A PROJECT REPORT

ON
CREDIT RISK MANAGEMENT AT ICICI BANK

UNDER THE GUIDANCE OF:

MR. JITESH AHUJA
(Manager - Finance)

SUBMITTED BY:
MEENAKSHI SHARMA
ENROLEMENT NO:-A19201181123

AMITY SCHOOL OF DISTANCE

LEARNING, NOIDA
 CERTIFICATE I

This is to certify that the project work entitled “Credit Risk Management at ICICI
Bank” is a record of bonafide work carried out by Ms. Meenakshi Sharma under my
supervision towards partial fulfillment of the management Programme course (MBA) of
Amity School of Distance Learning.

Place: (Mr. Jitesh Ahuja)

Manager - Finance
Date: Project Guide

ii
 CERTIFICATE II

I, Meenakshi Sharma certify that the project report entitled “Credit Risk Management
at ICICI Bank” is an original one and has not been submitted earlier either to Amity
School of Distance Learning or to any other institution for fulfillment of the requirement
of a course of Management Programme (MBA).

Place: Signature
Date: Meenakshi Sharma
Roll No. A19201181123

iii
 ACKNOWLEDGEMENT

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

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

time, energy and wisdom.

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

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

my sincere thanks to Mr. Jitesh Ahuja for his helpful hand in the completion of my

project.

Meenakshi Sharma

iv
 ABSTRACT

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

v
 CONTENT

ACKNOWLEDGMENT ......................................................................... iv

ABSTRACT............................................................................................. v

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

2. COMPANY PROFILE .................................................................................... 10

3. RESEARCH OBJECTIVE & METHODOLOGY ........................................... 20

4. LITERATURE REVIEW ................................................................................ 21

5. PRIMARY FINDING AND ANALYSIS ........................................................ 44

6. RECOMMENDATIONS ................................................................................ 53

7. CONCLUSION & IMPLICATIONS ............................................................... 54

8. BIBLIOGRAPHY ........................................................................................... 56

9. ANNEXURE - COPY OF THE QUESTIONNAIRE ....................................... 57

vi
 1

INTRODUCTION

Indian Banking sector:

The banking system in India is significantly different from that of other Asian nations
because of the country’s unique geographic, social, and economic characteristics. India
has a large population and land size, a diverse culture, and extreme disparities in come,
which are marked among its regions. There are high levels of illiteracy among a large
percentage of its population but, at the same time, the country has a large reservoir of
managerial and technologically advanced talents. Between about 30 and 35 percent of the
population resides in metro and urban cities and the rest is spread in several semi-urban
and rural centers. The country’s economic policy framework combines socialistic and
capitalistic features with a heavy bias towards public sector investment. India has
followed the path of growth-led exports rather than the “export- led growth” of other
Asian economies, with emphasis on self-reliance through import substitution. These
features are reflected in the structure, size, and diversity of the country’s banking and
financial sector. The banking system has had to serve the goals of economic policies
enunciated in successive five- year development plans, particularly concerning equitable
income distribution, balanced regional economic growth, and the reduction and
elimination of private sector monopolies in trade and industry. In order for the banking
industry to serve as an instrument of state policy, it was subjected to various
nationalization schemes in different phases (1955, 1969, and 1980). As a result, banking
remained internationally isolated (few Indian banks had presence abroad in international
financial centers) because of preoccupations with domestic priorities, especially massive
branch expansion and attracting more people to the system. Moreover, the sector has
been as- signed the role of providing support to other economic sectors such as
agriculture, small-scale industries, exports, and banking activities in the developed
commercial centers (i.e., metro, urban, and a limited number of semi-urban centers). The
banking system ’ s international isolation was also due to strict branch licensing controls
on foreign banks already operating in the country as well as entry restrictions facing new
 2
foreign banks. A criterion of reciprocity is required for any Indian bank to open an office
abroad. These features have left the Indian banking sector with weaknesses and strengths.
A big challenge facing Indian banks is how, under the current ownership structure, to
attain operational efficiency suit- able for modern financial intermediation. On the other
hand, it has been relatively easy for the public sector banks to recapitalize, given the
increases in nonperforming assets (NPAs), as their Government- dominated ownership
structure has reduced the conflicts of interest that private banks would face.

History:

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

Reserve Bank of India:

The RBI is the central banking and monetary authority in India. The RBI manages the
country’s money supply and foreign exchange and also serves as a bank for the GoI and
 3
for the country’s commercial banks. In addition to these traditional central banking roles,
the RBI undertakes certain developmental and promotional activities. The RBI issues
guidelines, notifications, circulars on various areas including exposure standards, income
recognition, asset classification, provisioning for non-performing assets, investment
valuation and capital adequacy standards for commercial banks, long-term lending
institutions and non-banking finance companies. The RBI requires these institutions to
furnish information relating to their businesses to the RBI on a regular basis.

Commercial Banks:

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

Public Sector Banks:

Public sector banks make up the largest category of banks in the Indian banking system.
There are 27 public sector banks in India. They include the SBI and its associate banks
and 19 nationalized banks. Nationalized banks are governed by the Banking Companies
(Acquisition and Transfer of Undertakings) Act 1970 and 1980. The banks nationalized
under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 are
referred to as ‘corresponding new banks’. Punjab National Bank is a public sector bank
nationalized in 1969 and a corresponding new bank under the Bank Acquisition Act. At
the end of June 2004, public sector banks had 46,715 branches and accounted for 74.7%
 4
of the aggregate deposits and 70.1% of the outstanding gross bank credit of the scheduled
commercial banks.

Regional Rural Banks:

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

Private Sector Banks:

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

Foreign Banks:

At the end of June 2009, there were around 33 foreign banks with 200 branches operating
in India, accounting for 4.7% of aggregate deposits and 7.3% of outstanding gross bank
credit of scheduled commercial banks. The Government of India permits foreign banks to
operate through (i) branches; (ii) a wholly owned subsidiary or (iii) a subsidiary with
aggregate foreign investment of up to 74% in a private bank. The primary activity of
most foreign banks in India has been in the corporate segment. However, some of the
larger foreign banks have made consumer financing a significant part of their portfolios.
These banks offer products such as automobile finance, home loans, credit cards and
household consumer finance. The GoI in 2008 announced that wholly owned subsidiaries
 5
of foreign banks would be permitted to incorporate wholly-owned subsidiaries in India.
Subsidiaries of foreign banks will have to adhere to all banking regulations, including
priority sector lending norms, applicable to domestic banks. In March 2008, the Ministry
of Commerce and Industry, GoI announced that the foreign direct investment limit in
private sector banks has been raised to 74% from the existing 49% under the automatic
route including investment by FIIs. The announcement also stated that the aggregate of
foreign investment in a private bank from all sources would be allowed up to a maximum
of 74% of the paid up capital of the bank. The RBI notification increasing the limit to
74% is however still awaited.

Cooperative Banks:

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

Term Lending Institutions:

Term lending institutions were established to provide medium-term and long-term

financial assistance to various industries for setting up new projects and for the expansion
and modernization of existing facilities. These institutions provide fund-based and non-
fund based assistance to industry in the form of loans, underwriting, and direct
subscription to shares, debentures and guarantees. The primary long-term lending
 6
institutions include Industrial Development Bank of India (converted into a banking
company with effect from October, 2008), IFCI Ltd., Infrastructure Development Finance
Company Limited, and Industrial Investment Bank of India and Industrial Credit
Corporation of India Limited (prior to its amalgamation).

Banking Sector Reforms:

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

Opportunities and Challenges for Players:

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

 High performance: In this scenario, policy makers intervene only to the extent
required to ensure system stability and protection of consumer interests, leaving
managements free to drive far-reaching changes. Changes in regulations and bank
capabilities reduce intermediation costs leading to increased growth, innovation
and productivity. Banking becomes an even greater driver of GDP growth and
employment and large sections of the population gain access to quality banking
products. Management is able to overhaul bank organizational structures, focus on
industry consolidation and transform the banks into industry shapers. In this
scenario we witness consolidation within public sector banks (PSB5) and within
private sector banks. Foreign banks begin to be active in M&A, buying out some
old private and newer private banks. Some M&A activity also begins to take place
between private and public sector banks. As a result, foreign and new private
banks grow at rates of 50 per cent, while PSBs improve their growth rate to 15 per
cent. The share of the private sector banks (including through mergers with PSB5)
 8
increases to 35 per cent and that of foreign banks increases to 20 per cent of total
sector assets. The shares of banking sector value add in GDP increases to over 7.7
per cent, from current levels of 2.5 per cent. Funding this dramatic growth will
require as much as Rs. 600 billion in capital over the next few years.

 Evolution: Policy makers adopt a pro-market stance but are cautious in

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

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

and management is unable to execute the changes needed to enhance returns to
shareholders and provide quality products and services to customers. As a result,
growth and productivity levels are low and the banking sector is unable to support
a fast-growing economy. This scenario sees limited consolidation in the sector
and most banks remain sub-scale. New private sector banks continue on their
growth trajectory of 25 per cent. There is a slowdown in PSB and old private
sector bank growth. The share of foreign banks remains at 7 per cent of total
assets. Banking sector value add, meanwhile, is only 3.3 per cent of GDP.
 9
Major Development:

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

COMPANY PROFILE

ICICI BANK

ICICI bank:

ICICI Bank is a major banking and financial services organization in India. It is the
second-largest bank by revenue, profit and
assets (behind State Bank of India) and the
largest private sector bank in India by
market capitalization. The bank also has a
network of 1,700+ branches (as on 31
March, 2010) and about 4,721 ATMs in
India and presence in 18 countries, as well
as some 24 million customers (at the end
of July 2007). ICICI Bank offers a wide range of banking products and financial services
to corporate and retail customers through a variety of delivery channels and specialization
subsidiaries and affiliates in the areas of investment banking, life and non-life insurance,
venture capital and asset management. (These data are dynamic.) ICICI Bank is also the
largest issuer of credit cards in India. ICICI Bank has got its equity shares listed on the
stock exchanges at Kolkata and Vadodara, Mumbai and the National Stock Exchange of
India Limited, and its ADRs on the New York Stock Exchange (NYSE). The Bank is
expanding in overseas markets and has the largest international balance sheet among
Indian banks. ICICI Bank now has wholly-owned subsidiaries, branches and
representatives offices in 18 countries, including an offshore unit in Mumbai. This
includes wholly owned subsidiaries in Canada, Russia and the UK (the subsidiary
through which the HiSAVE savings brand is operated), offshore banking units in Bahrain
and Singapore, an advisory branch in Dubai, branches in Belgium, Hong Kong and Sri
Lanka, and representative offices in Bangladesh, China, Malaysia, Indonesia, South
Africa, Thailand, the United Arab Emirates and USA. Overseas, the Bank is targeting the
NRI (Non-Resident Indian) population in particular. ICICI reported a 1.15% rise in net
profit to Rs. 1,014.21 crore on a 1.29% increase in total income to Rs. 9,712.31 crore in
 11
Q2 September 2008 over Q2 September 2007. The bank's current and savings account
(CASA) ratio increased to 30% in 2008 from 25% in 2007. ICICI Bank is one of the Big
Four Banks of India, along with State Bank of India, Axis Bank and HDFC Bank — its
main competitors.

History of ICICI bank:

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

 1994: ICICI established Banking Corporation as a banking subsidiary formerly

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

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

 2002: The Boards of Directors of ICICI and ICICI Bank approved the reverse merger
of ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services
Limited, into ICICI Bank. After receiving all necessary regulatory approvals, ICICI
integrated the group's financing and banking operations, both wholesale and retail,
into a single entity. At the same time, ICICI started its international expansion by
opening representative offices in New York and London. In India, ICICI Bank bought
the Shimla and Darjeeling branches that Standard Chartered Bank had inherited when
it acquired Grindlays Bank.
 12
 2003: ICICI opened subsidiaries in Canada and the United Kingdom (UK), and in the
UK it established an alliance with Lloyds TSB. It also opened an Offshore Banking
Unit (OBU) in Singapore and representative offices in Dubai and Shanghai.

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

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

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

representative offices in Bangkok, Jakarta, and Kuala Lumpur.

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

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

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

 2009: ICICI made huge changes in its organization like elimination of loss making
department and retrenching outsourced staff or renegotiate their charges in
consequent to the recession. In addition to this, ICICI adopted a massive approach
aims for cost control and cost cutting. In consequent of it, compensation to staff was
not increased and no bonus declared for 2008-09.
 13
Controversy:

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

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

 Four ICICI loan employees arrested on theft charges in Punjab

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

 RBI warns ICICI Bank for coercive methods to recover loans

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

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

 Family of Y. Yadaiah alleged that he was beaten to death by ICICI Bank’s recovery
agents, for failing to pay the dues. Four persons were arrested in this case.
 14
 A father while talking to Times of India, alleged that "ICICI Bank recovery agents
visited his house and threatened his family. And his son Nikhil consumed poison
because of the tension".

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

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

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

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

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

 In a landmark case, Allahabad High Court had ordered registration of an FIR against
ICICI Bank's branch manager, President, Chairman and Managing Director on a
complaint of 75-year-old widow Prakash Kaur. She had complained that “goondas”
were sent by the bank to harass her and forcibly took away her truck. When the
Supreme Court wanted to know about the procedure adopted by the Bank, ICICI
Bank counsel said notice would be sent to a defaulter asking him either to pay the
instalments or hand over the vehicle purchased on loan, failing which the agents
would be asked to seize it. When the Bench pointed out that recovery or seizure could
be done only legally, ICICI Bank counsel said, "If we have to go through the legal
 15
process it would be difficult to recover the instalments as there are millions of
defaulters".

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

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

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

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

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

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

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

 A consumer court imposed a joint penalty of Rs. 25 lakh on ICICI Bank and
American Express Bank for making unsolicited calls.
 16
Corporate profile:

ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$
81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for
the year ended March 31, 2010. The Bank has a network of 2,009 branches and about
5,219 ATMs in India and presence in 18 countries. ICICI Bank offers a wide range of
banking products and financial services to corporate and retail customers through a
variety of delivery channels and through its specialised subsidiaries and affiliates in the
areas of investment banking, life and non-life insurance, venture capital and asset
management. The Bank currently has subsidiaries in the United Kingdom, Russia and
Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and
Dubai International Finance Centre and representative offices in United Arab Emirates,
China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary
has established branches in Belgium and Germany. ICICI Bank's equity shares are listed
in India on Bombay Stock Exchange and the National Stock Exchange of India Limited
and its American Depositary Receipts (ADRs) are listed on the New York Stock
Exchange (NYSE).

Awards:

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

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

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

 Forbes' 2000 most powerful listed companies' survey ranked ICICI Bank 4th among
the Indian companies and 282nd globally.
 17
 ICICI Bank was awarded The Asian Banker Achievement Award 2009 for Cash
Management in India.

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

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

o Fixed Income Portfolio Management

o Lending/Financing Solutions

o Precious Metals Investment

o Private Equity Investment

o Specialized Services - Entrepreneurs

o FX/Rates Derivatives Supplier

 ICICI Bank wins the Asian Banker Award for Excellence in SME Banking 2009

 ICICI Bank won the second prize in the Six Sigma Excellence Awards, conducted by
Indian Statistical institute, Bangalore for "Improving Sales for TV Banking business"

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

A leader in banking technology:

ICICI Bank seeks to be at the forefront of technology usage in the financial services
sector. Information technology is a strategic tool for business operations, providing the
bank with a competitive advantage and improved productivity and efficiencies. All the
bank’s IT initiatives are aimed at enhancing value, offering customer convenience, and
improving service levels. ICICI Bank (NYSE:IBN) is India's second largest bank and
 18
largest private sector bank, with assets of USD 43 billion as of September 30,2005. ICICI
Bank offers a wide range of banking products and financial services to corporate and
retail customers through a variety of delivery channels and through its specialized
subsidiaries and affiliates. Areas include investment banking, life and non-life insurance,
venture capital, and asset management. Specifically, ICICI Bank is a leading player in the
retail banking market and has over 14 million retail customer accounts. The bank has a
network of 600 branches and extension counters and 2,060 ATMs. ICICI Bank is
growing rapidly, in part through its online service offerings, and is considered a
technology trendsetter in the Asian banking industry.

A loyal Symantec customer for six years and counting:

The bank set the stage for its technology ascendancy in 1999 when it consolidated its IT
operations to a new data center in Mumbai. Pravir Vohra, Senior General Manager of
ICICI Bank’s Technology Management Group, was a key decision maker in the planning
for the new data center. “We took a hard look at the bank’s requirements well into the
future,” he says. “High availability for our customer-facing applications was on the top of
the list. If my customers cannot transact, nothing else matters. An outage can be highly
detrimental to the bank’s reputation.” As a result, the bank’s internal applications needed
to meet high availability requirements. And all banking data had to be protected and
recovered in case of disaster. In building the bank’s Mumbai datacenter, Vohra looked
first to establish relationships with suppliers that could solve a whole class of problems,
not just those suppliers who offered point solutions. “To build a world- class
infrastructure, we needed world-class software to manage our applications and storage,”
explains Vohra. “We standardized on Symantec products for our data center because they
have a well-deserved reputation as being best in class. Also, Symantec supports all major
platforms, so we can deploy a single set of tools across the entire infrastructure,
simplifying administration and reducing training costs.” An additional decision factor
was Symantec’s broad range of services, from consulting to onsite education.
 19
Targeting high availability for the end user:

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

Investor Relations:

ICICI Bank disseminates information on its operations and initiatives on a regular basis.
The ICICI Bank website serves as a key investor awareness facility, allowing
stakeholders to access information on ICICI Bank at their convenience. ICICI Bank's
dedicated investor relations personnel play a proactive role in disseminating information
to both analysts and investors and respond to specific queries.
 20

RESEARCH OBJECTIVE AND METHODOLOGY

RESEARCH OBJECTIVES:
 Analysis of Credit Risk Management.

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

 To know the process of the Back End Operation.

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

RESEARCH METHODOLOGY:
Sample Size: [Credit Risk analysis]

Traders : 16 Companies

Contractors : 6 Companies

SME : 18 Companies.

Research Method :-

The Project is consists of :-

1. Primary Data

2. Secondary Data

Primary Data :

Primary Data is collected from the borrowers profile availed in the bank and telephonic
interview.

Secondary Data

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

The information for the literature survey has been obtained mainly from: News published
in Indian & International news paper on the subject of Payment Systems.
 21

LITERATURE REVIEW

In June 2004, the Basel Committee on Banking Supervision (BCBS) issued a Revised
Framework on International Convergence of Capital Measurement and Capital Standards
(hereinafter Basel II or BIl). Even today, the new Basel Capital Accord is increasing the
concern felt among retail banks, ICICI regarding the effect that the new standard will
have on the credit policy. One of the goals of BIl is to establish capital requirements that
are more sensitive to risk, which could increase the risk premium that the ICICI bank
charges on retail customer. This would increase the rates of interest applied onto their
loans, and as a result, would exacerbate their very well-known financing difficulties. To
improve the companies’ credit access, ICICI bank is obliged to provide guarantees or
collateral in most of the cases. To mitigate risk, the new Framework allows companies to
make use of collateral, guarantees and credit derivatives, on-balance sheet netting,
mortgages, etc. Thus, it turns out to be interesting to banks to know the impact of such
techniques on their capital requirements, since this could mean that some types of credit-
risk mitigation techniques are more advisable than others. There are various studies in the
literature analyzing the impact of the financing of retail customer on the capital
requirements of the ICICI bank, and its possible effects on bank financing. Researcher
analyzed the effects of BII on the capital requirements of financial entities using data
from the USA, Italy, and Australia. They concluded that the ICICI bank would have
significant benefits in terms of lower capital requirements, when considering small- and
medium-sized firms as retail customers, provided the internal ratings-based (IRB)
approach is applied. However, for SMEs treated as corporate, the capital requirements are
considered to be slightly greater than under the Basel I Capital Accord. This leads to the
assumption, in their opinion, that most financial entities would apply both the systems
simultaneously; i.e., they would consider one part of the credits granted to SMEs as
corporate and the other part as retail. Through a breakeven analysis, they observed that
the banks would be obliged to classify at least 2O/c of their SME portfolio as retail to
maintain the current capital requirement.
 22
According to author, the adoption of the advanced IRB approach proposed in BII by large
credit entities in the USA may not signify a reduction in the interest rates applied to the
credits granted to SMEs as retail customer, but may be enough to produce a substitution
effect with respect to other credit entities of smaller size. Remarkable studies that have
considered BII are those by them, among others. In their studied the techniques for credit
risk mitigation presented in the first consultative document of BII, and they analyzed the
consultative documents issued prior to the approval of BII, focusing their analysis on the
retail customer and their repercussions on the ICICI bank financing of Spanish
companies. They observed that the modifications made in 2002, considering part of the
financing of SMEs as retail or incorporating an adjustment for size in the curve
corresponding to the corporate category, substantially improved the figures of capital
requirements demanded, which were reduced on an average to 6.5/c for the IRB approach
and 6/c for the Standardized approach for those SMEs included in the retail category. The
rest of the SMEs included in the corporate category also saw that the capital required
reduced to lO.23/c and 8/c for the IRB and Standardized approaches, respectively.

Thus, they concluded that at least at the level of the Spanish credit system as a whole,
there were no incentives for a change in the current pattern of bank financing provided to
companies, although the final effect will depend again on the percentage of financing
provided to SMEs considered as retail. It is worth stressing the point that these results
obtained did not take into consideration the latest modifications prior to the definitive
approval of the agreement. As a particular case, we will emphasize the guarantee
provided by the Loan Guarantee Associations (ICICI5). It is well known that to reduce
the problems derived from information asymmetries, there exist entities all over the
world that mediate with the banks to give guarantees supporting the operations of SMEs.
The ICICI act as guarantors of SMEs in dealings with banks, with the object of reducing
the risks for the financial entities in providing credits to small companies; such support
helps small companies to get financing under better conditions of rate, term, and
guarantee. In parallel, in many countries, with the aim of offering sufficient cover and
guarantee for the risks contracted by the ICICI, and to facilitate the reduction of the cost
of the guarantee for their partners, there exist reinsurance companies, whose objective is
to provide a second or a backup guarantee for the operations guaranteed by an ICICI. As
 23
an initial approach, They considered the impact of the guarantees given to SMEs by the
ICICI in relation to the capital requirements demanded by BIl, as well as their possible
effects on the risk premium that the financial entities apply. They examined the effects on
the credit risk premium that the banks had to charge to their SME clients, and whether
this foreseeable theoretical reduction in the interest rates was compensated by the cost of
the guarantee requested.

Credit-Risk Mitigation Techniques According to BII:

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

a) Collateralized transactions;

b) Guarantees and credit derivatives

c) On-balance sheet netting.

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

d) Exposures secured by mortgage and

 24
e) Asset securitization.

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

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

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

assets or collateral of financial nature (cash, gold, equities, etc.). The loans secured by
property assets (mortgage guarantees) are subjected to a differentiated treatment.
Financial entities are allowed to reduce their credit exposure to counterparty when
calculating their capital requirements to take into account the risk mitigating effect of the
collateral. In the case of the Standardized approach, banks may choose between the two
approaches. The first one is a simple approach which, similar to the 1988 Accord,
substitutes the risk weighting of the collateral for that of the counterparty, for the
collateralized portion of the exposure (generally subjected to a 2O/c floor). And the
second one, a comprehensive approach allows fuller offset of the collateral against
exposures, by effectively reducing the exposure amount by the value ascribed to the
collateral. Financial entities may operate under either one, but not both, of the approaches
in the banking book. Although partial collateralization is recognized in both the
approaches, mismatches in the maturity of the underlying exposure and the collateral are
only allowed under the comprehensive approach. If a bank employs the foundation IRB
 25
approach for the treatment of the credit risk of its portfolio, the methodology for the
recognition of eligible financial collateral closely follows that outlined in the
comprehensive approach to collateral in the standardized approach. The financial entities
that employ the advanced IRB approach will normally take into account the collateral by
using their own internal estimations with the object of introducing an adjustment on the
loss given default (LGD) of the exposure.

b) Guarantees and credit derivatives:

A range of guarantors and protection providers are recognized, and under the 1988
Accord, a substitution approach would be applied. Thus, only guarantees issued by
entities with a lower risk weight than the counterparty will lead to reduced capital
charges, since the protected portion of the counterparty exposure is assigned the risk
weight of the guarantor or protection provider, whereas the uncovered portion retains the
risk weight of the underlying counterparty. Although the lower probability of suffering a
“double default” is recognized, it is not taken into account owing to the difficulty of
determining the correlations between debtor and guarantor. For the guarantee (or credit
derivative) to be accepted as mitigate of risks, it must be direct, explicit, irrevocable, and
unconditional. BII demands a series of operational conditions aimed at ensuring the legal
certainty of the cover (paragraphs 189—193 of BII).

c) On-balance sheet netting:

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

d) Exposures secured by mortgage:

In BII, the treatment of credits secured by property assets is different from that proposed
generally for credits secured by financial assets, particularly in the Standardized and
foundation IRB approaches.
 26
e) Securitization:

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

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

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

The Treatment of SMEs as Retail Customer in BII:

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

a) Standardized approach:

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

b) IRB Approach:

The IRB approach is based on the internal estimations made by the financial entity,
which allow the bank to calculate capital requirements that are more sensitive to the risk.
The Committee has made two IRB approaches available: a foundation and an advanced.
Under the foundation approach, banks provide their own estimates of probability of
default (PD) and rely on the supervisory estimates for other risk components: the loss
 27
given default (LGD), the exposure at default (EAD), and the effective maturity of the
operation (M). Under the advanced approach, banks provide more of their own estimates
of PD, LGD, EAD, and their own calculation of M, subject to meeting minimum
standards. For both the foundation and advanced approaches, banks must always use the
risk-weight functions provided in BII for the purpose of deriving capital requirements.

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

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

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

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

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

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

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

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

The function (Equations [3] and [5]) is derived from an adaptation of Merton’s (1974)
single-asset model to credit portfolios. The confidence level is fixed at 99.9%, i.e., an
 28
institution is expected to suffer losses that exceed its level of capital on an average once
in 1000 years. R is the coefficient of asset correlation and is introduced to reflect a
“portfolio effect,” such that the greater this coefficient, the greater the capital required for
the same PD. Correlations are adjusted to firm size, which is measured by annual sales.
The linear size adjustment, shown in Equation [4] as 0.04 x (1 — (S — 5)145), affects
Corporates with annual sales of less than €50 million (SME5). For SMEs with annual
sales of €5 million or less, the size adjustment takes the value of 0.04, thus lowering the
asset correlation from 24% to 2O% (best credit quality) and from l2% to 8% (worst credit
quality). The second part of Equation [3] shows the adjustment for the maturity of the
loan. Both the intuition and empirical evidences indicate that long-term credits are riskier
than the short-term ones. As a consequence, the capital requirement should increase with
maturity. The M is the effective term or maturity of each operation, and b = [0.11852—
0.05478.111 (PD)] With the aim of maintaining the current aggregate level of capital
requirement in general terms, the BCBS decided to apply a 1.06 scaling factor for credit
risk-weighted assets (calibration) in the IRB approach (May, 2006).

Once the capital requirement has been estimated, to derive risk-weighted assets (RWAs),
it must be multiplied by EAD and the reciprocal of the minimum capital ratio of 8/c, i.e.
by a factor of 12.5. It shows the capital requirement (CR), in %, for a loan to an SME
according to different probabilities of default (O.03% and 20%) and different levels of
total annual sales (less than €5 million, €30 million, and €50 million). It can be observed
that the risk-weighting ranges between ll.98/c and l99.72/c, l3.7g/c and 23O.24/c, and
lS.3l/c and 2S2.S3/c, respectively. It has been assumed that the loss in the event of
default is 4S/c, and that the effective maturity of the loan is 2.5 years (both the data fixed
by the regulator for the foundation approach). In the case when the financing granted to
the SME is included in the retail category, the formula given in Equation [5] is used for
calculating the regulatory capital. It should be observed that this function does not
include an explicit maturity adjustment. For the retail positions, banks must provide their
own estimators of PD, LGD, and EAD, i.e., there is no distinction between a foundation
and an advanced approach for this asset class. In addition, as in the case of financing
provided to firms, a minimum PD of O.O3/c is established. It shows a simulation of
different levels of CR demanded (PD of O.O3/c and 20%) for a loan to an SME included
 29
in the retail category. Again, the LGD is assumed as 45%. From the examination of the
different curves of capital, it can be observed how the own funds required are reduced in
line with the dropping levels of annual sales in the borrower company — the differences
between the curves being greater when the probability of default increases. When the
financing to the SME is considered as retail, the CR in both the approaches, Standardized
and IRB, drops considerably.

Quantification of the Credit Risk Premium:

The credit risk premium is the sum of two components:

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

Where:

PD: Probability of default

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

ROE: Return on Equity.

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

Analysis of each component of the credit risk premium:

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

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

Financial institutions view EL as a cost component of doing business, and manage them
by a number of means, including through the pricing of credit exposures and
provisioning. With respect to this, the amount imputable to the borrower in terms of
“foreseen loss,” as a percentage of the exposure to the risk, would be equal to PD x LGD.
 30
ii) The cost of the regulatory capital’ that the loan in question “consumes,” is obtained by
multiplying this capital by any variable representative of the return required from it, for
example, by the ROE ratio.

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

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

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

 IRB approach: At a similar probability of default, the SME borrowers with

lower annual sales will benefit more in terms of differential of interest, although it
should be remembered that, in principle, the lower the annual sales volume of the
SME, the higher is its probability of bankruptcy, ceteris paribus. In this way, Bli
tries to alleviate the burden represented by the new capital requirements for
companies of small size as much as possible, by not excessively increasing the
consequent risk premium.
 31
The ICICI in BII:

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

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

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

Option 2: The second option bases the risk-weighting on the external credit assessment
of the ICICI itself with claims on unrated ICICI being risk-weighted at 5O%. Under this
option, a preferential risk-weight that is one category more favourable may be applied to
claims with an original maturity of <3 months, subjected to a floor of 20%.
 32
Therefore, for a loan to an SME that is not rated and wholly guaranteed by an ICICI
possessing the status of credit institutions, if the supervisor opts for the first of the two
options in countries with a sovereign debt rating of AA or better, the CR will be:

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

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

retail.

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

b) IRB approach:

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

b.1) Foundation IRB:

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

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

 The risk-weighting function appropriate for the ICICI and

 33
 The PD corresponding to the ICICI or any intermediate rating between that of the
SME and ICICI, if the bank deems a full substitution treatment not to be
warranted.

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

b.2) Advanced IRB:

Banks using the advanced approach for estimating LGDs may reflect the risk-mitigating
effect of guarantees through either adjusting PD (the same treatment outlined previously
for banks under the foundation IRB approach) or LGD estimate. However, in contrast to
the foundation approach, guarantees prescribing conditions under which the guarantor
may not be obliged to perform (conditional guarantees) may be recognized under certain
conditions.

b.3) Retail Exposures:

The treatment proposed under BII for mitigating retail risks in the event of guarantees is
very similar to that proposed for those financial entities that choose to make their own
estimations of the LGD. Banks may reflect the risk- reducing effects of guarantees, either
in support of an individual obligation or a pool of exposures, through an adjustment of
either the PD or LGD estimate, if a series of minimum requirements are met and with the
prior approval of the competent authorities. There are no restrictions on the types of
eligible guarantors, if they meet the conditions established by the regulation, which are
the same as under the advanced IRB approach.
 34
c) Reinsurance systems:

In Europe,’ rather more than half of the guarantee systems (56%) have some kind of
counter-guarantee, although in most cases this does not cover 100% of the operation14, a
requirement demanded under BII to alleviate the capital requirements in the Standardized
approach. However, it is clear that the backup guarantee represents a significant support
to the creditworthiness of the ICICI, and this fact is even recognized by the Spanish
regulations15. In particular, it is recognized that, when a series of conditions are met,
reinsurance is an instrument that reduces the credit risk, and consequently should lead to
a reduction of the own resources (of the ICICI) required with respect to those
commitments that benefit from general contracts of second guarantees or reinsurance.
This signifies that the counter-guarantee constitutes a variable to be considered when the
bank estimates the PD or LGD applicable under the internal rating or IRB approach,
except where the national legislation stipulates to the contrary. Thus, those SMEs
endorsed by an ICICI whose guarantees are indirectly counter-guaranteed to a significant
percentage by any reinsurance company should benefit from the lower capital
requirements by the lender financial entity. Thus, having analyzed the impact of the
ICICI guarantee on the CR demanded of financial entities for loans to SMEs, the next
step is to determine its effect on the credit risk premium previously calculated. It has
already been shown how the reduction of risk (as a consequence of the existence of the
guarantee of the ICICI) is translated into reduced capital requirements and, ultimately,
into lower risk premiums (interest rates) chargeable to the SMEs, thus reducing the cost
of credit for the SMEs. The precise quantification of the new credit risk premium will
depend not only on the value taken by the basic variables of the risk (mainly the PD and
the LGD) for the endorsing ICICI, but also on the approach that the bank employs for
risk management (Standardized, foundation IRB, or advanced IRB approach) with
respect to the component of “not expected losses.” It is almost certain that the probability
of default of the ICICI will be lower than that of the borrower SME; hence, the amount of
the EL (the first component of the credit risk premium) should be considerably reduced.
If the possible existence of reinsurance is added to this, and since both the SME and its
endorsing ICICI would need to become insolvent for the financial entity not to recover its
money, the expected value of any loss would be even lower. For the average values of the
 35
Spanish market for credit and different values of the PD of the guaranteeing company16,
the element of EL to be included in the credit risk premium has been simulated.
Assuming the average rates of default for SMEs as 2.64%, and as 2.92% for those
companies with the due amount of more than (or less than) €1 million17, the differences
in the expected losses for credits guaranteed by an ICICI range from 1.17% (1.30%), for
very creditworthy ICICI, to positive differences for those ICICI with worse credit
assessments. With respect to the second component of the credit risk premium, which is
representative of the cost of the capital required, its amount does differ now according to
the approach that the financial entity chooses for the management of the risk. In countries
like Spain (with AAA rating), the factor for UL of the credit risk premium would be
reduced by 1.27% and O.88% for the SMEs included in the corporate and the retail
category, respectively, in the event of opting for the Standardized approach and assuming
that: i) the ICICI is classified as a credit institution; ii) the loan operation is guaranteed
for l00% of the amount, during the full life of the loan; and, finally, iii) the option chosen
by the supervisor for claims on banks is the first.

If the bank opts for the IRB approach, the quantification of the second element of the
credit risk premium will depend, as we already know, on the PD of the ICICI in question.
It is assumed, as we already noted, that this should be lower than that of the SME
guaranteed, causing a bigger reduction in the premium with the bigger difference
between the two PD5. Thus, for an average rate of insolvency for the SME of 2.64%, and
ICICI of 0.03% (lower limit of the PD), the difference in the component of UL will be
l.36% for an SME with the annual sales of less than or equal to €5 million, and l.8S/c if
the annual sales of the company are around €50 million. When the SME is treated as
retail for the purposes of calculating the regulatory capital, for an average rate of default
of 2.92%, the component of the premium for UL is reduced to l.06%, and this factor
could be reduced to 0.82% for an SME endorsed by an ICICI. As the PD of the ICICI
takes higher values (meaning that its credit rating gets worse), the differences become
lower to the point where an average rate of default for the ICICI of l.O7/c makes the
element of UL of the credit risk premium of an endorsed SME (with annual sales lower
than €5 million and active risk of more than €1 million) equal to that of another without
guarantee. Although the differences with respect to the SMEs that are not endorsed
 36
depend on the approach employed by the bank for calculating its CR, these are about 2—
3/c for operations supported by an ICICI with PD of 0.03%. When the creditworthiness
of the ICICI is worse, the differences narrow, to the point where, if the ICICI has a PD of
more than 2.64% (the average PD for the SME5), the new credit risk premiums will
exceed those for the SMEs that are not endorsed, in the IRB approach.

Determining the Cost of the ICICI Guarantee:

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

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

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

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

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

The application of BII will bring important consequences for: i) the bank lenders, ii) the
SME borrowers, and iii) the ICICI, which are financial entity whose importance is
increasing and which appear, practically, all over the countries in the European Union.
 37
 For the financial entities, BII means working in a more stable financial
environment. Once the financial entities have learnt how to measure, cover, and
appropriately manage the risks to which their operations are exposed, they should
face fewer situations of default; but if these situations do occur, they should be
better placed to deal with them.

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

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

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

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

b) The approach that the financial entity employs for the management of the risk
(Standardized, foundation IRB, or advanced IRB).
 38

Procedural Guidelines:

Approval Process:

The approval process must reinforce the segregation of Relationship

Management/Marketing from the approving authority. The responsibility for preparing
the Credit Application should rest with the RM within the corporate/commercial banking
department. Credit Applications should be recommended for approval by the RM team
and forwarded to the approval team within CRM and approved by individual executives.
Banks may wish to establish various thresholds, above which, the recommendation of the
Head of Corporate/Commercial Banking is required prior to onward recommendation to
CRM for approval. In addition, ICICI may wish to establish regional credit centres within
the approval team to handle routine approvals. Executives in head office CRM should
approve all large loans. The recommending or approving executives should take
responsibility for and be held accountable for their recommendations or approval.
Delegation of approval limits should be such that all proposals where the facilities are up
to 15% of the ICICI’ capital should be approved at the CRM level, facilities up to 25% of
capital should be approved by CEO/MD, with proposals in excess of 25% of capital to be
approved by the EC/Board only after recommendation of CRM, Corporate Banking and
MD/CEO.
 39
The following diagram illustrates the preferred approval process:

1. Application forwarded to Zonal Office for approved/decline

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

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

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

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

 40
5. HOC & HOCB supports & forwarded to Managing Director

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

7. Managing Director presents the proposal to EC/Board

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

Credit Administration:

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

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

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

Custodial Duties:

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

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

assets pledged as collateral.
 41
 Security documentation is held under strict control, preferably in locked fireproof
storage.

Compliance Requirements:

 All required ICICI Bank returns are submitted in the correct format in a timely
manner.

 ICICI Bank circulars/regulations are maintained centrally, and advised to all

relevant departments to ensure compliance. \

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

Credit Monitoring:

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

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

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

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

regulator inspection/audit.

 All borrower relationships/loan facilities are reviewed and approved through the
submission of a Credit Application at least annually.
 42
Computer systems must be able to produce the above information for central/head office
as well as local review. Where automated systems are not available, a manual process
should have the capability to produce accurate exception reports. Exceptions should be
followed up on and corrective action taken in a timely manner before the account
deteriorates further.

Early Alert process:

An Early Alert Account is one that has risks or potential weaknesses of a material nature
requiring monitoring, supervision, or close attention by management. If these weaknesses
are left uncorrected, they may result in deterioration of the repayment prospects for the
asset or in the Bank’s credit position at some future date with a likely prospect of being
downgraded to CG 5 or worse (Impaired status), within the next twelve months. Early
identification, prompt reporting and proactive management of Early Alert Accounts are
prime credit responsibilities of all Relationship Managers and must be undertaken on a
continuous basis. An Early Alert report should be completed by the RM and sent to the
approving authority in CRM for any account that is showing signs of deterioration within
seven days from the identification of weaknesses. The Risk Grade should be updated as
soon as possible and no delay should be taken in referring problem accounts to the CRM
department for assistance in recovery. Despite a prudent credit approval process, loans
may still become troubled. Therefore, it is essential that early identification and prompt
reporting of deteriorating credit signs be done to ensure swift action to protect the Bank’s
interest. Moreover, regular con tact with customers will enhance the likelihood of
developing strategies mutually acceptable to both the customer and the Bank.
Representation from the Bank in such discussions should include the local legal adviser
when appropriate. An account may be reclassified as a Regular Account from Early Alert
Account status when the symptom, or symptoms, causing the Early Alert classification
have been regularized or no longer exist. The concurrence of the CRM approval authority
is required for conversion from Early Alert Account status to Regular Account status.
 43
Credit Recovery:

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

The RU’s primary functions are:

 Determine Account Action Plan/Recovery Strategy

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

receivership or liquidation as appropriate.

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

 Regular review of grade 6 or worse accounts.

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

NPL Account Management:

All NPLs should be assigned to an Account Manager within the RU, who is responsible
for coordinating and administering the action plan/recovery of the account, and should
serve as the primary customer contact after the account is downgraded to substandard.
Whilst some assistance from Corporate Banking/Relationship Management may be
sought, it is essential that the autonomy of the RU be maintained to ensure appropriate
recovery strategies are implemented.
 44

PRIMARY FINDINGS AND ANALYSIS

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

Less than 2 years 35%

2 to less than 4 years 45%

4 to less than 6 years 15%

More than 6 years 5%

Working period in the organization

50% 45%
45%
40% 35%
35%
30%
25%
20% 15%
15%
10% 5%
5%
0%
Less than 2 years 2 to less than 4 4 to less than 6 More than 6
years years years

35% respondents replied that they working in their organization from less than 2 years
but 45% respondents replied that they are working in their organization from 2 to less
than 4 years.
 45
Q2. Are you involved in credit risk management process of your organization?

Yes 100%

No 0%

Involved in credit risk management process

No
0%

Yes
100%

100% respondents replied yes that they are involved in the credit risk management
process of their organization.
 46
Q3. In the following, which technique is mostly applied by your bank in case of
mitigating the risk?

Collateralization 25%

Guarantor 30%

Insurance 20%

Securitization 25%

Technique for mitigating the risk

35%
30%
30%
25% 25%
25%
20%
20%
15%
10%
5%
0%
Collateralization Guarantor Insurance Securitization

25% respondents replied that collateralization is mostly applied by their bank in case of
mitigating the risk but 30% respondents replied that guarantor is mostly applied by their
bank in case of mitigating the risk.
 47
Q4. In the following, which is the most import collateral instrument in your bank?

Cash on deposit with bank 35%

Lending bank 25%

Equities 25%

Mutual Funds 15%

Most import collateral instrument

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

35% respondents replied that cash on deposit with bank is the most import collateral
instrument in their bank but 25% respondents replied that lending bank is the most import
collateral instrument in their bank.
 48
Q5. In the following, which type of guarantee mostly accepted by your bank?

Guarantees from government 15%

Guarantees from director/trustees of the company 30%

Guarantees from inter-bank/inter-branch 35%

Guarantee from a third party 20%

Guarantee mostly accepted by your bank

40% 35%
35% 30%
30%
25% 20%
20% 15%
15%
10%
5%
0%
Guarantees from Guarantees from Guarantees from Guarantee from
government director/trustees inter-bank/inter- a third party
of the company branch

30% respondents replied that guarantees from director/trustees of the company mostly
accepted by their bank but 35% respondents replied that guarantees from inter-bank/inter-
branch of the company mostly accepted by their bank.
 49
Q6. In the following, which type of security mostly accepted by your bank?

Jewellery 10%

Debentures 15%

Life Insurance Policy 8%

Cash Deposit 9%

Land 20%

Assets 25%

Shares 13%

Type of security mostly accepted by your bank

30%
25%
25%
20%
20%
15%
15% 13%
10% 9%
10% 8%

5%
0%
Land
Jewellery

Deposit
Insurance

Shares
Debentures

Assets
Cash
Policy
Life

20% respondents replied that land mostly accepted by their bank as a security but 25%
respondents replied that assets mostly accepted by their bank as a security.
 50
Q7. In the following, which credit reminder period used by your bank?

After 1-3 months default payment 25%

After 3-6 months default payment 40%

After 6-9 months default payment 35%

Credit reminder period

45% 40%
40% 35%
35%
30% 25%
25%
20%
15%
10%
5%
0%
After 1-3 months After 3-6 months After 6-9 months
default payment default payment default payment

40% respondents replied that after 3-6 months default payment used by their bank but
35% respondents replied that after 6-9 months default payment used by their bank.
 51
Q8. In the following, which action is mostly applied by your bank to recuperate
loan?

Public auction 16%

Claim with insurance 25%

Use collateral as security 35%

Sue customer by court 9%

Ask customer pay loan without interest 15%

Recuperate loan

40% 35%
35%
30% 25%
25%
20% 16% 15%
15% 9%
10%
5%
0%
Public Claim with Use collateral Sue customer Ask
auction insurance as security by court customer pay
loan without
interest

25% respondents replied that claim with insurance action is mostly applied by their bank
to recuperate loan but 35% respondents replied that use collateral as security is mostly
applied by their bank to recuperate loan.
 52
Q9. In the following, which is the most important component of your credit risk
management strategy?

Credit reminder 15%

Guideline for loan 20%

Credit criteria 10%

Risk mitigation 35%

Training 20%

Component of your credit risk management strategy

40% 35%
35%
30%
25% 20% 20%
20% 15%
15% 10%
10%
5%
0%
Credit Guideline for Credit Risk Training
reminder loan criteria mitigation

35% respondents replied that risk mitigation is the most important component of their
credit risk management strategy but 20% respondents replied that guideline for loan is the
most important component of their credit risk management strategy.
 53

RECOMMENDATION

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

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

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

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

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

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

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

 To arrive at a risk score that would reflect the borrower's creditworthiness/degree of

risk
 54

CONCLUSION & IMPLICATIONS

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

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

Furthermore, consistent, accurate and reliable data is required to achieve best practice in
credit risk management. Basel II was highlighted as one of the main drivers in shaping
the banks’ approach to credit risk management. It imposes disciplinary capital charges for
procedural errors, limit violations and other operational risks. It also creates new
pressures to ensure that effective credit risk management controls are in place. A leading
investment bank, for example, commented that regulations drive its credit risk
 55
management procedures. The bank is forced to provide more detailed disclosures in its
annual reports. These may include information on its strategies, nature of credit risk in its
activities and how credit risk arises in those activities, as well as information on how it
manages credit risk. Basel II will affect a number of key elements in another European
bank, including a more rigorous assessment of the bank’s credit risk appetite, more
technical approach toward its counterparties and better portfolio risk management.
Another bank mentioned that the impact of Basel II is largely dependent on the
environment it is regulated under, as it is different for each region.
 56

BIBLIOGRAPHY

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

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

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

Internal Ratings Systems. Basel: Bank for International Settlements.

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

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

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

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

Website:

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

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

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

9. http://ercim-news.ercim.eu/en78/special/improving-banks-credit-risk-management
 57

ANNEXURE

COPYF OT THE QUESTIONNAIRE

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

Q2. Are you involved in credit risk management process of your organization?
Yes
No

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

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

Q5. In the following, which type of guarantee mostly accepted by your bank?
Guarantees from government
Guarantees from director/trustees of the company
 58
Guarantees from inter-bank/inter-branch
Guarantee from a third party

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

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

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

Q9. In the following, which is the most important component of your credit risk
management strategy?
Credit reminder
Guideline for loan
Credit criteria
Risk mitigation
 59
Training

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

Thanks for your support

 60

SYNOPSIS
*Title of the project: Credit Risk Management at ICICI Bank

Project Area Finance

Abstract : Risk is inherent in all aspects of a commercial operation; however

for Banks and financial institutions, credit risk is an essential
factor that needs to be managed. Credit risk is the possibility that a
borrower or counter party will fail to meet its obligations in
accordance with agreed terms. Credit risk, therefore, arises from
the bank’s dealings with or lending to Corporates, individuals, and
other banks or financial institutions. Credit risk analysis needs to
be a robust process that enables banks to proactively manage loan
portfolios in order to minimize losses and earn an acceptable level
of return for shareholders.

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

Objective:  Analysis of Credit Risk Management.

 To know the various Parameters/Risks taken for

consideration while loan

 To know the process of the Back End Operation.

Scope: ICICI Bank has deep roots and a long heritage in international
banking. Have an extensive history in some of the world’s most
dynamic and fast-growing markets, such as Asia and the Middle
East. No one has a better understanding of the wealth management
needs of clients across these markets.
 61

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

Name of the organization ICICI Bank

Methodology: Primary Data :

Primary Data is collected from the borrowers profile availed in the
bank and telephonic interview.

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

Chapter scheme 1. Introduction

2. Company Profile
3. Objective & Scope of the Study
4. Research Methodologies
5. Literature Review
6. Data Analysis
7. Conclusions and Suggestions
 62

8. Bibliography
9. Annexure

References 10. Altman E. and Sabato, G. (2005) `Effects of the New Basel

Capital Accord on Bank Capital Requirements for SMEs´,

Journal of Financial Services Research, 28 (1-3): 15-42.
11. Altman, E. I., Bharath, S. T. and Saunders, A. (2002)

`Credit Ratings and the BIS Capital Adequacy Reform

Agenda´, Journal of Banking & Finance, 26 (5): 909-921.

*Name and designation of Jitesh Ahuja, Manager-Finace

project guide:

Qualification and Years and MBA, 31 Years, 10 Years

Experience