each
reporting Friday and put up to the ALCO/ Top Management within 2/3 days from
the close of the reporting Friday. RBI guidelines for ALM cover the banks’
operations in domestic currency. In regard to foreign currency risk, banks should
follow the instructions contained in Circular AD No. 52 dated December 27, 1997
issued by the Exchange Control Department. Keeping in view the level of
computerization and the current MIS in banks, adoption of a uniform ALM System
for all banks may not be feasible. The final guidelines have been formulated to
serve as a benchmark for those banks which lack a formal ALM System. Banks
which have already adopted more sophisticated systems may continue their
existing systems but they should ensure to fine-tune their current information
and reporting system so as to be in line with the ALM System suggested in the
Guidelines. Other banks should examine their existing MIS and arrange to have an
information system to meet the prescriptions of the new ALM System. To begin
with, banks should ensure coverage of at least 60% of their liabilities and assets.
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As for the remaining 40% of their assets and liabilities, banks may include the
position based on their estimates. It is necessary that banks set targets in the
interim, for covering 100 per cent of their business by April 1, 2000. The MIS
would need to ensure that such minimum information/data consistent in quality
and coverage is captured and once the ALM System stabilizes and banks gain
experience, they must be in a position to switch over to more sophisticated
techniques like Duration Gap Analysis, Simulation and Value at Risk for interest
rate risk management. They are:
 ALM Information Systems

o Management Information Systems
o Information availability, accuracy, adequacy and expediency
 ALM Organization
o Structure and responsibilities
o Level of top management involvement
 ALM Process
o Risk parameters
o Risk identification
o Risk measurement
o Risk management
o Risk policies and tolerance levels
(i) ALM Information Systems:

ALM has to be supported by a management philosophy which clearly specifies
the risk policies and tolerance limits. This framework needs to be built on
sound methodology with necessary information system as back up. Thus,
information is the key to the ALM process. It is, however, recognized that
varied business profiles of banks in the public and private sector as well as
those of foreign banks do not make the adoption of a uniform ALM System for
all banks feasible. There are various methods prevalent world-wide for
measuring risks. These range from the simple Gap Statement to extremely
sophisticate and data intensive Risk Adjusted Profitability Measurement
methods. However, the central element for the entire ALM exercise is the
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availability of adequate and accurate information with expedience and the
existing systems in many Indian banks do not generate information in the
manner required for ALM. Collecting accurate data in a timely manner will be
the biggest challenge before the banks, particularly those having wide
network of branches but lacking full scale computerization. However, the
introduction of base information system for risk measurement and monitoring
has to be addressed urgently. As banks are aware, internationally, regulators
have prescribed or are in the process of prescribing capital adequacy for
market risks. A pre-requisite for this is that banks must have in place an
efficient information system.
Considering the large network of branches and the lack of (an adequate)
support system to collect information required for ALM which analyses
information on the basis of residual maturity and behavioral pattern, it will
take time for banks in the present state to get the requisite information. The
problem of ALM needs to be addressed by following an ABC approach i.e.
analyzing the behavior of asset and liability products in the sample branches
accounting for significant business and then making rational assumptions
about the way in which assets and liabilities would behave in other branches.
In respect of foreign exchange, investment portfolio and money market
operations, in view of the centralized nature of the functions, it would be
much easier to collect reliable information. The data and assumptions can
then be refined over time as the bank management gain experience of
conducting business within an ALM framework. The spread of
computerization will also help banks in accessing data.
(ii) ALM Organization:
a) Successful implementation of the risk management process would require

strong commitment on the part of the senior management in the bank, to
integrate basic operations and strategic decision making with risk
management. The Board should have overall responsibility for management of
risks and should decide the risk management policy of the bank and set limits
for liquidity, interest rate, foreign exchange and equity price risks.
b) The Asset - Liability Committee (ALCO) consisting of the bank's senior

management including CEO should be responsible for ensuring adherence to
the limits set by the Board as well as for deciding the business strategy of the
bank (on the assets and liabilities sides) in line with the bank's budget and
decided risk management objectives.
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c) The ALM Support Groups consisting of operating staff should be responsible
for analyzing, monitoring and reporting the risk profiles to the ALCO. The staff
should also prepare forecasts (simulations) showing the effects of various
possible changes in market conditions related to the balance sheet and
recommend the action needed to adhere to bank's internal limits.
The ALCO is a decision making unit responsible for balance sheet planning
from risk -return perspective including the strategic management of interest
rate and liquidity risks. Each bank will have to decide on the role of its ALCO,
its responsibility as also the decisions to be taken by it. The business and risk
management strategy of the bank should ensure that the bank operates
within the limits / parameters set by the Board. The business issues that an
ALCO would consider, inter alia, will include product pricing for deposits and
advances, desired maturity profile and mix of the incremental assets and
liabilities, etc. In addition to monitoring the risk levels of the bank, the ALCO
should review the results of and progress in implementation of the decisions
made in the previous meetings. The ALCO would also articulate the current
interest rate view of the bank and base its decisions for future business
strategy on this view. In respect of the funding policy, for instance, its
responsibility would be to decide on source and mix of liabilities or sale of
assets. Towards this end, it will have to develop a view on future direction of
interest rate movements and decide on funding mixes between
fixed vs floating rate funds, wholesale vs retail deposits, money
market vs capital market funding , domestic vs foreign currency funding, etc.
Individual banks will have to decide the frequency for holding their ALCO
meetings.
(iii)ALM Process:
The scope of ALM function can be described as follows:
 Liquidity risk management

 Management of market risks
 Trading risk management
 Funding and capital planning
 Profit planning and growth projection
The guidelines given in this note mainly address Liquidity and Interest Rate
risks. Measuring and managing liquidity needs are vital for effective operation
16
of commercial banks. By assuring a bank's ability to meet its liabilities as they
become due, liquidity management can reduce the probability of an adverse
situation developing. The importance of liquidity transcends individual
institutions, as liquidity shortfall in one institution can have repercussions on
the entire system. Banks management should measure not only the liquidity
positions of banks on an ongoing basis but also examine how liquidity
requirements are likely to evolve under different assumptions. Experience
shows that assets commonly considered as liquid like Government securities
and other money market instruments could also become illiquid when the
market and players are unidirectional. Therefore liquidity has to be tracked
through maturity or cash flow mismatches. For measuring and managing net
funding requirements, the use of a maturity ladder and calculation of
cumulative surplus or deficit of funds at selected maturity dates is adopted as
a standard tool.
The phased deregulation of interest rates and the operational flexibility given
to banks in pricing most of the assets and liabilities imply the need for the
banking system to hedge the Interest Rate Risk. Interest rate risk is the risk
where changes in market interest rates might adversely affect a bank's
financial condition. The changes in interest rates affect banks in a larger way.
The immediate impact of changes in interest rates is on bank's earnings (i.e.
reported profits) by changing its Net Interest Income (NII). A long-term impact
of changing interest rates is on bank's Market Value of Equity (MVE) or Net
Worth as the economic value of bank's assets, liabilities and off-balance sheet
positions get affected due to variation in market interest rates. The interest
rate risk when viewed from these two perspectives is known as 'earnings
perspective' and 'economic value' perspective, respectively. The risk from the
earnings perspective can be measured as changes in the Net Interest Income
(NII) or Net Interest Margin (NIM). There are many analytical techniques for
measurement and management of Interest Rate Risk. In the context of poor
MIS, slow pace of computerization in banks and the absence of total
deregulation, the traditional Gap analysis is considered as a suitable method
to measure the Interest Rate Risk in the first place. It is the intention of RBI to
move over to the modern techniques of Interest Rate Risk measurement like
Duration Gap Analysis, Simulation and Value at Risk over time when banks
acquire sufficient expertise and sophistication in acquiring and handling MIS.
The Gap Report should be generated by grouping rate sensitive liabilities,
assets and off-balance sheet positions into time buckets according to residual
maturity or next repricing period, whichever is earlier. The difficult task in Gap
analysis is determining rate sensitivity. All investments, advances, deposits,
borrowings, purchased funds, etc. that mature/reprice within a specified
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timeframe are interest rate sensitive. Similarly, any principal repayment of
loan is also rate sensitive if the bank expects to receive it within the time
horizon. This includes final principal payment and interim installments. Certain
assets and liabilities receive/pay rates that vary with a reference rate. These
assets and liabilities are repriced at pre-determined intervals and are rate
sensitive at the time of repricing. While the interest rates on term deposits are
fixed during their currency, the advances portfolio of the banking system is
basically floating. The interest rates on advances could be repriced any
number of occasions, corresponding to the changes in PLR.
Chapter 2
Review of Literature and
Research Methodology
Review of Literature and Research Methodology:
One of the major imperatives of the financial sector reforms has been to
strengthen the banking sector by improving the financial health of banks through
better capital adequacy and asset quality. The traditional phase of banks as near
financial intermediaries has since altered and Risk management has emerged as
the defining attribute.
With the initiation of the reforms banks were required to evolve strategies rather
than ad-hoc fire fighting solutions. These strategies are executed in the form of
ALM practices. ALM involves quantification of risks and conscious decision making
with regard to asset-liabilities structure in order to maximize interest earning
within the framework of perceived risk. ALM is the only solution for the banks to
survive in this rapid changing environment where the composition, duration and
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risk profile of a bank’s assets and liabilities have an important impact on their
growth and profitability.
Many studies have been concluded in India and abroad to investigate the major
structural changes in the field of banking and the relevance of ALM for
commercial banks in marinating their interest spreads and profitability. In this
context the present chapter is an attempt to review the studies already done and
draw some important conclusions that can serve as a guide mark for the study.
2.1 Review of Literature
Kumar, Ravi T. (2000) in the study, ”Asset Liability Management”, has discussed
the ALM in different models. According to him, ALM is basically a hedging
response to the risk in financial intermediation with ALM in place, managers can
evaluate the impact of alternative decisions on the future risk profiles. Managing
the spread income and controlling the risk associated with generating the spread
are the crucial part of the ALM process for any Bank. He concluded that intense
competition for business on the Asset and Liability side coupled with increasing
volatility in both domestic interest rates and foreign exchange rates is putting
pressure on the management of banks to maintain spreads, profitability and long
term viability. He further concluded that to remain competitive Indian financial
institutions can not afford to remain aloof and they should evolve necessary
system for the adoption of ALM.
Joshi, C. Vasant and Joshi, C. Vinay (2002) in the study, “Managing Indian Banks:
The Challenges Ahead”, emphasized on the importance of ALM in the planning
process. According to them ALM focused on the net interest income of the
institution. The principal purpose of ALM has been to control the size of NII. To
achieve transparency a bank must provide accurate, relevant and sufficient
disclosure of qualitative and quantitative information activities and risk profiles.
In the light of the recommendations of the Basel Committee, the balance sheet
must truly highlight the state of the bank’s health. They concluded that bank
19
should take some amount of risk on their asset liability management, but it
should never be on interest rate predictions, as in a globally competitive
environment. The Indian banks need to build on their strengths and reach the
desired standards as soon as possible.
Rajwade, A. V. (2002) in the study, “Issues in Asset Liability Management – III:

More on Regulatory Framework”, emphasized on different issues involved in ALM
by bank and focused mainly on points arising from the regulatory framework. The
study showed that deregulation of interest rates, itself was a recent idea and that
RBI had an inflation as well as exchange rate target or objective. Again RBI’s
mechanism for implementing monitoring policy was undergoing changes and
refinement. The study found that of the reserved money, around 72% came from
holding of foreign currency reserves and around 28% from RBI holdings of
government securities. The study concluded that fro predicting changes in
interest rates, one will have to take a view of the exchange market demand
supply in future and this was a very difficult exercise as it depended on many
factors such as sentiment, other political or economic scenario, which are beyond
anybody’s control.
Sehgal, M. and Kher, R. (2002) in the study, “Asset Liability Management in the
Indian Banks”, stressed on the objective and aspects of ALM in bank, and to some
extent, on the broader aspects of risk management. They viewed that a sound
ALM system for the bank should encompass review of interest rate outlook,
fixation of interest, product pricing of both assets and liabilities, review of credit
portfolio and credit risk management of foreign exchange operations and
management of liquidity risks. In the present context, ALM exercised should
comprise of prudential management of funds with respect to size and duration
minimizing undesirable maturity mismatch to avoid liquidity problem and
reducing the gap between risks sensitive assets and rate sensitive liabilities with
the given risk taken capacity.
Qamar, F. (2003) in the study, “Profitability and Resource use Efficiency in

Scheduled Commercial Banks in India: A Comparative Analysis of Foreign New
Private Sector, Old Private Sector and Public Sector Banks”, presented that
banking sector reforms on one hand, strive to increase efficiency and profitability
of banking institutions and on the other hand brought the existing banking
institutions face to face with global competition. The objective of the study was to
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examine whether foreign banks, new private sector banks, old private sector
banks and public sector banks differ significantly in terms of their endowment
and risk factors, revenue diversification initiatives, profitability and resource – use
efficiency. The study concluded that public sector banks were better endowed in
their assets based share capital and share holders equity than most other types of
banking institutions in the country.
Gurumoorthy, T. R. (2004) in the study, “Analysis of Income and Expenditure ion

Banks”, attempted to analyze the income, expenditure and operating profit of
public sector banks, foreign banks, old private sector banks and new private
sector banks. The new private sector banks have been in the stage of branch
expansion and have spent for full fledged internet banking. Thus, the percentage
rise in expenditure of the new private sector banks has been greater than that of
the other banks. As far as operating profits are concerned the new private sector
banks stand first, followed by old private sector banks, public sector banks and
foreign banks. In this competitive environment the efficient asset liability
management, project appraisal and recovery mechanism will help to earn the
interest income substantially.
Thimmaiah, G. (2004) in the study, “Asset Liability Management in Post Indian

Banking Sector Reforms”, focused on Asset Liability Management in the bank and
to some extent on broader aspects of risk management. The objective of the
study was to review the interest rate, credit portfolio, investment portfolio, credit
risk management, risk management and management of liquidity risk. In the
study four principal approaches were used to quantify the risk i.e. Gap Method,
Duration Method, Simulation Method and Value at Risk Method. The study
concluded that there was a need of ALM in India because to maximize income
with acceptable risk there was need to emphasize on interest margin/spread,
liquidity and capital which were having desired maneurability.
Prasad, L and Pande, M. C. (2005) in the study, “Asset-Liability Management: An

emerging trend in Banking Sector”, presented the role and importance of asset-
liability management in commercial banks. The study selected the Nainital Bank
Limited as sample which has rendered its services in four states – Uttaranchal,
Uttar Pradesh, Delhi and Haryana. The study was based on secondary data and
the period of the study was four years. The study showed that process of
Globalization has arrived in India, without proper advance planning. The study
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found the slow pace of computerization was barring the progress of ALM in bank.
The study concluded that ALM has been proved of great use in curtailing NPA’s,
increasing profitability and facing competition with other banks. This study
suggested that the commercial banks should improve their Management
Information System as per the needs of ALM.
Raghavan, R. S. (2005) in the study, “Risk Management – An Overview”, discussed

the implication of Basel-II Accord on the capital structure of banks. The purpose
of Basel-II is to introduce a more risk sensitive capital framework with incentives
for good risk management practices. Under Basel-II approach, capital
requirements will increase for those banks that hold high risk assets/ low quality
assets and those with low risk assets (high quality assets), a balanced portfolio as
well as effective risk management control systems may need less capital
requirements. He concluded that the financial system has to cope constantly with
changes in the broader environment in which it operates and face new challenges
that those developments impose on it.
Sharma, K. and Kulkarni, P. R. (2006) in the study, “Asset Liability Management

Approach in Indian Banks: A Review and Suggestions”, emphasized that Assets
Liability Management should ensure a proper balance between funds
mobilization and their deployment with respect to their maturity profiles, cost,
yields and risk exposures. For this Indian Banks need to reorient their credit
deployment strategies. They suggested that Bank should diversify the portfolio
suitably between the small and large borrowers as this will help in reducing risks.
Bank should withdraw their exposure to sunset industries as their loans may turn
into NPA’s. Bank should think in terms of loan exposures to different regions in
the country. It is highly essential to look at credit deployment in terms of
managing credit portfolio and its diversification, both geographically and industry-
wise which helps them to reduce the portfolio risk of credit.
Bhasin, A. (2007) in the study, “Understanding Risks in Banking: A Note”,

endeavored to discuss the important concepts in tasks management as applicable
to banks against the backdrop of Basel-II. The article aims to develop a basic
understanding on major risks surrounding a bank institution as also the more
popular means of managing them. She concluded that risk management calls for
consolidating on the techniques and structures already built rather than going
haphazardly for new techniques as effort have been made already to create an
22
environment for all market participants in terms of regulation, infrastructure and
instruments.
R. P. Sinha (2007) in the study entitled “Asset Quality Based Ranking of Indian
Commercial Bank – a Non-Parametric Approach” - tried to make an asset quality
based ranking of selected (28) Indian commercial Banks. The period of the study
was five years from 2000-01 to 2005-06. The study used data Envelopment
Analysis – a Non-Parametric Tool. The study compared the observed Banks in
terms of total factor productivity growth for the study period. The study found
that the exercise indicated improvement in technical efficiency scores in 2004-05
related to the previous four years. The observed private sector banks exhibited
higher mean technical efficiency relative to the observed public sector banks. The
study concluded that both types of banks were focusing their attention on fee-
based activities as opposed to fund based activities. This was probably the reason
for negative total factor productivity growth exhibited by them during the
observed years.
Batra, N. K. and Kapoor, R. (2008) in the study, “Profitability Analysis of New

Private Sectors Bank in India”, emphasized that banks exerted influence on
economic growth and profit was main cause of business. The study also showed
that if the domestic financial resources of the country were properly channelized
towards productive investment then the economy of that country could be fully
developed. The objective of the study was to evaluate profitability of new private
sector banks and to analyze their relative efficiency in India. The period of the
study was from 2001-05. The data for the study was collected from IBA Bulletins
annual issues and monthly issues, statistical tables relating to banks in India and
from RBI bulletins and from Annual Reports. The study analyzed the performance
of various private sector banks. The study concluded that evaluation of banks in
terms of profitability was very essential because with the help of profits a
business could be flourished to the maximum extent which was the due need for
the existence of Business.
2.2 Research Methodology
2.2.1 Need of the Study:
23
Now a days, the Indian banking sector is waking up to the concept of ALM. The
uncertainty of interest rate movements gave rise to interest rate risk, thereby causing
banks to look for processes to manage their risks. In the wake of interest rate risk, came
liquidity risk and credit risk as interest components of risks for banks. The recognition of
these risks has brought ALM to the center stage of financial intermediation. With the RBI
framing up a regulatory framework to monitor the ALM from March 31, 1999, the ALM
has attained tremendous importance in the banking sector. Banks are now operating in a
fairly deregulated environment and are required to determine on their own, interest rate
on deposits and advances on a dynamic basis. Managing the spread income and
controlling the risk associated with generating the spread is a vital area of ALM, as it
requires simultaneous decisions and maturity structure of the institution.
The present study aims to analyze the importance of ALM for banks and its impact on
the profitability performance of ICICI bank. Management of net interest is one of the
most important means of earning of banks. The choice of asset’s portfolio of banks is
expected to be influenced by the kinds of liabilities held by them and vice versa. In this
context, the bank has to identify its assets and liability structure which is not only
compatible but also capable to generate net interest revenue that helps is attaining the
earning’s objective. There is a need to study the various aspects of ALM that directly
affect profitability because commercial viability is essential for the existence and growth
of banks.
2.2.2 Objective of the study:
The specific objectives are:
 To analyze the growth and performance of ICICI bank.

 To study the extent to which the ICICI bank has efficiently managed their assets
and liabilities during the period under study.
 To analyse the profitability of the bank.
 To examine the loan portfolio management of the bank.
 To suggest the future strategies for assets and liabilities for ICICI bank.
2.2.3 Methodology
24
The study covers ICICI bank. The period of the study is from 2003-2004 to
2007-2008. The study is based on secondary data. The secondary data has been
collected from various sources i.e RBI bulletins, trends & progress of banking
sector in India, IBA bulletins, economic surveys, website of ICICI bank etc. The
various methods used are:
 Compound Growth Rate: Compound Annual Growth Rate isn't the actual return
in reality. It's an imaginary number that describes the rate at which an
investment would have grown if it grew at a steady rate. You can think of
Compound Annual Growth Rate as a way to smooth out the returns.
The compound annual growth rate is calculated by taking the nth root of the total
percentage growth rate, where n is the number of years in the period being
considered.
This can be written as follows:
The percentage rate, generally stated on an annual basis, at which a variable

grows adjusted for compounding. For example, a 7% compound growth rate for
ten years results in $100 growing to slightly less than $200. Without
compounding, the $100 would earn $7 per year and grow to only $170. Financial
analysts frequently use historical and projected compound growth rates in
analyzing earnings, sales, and dividends.
 Trend Analysis: Trend means any general tendency. Analysis of these is called
trend analysis. It has major importance in interpretation of financial statements.
It is done to know the trend of available financial institutions. It gives information
about increase or decrease in the ratios of the data. For trend analysis, various
trend ratios of different items are calculated for various periods for comparison
purpose. The trend ratios are the index numbers of the movement of reported
financial items in the financial statements which are calculated for more than one
year. They help in making horizontal analysis of comparative statements. It
reflects the behavior of items over a period of time.
25
 Ratio Analysis: According to J. Batty, “The term accounting ratio is used to
describe significant relationship which exist between figures shown in the balance
sheet in a profit and loss account, in a budgetary control system or in any other
part of the accounting organization”.
The study and interpretation of the relationships between various financial
variables by investors or lenders. Ratios are regarded as the true test of earning
capacity, financial soundness and operating efficiency of a business organization.
It is used to know inter relationship among figures appearing in the financial
statements and to analyze the past performance and to make further projections.
The following are the ratios:
 Asset Management Ratios
 Liability Management Ratios
 Liquidity Ratios
 Burden Ratios
 Spread Ratios
 Profitability Ratios
2.2.4 Limitations
1. The financial information collected for the present study is entirely secondary
in nature. In such a case, the study carries all the limitations inherent with the
secondary data.
2. Scope of the study is limited due to the constraint of time and research.
2.2.5 Chapter Scheme
Chapter 1: Introduction
Introduction of Indian Banking System is introduced and then Structure of

Banking Sector is discussed. Concept of ALM and ALM objectives are discussed in
detail. Then is Risk Management and ALM in which Credit Risk, Market Risk and
26
Operational Risk are discussed. After it ALM System in Banks – RBI guidelines are
explained in detail.
Chapter 2: Review of Literature and Research Methodology
This chapter has details of all the literature reviewed and then the research
methodology in which rationale of study, objectives of study, methodology, scope
and need and limitations are discussed.
Chapter 3: Overview & Performance of ICICI Bank
In this chapter, first of all ICICI bank’s profile is written and then is information
about its subsidiaries with major subsidiaries explained. Then credit deposit ratio,
Loans and Advances, Deposit Mobilization and Investment are discussed. After
that Priority Sector Advances, Net Interest Margin, Non-Interest Income and then
at then end conclusions from the study of above ratios is discussed
Chapter 4: Assets Management of ICICI Bank
First of Assets Management is introduced and then in the areas of assets

management, Reserve Position Management, Investment Management, Liquidity
Management, Measuring and Managing Liquidity Risk and then at the ends final
conclusions from the above study.
Chapter 5: Liabilities Management of ICICI Bank
In this after introducing Liabilities Management, Capital, Reserves and Surplus,

Deposits are discussed. In deposits, Fixed Deposit/ Term Deposit, Saving Bank
Deposit, Demand Deposit, Borrowings and other Liabilities and Provisions are
explained in detail. At the end again conclusions made from the study of above
ratios are given.
Chapter 6: Profitability Analysis of ICICI Bank
In this first of all profitability trends are introduced and then trends in various
ratios are discussed. Trends in Income, Expenditure, Spread Ratios, Burden Ratios
and Net Profit are discussed. Again conclusion at the end.
Chapter 7: Loan Portfolio Management of ICICI Bank
27
In this Loan Portfolio Management is introduced and its objectives are discussed.
Then various types of loan are talked about extending to the constituents of Loan
Portfolio of Banks and then the final conclusions discussing about the
interpretations made from the above study.
Chapter 8: Findings and Suggestions
This includes various findings of the study done for the span of five years for ICICI
bank and then the list of suggestions made.
Bibliography
28
Chapter 3
Overview and Performance of ICICI Bank
29
3.1Brief Profile of ICICI Bank
ICICI Bank is India's second-largest bank. The Bank has a network of about 573 branches
and extension counters and over 2,000 ATMs. ICICI Bank was originally promoted in
1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned
subsidiary.
ICICI was formed in 1955 at the initiative of the World Bank, the Government of India
and representatives of Indian industry. The objective was to create a development
financial institution for providing medium-term and long-term project financing to
Indian businesses.
In the 1990s, ICICI transformed its business from a development financial institution
offering only project finance to a diversified financial services group offering a wide
variety of products and services, both directly and through a number of subsidiaries and
affiliates like ICICI Bank.
In 1999, ICICI become the first Indian company and the first bank or financial institution
from non-Japan Asia to be listed on the NYSE. In 2001, ICICI bank acquired Bank of
Madura Limited.
ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross
border needs of clients and leverage on its domestic banking strengths to offer products
internationally. ICICI Bank currently has subsidiaries in the United Kingdom, Canada and
Russia, branches in Singapore and Bahrain and representative offices in the United
States, China, United Arab Emirates, Bangladesh and South Africa.
Today, 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 in the areas of investment banking, life and non-life
insurance, venture capital and asset management.
In 2008 the major initiative taken is that ICICI Bank enters US, launches its first branch in
New York. Also Bank enters Germany, opens its first branch in Frankfurt. ICICI Bank
launched iMobile, a breakthrough innovation in banking where practically all internet
banking transactions can now be simply done on mobile phones. ICICI Bank concluded
India's largest ever securitization transaction of a pool of retail loan assets aggregating to
Rs. 48.96 billion (equivalent of USD 1.21 billion) in a multi-tranche issue backed by four
30
different asset categories. It is also the largest deal in Asia (ex-Japan) in 2008 till date and
the second largest deal in Asia (ex-Japan & Australia) since the beginning of 2007.
In 2007 it introduced a new product - 'NRI smart save Deposits' – a unique fixed deposit
scheme for nonresident Indians. Representative offices opened in Thailand, Indonesia
and Malaysia. ICICI Bank became the largest retail player in the market to introduce a
biometric enabled smart card that allow banking transactions to be conducted on the
field. A low-cost solution, this became an effective delivery option for ICICI Bank's micro
finance institution partners. Financial counseling centre Disha launched. Disha provides
free credit counseling, financial planning and debt management services.
In 2006, ICICI Bank became the first private entity in India to offer a discount to retail
investors for its follow-up offer. Bank became the first Indian bank to issue hybrid Tier-1
perpetual debt in the international markets. ICICI Bank subsidiary set up in Russia.
In 2005, Bank and CNBC TV 18 announced India's first ever awards recognising the
achievements of SMEs, a pioneering initiative to encourage the contribution of Small
and Medium Enterprises to the growth of Indian economy. ICICI Bank opened its 500th
branch in India. ICICI Bank introduced partnership model wherein ICICI Bank would forge
an alliance with existing micro finance institutions (MFIs). The MFI would undertake the
promotional role of identifying, training and promoting the micro-finance clients and
ICICI Bank would finance the clients directly on the recommendation of the MFI. ICICI
Bank introduced 8-8 Banking wherein all the branches of the Bank would remain open
from 8a.m. to 8 p.m. from Monday to Saturday. ICICI Bank introduced the concept of
floating rate for home loans in India. First rural branch and ATM launched in Uttar
Pradesh at Delpandarwa, Hardoi. "Free for Life" credit cards launched wherein annual
fees of all ICICI Bank Credit Cards were waived off.
In 2004, the Max Money, a home loan product that offers the dual benefit of higher
eligibility and affordability to a customer, introduced. Mobile banking service in India
launched in association with Reliance Infocomm. India's first multi-branded credit card
with HPCL and Airtel launched. Kisaan Loan Card and innovative, low-cost ATMs in rural
India launched.
Subsidiaries of the ICICI Bank are:
Following are the subsidiaries of ICICI:
 ICICI Personal Financial Services Limited

 ICICI Capital Services Limited
31
 ICICI Prudential Life Insurance Company
 ICICI Bank UK, Russia, Canada, branches in US, Singapore, Bahrain, Hong Kong, Sri
Lanka, Qatar
 Dubai International Finance Centre
 ICICI General Insurance Company, Lombard
 ICICI Securities
 ICICI Capital Services
 ICICI Web Trade
 ICICI Personal Finance
Major Subsidiaries are:
ICICI Prudential Life Insurance Company

ICICI Prudential Life Insurance Company (ICICI Life) continued to maintain its market
leadership among private sector life insurance companies with a retail market share of
about 12.7% in the overall industry in fiscal 2008 (on weighted received premium basis)
as against 9.1% in fiscal 2007. ICICI Life’s new business premium (on weighted received
premium basis) grew by 68.3% from Rs. 39.71 billion in fiscal 2007 to Rs. 66.84 billion in
fiscal 2008. Life insurance companies worldwide make losses in the initial years, in view
of business set-up and customer acquisition costs in the initial years as well as reserving
for actuarial liability. While the growing operations of ICICI Life had a negative impact of
Rs. 10.31 billion on the Bank’s consolidated profit after tax in fiscal 2008 on account of
the above reasons, the company’s unaudited New Business Profit (NBP) for fiscal 2008
was Rs. 12.54 billion as compared to Rs. 8.81 billion in fiscal 2007. NBP is a metric for the
economic value of the new business written during a defined period. It is measured as
the present value of all the future profits for the shareholders, on account of the new
business based on standard assumptions of mortality, expenses and other parameters.
Actual experience could differ based on variance from these assumptions especially in
respect of expense overruns in the initial years.
ICICI Lombard General Insurance Company

ICICI Lombard General Insurance Company (ICICI General) enhanced its leadership
position with a market share of 29.8% among private sector general insurance
companies and an overall market share of about 11.9% during fiscal 2008. ICICI General’s
32
gross written premium (excluding share of motor third party insurance pool) grew by
11.4% from Rs. 30.03 billion in fiscal 2007 to Rs. 33.45 billion in fiscal 2008. The industry
witnessed a slowdown in growth on account of de-tariffication of the general insurance
industry whereby insurance premiums were freed from price controls, resulting in a
significant reduction in premium rates. The industry also witnessed the formation of the
motor third party insurance pool for third party insurance of commercial vehicles.
Accordingly, all insurance companies are required to cede 100% of premiums collected
and claims incurred for this segment to the pool. At the end of the year, the results of
the pool are shared by all insurance companies in proportion to their overall market
share in the industry. The motor third party pool had a negative impact of Rs. 0.53 billion
on the profit of ICICI General. ICICI General is also required to expense upfront, on
origination of a policy, all sourcing expenses related to the policy. ICICI General achieved
a profit after tax of Rs. 1.03 billion in fiscal 2008, a growth of 50.5% over fiscal 2007.
ICICI Prudential Asset Management Company

ICICI Prudential Asset Management Company (ICICI AMC) was the second largest asset
management company in India with average assets under management of Rs. 543.55
billion for March 2008. ICICI AMC achieved a profit after tax of Rs. 0.82 billion in fiscal
2008, a growth of 69.7% over fiscal 2007.
ICICI Venture Funds Management Company Limited

ICICI Venture Funds Management Company Limited (ICICI Venture) strengthened its
leadership position in private equity in India, with funds under management of about Rs.
95.50 billion at year-end fiscal 2008. ICICI Venture achieved a profit after tax of Rs. 0.90
billion in fiscal 2008 compared to Rs. 0.70 billion in fiscal 2007.
ICICI Securities Limited and ICICI Securities Primary Dealership Limited

The securities and primary dealership business of the ICICI group have been reorganised.
ICICI Securities Limited has been renamed as ICICI Securities Primary Dealership Limited.
ICICI Brokerage Services Limited has been renamed as ICICI Securities Limited and has
become a direct subsidiary of ICICI Bank. ICICI Securities achieved a profit after tax of Rs.
1.50 billion and ICICI Securities Primary Dealership achieved a profit after tax of Rs. 1.40
billion, in fiscal 2008.
ICICI Bank UK PLC

ICICI Bank UK PLC (ICICI Bank UK) is a full-service bank offering retail and corporate and
investment banking services in the UK and Europe. ICICI Bank UK’s total assets increased
by 81.4% from US$ 4,868 million at March 31, 2007 to US$ 8,829 million at March 31,
2008 while total deposits grew by 84.2% from US$ 2,812 million at March 31, 2007 to
33
US$ 5,180 million at March 31, 2008. ICICI Bank UK’s profit after tax was US$ 38.4 million
during fiscal 2008 after taking into account investment valuation charges.
ICICI Bank Canada

ICICI Bank Canada is a full-service direct bank established in Canada as a wholly-owned
subsidiary of ICICI Bank, and offers a wide range of financial solutions to cater to
personal, commercial, corporate, investment, treasury and trade requirements. ICICI
Bank Canada’s total assets increased by 92.3% from US$ 2,002 million at March 31, 2007
to US$ 3,849 million at March 31, 2008. Total deposits increased by 77.7% from US$
1,796 million at March 31, 2007 to US$ 3,191 million at March 31, 2008. ICICI Bank
Canada recorded a net loss of US$ 14.3 million during fiscal 2008, after taking into
account investment valuation charges.
As per the financial statement of ICICI bank for the year ended 2007-08
ICICI Bank’s credit ratings by various credit rating agencies at March 31, 2008 are given below:
Agency Rating
Moody’s Investor Service (Moody’s) Baa2
Standard & Poor’s (S&P) BBB-
Credit Analysis & Research Limited (CARE) CARE AAA
Investment Information and Credit Rating Agency (ICRA) AAA
CRISIL Limited AAA
Japan Credit Rating Agency (JCRA) BBB+
3.2Credit Deposit Ratio
Credit Deposit Ratio indicates the total advances as a percentage of total deposits. It
is a measure of utilization of resources by banks and has a direct bearing on the size
and the loan portfolio. This ratio indicates the bank aggressiveness to improve
income.
Although the deployment of credit and time pass of Credit Deposit ratio in general,
are influenced by the structural transformation of the economy.
Year Credit Deposit Ratio (%) % Inc/Dec to prev. Year
34
2003-04 94.59 ------
2004-05 95.35 0.803
2005-06 90.61 - 4.97
2006-07 85.03 - 6.15
2007-08 90.76 6.73
Compounded Growth Rate (CGR)= -0.82%
CGR is negative, which shows that credit deposit ratio has decreased over the period of
study and the above table depicts the same.
3.3Loans and Advances
Loans and Advances represent that part of customer deposit which the bank
considers may be safely lent, while the remainder is in the form of cash and other
assets. It includes working capital and term finance, for different types of borrowers,
various forms of bank lending by way of loans (demand loans and term loans) and
advances over drafts, cash credit, letter of credit and bill finance.
Year Loans and Advances (Rs in ‘000s) % Inc/Dec to prev. Year

2003-04 643,958,205 ------
2004-05 964,099,562 49.71
2005-06 1,562,603,202 62.07
2006-07 2,113,994,413 35.28
2007-08 2,514,016,693 18.92
Compounded Growth Rate (CGR)= 31.31%
Positive value of CGR says about the increase in loans and advances over the last five
years of study but after 2005-06 the increment rate has declined.
3.4Deposit Mobilization
Deposits constitute a vital source of funds in a bank which places an almost exclusive
reliance on public deposits for its operations, for the fact that equity capital invested
in a bank is very insignificant part of the total funds of the bank. Lending an
investment operations of a bank are influenced by the magnitude of deposits.
35
Deposits expansion of the banking system can only be done by co-operation of all
banks and by a willingness on the part of monetary and fiscal authorities to permit
such expansion by making additional reserves available. Various types of deposits
from public, banks and another financial institutions are:
(a) Demand Deposits
(b) Saving Bank Deposits
(c) Fixed Deposits
Year Deposits (Rs in ‘000s) % Inc/Dec to prev. Year

2003-04 680,787,334 ------
2004-05 1,011,086,273 48.51
2005-06 1,724,509,830 70.56
2006-07 2,486,136,330 44.16
2007-08 2,769,832,312 11.41
CGR shows a favorable response to social obligation, there management devised

various schemes of deposit mobilization and started providing many facilities to their
depositors and the table shows the same.
3.5Investments
Investment is the sacrifice of the certain present value for (possibly uncertain) future
value. Classification of investments given in schedule VI:-
There are three categories:
(a) Government Securities
(b) Share Debenture and Bonds
(c) Immovable properties
The principal objective of investment by a commercial bank is to maximize earnings and to keep the
funds liquid and safe. Banks invests in Indian securities as well as foreign securities.
Year Investments (Rs in ‘000s) % share in total % Inc/Dec to prev. Yr

assets (Investments)
2003-04 455,747,851 34.85 ------
2004-05 546,527,266 30.63 19.91
2005-06 840,138,822 30.30 53.72
2006-07 1,206,166,898 30.58 43.56
36
2007-08 1,600,467,579 32.95 32.69
CGR is positive showing that investments has increased over the period of study but
in the last three years, the rate of increment has decline. Still as a whole, CGR has
increased over the total span of five years.
3.7 Priority Sector advances
Priority sector advances is an important element of social banking. It is an advances

given by bank to the priority sectors which requires development. If bank fail to meet
priority sector lending target through direct lending the bank can invest the shortfall amount.
Year Priority Sector Advances % share in total % Inc/Dec to prev. Yr.

(Rs in ‘000s) advances (Priority Sector Advances)
2003-04 145,307,396 22.56 ------
2004-05 215,591,362 22.36 48.36
2005-06 447,310,487 28.62 107.48
2006-07 555,491,571 26.27 24.18
2007-08 606,025,758 24.10 9.09
CGR is positive. Thus ICICI has started giving more advances to priority sector but the
increment rate has declined over the years and the table also depicts the rising trend.
3.8 Net Interest Margin (NIM)
NIM is defined as net interest income divided by average total assets.

Net interest margin can be viewed as the ‘spread’ on earning assets. The net income
of banks comes mostly from the spreads maintained between total interest income
and total interest expense. The higher the spread the more will be the NIM. There
exists a direct correlation between risks & return. As a result, greater spreads only
imply enhanced risk exposure. But since any business is conducted with the objective
of making profits & achieving higher profitability is the target, it is the management
of risks that holds key to success & not risk elimination.
37
Year NIM (%) % Inc/Dec to prev. Year
2003-04 1.8 ------
2004-05 2.4 33.33
2005-06 2.4 0.0
2006-07 2.6 8.33
2007-08 2.2 - 15.38
Increase in NIM reflects that spread in earning assets has increased over the
period of study. Positive CGR says about this and table above too depicts the
same.
3.9 Non Interest Income
It is also known as fee based income and it has become an important source of
income for banks. NII consists of income from commission, exchange and brokerage
transaction and other miscellaneous incomes. This stream of revenue is not
dependent on the banks. Capital adequacy and consequently, potential to increase
this transaction is vast.
Year NII (Rs in ‘000s) % Inc/Dec to prev. Year

2003-04 45,530,184 ------
2004-05 70,971,868 55.87
2005-06 111,469,028 57.00
2006-07 163,625,427 46.70
2007-08 259,581,255 58.64
CGR is positive and is quite high too which shows a large increase in NII for the
bank. This shows that over the past five years non-interest income has increased
manifold for the bank and this is clear from the table too.
38
Conclusions:
1. Credit Deposit Ratio: It shows the utilization of resources by the bank and has
a direct bearing on the size and the loan portfolio. It shows a declining trend
which is a matter of concern for the bank. Bank lending policy have an
inherent in the size of the ratio.
2. Loans and Advances: It represent that part of the customer deposit which the
bank considers may be safely lent and it shows an increment till 2005-06 and
it declines thereafter.
3. In the recent years, market risks associated with the holding of securities has
increased, so greater awareness is required while extending loans.
4. Deposits shows a favorable response to social obligation, there management
devised various schemes of deposit mobilization and started providing many
facilities to their depositors.
5. Greater orientation towards investment activities and a aversion to credit risk
exposure have deterred banks from undertaking their core functions of
providing loans and advances.
6. Due to the liberalization and reluctant competition and soft interest rates
prevalent in the Indian economy, risk arising out of traditional banking
business are on increase and the net interest margin over the period under
study is almost at steady rate.
39
Chapter 4
Assets Management of ICICI Bank
40
Assets Management:
While a bank’s asset can be conceptually subdivided into components such as reserves,
investments and loans, management policies and decisions should serve to identify and
measure the inter-relationships among these elements. The decisions concerning loan
and investment strategies are closely linked to management of bank’s liquidity position
and the other element such as the structure and variability of deposits, capital structure
and international operations also are seen to be interrelated with effective asset
management.
In managing its liquidity position a bank is confronted by a trade off between liquidity
and profitability. Because liquid assets often provide zero or low return, bank manager
must constantly analyze the opportunity cost involved in not reducing liquid assets and
increasing high yielding assets. Recent changes in the structure of bank assets and
liabilities place doubt on the significance of traditional liquidity ratios. According to a
article by James L. Pierce also questions the traditional measures in view of new
techniques by which banks can affect their liquidity – particularly by means of
endogenous deposit determination. He suggests that an appropriate concept of liquidity
must consider the time dimension involved in selling an asset and demonstrates that the
liquidity decision is closely linked to the loan-supply function of banks.
Mismatch of assets and liabilities is the cause of many risks. Banks need to address these
risks in a structured manner by upgrading their risk management and adopting more
comprehensive ALM practices than has been done earlier. As per RBI guidelines, dated
Feb. 10, 1999, issued to all scheduled commercial banks. ALM is also concerned with risk
management and provides a comprehensive and dynamic framework for measuring
monitoring and managing liquidity, interest rates, and foreign exchange, equity and
commodity price risks of a bank. The focus of the Asset Liability Management should be
on the profitability and long term operating viability.
Components of Assets are:
 Cash and balance with RBI

- Cash in hand
- Balance with RBI
- Balances with banks and money at call and short notice
 Investments
 Advances
41
- Cash credits, overdrafts and loans repayable on demand
- Term loans
- Bills purchased and discounted
- Secured/unsecured advances
- Secured by tangible assets
- Covered by bank/government guarantees
- Unsecured advances
 Fixed assets
 Other assets
- Inter - office adjustments
- Interest accrued
- Tax paid in advance/tax deducted at source
- Stationary and stamps
- Non – banking assets acquired in satisfaction of claims
- others
4.1 AREAS OF ASSET MANAGEMENT
 Reserve position management

 Investment management
 Liquidity management
4.1.1 Reserve position management
Reserve position management is based on the statutory requirements along with

maintenance of working reserves for operational needs. The primary objective of
reserve position management is minimizing risks & maximizing returns by achieving an
optimum risk reward ratio.
(A) Primary reserves:

Primary reserves are those non-earning assets of commercial banks made uoto cash or
its equivalent. The objective of primary reserves is to maintain liquidity and solvency. It
consists of cash in hand, balance with central bank and demand deposits with other
banks. From the liquidity point of view/the primary reserves plays the role of first day-
to-day business needs but to comply with the obligation imposed on it by law. The
primary reserves divided into two categories:
- Legal reserves
- Working reserves
A.1 Legal reserves
42
The legal reserves represent that portion of the primary reserve which the law requires a
bank to maintain. These reserves are computed on the basis of average deposits
outstanding on the bank’s books over the short periods (one or two weeks). Originally,
legal reserve requirements were expected to compel commercial banks to maintain
prudent standards of liquidity which would enable them to meet the withdrawals of
deposits in cash.
Through the years the above conception of legal reserves has changed. It is now
generally recognized that the legal reserve does not serve as a safty fund to protect
banks against the hazards of liquidity. The primary function of legal reserve is to serve as
a potent control tool in the hands of central banking authority to affect the supply of
money. By changing the reserve requirements, the central bank can regulate the
magnitude of credit.
A.2 Working Reserve
Since the legal reserve cannot be depended upon for overcoming ‘’illiquidity’’ crises,
commercial banks have to carry cash reserves in excess of the legal minimum reserve to
meet the depositors’ claims, satisfy the credit needs of the community, & provide
protection against unforeseen withdrawals. This excess cash reserves held by the banks
to fulfill day-to-day business requirements is designated as working reserve. It consists of
:
- Cash in their own vaults;

- Demand deposits with other banks; and
- Excess reserve with central bank
The principal function of the working reserve is to take care of both regular &
exceptional requirements. How much of its total deposit liabilities should be held in the
form of working reserve is a basic problem which confronts a commercial bank because
it involves a trade off between liquidity & profitability.
(a) Cash & balance with RBI in current account: It has shown the steady increase in it
and it is clear from the table.
(b) Balance with other banks in current account: Again the continuous increase in
this year by year says about the victory path of ICICI bank.
(c) Primary reserves as % of total deposits: This shows the declining trend up to
2005-06 and then it is increasing till 2007-08.
43
Year Cash & balance Balance with Primary reserves % inc. / dec.
with RBI in other banks in as % of total to prev. year
current account current account deposits
2003-04 49,613,712 6,909,886 8.30 ------
2004-05 57,966,103 12,732,346 6.99 -15.78
2005-06 77,259,488 12,292,632 5.19 -25.75
2006-07 166,407,662 25,235,925 7.7 48.36
2007-08 265,353,394 28,953,021 10.62 37.92
Compounded Growth Rate (Primary Reserves as percentage of Total Reserves)=5.05%
CGR is positive which shows that primary reserves as percentage of total reserves has
increased in the past five years but the increase was not continuous as it declined for the
first three years and then increased thereafter.
(B) Secondary Reserves:
The aggregate of highly liquid earning assets is designated as the secondary reserves in
banking circles. The principal objective of holding the secondary reserves is to impart
adequate liquidity to funds without adversely affecting the profitability of a bank. It
must, therefore, comprise such assets as yield some income to the bank and at the same
time, are highly liquid. Only such assets as fulfill the three conditions of shift ability, low
risk & yield can be included in the secondary reserves. The shift ability of asset is
possible if there is a ready market for it. Apart from the high degree of shift ability, an
asset must be free from the money rate risk- the risk arising out of fluctuation in security
prices due to variations in interest rate. Secondary reserve assets must yield income. But
it should be emphasized; for the sake of income the liquidity attribute should not be
foregone. The income factor has to receive secondary emphasis while choosing assets
for the secondary reserves.
Constituents are:
 Call loans to stock brokers & commercial banks

 Short term loans to commercial banks
 Short term loans secured against self liquidating assets for blue chips
44
 Investment in treasury bill
 Promissory notes to short period maturity
 Discounting of usance bills eligible for rediscounting from the RBI
 Short period debentures of company with an unimpeachable credit standing.
Year Money at Bill Cash credit, Gov. Deb and Sec. %

call & discounted overdraft & securities bonds res. inc/de
short & purchased loans as % c to
notice & payable on of the
balance demand Total prev
with banks Dep. yr
2003-04 4,150,667 18,267,009 61,254,576 318,551,612 64,916,056 68.61 -----
2004-05 41,534,960 68,868,430 123,344,410 360,243,838 335,035,525 62.21 -9.32
2005-06 33,750,713 107,554,857 258,593,077 538,681,776 27,896,238 56.04 -9.91
2006-07 56,809,959 71,995,344 334,781,882 717,115,958 458,299,459 49.33 -11.97
2007-08 91,995,784 68,903,033 351,458,670 827,450,043 49,447,032 50.15 1.66
Compounded growth rate (Sec Res as % of Total Deposits) (CGR)= -6.07%
CGR is negative and the position of the secondary reserve is different and secondary
reserves are more than the primary reserves and the tables shows the declining trend till
2007-08 and small increase in 2007-08.
4.1.2 Investment management
The foremost concern of a bank is to ensure its liquidity by maintaining adequate

primary & secondary reserves. Investment is then, residual in nature. It includes gilt
edged securities & stock exchange securities as well as the shares & bonds of highly
reputed companies. The principal objective of investment by a commercial bank is to
maximize earnings & to keep the funds liquid & safe. As a matter of fact security
investment is supposed to act as the third line of defense & to replenish the secondary
reserves to meet the unexpected withdrawals of deposit & usual loan demands.
Classification of investment portfolio is:
 Government securities
45
 Approved securities
 Shares
 Debentures & bonds
 Subsidiaries/or joint ventures
 Other investments.
Year Govt. % inc/dec Other % inc/dec Shares % inc/dec

Securities to prev yr Approved to prev yr to prev yr
Securities
2003-04 318,551,61 ----- 301,155 ----- 29,491,73 ----
2 6
2004-05 360,243,83 13.08 318,890 5.88 32,027,93 8.59
8 6
2005-06 538,681,77 49.53 356,349 11.74 38,738,17 20.95
6 8
2006-07 717,115,95 33.12 601 -99.83 40,895,69 5.56
8 8
2007-08 827,450,04 15.38 97,946 16,197.17 47,118,72 15.21
3 6
Year Deb and % inc/dec Others % inc/dec

Bonds to prev yr to prev yr
2003-04 64,916,056 ----- 42,473,994 -----
2004-05 35,035,525 -46.02 118,887,76 179.90
6
2005-06 27,896,238 -20.37 234,466,28 97.20
1
2006-07 45,829,459 64.28 273,418,87 16.61
9
2007-08 49,447,032 7.89 427,893,11 56.49
1
Compounded Growth Rate (Govt. Securities) (CGR)= 21.03%
Compounded Growth Rate (Other Approved Securities) (CGR)= -20.11%
Compounded Growth Rate (Shares) (CGR)= 9.82%

46
Compounded Growth Rate (Deb. and Bonds) (CGR)= -5.29%
Compounded Growth Rate (others) (CGR)= 53.95%
CGR for various investments over the period shows a positive trend accept other
approved securities and debentures and bonds and the table proves the same.
Investment deposit ratio
This ratio is commonly used indicator of the investment policy of the bank.
Year Investment deposit % Inc/Dec to prev. Year

ratio(%)
2003-04 66.94 ------
2004-05 54.05 -19.25
2005-06 48.71 -09.87
2006-07 48.51 -0.41
2007-08 57.78 19.10

CGR is negative which shows that the deposits have gone down, it can effect the
operations of the bank & its expansion etc. & the table verifies the same.
4.1.3 Liquidity Management
 Banks need liquidity to meet deposit withdrawal and to fund loan demands.
 The variability of loan demands and variability of deposits determine bank’s
liquidity needs.It represents the ability to accommodate decreases in liability
and to fund increases in assets.
 It demonstrates the market place that the bank is safe and therefore capable
of repaying its borrowings.
 It enables bank to meet its prior loan commitments,whether formal or
informal.
 It enables bank to avoid the unprofitable sale of assets.
 It lowers the size of the default risk premium the bank must pay for funds.
47
Types of liquidity risk:
-Funding Risk
-Time Risk
-Call Risk.
 Funding Risk:
Need to replace net outflows due to unanticipated withdrawal/non-renewal of

deposits arises due to Fraud causing substantial loss
 Systemic Risk
 Loss of confidence
 Liabilities in foreign currencies
 Time Risk:
Need to compensate for non-receipt of expected inflow of funds,arises due to,
 Severe deterioration in the asset quality
 Standard assets turning into non-performing assets
 Temporary problems in recovery
 Time involved in managing liquidity
 Call Risk:
Crystallization of contingent liabilities and inability to undertake profitable
business opportunities when desirable, arises due to,
 Conversion of non-fund based limit into fund based.
 Swaps and options.
Measuring and Managing Liquidity Risk

 Developing a structure for managing liquidity risk.
 Setting tolerance level and limit for liquidity risk.
Stock Approach:
Stock Approach is based on the level of assets and liabilities as well as off balance sheet
exposures on a particular date. The following ratios are calculated to assess the liquidity
position of the bank:
(i) Loan to Deposit Ratio:
This ratio indicates the degree of already used available resources by the bank
to accommodate the credit needs of the customers. The portion of deposits
invested in loan rises with the decline in liquidity.
48
Year Loan to deposit ratio(%) % Inc/Dec to prev. Year
2003-04 94.59 ------
2004-05 95.35 -0.80
2005-06 90.61 -4.97
2006-07 85.03 -6.15
2007-08 90.76 6.73
CGR is negative and is a matter of great concern for the bank as it creates
problem for the bank in providing loan to the outsiders and the table verifies
the same.
(ii) Liquid Assets to Total Asset Ratio

Cash in hand, balances with RBI and money at call in short notice are included
under the category of cash and near cash assets (liquid assets). The prudential
limit for this ratio has been fixed at five percent.
Year Liquid asset/total asset (%) % Inc/Dec to prev. Year

2003-04 6.87 ------
2004-05 7.63 11.06
2005-06 6.58 -13.76
2006-07 10.06 62.00
2007-08 9.33 -7.25
CGR is positive but this increase is very small showing the fact that over the
years there has been a slight increase in the liquid asset to total asset ratio.
The table depicts the fluctuating trend over the period under study.
49
(iii) Current Ratio
Current assets consist of cash and near cash assets and government securities.
Current liabilities comprises of bills payable, branch adjustment, interest
accrued and other provisions. This ration is commonly used to measure the
liquidity of bank.
Year Current Ratio % Inc/Dec to prev. Year

2003-04 0.81 ------
2004-05 0.65 -19.75
2005-06 0.80 23.07
2006-07 0.78 -2.5
2007-08 0.83 6.41
CGR is positive but this increase is very small showing the fact that over the
years current ratio has increased by a small amount only. The table depicts the
declining and rising trend alternatively over the period under study.
4.1.4 Conclusions
1. Reserve position management: ICICI bank has less primary reserves in relation
to deposits. The position in case of secondary reserve is different. The secondary
reserve as percentage to total deposits, increased at a declining rate.
2. Investment Management: The investment portfolio of the ICICI bank, showed
that government securities form a major chunk of the investment portfolio. The
share of investment in deb. and bonds has decreased till 2005-06 and increased
thereafter. Bank has increased investment in shares and its subsidiaries etc.
3. Liquidity Management: Various liquidity ratios have been calculated to
ascertain the liquidity position of the ICICI bank like current ratio, liquid asset to
total asset ratio, loan to deposit ratio etc.
In general, bank has become cautious with regard to their asset-liability

mismatch.
50
Chapter 5
Liabilities Management of ICICI Bank
51
Liabilities Management:
Liability Management as it was called initially originated in USA and Canada in 70’s. Its
purpose is to finance holdings of remunerative assets efficiently and profitably.
According to Basel study paper measuring and managing liquidity are the important
activities of commercial banks, whereby banks can ensure that they have the ability to
meet their liabilities as they come due. Thus, liquidity needs to be maintained to avoid
the effect of assets liabilities mismatch as liquidity shortfall in a single institution can
have re-percussion across the whole banking sector.
Often liabilities are accepted in advance of commitments, such liabilities being deployed
subsequently in the acquisition of remunerative assets. At the time of maturity,
mismatches occur which can be dangerous for banks. The sources of funds for the
lending and investment activities constitute the liabilities side of bank’s balance sheet.
The liability management involves:-
(a) Choosing the sources of financing to be used, that is choosing between deposit
financing and non-deposit financing
(b) Determining the amount of funds needed
(c) Obtaining funds at possible cost with the least risk exposure
Constituents of Bank Liabilities
 The sources of funds for the lending and investment activities constitute liabilities
side of balance sheet.
 Capital
 Reserves and Surplus
 Deposits
 Demand Deposits
 Saving Deposits
 Term Deposits/ Fixed Deposits
 Borrowings
 Borrowings in India
- From RBI
- From other banks and institutions
 Borrowings from outside India
 Other Liabilities and Provisions
 Bills Payable
 Inter Office adjustments
 Interest accrued
52
 Others
 Contingent Liabilities
5.1 Capital
All Banks need capital and extend fixed assets and business investments, to enable
trading, to continue an increase and to maintain the confidence of depositors and to
ensure viability in the face of loss arising from inevitable business and political
fluctuation and uncertainty particularly in an inflationary climate. Banks will have to
show in their capital account the various classes of capital viz.
 Authorized
 Issued
 Subscribed
 Called-Up
The capital account will be represented by the paid up capital which will be arrived at
after deducting calls and arrears and adding up the paid value of forfeited shares to the
called-up capital.
Trends in capital adequacy
A number of criteria have been devised to determine capital adequacy. A bank must
have an adequate capital fund to cover the normal hazards inherent in its operations. It
may have to incur unforeseen operational losses from time to time or there may be an
unanticipated crash in the value of its assets, particularly its security investment. To
provide these contingencies the bank must have an adequate capital fund.
Year Capital Adequacy (%) % Inc/Dec to prev. Year

2003-04 10.36 ------
2004-05 11.77 13.61
2005-06 13.35 13.42
2006-07 11.69 -12.43
53
2007-08 13.97 19.50
CGR is positive and table above depicts capital adequacy ratio. Adequacy needs to be
attained by the bank at any cost.
5.2 Reserves and Surplus
After the capital, the next item on the liability side of balance sheet of a bank is reserves
and surplus. It compliment the capital of the bank and aid in meeting financial
commitments of a commercial bank.
Constituents of reserves and surplus:-
-- Statutory Reserve
-- Capital Reserve
-- Re-evaluation Reserve
-- Share Premium
-- Investment fluctuation reserve
-- Contingency Reserve
-- General Reserve
-- Redemption Reserve
-- Revenue and other reserves
-- Foreign Currency Translation Reserve
Year Reserves and Surplus (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 71,395,199 ------
2004-05 115,376,012 61.60
2005-06 213,519,487 85.06
2006-07 230,656,945 8.02
2007-08 436,095,477 89.06
54
CGR is positive within the period. From the table, Reserves and Surplus has increased
which can help the bank in its expansion for increasing its profit.
5.3 Deposits
In the commercial banking system, the level of deposits depend primarily on the amount
of credit extended by banks in the form of loans and advances. Deposits are the vital
source of funds for commercial banks which are used in rendering credit services to their
customers. Compound rates of interest, loan facility of deposits, safety and liquidity,
allowing old-age benefits, incentive of percentage on interest, children education and
marriage, the benefit of life insurance cover, trial of luck, easy transfer of funds and so
on are some of the important attraction offered to the depositors.
Types of deposits:
(i) Fixed Deposits/ Term Deposits:
Under this scheme money is deposited for a fixed period of time so it is also
called Fixed Deposit. Investor can withdraw the money only after the time
period. Premature withdrawals are also allowed by paying a penalty. Interest
is calculated on monthly, quarterly or yearly depends on the bank and
scheme. Many banks offers loan or overdraft facility as an added features with
fixed deposits. Term deposits is a safe investment and it is therefore a very
good option for conservative, low-risk investors.
 Fixed Deposit from Public:
The table depicts a rising trend in the fixed deposit from public, over
the period under study.
Year Fixed Deposits (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 474,195,226 ------
2004-05 704,131,438 48.48
2005-06 1,210,989,770 71.98
55
2006-07 1,749,198,396 44.44
2007-08 1,857,448,625 6.18
It shows the positive trend which is a good sign for the bank and in future
bank should adopt such methods which can attract more and more
deposits from public.
 Fixed Deposit from Banks:

The table depicts the rising trend up to 2006-07 and slight decline in
2007-08.
Year Fixed Deposits (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 50,418,828 ------
2004-05 64,467,974 27.86
2005-06 107,092,998 67.11
2006-07 147,107,672 37.36
2007-08 125,024,337 -15.01
Compounded growth Rate (CGR)= 19.91%
CGR shows fixed deposits from banks has been increased over the past five
years, which can help them in their lending activities.
(ii) Saving Bank Deposits:

This is a kind of demand deposit with limited number of withdrawals during
any specific period. Savings Accounts provides principal security and a modest
interest rate. Now banks also put some restriction on the minimum balance. If
customer don’t maintain the minimum balance customer has to pay a penalty.
Now saving account comes with many features like ATM and Debit Card,
Cheque Book, Free Internet Banking with Bill Pay, Fund Transfer, Prepaid
mobile charging, Free Telephone Banking etc.
Year Saving Bank Deposits (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 83,722,246 ------
56
2004-05 116,596,089 39.26
2005-06 242,571,556 108.04
2006-07 375,330,044 54.72
2007-08 537,563,405 43.22
Compounded growth rate (CGR)= 45.05%
CGR is positive and is a good sign for the bank and more and more efforts
should be made to increase the same. Table finds the rising trend in the saving
bank deposits from public and another institutions which is good for the bank.
(iii) Demand Deposits:

Here money is not deposited for a specific time period. Investor can withdraw
money at any time. Bank is responsible to return the money on customer’s
demand. This account allows you to demand your money at any time.
 Demand Deposit from Public:

Table depicts the rising trend in the demand deposit from the public
which helps the bank for lending activities and investment in other key
areas.
Year Demand Deposits (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 71,097,860 ------
2004-05 123,914,225 74.28
2005-06 159,158,492 28.44
2006-07 209,693,799 31.75
2007-08 244,114,127 16.41
CGR is positive which is beneficial for the bank and bank should make such
type of policies which attract more and more depositors.
 Demand Deposit from Banks:

The following data depicts the rising trend in the demand deposits
from other banks during the period under study.
57
Year Demand Deposits (Rs in 000’s) % Inc/Dec to prev. Year
2003-04 1,353,174 ------
2004-05 1,976,547 46.06
2005-06 4,697,014 137.63
2006-07 4,806,419 2.32
2007-08 5,681,818 18.31
CGR is positive which is a good sign for the bank and in future bank should
follow such types of policies which further increase the demand deposits.
(iv) Borrowings:
These are of non-depository nature and are useful when a bank temporarily
needs for funds then are being being deposited and experiences paucity of
funds. The borrowings can be from the following sources:
 Borrowings from RBI:

RBI is traditionally the “lender of last resort”. It provides liquidity to the
banks when all other sources of funds have been exhausted. The RBI
usually provides such liquidity to the scheduled commercial banks by
way of credit refinance, export credit refinance, standby refinance
against pledge of government securities in terms of mismatch between
sources and uses of funds and discretionary refinance to tide over
temporary financial stringencies during the busy season.
ICICI bank over the years, has stopped approaching the RBI for
borrowings which is clear from the given table.
Year Borrowings (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 ------ ------
2004-05 ------ ------
2005-06 ------ ------
2006-07 1,400,000 ------
2007-08 ------ ------
58
Compounded Growth Rate = NIL
 Borrowings From Other Banks:

In order to transact business, banks in India, quite frequently, open
their current accounts with other banks in India and abroad at places
where they are not represented and make overdraft arrangements with
them on secured or unsecured basis.

2003-04 36,831,073 -----
2004-05 47,413,551 28.73
2005-06 73,138,752 54.25
2006-07 78,545,412 7.39
2007-08 72,605,734 -7.56
The borrowings from other banks shows a positive growth rate which
means rising of borrowings from them. The following table depicts the
rising of borrowings from other banks upto the year 2006-07 but
slightly declining trend in 2007-08.
 Borrowings From institutions and Agencies:

Apart from borrowings from RBI, banks supplement their sources by
refinancing or bill rediscounting facilities from many financial
institutions: IDBI, SIDBI, NABARD, EXIM, NHB and DFHI.

2003-04 62,870,999 -----
2004-05 56,241,312 -10.54
2005-06 41,357,682 -26.46
2006-07 40,153,633 -2.91
2007-08 49,884,631 24.23
59
Compounded growth rate (CGR)= -4.52%
CGR is negative and thus contribution from institutions and agencies in

borrowings has decreased in the last five years. . The following data
depicts, the declining trend as bank does not rely only on institutions
and agencies for borrowings.
 Borrowings From outside India:

ICICI bank also borrows from outside India. The table depicts rising
trend in all the five years of study. It can accessed foreign capital as
now FDI has been allowed upto 74%.

2003-04 82,424,694 -----
2004-05 149,618,940 81.52
2005-06 241,444,958 61.37
2006-07 437,065,654 81.02
2007-08 651,413,245 49.04
CGR shows that borrowing from outside India has increased over the span
as too much dependence on single source may cause problem, therefore
ICICI bank has been borrowing from outside India also.
(v) Other Liabilities and Provisions:

It includes bills payable, interoffice adjustments, interest accrued and others
(including provisions).
 Bills Payable:
It includes drafts, calligraphic transfers, traveler’s cheque, pay-slips,
mail transfers payable, banker’s cheque and other miscellaneous items.
Bills payable has increased up to 2006-07 but it showed a declining
trend in 2007-08.
Year Bills Payable (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 16,872,412 -----
2004-05 27,944,845 65.62
60
2005-06 33,336,184 19.29
2006-07 42,476,957 27.41
2007-08 29,285,903 -31.05
Over the period, compounded growth rate shows a rising trend.
 Interoffice Adjustments:
The credit balance of the net interoffice adjustments. The following
data is not showing any definite trend.
Year Interoffice Adjustments (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 3,419,337 -----
2004-05 5,614,186 64.18
2005-06 3,496,486 -37.72
2006-07 ----- -100.00
2007-08 4,293,542 -----
The growth rate of the interoffice adjustments during the period shows
positive trend.
 Interest Accrued:
The interest accrued but not due on deposits and borrowings. Interest
accrued has increased significantly during the period under study i.e. of
five years.
Year Interest Accrued (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 13,691,233 -----
2004-05 13,418,493 -1.99
2005-06 14,563,000 8.53
2006-07 21,167,766 45.35
2007-08 26,780,408 26.52
61
CGR regarding the interest accrued shows a positive trend which should
also be considered by the bank.
 Provisions and Others:

All other liability items like provision for income tax, tax deducted at
source, interest tax, provisions etc. Provisions has risen due to the
introduction of asset classification and provisioning norms adopted by
the bank during the period under study.
Year Provisions and Others (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 60,285,438 -----
2004-05 97,998,803 62.56
2005-06 129,144,096 31.78
2006-07 168,094,683 30.16
2007-08 230,087,056 36.88
CGR is positive and it should be considered by the bank.
5.4 Conclusions:
Liability management has become a vital area of concern for banks today as
assets have to be managed in tandem with liability for commercial banks. On
the basis of the study undertaken with regard to the liabilities of ICICI bank,
the following observations have been made:-
1. Capital is the most important constituent of the liability of the bank.
Hence, its adequacy needs to be attained by the bank at all costs.
Moreover, with the introduction of Basel-II norms, the operational risk has
also come into focus along with credit risk and market risk, for which more
capital has to be provided.
2. Reserves and surplus compliment the capital of the bank and have risen
significantly.
62
3. The deposits are the major sources of funds for banks. Deposits from
public provide the funds for lending to the bank. All the types of deposits
from public has increased significantly.
4. There is a need to open the branches in such areas where more deposits
can be mobilized. Moreover, with the introduction of liberalized economy,
FDI has paved the way for generating funds
5. Bank has stopped approaching RBI for borrowings.
6. ICICI bank should access foreign capital as now FDI, has been allowed upto
74%. It should borrow from other banks also as too much dependence on
single source may cause problems in the long run.
7. Among the other liabilities and provisions of bank, bills payable have
increased till 2006-07 and declined in 2007-08.
8. Interest accrued and provisions has increased due to the introduction of
asset classification and provisioning norms adopted by ICICI bank as a
result of economic reforms.
63
Chapter 6
Profitability Analysis of ICICI Bank
Profitability Trends:
Up to 1969, banking sector was in the hands of private operators and banks had
been pursuing their commercial motive of augmenting their earnings. However in
the post nationalization era banks lost their commercial character and social
banking concept and pushed motive to the background. The reforms sought to
improve the bank’s profitability by lowering pre-emption and to strengthen the
banking system through the institution of 8% capital adequacy norms. The profits
are needed by banks for the number of reasons.
Profitability is the measure of returns generated by the firm on its sales and
investment. Overall profit figures do not convey any idea of how effectively the firm
is managed, when considered as proportions to sales and investment, the profit
figures disclose the yields or returns. There are several constraints on the return on
sales and investment. Market conditions, scale of operations, efficiency of activity
64
may be lower than those on manufacturing activity. As a general rule profitability
ratios of a firm should be interpreted after taking into account the firm’s policy and
exceptions and the averages of the industry or trade as whole. The RBI bulletin
(monthly), stock exchange directories of listed companies and other generals are
useful sources of comparative financial data.
Today the bank management of India is facing a two faceted challenge to improve
their profitability on the one hand and to serve the public in new ways and means
with greater efficiency and effectiveness on the other.
The profitability of banks is of interest to bank management, financial markets,

bank supervisors and academics. This interest is driven by increasing consolidation
in the banking sector, changes in production technology and regulation, and
dissolving borders, both internationally and vis-à-vis related financial products and
industries. As a result, explaining (changes in) the profitability of banks is the
implicit or explicit subject of much of the banking literature. When we estimate a
market power model, we look for – the abuse of – market power as a means of
explaining increases and differences in profitability. And when we employ an
efficient frontier model, we expect sub-optimal management decisions regarding
production factors to lead to differences in profitability.
Trends in Profitability Ratios:
In order to analyze the context of profitability of the banks, some indicators

have been selected.
(i) Income
(ii) Expenditure
(iii) Spread
(iv) Burden
(v) Net Profit
(i) Income
(a) Interest Income of Banks:

The constituents of bank income are interest and discount, income from
investment and interest on balance with RBI and other inter bank
balances. After the advent of the reforms the trends in the interest income
of the private sector banks has increase manifold.
65
Year Interest Income (Rs in 000’s) % Inc/Dec to prev. Year
2003-04 92,443,183 -----
2004-05 98,337,452 6.38
2005-06 146,141,891 48.61
2006-07 250,012,495 71.08
2007-08 340,949,565 36.37
CGR is positive saying that interest income of banks has increased which is
a good and positive sign for a bank.
(b) Interest and Discount Income:

After the reforms the interest and the discount income has increased in
the private sector banks. The following data shouts about the increasing
trend in the increment of interest and discount income but the increment
has decreased in the last financial year.
Year Interest & discount income (Rs in % Inc/Dec to prev. Year

000’s)
2003-04 61,989,102 -----
2004-05 69,811,266 12.62
2005-06 101,142,652 44.88
2006-07 169,700,875 67.78
2007-08 240,683,557 41.83
CGR is quite high which says that interest and discount income has
increased over the period and this is good for the bank.
(c) Income from investments:

Though there is net increase in the income in total span of five years
but decrease in 2007-08 is a matter of concern.
66
Year Income from investments (Rs in % Inc/Dec to prev. Year
000’s)
2003-04 26,453,853 -----
2004-05 23,921,900 -9.57
2005-06 40,607,809 69.75
2006-07 68,460,679 68.59
2007-08 34,042,178 -50.27
In the past five years, the income from investment has increased and this is
a good sign for the organization if viewed over the period.
Income from investments decreased during 2004-05 as compared to 2003-

04 & it increased during the years 2005-06 as well as 2006-07 as compared
to previous years while it again decreased during the year 2007-08 as
compared to 2006-07. In the declining interest rate scenario, such
investments became attractive due to their high yields & non risky nature.
(d) Interest on Cash Balance which are kept with RBI and other inter
bank funds:
The following data depicts that income has increased till 2006-07 but it
decreased slightly in 2007-08 and it is a matter of concern for the bank.
Year Interest (Rs in 000’s) % Inc/Dec to prev. Year

2003-04 2,193,950 -----
2004-05 2,334,833 6.42
2005-06 3,433,183 47.04
2006-07 9,037,876 163.25
2007-08 8,747,745 -3.21
This positive value of CGR shows that the income on cash balance which
are kept with RBI and other inter bank funds has increased over the
period.
67
(e) Income from other sources of Interest:
Table shows the flexible trend in income from other sources.
Year Income from other sources (Rs in 000’s) % Inc/Dec to prev. Year
2003-04 1,806,278 -----
2004-05 2,269,453 25.64
2005-06 958,247 -57.78
2006-07 2,813,065 193.56
2007-08 2,472,835 -12.09

CGR is positive during the period.
(f) Other Incomes of banks:

Other Income refer to all non-interest earnings of bank viz. income from
commissions, exchange and brokerage, sale of investment, sale of lend,
building, exchange transactions, income derived from dividend, leasing
business etc.
– Income from commission, exchange and brokerage
Table says about the rising trend in the income from commission,
exchange and brokerage during five years.
Year Income from comm., exch. And Brok.(Rs in 000’s) % Inc/Dec to prev. Yr.
2003-04 12,037,235 -----
2004-05 20,746,655 72.35
2005-06 32,546,535 56.87
2006-07 54,432,414 67.24
2007-08 67,673,441 24.33

Positive value of CGR says that bank is doing a better job to gather
income from commission, exchange and brokerage.
– Income from Sale of Investment

Table clearly shows the flexibility in the income from the sale of
investment i.e. in 2004-05 it declined but in 2005-06 it has increased
68
manifold and then it again declined in 2006-07 and then further
increased in 2007-08.
Year Income from sale of investment(Rs in 000’s) % Inc/Dec to prev. Yr.

2003-04 14,175,352 -----
2004-05 7,560,560 -46.66
2005-06 32,546,535 303.48
2006-07 14,061,769 -56.79
2007-08 34,042,178 142.09

CGR is positive and it gives information regarding rising in the investment
income during the period of study.
– Income from Exchange Transactions

Table gives information about the income from exchange transactions
has increased till 2006-07 but it has declined in 2007-08.
Year Income from Exchange Transactions(Rs in 000’s) % Inc/Dec to prev. Yr.

2003-04 2,086,142 -----
2004-05 2,781,079 33.31
2005-06 4,451,911 60.08
2006-07 8,435,218 89.47
2007-08 1,279,786 -84.82
CGR is negative which depicts that the bank is not earning much profits
or income from the exchange transactions. The bank should adopt
different measures to increase the exchange income.
(ii) Expenditures
(a) Interest Expanded

Interest paid on deposits and borrowings (from RBI and Banks) form a
major chunk of total expenses incurred by banks.
69
– Interest expanded on deposits
Table depicts that the interest paid by the bank on the deposits which
has increased very much till 2006-07 but increment is at a declining rate
in 2007-08.
Year Interest expanded (Rs in 000’s) % Inc/Dec to prev. Yr.

2003-04 30,194,309 -----
2004-05 32,622,753 8.04
2005-06 59,590,224 82.66
2006-07 124,565,606 109.04
2007-08 187,220,141 50.30
CGR is quite high and says that bank’s interest expanded on deposits has
increased in the last five years. It shows that the deposits in the bank has
increased over the period.
– Interest on RBI/ Inter Bank Borrowings
It shows the increasing trend of the interest on RBI/ Inter bank
borrowings during the period under study i.e. of five years.
Year Interest expanded (Rs in 000’s) % Inc/Dec to prev. Yr.

2003-04 3,230,976 -----
2004-05 2,334,833 -27.74
2005-06 11,888,142 409.16
2006-07 16,659,290 40.13
2007-08 23,140,065 38.90
CGR is positive and is quite high, nearly equal to 50% which shouts about
the great increase in interest on RBI and Inter bank borrowings.
– Interest Expanded on other Borrowings

Table depicts that interest expanded on other borrowings has decreased
up to 2005-06 but it increased thereafter.
70
Year Interest exp on other Borrowings (Rs in 000’s) % Inc/Dec to prev. Yr.
2003-04 38,251,291 -----
2004-05 31,373,162 -17.98
2005-06 29,536,430 -5.85
2006-07 35,532,297 20.30
2007-08 47,309,548 33.15
CGR is positive and says about the increased interest expanded on other
borrowings in the span of five years.
– Expenses (Component Wise)

Table depicts the interest expenditure has declined up to 2005-06 but it
increased manifold in 2006-07 but incremented at a declining rate in
2007-08 while the operating expenditure has also increased till 2006-07
but it declined during 2007-08 .
Year Interest Exp (Rs in % Inc/Dec to Operating Exp. (Rs % inc/dec to

billion) prev. Yr. in billions) prev. yr
2003-04 70.15 ----- 19.99 -----
2004-05 65.71 -6.33 25.17 25.91
2005-06 41.87 -36.28 35.47 40.92
2006-07 163.58 290.69 125.50 253.82
2007-08 234.84 43.56 64.29 -48.77
Compounded growth rate (Interest Expenditure) (CGR)= 27.33%

Compounded growth rate (Operating Expenditure) (CGR)= 26.31%
CGR is positive for both interest expenditure as well as operating

expenditure, the main reason for that is the expansion of the branches by
the bank in different areas.
(iii) Spread Ratios:

The difference between interest earned and interest paid constitutes
the spread. Spread along with non-interest income earned as
commission, service charges etc. form the revenue pool, out of which
71
man power and other expanses are met. Hence it is the amount of the
spread and its components that is interest earned and interest paid in
relation to the average working funds which is significant for the banks
to analyze their profitability. RBI has issued guidelines for banks to
disclose certain ratios i.e interest income, non-interest income, hence
all spread and burden ratios are calculated in terms of average working
funds to enable comparison of all ratios. Interest earned as percentage
of average working funds.
(a) Interest earned as percentage of average working funds
Interest earnings relate to funds based income earned from the
traditional banking business i.e. of lending funds. The ratio of interest
earned as percentage of average working funds indicates the rate of
income a bank earns on its total assets. Interest has declined till 2005-
06 but it increased thereafter.
Year Interest earned/ Avg Working funds(%) % Inc/Dec to prev. Yr.

2003-04 172.04 -----
2004-05 134.10 -22.05
2005-06 128.27 -4.34
2006-07 154.27 20.26
2007-08 170.84 10.74
Negative CGR says about the declining trend in the interest earned by the
bank which should be considered as a matter of concern.
(b) Interest paid by average working funds

Interest expenditure consists of funds based expenditure incurred
to earn interest income. The major constituents of interest
expenditure consist of interest paid on deposits, borrowing on
balances from RBI and inter bank borrowings. The trend has
72
declined till 2005-06 but it has increased thereafter, which should
be considered by the bank.
Year Interest paid/ Avg Working funds(%) % Inc/Dec to prev. Yr.

2003-04 133.39 -----
2004-05 92.79 -30.43
2005-06 88.66 -4.45
2006-07 109.07 23.02
2007-08 129.11 18.37
CGR is negative for the interest paid as percentage of average working

funds, which is a good sign for the bank.
(iv) Burden Ratios:
(a) Non-Interest Expenditure as percentage of average working funds

Non-interest expenditure of commercial banks consists of
manpower expenses like salaries, allowances, provident fund and
other current and non-current expenses. Expenditure has increased
annually over the period under study.
Year Non-Interest exp/ Avg Working funds(%) % Inc/Dec to prev. Yr.

2003-04 93.98 -----
2004-05 113.41 20.67
2005-06 116.39 2.62
2006-07 129.92 11.62
2007-08 156.19 20.22
73
CGR is positive which says that expenditure has increased which is due to
the branch expansion.
(b) Non-Interest Income as percentage of average working funds

Other incomes of the bank constitute income by way of
commission, exchange, brokerage, service charges and other
miscellaneous receipts. NII has increased in the last five years. For
the bank it is good sign.
Year Non-Interest Inc/ Avg Working funds(%) % Inc/Dec to prev. Yr.

2003-04 84.73 -----
2004-05 96.78 14.22
2005-06 97.83 1.08
2006-07 100.96 3.19
2007-08 130.07 28.83
CGR is positive over the period of study.
(v) Net-Profit – Profitability Ratios
(a) Net-Profit as percentage of total income
Profitability of banks can also be related to the total income of the

banks. Total income includes both interest income and non-interest
income of the banks. It shows declining trend over the period under
study.
74
Year Non Profit/ total income(%) % Inc/Dec to prev. Yr.
2003-04 11.44 -----
2004-05 10.69 -6.55
2005-06 9.31 -12.90
2006-07 6.36 -31.68
2007-08 5.18 -18.55
CGR shows the negative trend which is a great concern for the bank and
bank should take positive measures to improve its position.
(b) Net Profit as percentage of Total Deposits:
The ratio reveals profit per 100 rupee of total deposits. Total
deposits consist of fixed saving and demand deposits both for public
and banks. The ratio shows a declining trend till 2006-07 but
increase in 2007-08.
Year Non Profit/ total deposits(%) % Inc/Dec to prev. Yr.

2003-04 2.32 -----
2004-05 1.79 -22.84
2005-06 1.35 -24.58
2006-07 1.01 -25.19
2007-08 1.22 20.79
75
CGR is negative which shows the deposits which are made are not
sufficient for earning profits to the bank. So bank should take immediate
measures.
(c) Earning per Share:

Earning per share is calculated by dividing net profit by number of
equity shares. EPS has increased over the period and it fluctuates.
Year Earning Per Share % Inc/Dec to prev. Yr.

2003-04 26.66 -----
2004-05 27.6 3.52
2005-06 32.5 17.75
2006-07 34.8 7.07
2007-08 39.4 13.21
Compounded growth rate (CGR) = 8.12%
CGR being positive shows increase in the earnings per share during the
period under study which is a good sign for the bank.
(vi) Conclusions:
1. The major source of income that is income from income from
commission, exchange and brokerage, commission has increased
significantly for ICICI bank.
2. Foreign exchange income has increased significantly till 2006-07 but
it declines in 2007-08.
3. The share of the operating expenses of the ICICI bank has increased
manifold till 2006-07 because bank was initially in the stage of
branch expansion and had spent heavily on technology intensive
systems.
4. ICICI bank have installed ATM’s and have been expanding internet
banking to their customers since the day of there inception.
76
5. Bank has recorded a rise in all the sources of interest income i.e.
interest discount income, income on investment, income from
balance with RBI and other inter bank funds till 2006-07.
6. As far as interest expanded is concerned, the interest expanded on
deposits has increased significantly up to 2006-07 and declined in
2007-08.
7. The non-interest income for ICICI bank scaled new heights to
augment their total income.
8. ICICI bank emerged strong on most of the major parameters of
profitability.
9. ICICI bank increased income from major non-fund activities.
10. ICICI bank has been able to consolidate its position after the merger,
the merger as all the indicators of profitability responded in its
favor.
11. The reforms have granted flexibility to banks in meeting their
targets of priority sector lending.
77
Chapter 7
Loan-Portfolio Management of ICICI Bank
78
Loan-Portfolio Management:
Lending is the principal business activity for most commercial banks. The loan portfolio is
typically the largest asset and the predominate source of revenue. As such, it is one of
the greatest sources of risk to a bank’s safety and soundness. Whether due to lax credit
standards, poor portfolio risk management, or weakness in the economy, loan portfolio
problems have historically been the major cause of bank losses and failures. Effective
management of the loan portfolio and the credit function is fundamental to a bank’s
safety and soundness. Loan portfolio management (LPM) is the process by which risks
that are inherent in the credit process are managed and controlled. Because review of
the LPM process is so important, it is a primary supervisory activity. Assessing LPM
involves evaluating the steps bank management takes to identify and control risk
throughout the credit process. The assessment focuses on what management does to
identify issues before they become problems. This booklet, written for the benefit of
both examiners and bankers, discusses the elements of an effective LPM process. It
emphasizes that the identification and management of risk among groups of loans may
be at least as important as the risk inherent in individual loans. For decades, good loan
portfolio managers have concentrated most of their effort on prudently approving loans
and carefully monitoring loan performance. Although these activities continue to be
mainstays of loan portfolio management, analysis of past credit problems, such as those
associated with oil and gas lending, agricultural lending, and commercial real estate
lending in the 1980s, has made it clear that portfolio managers should do more.
Traditional practices rely too much on trailing indicators of credit quality such as
delinquency, nonaccrual, and risk rating trends. Banks have found that these indicators
do not provide sufficient lead time for corrective action when there is a systemic
increase in risk.
Effective loan portfolio management begins with oversight of the risk in individual loans.
Prudent risk selection is vital to maintaining favorable loan quality. Therefore, the
historical emphasis on controlling the quality of individual loan approvals and managing
the performance of loans continues to be essential. But better technology and
information systems have opened the door to better management methods. A portfolio
manager can now obtain early indications of increasing risk by taking a more
comprehensive view of the loan portfolio.
79
Loan Portfolio Objectives:
Loan Portfolio objectives establish specific, measurable goals for the portfolio. They are
an outgrowth of the credit culture and risk profile. The board of directors must ensure
that loans are made with the following three basic objectives in mind:
• To grant loans on a sound and collectible basis.
• To invest the bank’s funds profitably for the benefit of shareholders and the protection
of depositors.
• To serve the legitimate credit needs of their communities
Types of Loans:
1. Commercial loans: Loans intended to fulfill the credit needs of business

enterprises, including farm operations, are commercial loans. On the basis of
security, commercial loans can be secured or unsecured. Loans can be made at
either fixed rate of interest or floating rates. It can be further classified as:-
(a) Seasonal Loans:
This loan is taken out only for seasonal needs and is repaid when inventory
and receivables are partially converted into cash at the end of the seasonal
upsurge.
(b) Working Capital Loans:
This type of business loan is needed for financing current assets – inventories,
receivables and for other operational expenses. The need for working capital
may arise for many purposes:-
(i) To finance increasing level of sales.
(ii) To finance the provision of longer credit terms to customers.
(iii) To finance large stock holdings.
(c) Term Loans:
Bank provide term loans primarily to finance fixed assets such as plant and
machinery, construction of factory building, purchase of factory land etc.
Loans are sanctioned for a period more than one year, without specific
scheduled repayment.
2. Consumer Loans: These are loans granted by banks to individuals who may feel
inclined to purchase articles to improve their standard of living. In broad usage,
short and intermediate term consumer loans include both installment credit and
non-installment credit.
3. Real Estate Lending, Mortgage Loans: These are specialized form of consumer and
commercial lending. Two considerations dominate on financial institutions
decisions of whether to approve a mortgage loan application.
80
(a) The applicant’s ability and willingness to make timely interest and principal
payment.
(b) The value of the collateral underlines the loan.
Constituents of Loan Portfolio of Banks:
(a) Priority Sector Lending: The Narasimham committee recommends that the
advances to the priority sector should be fixed at the 10% of the total advances
has not been accepted by the government. But banks have been given
operational autonomy in meeting the priority sector target. If the target is not
achieved then amount equal to the shortfall can be invested in NABARD/ SIDBI.
Now, banks have several profitable avenues included in the priority sector to
extend loans. Table depicts priority sector lending which has increased ery much
till 2005-06 but increment has shown a declining trend thereafter.
Year Priority Sector Lending (Rs in ‘000s) % Inc/Dec to prev. Yr. (Priority Sector
Lending)
2003-04 145,307,396 ------
2004-05 215,591,362 48.36
2005-06 447,310,487 107.48
2006-07 555,491,571 24.18
2007-08 606,025,758 9.09
CGR is positive over the period of study but since the initiation of reforms, there has
been a decline in the priority sector lending due to greater flexibility by the bank.
(b) Trends in Cash Credit, Overdrafts and Loans:

Table depicts that the trends in cash credit, overdraft & loans payable on demand
for all the five years of ICICI bank under study has shown significant increase till
2005-06 but the increment has shown a declining trend thereafter.
Year CC, OD and Loans (Rs in ‘000s) % Inc/Dec to prev. Yr.

2003-04 61,254,576 ------
2004-05 123,344,410 101.36
81
2005-06 258,593,077 109.65
2006-07 334,781,882 29.46
2007-08 351,458,670 4.98
CGR shows positive trend and is quite high and is good sign for the bank as Cash
Credit, Overdrafts and Loans have increased over the past five years but
increment has shown a declining trend from 2006-08 which is a matter of concern
for the bank.
(c) Trends in Bills Purchased and Discounted

The table exhibits the trends in another vital component of loans & advances i.e.
bills purchased & discounted. The share in 2004-05 has increased manifold but
later on it starts declining.
Year Bills Purchased and Discounted (Rs in ‘000s) % Inc/Dec to prev. Yr.
2003-04 18,267,009 ------
2004-05 68,868,430 277.00
2005-06 107,554,857 56.17
2006-07 71,995,344 -33.06
2007-08 68,903,033 -4.29
Positive value of CGR speaks of the increasing trend in the Bills Purchased and
Discounted of ICICI Bank which is a vital component of Loans and Advances.
(d) Trends in Term Loans:

The table depicts the rising trend in the term loans during all the five years but in
2005-06 the rise in the term loans has been spontaneous than the other years.
Year Term Loans (Rs in ‘000s) % Inc/Dec to prev. Yr.

2003-04 556,944,528 ------
2004-05 772,559,072 38.71
2005-06 1,209,251,205 56.52
2006-07 1,659,223,017 37.21
82
2007-08 2,009,110,336 21.08
CGR depicts that there is increasing trend in the Term Loans over the period
under study which is a good sign for the ICICI bank.
(e) Trends in Secured Advances to total advances:

This ratio indicates the proportion of advances granting after securing them. The
table highlights the trends in the ratio. It highlights the declining trend in the ratio
from 2003-04 to 2007-08.
Year Secured Adv/ Total Adv (%) % Inc/Dec to prev. Yr.

2003-04 93.13 ------
2004-05 85.96 -7.69
2005-06 83.59 -2.75
2006-07 79.90 -4.41
2007-08 78.39 -1.88
Compounded Growth Rate (CGR) = -3.38%
CGR is negative here and shows that secured advances to total advances had a
declining trend over the study period.
(f) Trends in Term Loans to Total Advances:

This ratio indicates the proportion of term loans granted by a bank in the entire
advances which is depicted in the table. It is a preferred mode of financing by
banks, it has decreased for first three years & increased thereafter.
Year Term Loans/ Total Adv (%) % Inc/Dec to prev. Yr.

2003-04 86.48 ------
2004-05 80.13 -7.34
2005-06 77.38 -3.43
2006-07 78.49 1.43
2007-08 79.91 1.80
Compounded Growth Rate (CGR) = -1.56%

83
CGR shows there is a declining trend in the above ratio over the five years period.
Also it is clear from the table above that there is an increasing trend in the
increment too.
Conclusions:
1. However, with flexibility provided to banks to invest in apex institutions on
failure to meet the priority sector targets, the bank has started lending on
commercially viable terms.
2. The various constituents of loans and advances i.e. cash credit, overdraft
and loans payable on demand shown a significant rise till 2005-06 but
increment has shown a declining trend thereafter.
3. Term loans constituted the largest proportion of advances, followed by
cash credit, overdraft and loans repayable on demand and bills purchased
and discounted.
84
Chapter 8
Finding and Suggestions
Finding and Suggestions:
The introduction of financial and banking sector reforms has brought some major policy
measures, deregulation, decontrol, liberalizing of control in trade/ foreign exchange etc.
deregulation and integration have led to Indian banks and financial institutions into
competition both on assets side and liabilities side of balance sheet, forcing them to
assume greater and newer risks in their quest for higher returns.
85
Though the ALM process is too complex to practice, it is perhaps the only solution for
the banks to survive in this rapidly changing environment where the composition,
duration and risk profile of their assets and liabilities have an important bearing on their
growth and profitability.
The narasimham committee report on the banking sector reforms highlighted the
weaknesses in the Indian banking system & suggested reforms based on the Basel
norms.
Suggestions:
1. While providing credit to the priority sector, sound principles of lending should be
followed by the public sector banks to avoid NPA’s.
2. Bank should follow the essentials of Basel committee regarding the management
of interest rate risks to avoid reduction in spread.
3. Of balance sheet activities should be undertaken as they generate fee income and
increase the non-interest revenue of bank.
4. Bank should move from deposit orientation to profit orientation. However, the
shift in focus to profitability rather than the balance sheet doesn’t mean that
targeted resource mobilization and asset build up should take a back seat.
5. Bank is in dubious position of having more secondary reserves and less primary
reserves.
6. The decline in the investment in the debentures has been due to the lack of
development of corporate bond market. The secondary market has not
developed commensurately and market liquidity remains an issue.
7. Bank needs to increase loans so that the loans/ assets ratio reaching the
prudential limit of 50%.
8. ICICI bank which is the largest private sector bank, needs to increase lending to
the priority sector as its lending is short of the stipulated target. It is highly
imperative that the private sector banks also shoulder their responsibility towards
the priority sector.
9. If 50% of the liabilities are maturing within 1 year but only 10% of the assets are
maturing within the same period. Though the financial institution has enough
assets, it may become temporarily insolvent due to a severe liquidity crisis. Thus,
ALM is required to match assets & liabilities and minimize liquidity as well as
market risk.
10. There should be thorough awareness about ALM among the staff at all levels,
supportive management & dedicated teams.
86
11. For reporting data from branches/ other department’s strong management
information system should be used.
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4. www.marketresearch.com
5. www.investopedia.com
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A Study of Management of Assets and Liabilities in Relation To Performance and Profitability in ICICI Bank

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A Study of Management of Assets and Liabilities in Relation To Performance and Profitability in ICICI Bank

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Project Report

 Introduction of Indian Banking System

Chapter 2: Review of Literature and Research Methodology

Chapter 3: Overview & Performance of ICICI Bank

 Brief Profile of ICICI Bank

Chapter 4: Assets Management of ICICI Bank

 Areas of Asset Management

Chapter 5: Liabilities Management of ICICI Bank

Chapter 6: Profitability Analysis of ICICI Bank

 Loan Portfolio Management

Chapter 8: Findings and Suggestions

Meanwhile, during 1962 Deposit Insurance Corporation was established to

In the post-nationalization period, there was substantial increase in the no. of

1.1 Structure of Banking Sector:

Scheduled Commercial Banks Non- scheduled Commercial Banks

New Private Sector Banks Old Private Sector Banks

SBI Group Other Public Sector Banks Nationalized Banks

SBI Subsidiary Banks

1.2 Concept of ALM

 ALM is concerned with strategic management of Balance Sheet by giving

 ALM is concerned with strategic Balance Sheet management involving all

 It involves in managing both sides of balance sheet to minimize market risk

 Liquidity Risk Management.

 Over extension of credit

Interest Rate Risk Management

 Interest Rate risk is the exposure of a bank’s financial conditions to

Currency Risk Management

Profit Planning and Growth Projection

1.3 RISK MANAGEMENT AND ALM

(1) Credit Risk:

(2) Market Risk:

(3) Operational Risk:

ALM System in Banks – RBI Guidelines 1999

 ALM Information Systems

o Information availability, accuracy, adequacy and expediency

o Level of top management involvement

o Risk policies and tolerance levels

(i) ALM Information Systems:

(ii) ALM Organization:

a) Successful implementation of the risk management process would require

b) The Asset - Liability Committee (ALCO) consisting of the bank's senior

The scope of ALM function can be described as follows:

 Liquidity risk management

Review of Literature and Research Methodology:

2.1 Review of Literature

Rajwade, A. V. (2002) in the study, “Issues in Asset Liability Management – III:

Qamar, F. (2003) in the study, “Profitability and Resource use Efficiency in

Gurumoorthy, T. R. (2004) in the study, “Analysis of Income and Expenditure ion

Thimmaiah, G. (2004) in the study, “Asset Liability Management in Post Indian

Prasad, L and Pande, M. C. (2005) in the study, “Asset-Liability Management: An

Raghavan, R. S. (2005) in the study, “Risk Management – An Overview”, discussed

Sharma, K. and Kulkarni, P. R. (2006) in the study, “Asset Liability Management

Bhasin, A. (2007) in the study, “Understanding Risks in Banking: A Note”,

Batra, N. K. and Kapoor, R. (2008) in the study, “Profitability Analysis of New

2.2 Research Methodology

2.2.1 Need of the Study:

2.2.2 Objective of the study:

The specific objectives are:

 To analyze the growth and performance of ICICI bank.

This can be written as follows:

The percentage rate, generally stated on an annual basis, at which a variable

2.2.5 Chapter Scheme

Introduction of Indian Banking System is introduced and then Structure of