CHAPTER – I

INTRODUCTION

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 INTRODUCTION

Financial derivatives are financial instruments that are linked to a specific

financial instrument or indicator or commodity, and through which specific
financial risks can be traded in financial markets in their own right.
Transactions in financial derivatives should be treated as separate
transactions rather than as integral parts of the value of underlying
transactions to which they may be linked. The value of a financial derivative
derives from the price of an underlying item, such as an asset or index.
Unlike debt instruments, no principal amount is advanced to be repaid and
no investment income accrues. Financial derivatives are used for a number
of purposes including risk management, hedging, arbitrage between
markets, and speculation.

Financial derivatives enable parties to trade specific financial risks (such as

interest rate risk, currency, equity and commodity price risk, and credit risk,
etc.) to other entities who are more willing, or better suited, to take or
manage these risks—typically, but not always, without trading in a primary
asset or commodity. The risk embodied in a derivatives contract can be
traded either by trading the contract itself, such as with options, or by
creating a new contract which embodies risk characteristics that match, in a
countervailing manner, those of the existing contract owned. This latter is
termed offsetability, and occurs in forward markets. Offsetability means that
it will often be possible to eliminate the risk associated with the derivative
by creating a new, but "reverse", contract that has characteristics that
countervail the risk of the first derivative. Buying the new derivative is the
functional equivalent of selling the first derivative, as the result is the
elimination of risk. The ability to replace the risk on the market is therefore
considered the equivalent of tradability in demonstrating value. The outlay
that would be required to replace the existing derivative contract represents
its value—actual offsetting is not required to demonstrate value.

Financial derivatives contracts are usually settled by net payments of cash.

This often occurs before maturity for exchange traded contracts such as
commodity futures. Cash settlement is a logical consequence of the use of
financial derivatives to trade risk independently of ownership of an
underlying item. However, some financial derivative contracts, particularly
involving foreign currency, are associated with transactions in the
underlying item.

Since the fifth edition of the IMF’s Balance of Payments Manual (BPM5)
and the 1993 edition of the System of National Accounts (SNA) were
published, knowledge and understanding of financial derivatives market
have deepened, and prompted the need for a review of the appropriate

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statistical treatment. In 1997, the Fund produced a discussion paper, The
Statistical Measurement of Financial Derivatives, which was adopted by the
IMF Committee on Balance of Payments Statistics (and the Inter-Secretariat
Working Group on National Accounts). In many respects, the paper
reaffirmed the nature of financial derivatives but proposed that over-the-
counter financial derivatives be treated as financial assets, and, as a result, a
change be made to the treatment of interest rate swaps and forward rate
agreements (FRAs) so that instead of being recorded in the income account
as property income they be recorded as financial assets and be recorded in
the financial account (and the outstanding positions be recorded in the
international investment position). A separate functional category has been
created for financial derivatives in the balance of payments and a separate
instrument in the national accounts.

Financial Risk refers to the potential loss that a company will experience if a customer
does not pay their bill. Companies need to anticipate that some of their customers will
default on the credit that has been extended to them. There are a variety of techniques
companies can use to manage their Financial Risk .

Financial Risk
Financial Risk – the risk of financial loss due to an unexpected deterioration of
counterparty credit quality – has doubtless been brought into sharp focus over recent
years, but it has also played a significant role in the majority of financial crises prior
to this time. This ongoing need to have accurate measurement and efficient
management of credit exposure is a foundation stone for firms; therefore it is essential
that they are equipped with a complete gamut of tools and techniques to achieve this.

Our comprehensive Financial Risk solution covers provides single name and portfolio
Financial Risk analysis by means of three components: current and potential
exposure, expected credit loss and credit value-at-risk.

The solution’s counterparty structure allows users to drill down to the individual
subsidiaries of an organization. The full legal structure can be implemented with
distinction between branches and legally independent subsidiaries. Subsidiaries can be
consolidated based on the percentage ownership. Additionally, flexible analysis by
country is available.

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Risk mitigation techniques
 Close out netting
 Collateral and guarantees for one specific exposure or all exposures of a given
counterparty
 Freedom to model any contract structure, whether from the corporate, trading
or retail business

Credit line analysis

 Modeling of the expected usage of the undrawn part of a credit line
Financial product / Instrument coverage
 All credit exposure calculations applied consistently for any type of financial
product/instrument from deposits to exotic options
 Specific instruments for Financial Risk include collateral, guarantees, credit
lines, credit line opening, credit default swaps, total return swaps and credit
spread options
Trade credit arises when a firm sells in products or services on Credit and does not
receive cash immediately. It is an essential marketing tool, acting for the moment of
goods through production and distribution stages to customer. Affirm grants trade
credit. To protect is sales form the competitors and to attract the potential customers
to by its products at favorable terms. Trade creates “Accounts receivable or trade
debtors” that the firm is expected to in the near futures. The customers from whom
receivable or book debits have to be collected in the future is called trade debtors or
simply as debtors and represent the firms clime or asset.

A credit sale has characteristics:

i) It involves an element of risk that should be carefully analyzed. Cash sales are
totally risk less, but not the credit sales as the cash sales as the cash payment
are yet too received.
ii) It is based on economic value to the buyer, the economic value goods services
passes immediately at the time of sales while the seller expects on the
equivalent value to be received later on.
iii) It implies futurity the buyer will make the cash payment for goods services
received by him in future period. debtors constituted a substantial portion of

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 customer assets several firms. For e.g.:- In India, traders Debtors after
inventories are the major components of current assets. They from 1/3 rd of
current assets in India. Granting credit and creating Dr’s amount to the
blocking of the firms founds.

Thus trade debtors represent investment as substantial amount are tide-up in trade
debtors it needs careful analysis and proper management.

The word risk is derived from an early Italian word “risicae” which means “to dare”.
The story of mankind is a story of threats and opportunities, of braving the risks and
getting the rewards in the process. We may define risk emanating from a situation as
something which throws a challenge to an act or not to act with regard to an event or
happening. These challenges (or risks) under the different walks of life may take
various forms. A soldier may the risk of life in a battle and a traffic police may run the
risk of being hit by an automobile on the road. Thus, the concept of risk is
synonymous with the uncertainties in a proposition and the degree of risk may be
computed in terms of probability of associated risks. It is possible to educe them to a
manageable level but these cannot be wiped out altogether. In short, we cannot think
of a zero- risk situation, whether in our work environment or in our personal lives.

Risk taking is a deliberate action in the process of financial decision- making.

The action results from an optimal choice made by the decision maker, which, in
turns, emanates from a systematic analysis of the various alternatives available. Risk
taking is a calculated decision and phases like outcome “fate” o “come what may”,
etc., do not find a place in the process of risk assessment.

Particularly the risks associated with credit decisions taken by a banker, inter-
relationship between the various credit related risks, qualification of such risks,
theoretical framework of risk and the extent of their applicability in actual business
decisions. We will also discuss about the principles and guidelines laid down in this
context, both by the BIS (Bank for INTRNATIONAL settlement, Switzerland) and
RBI (Reserve Bank of India). The various steps in construction of risk assessment
models will also be discussed which would enable us to prescribe benchmarks for the
purpose of decision making in dispensing credit.

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 Any activity involves risk, touching all spheres of life, both personal and
business, Risk is pervasive condition of human existence. The term risk has a variety
of meaning in business and everyday life. Traveling in a car, crossing the road,
investing in financial instruments, launching a new product all involves risk. At its
most gnarl level, risk is used to describe any situation where there is uncertainty about
what outcome will occur. Although our instinctive understanding of concept of risk is
clear enough, terms that have a simple meaning in everyday usage sometimes have a
specialized connotation when used in particular field.

DEFINATION

There is no universal accepted definition of risk. The term risk is variously defined as

a) The chance of loss,

b) The possibility of loss,
c) Uncertainty,
d) The dispersion of actual from expected results or
e) The probability of any outcome different from the on expected.

The Basel committee has defined risk as “the probability of the unexpected
happening-the probability of suffering a loss”.

Prof. John Geiger has defined risk as “an expression of the danger that the effective
future outcome will deviate from the expected in a negative way”.

Vaughan & Vaughan defined risk as “A condition in which there is a possibility of an

adverse deviation from desired outcome that is expected or hoped for”.
The four letters comprising the word R I S K define its features.

R = Rare (unexpected).
I = incident (outcome).
S = selection (identification).
K = knocking (measuring, monitoring, controlling).

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RISK, therefore, needs to b looked at from four fundamental aspects:

 Identification
 Measurement
 Monitoring
 Control (including risk audit)

RISK VS UNCERTAINITY
Uncertainty must be taken in a sense radically distinct from the familiar notion of
Risk, from which it has never been properly separated, The term “risk,” as loosely
used in everyday speech and in economic discussion, really covers two things which,
functionally at least, in their causal; relations to be phenomena of economic
organization, are categorically different. … The essential fact is that “risk” means in
some cases a quantity susceptible of measurement, while at other times it is something
distinctly not of this character; and there are far-reaching and crucial differences in
the bearings of phenomenon depending on which of which of the two is really present
and operating. … It will appear that a measurable uncertainty, or “risk” proper, as we
shall use the term, is so far different from an immeasurable one that it is not in effect
an uncertainty at all. We … accordingly restrict the term “uncertainty” to cases of the
non-quantities type.

TYPES OF RISKS
The risk profile of an organization may be reviewed from the following angles:
A. BUSINESS RISK:
I. capital risk.
ii. Financial Risk .
iii. Market risk.
iv. Liquidity risk
V. business strategy and environment risk.
vi. Operational risk.
vii. Group risk.
B. CONTROL RISK:

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i. Internal controls.
ii. Organization.
iii. Management (including corporate governance).
iv. Compliance.
Both these types of risk, however, are linked to the three omnibus risk categories
listed below:
1. Financial Risk s.
2. Market risks.
3. Organizational risks.

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Risk management is a scientific approach applied to the problem of risk. Although the
term risk management is a recent phenomenon, the actual practice of risk
management is as old as civilization itself. Risk management allows financial
institutions to bring their risk leels to manageable proportions while not severely
reducing their income. Factors like increasing competition, innovative products,
technological revolution, and changing external operating environment makes it
necessary that proper risk management systems b implemented, Risk management is
thus a functional necessity and adds to the strength and efficiency of an organization
on an ongoing basis.

Risk is inherent in all aspects of a commercial operation and covers areas such as
customer services, reputation, technology, security, human resources, market price,
funding, legal, regulatory, fraud and strategy. However, for banks and financial
institutions Financial Risk is the most important factor to be managed. The term
Financial Risk is defined, “as the potential that a borrower or counter-party will fail to
meet its obligations in accordance with agreed terms”. In simple terms it is the
probability of loss from a credit transaction. Loans are the largest and most obvious
source of Financial Risk . Loans are given by banks in the form of corporate lending,
sovereign lending, project financing and retail lending. However other sources of
Financial Risk exists throughout the activities of banks, including in the banking book
and in the trading book and both on and off the balance sheet. Banks are increasingly
facing Financial Risk in various instruments other than loans, including acceptances,
interbank transactions, trade financing, foreign exchange transactions, financial
futures, swaps, bonds, equities, options and in the extension of commitments and
guarantees, and the settlement of transactions. Financial Risk encompasses both
default risk and market risk. Default risk is the objective assessment of the likelihood
that counterparty will default. Market risk measures the financial loss that will be
experienced should the client default.
Banks need to manage Financial Risk inherent in the entire portfolio as well as risk in
individual credits or transactions. The effective management of Financial Risk is a
critical component of a comprehensive approach of risk management and essential to
long term of any banking organization. Banks for this purpose incorporates proper
framework for Financial Risk management (CRM), which includes.

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Given the fast changing, dynamic world scenario experiencing the pressure of
globalisation, liberalisation, consolidation and disintermediation, it is important that
banks must have robust Financial Risk management policies (CRMPs) and
procedures, which are sensitive and responsive to these changes. In any bank, the
corporate goals and credit culture are closely linked and an effective CRM framework
requires the following distinct building blocks: (1) Strategy and policy, (2)
organization, and (3) operations/systems.

Strategy and policies includes defining credit limits, the development of credit
guidelines and the identification and assessment of Financial Risk . Banks should
develop its own Financial Risk strategy defining the objectives for the credit granting
function. This strategy should spell out clearly the organisation’s credit limits and
acceptable level of risk-reward trade-off at both macro and micro levels. The
Financial Risk strategy should provide continuity in approach, and take into account
the cyclical aspects of any economy and the resulting shifts in the composition and
quality of the overall credit portfolio. This strategy should be viable in the long run
and through various credit cycles. Credit policies and procedures should necessarily
have the following elements: ™ Banks should have written policies that define target
markets, risk acceptance criteria, credit approval authority, credit origination and
maintenance procedures and guidelines for portfolio management and remedial
management. ™ Sound procedures to ensure that all risks associated with requested
credit facilities are promptly and fully evaluated by the relevant lending and credit
officers.

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 RESEARCH METHODOLOGY
The data used for analysis and interpretation from annual reports of the company.
that is secondary forms of data. DDR, ACP and Increase in credit period analysis are
the Techniques used for calculation purpose.
The project is presented by using tables, graphs and with their interpretations.

The study of Financial Risk Management is based on two factors.

1. Primary data collection.
2. Secondary data collection

PRIMARY DATA COLLECTION:

The sources of primary data were
 The chief manager – Financial Risk Management cell
 Department Sr. manager financing & Accounting
 System manager- Financial Risk Management cell

Gathering the information from other managers and other officials of the organization.
SECONDARY DATA COLLECTION:
Collected from books regarding journal, and management containing relevant
information about Financial Risk Management and Other main sources were

 Annual report of the ICICI Bank

 Published report of the ICICI Bank
 Guidelines for Financial Risk Management.

METHODOLOGY

 The total revenues of the income statements are converted from USA $ to

Indian rupee.

 The revenues of the companies are divided into 40:60.

 The rates which are used for the study are taken as mid value i.e., is Rs.44

and it is compared with minimum & maximum exchange rates.

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NEED AND IMPORTANCE OF THE STUDY
Financial Risk management is one of the key areas of financial decision-making. It is
significant because, the management must see that an excessive investment in current
assets should protect the company from the problems of stock-out. Current assets will
also determine the liquidity position of the firm.

The goal of Financial Risk management is to manage the firm current assets and
current liabilities in such a way that a satisfactory level of working capital is
maintained. If the firm cannot maintain a satisfactory level of working capital, it is
likely to become insolvent and may be even forced into bankruptcy.

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OBJECTIVES OF THE STUDY:
1. To analysie the credit policies of ICICI Bank
2. To find out debtor turnover ratio and average collection period.
3. To find out wether it is profitable to extend credit period or reduce credit
Period.
4. To suggest measures to increase profits.

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SCOPE OF THE STUDY
The scope of the study is limited to collecting financial data published in the annual
reports of the company every year. The analysis is done to suggest the possible
solutions. The study is carried out for 5 years (2011-15). Financial Risk is the risk
arising from the uncertainty of an obligor’s ability to perform its contractual
obligations. Financial Risk could stem from both on- and off-balance sheet
transactions. An institution is also exposed to Financial Risk from diverse financial
instruments such as trade finance products and acceptances, foreign exchange,
financial futures, swaps, bonds, options, commitments and guarantees.

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LIMITATIONS
 The study is based on only secondary data.
 The period of study was 2018-22 financial years only.
 Another limitation is that of standard ratio with which the actual ratios may be
compared. Generally there is no such ratio, which may be treated as standard
for the purpose of comparison because conditions of one concern differ
significantly from those of another concern.
 The accuracy and correctness of ratios are totally dependent upon the
reliability of the data contained in financial statements on the basis of which
ratios are calculated.

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 CHAPTER – II
REVIEW OF LITERATURE

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 REVIEW OF LITERATURE

Good risk management at a strategic level helps protect an organization’s reputation,

safeguard against financial loss, minimize disruption to services and increase the
likelihood of achieving business objectives successfully.
This also gives assurance on how an organization’s business is managed and at the
same time will satisfy any compliance requirements of the organization, where an
internal control mechanism is established. Internal control includes:
 The establishment of clear business objectives, standards, processes and
procedures
 Clear definition of responsibilities
 Measurement of inputs, outputs and performance outcomes in relation to
objectives
 Performance Management
 Financial controls over expenditure and budget.
What does it require?
 The establishment and understanding of a risk management policy and
framework
 The identification, assessment and judgement of threats to the achievement of
clear business objectives
 Effecting the right action to anticipate and mitigate against risk - this includes
establishing effective internal controls to counter key risks
 Where necessary, to take reasonable and calculated risks based on well
informed management decisions
 Balancing risks by design control to give reasonable assurance to contain risks
and offer value for money
 Monitoring risks and reviewing progress
 Quantifying risks by assessing any potential costs or benefits arising from
possible impact
 Reporting on the above.

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How to identify risks?
Step 1 - Clarity of Objectives
Be clear first of all about the overall objectives of the organisation and understand
how departmental objectives are aligned to the delivery of same. Think about:
 What needs to be done
 By when
 Who is accountable for delivery.

Step 2 - Identify Risks

With your objectives in mind, ask the following questions:
1. What can go wrong?
2. How and why can it happen?
3. What do we depend on for continued success?
4. What could happen?

Consult with staff and others as appropriate and consider a range of possible scenarios
including the best and worst cases. Be as creative with this process as possible.
Consider the 'cause and effect' and scope of the risk and state as clearly as possible to
avoid misunderstanding and misinterpretation. Try to quantify where possible based
on what the effect might be.

Go back to Step 1 above and do the same for external risks by considering the
relationship between the organisation and its wider environment and follow the steps
above. Consider potential external cause of business disruption, issues affecting
relationship with partners, suppliers and any possible changes in government policy
and legislation.

Step 3 - Assess Risks

 Identify existing controls and their effectiveness
 Assess what other controls may be necessary
 Determine likelihood / impact - use a bespoke template:
 Likelihood of risk occurring is used as a qualitative description of probability
or frequency

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  Impact is the outcome of the risk impacting and is expressed qualitatively or
quantitatively, i.e. being a loss, injury, disadvantage or gain. NB - there may
be a range of possible outcomes.
 Set out a realistic timeframe for managing / mitigating risk.

Step 4 - Address Risks

This involves practical steps to managing and controlling risks. Think about:
 what actions or responses are required to control risks
 what are the associated cost of these actions
 are the costs proportionate to the risk that it is controlling
 What information is needed to make an informed decision to accept, manage,
avoid, transfer or reduce the risks
 Is it better to work to eliminate or innovate through taking reasonable
calculated risks.

Step 5 - Review, Quantify and report Risks

Although policy may dictate a review and half yearly update should be enacted, risk
owners need to regularly review to ensure there is ongoing relevant management of
risks
Advice should be sought where quantification / confirmation is needed, i.e. Finance or
Audit Department
Build into the current reporting structure via the business planning round. Where key
risks need to be considered, ensure it is given priority within the agreed framework.

Risk Defined
Risk: is the actual exposure of something of human value to a hazard and is often
regarded as the product of probability and loss - Source: Smith K 2001;
Environmental Hazards Assessing Risk and Reducing Disaster: London: Routledge: 6
-7.
Risk Assessment: The evaluation of a risk to determine its significance, either
quantitatively or qualitatively.
Risk Management: Determines the levels at which risk acceptability is set and
methods of risk reduction are evaluated and applied.

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Resilience: The ability at every relevant level to detect, prevent and, if necessary
handle disruptive challenges. Source: CCS Resilience

Business Continuity: A proactive process which identifies the key functions of an

organisation and the likely threats to those functions; from this information plans and
procedures which ensure that key functions can continue, whatever the circumstances,
can be developed.

CREDIT POLICIES :
The first decision area is credit policies;-
The credit policy of a firm provides the frame work to determine –

a) whether or not to extend credit to a customer and

b) How much credit to extend.

The credit policy decision of firm has two broad dimensions are;
1) credit standards and
CREDIT POLICY VARIABLES:
In establishing an optimum credit policy. The financial manager must consider the
important decisions variables which influence the level of receivables.

The major controllable decision variable include the following –

 Credit standards
 Credit analysis
 Credit terms
 Collection policies and procedures

CREDIT STANDARDS
The term credit standards represent the basic criteria for the extension of credit to
customers. The quantitative basic of establishing credit standards or factors such as
credit

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rating, credit reference, average payment period and certain financial ratio’s since we
are interested in illustrating the trade – off between benefit and cost to the firm as a
whole. We do not consider here these individual components of credit standards.
To illustrate the effect,

We have divided the overall standards into –

a) Tight or restrictive and

b) Liberal or non- restrictive i.e., to say our aim is to show what happens to the
trade-off
when standards are relaxed or alternatively, tighten.

The trade – off with reference to credit standards covers –

i) The collection cost
ii) The average collection period or investment in receivables
iii) Levels of bad debts losses and
iv) Level of sales.

These factors should be considered while deciding whether to relax credit standards
or not.
 If standards are relaxed, it means more credit will be extended while. If credit
standards are tightened. Less credit will be extended.

The implication of four factors are elaborated below –

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COLLECTION COST :

The implication of relaxed credit standards are –

i) more credit
ii) A large credit department to service accounts receivables and related
matters
iii) Increase in collection cost

The effect of tightening of credit standards will be exactly the opposite. These costs
are likely to be semi-variable.

This is because up to a certain point the existing staff will be able to carry on the
Increased workload but beyond that, additional staff would be required these are
assumed to be included in the variable cost per unit and need not be separately
identified.

INVESTMENT IN RECEIVABLE OR AVERAGE COLLECTION PERIOD

The investment in accounts receivable involves a capital cost as funds have to be
arranged by the firm to finance them till customers make payment. Moreover, the
higher the average accounts receivables; the higher is the capital or carrying cost.
a change in the credit standards – relaxation or tightening leads to a change in the
level of accounts receivables either –
a) Through a change in sale,
b) Through a change in collection.

A relaxation in credit standards as already stated, implies an increase in sales

which in turn would lead to higher average accounts receivables?
further relaxed standards would mean that credit is extended liberally so, that it is
available to even less credit worthy. Customers who will take a longer period to pay
over dues. The extension of trade credit to slow paying customers would result in a
higher level of accounts receivables.

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A tightening of credit standards would signify –

i) A decrease in sales and lower average accounts receivables / ACP and

ii) an extension of credit limited to more credit worthy customers who can
promptly pay their bills and thus, a lower average level of accounts receivables.
Thus a change in sales and change in collection period together with a relaxation in
Standards would produce a higher carrying cost, while changes in sales and collection
period result in lower costs when credit standards are tightened. These basic reactions
also occur when changes in credit terms or collection procedures are made.

BAD DEBTS EXPENSES

Another factor which is expected to be affected by changes in the credit standards is
bad debts (default) expenses. They can be expected to increase with relaxation in
credit standards and decreases if credit standards become more restrictive.

SALES VOLUME;-
Changing credit standards can also be expected to be change the volume of sales. As
standards are relaxed, sales are expected to increase; conversely a tightening is
expected to cause a decline in sales.

The basic changes and effects on profits arising from a relaxation of credit standards
are summarized in exhibit –

If the credit standards are tightening, the opposite effects, as shown in the brackets
would follow-

EFFECT OF STANDARDS

Direction of change Effect on profits

ITEM (Increase = I (positive +
Decrease = D) Negative - )

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 1 SALES VOLUME I (D) + (-)
2 AVG COLLECTION I (D) - (+)
PERIOD
3 BAD DEBTS I (D) - (+)

Item Direction of change Effect on profits

(I = increase D = ( positive + or Negative - )
decrease)
BAD DABTS D +
ACP D +
SALES VOLUME D -
COLLECTION I -
EXPENDITURE

CREDIT ANALYSIS
Credit standards influence the quality of the firm’s customers. There are two aspects
of the quality of customers –

i) The time taken by customers to repay credit obligations,

ii) The default rate.

The ACP determines the speed of payment by customers. It measures the number of
days for which credit sales remains outstanding. The longer the ACP, the higher the
firm’s investment in accounts receivables.

DEFAULT RATE - Can be measured in terms of bad debts losses ratio’s – the
proportion of uncollected receivable. Bad debts losses ratio indicates default risk.

DEFAULT RISK - Is the likelihood that a customer will fail to repay the credit
obligation. On the basis of past practice and experience, the financial or credit
manager should be able to form a reasonable judgment regarding the chance of
default.

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To estimate the probability of default, the financial or credit manager should consider
3 c’s –

a) Character b) capacity and c) Conditions

CHARACTER
Refers to the customers willingness to pay the financial or credit manager should
Judge whether the customer will make honest efforts to honor their credit obligation.
the moral factor is considerable importance in credit evaluation in practice.

CAPACITY
Refers to the customers ability to pay can be judged by assessing the customers
capital and assets which he may offer as security capacity is evaluated by the financial
position of the firm’s as indicated by analysis of ratio’s and trends in firm’s cash and
working Capital position. The financial position or credit manager should determine
the real worth of assets offered as collateral (security ).

CONDITIONS
Refers to the prevailing economy and other conditions which may effects the
customers ability to pay. Adverse economic conditions can affect the ability or
willingness of a customer to pay. An experienced financial or credit manager will be
able to judge the extent and genies ness to which the customer’s ability to pay is
effected by the economic conditions. Information on these variables may be collected
from the customers themselves, their published financial statement and outside
agencies which may keeping credit information about customers. A firm should use
this information in preparing categories of customers according to their credit
worthiness and default risk. This would be an important input for the financial or
credit manager in formulating its credit standards.

The firm may categorized its customers at least, in the following 3 – categories:
GOOD ACCOUNTS : that is financially strong customers.
BAD ACCOUNTS : that is financially very weak, high risk customers.
MARGINAL ACCOUNTS : that is customers with moderate financial health and risk
(falling between good and bad accounts ).

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The firm will have no difficulty in quickly deciding about the extension of credit to
Good accounts and Rejecting the credit request of bad accounts. Most of the firm’s
time will be taken in evaluating marginal accounts. i.e., customers who are not
financially very strong but are also not so bad to be rightly rejected. A firmcan expand
its sales by extending credit to marginal account’s but the firms cost and bad debts
losses may also increases. Therefore credit standards should be relaxed upon the point
where incremental return equals incremental cost ( IR = IC ).
NUMBER OF COUNTERPARTIES

LAR
GE RETAIL

MID-
MARKE
T

WHOLE
SALE
SM
ALL LO HIGH
SIZE OF INDIVIDUAL
W
EXPOSURE
CREDIT TERMS:-
The 2nd decision area in accounts receivable management is the credit terms. After the
credit standards have been established and the worthiness of the customers has been
assessed the management of a firm must determine the terms and conditions on which
trade credit terms. These relate to the repayment of the amount under the credit sale.
Credit term is the stipulation under which the firm sells on credit to customers are
called credit terms. These stipulations include;-

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 A) the credit period B) Cash discount

C) Cash discount period

A) CREDIT PERIOD;-

The length of time which credit is to customers is called the credit period. It is generally
stated in net terms of a net date. A firms credit period may governed by the industry
norms. But depending on its objective the firm can lengthen the credit period. On the
other hand, the firm may lengthen its credit period if customers are defaulting to
frequently and bad debts losses are building up.

A firm lengthens to credit period to increases its operating profit through expanding
sales however, there will be net increases in operating profit when the cost of extended
credit period is less than the incremental operating profit. With increased sales and
extended credit period receivable would increases.

a) incremental sales result in incremental receivables and

b) excising customer will take more time to repay credit obligations i.e. the average
c) Collection period will increase.
The 2nd component of credit terms is the credit period.
The expected effect of an increase in the credit period is summarized in table
bellow.

EFFECT OF INCRESE IN CREDIT PERIOD

Item Direction of change Effect on profit

I=increases +vet or – vet
D=decreases
Sales volume 1 +
ACP 1 -
Bad debts expenses 1 -
A reduction in the credit period is likely to have an opposite effect. The above table
indicates the credit period decision.

B) CASH DISCOUNT;-

A cash discount is a payment offered to customers to induce them to repay credit

obligations with in a specified period of time which is less than the normal credit
period.It is usually expressed as a percentage of sales cash discount terms indicate
the rate of discount and the period for which it is available. It the customer does not
avail the offer, he must make payment with in the normal credit period. Credit term
would
include.
 Rate of cash discount
 The cash discount period.
 The net credit period
A firm uses cash discount as a tool to increases sales & accelerates collections form
customers. Thus the level of receivable & associated costs may be reduced the cost
involved in the discounts taken by customers. The effects of increasing the cash
discounts are summarized in below table.
The effect of decreasing cash discount will be exactly opposite.

EFFECTS OF INCREASE IN CASH DISCOUNT

Direction of change Effect on profits

ITEM ( I = increase, D = ( + value, - value)
decrease)

SALES VOLUME I +
ACP D +
BAD DEBTS EXPENSES D +
PROFIT PER UNIT D -

28
The above table indicates cash discount decision

CASH DISCOUNT PERIOD :

Which refers to the duration during which the discount can be availed of these terms are
usually written in abbreviation for instance 2/10 net 30 i.e. 2% 10 days (time available)
30 days (maxi)

COLLECTION POLICY & PROCEDURES:

A collection policy is needed because all customers do not pay the firm’s bill in time,
some customers are slow payers while some are non payers. The collection effort
should, therefore aim at accelerating collections from slow payers and reducing bad
debts losses. A collection policy should ensure prompt and regular collection. Prompt
collection is needed for fast turn over or working capital keeping collection costs & bad
debts within limits & maintaining collection efficiency’s. Regularity in collection
keeps dr’s alert & they tend to pay their dues promptly.The collection policy should lay
down clear cut collection procedures. The collection procedures for past dues or
delinquent accounts should also be establish in unambiguous terms. The slow paying
customers should be handled very tactfully, some of them maybe permanent customers
the collection process initiated quickly. With out giving any chance to them may
antagonize them, and the firm may loss them to competitors. The accounting dept
maintains the credit records and information it is responsible for collection, it should
consult the sales dept before initiating an action against non paying customers similarly
the sales dept must obtain past information about customers from the Accounting dept
before granting credit to him. Through collection procedure should be firmly
established, individual cases should be dept with on their merits. Some customers may
be temporarily in tight financial position and in spite of their best intention may not be
able to pay on due date this may be due to recessionary –conditions, or other factors
beyond the contract of the customers, such cases need special consideration. The
collection procedure against them should be initiated only after they have over come
their financial difficulties and do not intend to pay promptly.

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 CAPITAL
CREDIT
PROVISIONI RISK
NG MANA
CREDIT
RISK GEMEN
REQUEST
SYNDICATI T
TRANS
CREDIT ON ORIGI ACTIO CLIEN
FUNCTI NATIO N T
ON N
CREDIT
CREDIT LIMIT TRANSACTION
ASSESSMENT ORIGINATION
MONITORING PREPARATION OF
CREDIT LIMIT & CREDIT REQUEST
CREDIT PRICING/
ADMINISTRATIO STRUCTURING
N
ADMINISTRATIO
N

CREDIT GRANTING DECISION;-

Once a firm has assessed the credit worthiness of a customer, it has to decide whether or
not. Credit should be granted. The firm should use the NPV (net present value) rule to
make the decision, if the NPV is positive, credit should be granted. If the firm chooses
not to grant any credit, the firm avoids the possibility of any losses but losses the
opportunity of increasing its profitability. On the other hand if it grants credit then it
will benefit if the customer pay’s. There is some profitability that a customer will
default, and then the firm may lose its investment. The expected net pay-off of the firm
is the differences between the present values of net benefit and present value of the
expected loss.

CREDIT GRANTING DECISIONS

30
CREDIT LIMIT:-
A credit limit is a maximum amt of credit which the firm will extend at a point of time
it indicates the extent of risk taken by the firm by supplying goods on credit to a
customer. Once the firm has taken a decision to extend credit to the applicant, the
amount and duration of the credit has to be decided. The decision on the magnitude of
credit will depend upon the amount of contemplated scale and the customer’s financial
strength in case of customers who are frequent buyers of the firm’s goods, a credit limit
can be establish. This would avoid the need to investigate each order from the
customers. Depending on the regularity of payment, the line of credit for a customer can
be fixed on the basis of his normal buying pattern...

The credit limit must be reviewed periodically. If tendencies of slow paying are found.
the credit can be revised downward.

WHY DO COMPANIES GRANT IN INDIA

Companies in practice feel the necessity of granting credit reason;-

CMPETITION
Generally the higher the degree of competition, the more the credit granted by a firm
however, there are exceptions such as firms in the electronics industry in India.

COMPANIES BARGAINING POWER

31
If A Company has higher bargaining power vis-à-vis its buyers, no or less credit. The
company will have a string bargaining power if it has a strong product, monopoly, and
brand image, large size or strong financial position.

BUYER REQUIREMENT
In a number of business sectors buyers or dealers are not able to operate with extend
credit this is particularly so, in the case of industrial products.

BUYERS STATUS
Large buyers demand easy credit terms because bulk purchasers and higher bargaining
power some companies fallow a policy of not giving much credit to small retailers since
it is quite difficult to collect dues from them.

RELATIONSHIP WITH DEALERS ;-

Companies some times extend credit to dealers to build long –term relationship with
or to reward them for their loyalty.

MARKETING TOOL
Credit is used as a marketing tool, particularly when a new product is launched or when
a new company wants to push its week products.

INDURSTRY PRACTICE
Small companies have been found guided by industry practice or norm more than the
large companies. Some times companies continue givining credit because of past
practice rather than industry practice.

TRYNIST DELAY
This is a forced reason for extended credit in the case of a number of companies in India
most companies evolved systems to minimize the impact of such delays some of them
take the help of banks to control cash flows in such situations.
The graph represents the optimum level of receivables :

32
 Optimum level of receivables

NATURE OF CREDIT POLICY:-

A firm’s investment in accounts receivable depends on –

a) The volume of credit sales, and

b) The collection period

For example; if a firm’s credit sales are Rs. 30, 00,000 per day and customers, on an
average, take 45 days to make payment then the firm’s average investment in accounts
receivable is:
Daily credit sales x ACP

30, 00,000 x 45 = 1, 350, 00,000

The investment in receivables may be expressed in terms of cost of sales instead of

sales value. The volume of credit sales is a function of the firm’s total sales and the %
of credit sales to total sales. Total sales depends on market size, firm’s share, product
quality, intensity of competition, economic condition etc. The financial manager hardly

33
has any control over these variables. The % of credit sales to total sales are mostly
influence by the nature of the business and industry norms. For example: Car
manufacture in India, until recently, was not selling cars on credit.

They required the customers to make payments at the time of delivery. Some of them
even asked for the payment to be made in advance this were so, because of the absence
of genuine competition and a wide gap between demands for and supply of cars in
India. This position changed after economic liberalization which led to intense
competition. In contrast, the textile manufacture sold 2/3 rd of their total sales on credit
to the wholesale dealers. The textile industry is still going through a difficult phase.

GOALS OF CREDIT POLICY

A firm may follow a Lenient or a stringent credit policy.
The firm follow a lenient credit policy tend to sell on credit to customers on very
liberal terms and standards, credits are granted for longer period even to those
customers whose credit worthiness is not fully known or whose financial position is
doubtful. A firm follow a stringent credit policy sells on credit on a highly selective
basis only to those customers who have proven credit worthiness and who are
financially strong. In practice firms follow credit policies ranging between stringent to
lenient.

This graph indicates cost of credit policy :

34
COST OF CREDIT POLICY

1) If the credit policy is loose, bad debts are more.

2) If the credit policy is tight, bad debts are less.
3) If the credit policy is tight, opportunity cost is more.
4) If the credit policy is loose, opportunity cost is less-optimum credit
policy.

RESEARCH ON CREDIT MANAGEMENT

Business have receivables i.e. dues from credit customers. To increase sales, to earn
more, to meet the competitors, to achieve break even volumes, to gain a foot hold in the
market, to help the customers on whom the business fortune is intimately in nexus and
to develop a strong brand, receivables, i.e. credit sales, are vital. Maintaining accounts
receivables involves cost. Administration cost, capital cost, collection cost, and bad-
debt cost etc. are diverse costs involved. As in any financial decision matching costs
with benefits is needed here too. And what is the optimum level of accounts receivables
is to be decided. Too little of accounts receivable, that is very limited credit ales
reduced sales, loss of customer to the competitor’s camp, reduced profit and so on. Of

35
course no bad debt, less capital locked up in accounts receivables resulting lower capital
cost etc., are benefits. But , a little more risk can be taken and profits can be inflated.
Too much of accounts receivables lead to scale advantage and hence more profit can be
inflated. Too much of accounts receivables lead to scale advantage and hence mire
profit, but costs of added bad debts, capital cost etc. are involved. Perhaps by reducing
accounts receivables costs can be steeply reduced, while benefits are not similarly
decreasing. Therefore optimum investment in accounts receivable has to be planned and
achieved.

CREDIT POLICY
Policy is a guideline to action. policy establishes guideposts or limits for actions. Credit
policy, therefore, refers to guide lines regarding credit sales, size of accounts
receivables etc. Credit policy has a few variables. Credit standard, Credit period, Credit
terms and collection policies are the policy variables.Credit standards refers to
classification of customers on the basis of their Credit standards and stipulation of
Credit eligibility of different classes of customers. The high rated customers may be
extended unlimited Credit, the moderate Credit standards class may be extended a
limited credit facility and the rest may not be given any Credit facility .credit period
refers to how long credit is allowed. Longer credit period might help drawing more

36
customers and vice-versa. Credit terms refers to discount incentive for prompt
payments by offering cash discount can be ensured. 2/30,net 45 means.2% cash
discount for payment with in 30 days ,failing which full payment by the 45 th day of
truncation. Collection policy refers the seriousness or otherwise with which collection is
dealt with, especially the delinquent customers. It may be harsh or warm.Credit policy
can be liberal or stringent. Liberal credit policy adopts a lenient credit Standards ,i.e.
almost all are extended credit; longer Credit period, higher cash discount for a longer
entitlement period and informal and accommodative collection procedure. Stringent
credit policy does the opposite. Both policies have advantages and accompanying
costs .hence, choice must be exercised by individual firms after assessing the net effect
of liberalizing or tightening up the Credit policy.

LENINET VS STRINGENT CREDIT POLICY

An analysis of effects of lenient credit policies is depicted below in a table form:
Factors Lenient policy Stringent policy
Sales More less
Capital locked up More less
Customer base More less
Competitive edge More less
Profit More less
Customer goodwill More less
Capital cost More less
Bad debt loss More less
Administrative cost More less
Collection cost More less
Discount allowed More less

Lenient credit policy enhances benefits as well as costs. Stringent policy reduces both
benefits and costs. Hence the problem of choice. Hence the need for detailed evaluation
for decision-making. Evaluation needs to be done in respect of each and every credit
policy variable.

37
 CREDIT EXPOSURE - STATIC &
DYNAMIC (PFCE MODEL)
DEFAULT PROBABILITY/ RATINGS
MIGRATION
RATING RECOVERY RATES PORTFOL
MODELS CREDI RISK CREDI IO
T DEFAULT CORRELATIONS T MODELS
INTERNAL DATA
ANAL MODE PRICING
EXTERNAL YSIS LS MODELS

TRANSAC
TION
CRED DATA COLLATE
OBLIGOR/ IT CREDIT RAL
COUNTER DAT ENHANCE
PARTY NETTING
A MENT
DATA CLEARIN
G HOUSE
ECONOMI
C CREDIT LIMIT
CAPITAL CAPITAL ADMINISTRA
REGULAT MANAG TION REPOR
ORY EMENT SETTLEMENT TING
CAPITAL LIMITS
PROVISIO RISK LIMITS
NING

CONTROL ON CREDIT MANAGEMENT

The investment in accounts should be with in accepted level. To achieve this, control
measures are needed so that when actual fall outside the prescribed range, corrective
actions can be taken. In controlling accounts receivables certain techniques are
adopted. Three such techniques are described below. These are Debtor’s turnover
ratio(DTR)Debtors turn over ratio refers to ratio of sales to accounts receivable(sundry
debtors plus

bills receivables). The accounts receivables may be closing figure, or average of year
beginning and year-end figures or average of monthly opening and closing figures. An
acceptable range for the ratio is within this band, is all right. if the actual DTR is less
than 5,it means more money is locked up in accounts receivables. Either sales have
slumped relative to size of debtors, or debtors have risen to sales. If the ratio exceeds

38
the upper hand, it means customers promptly pay willingly or buy over force. It is
good.

Debtor’s velocity :
Debtors velocity refers to how much many days sales are outstanding with the
customers. This is given by: accounts receivables/ per day credit sales. If fact, debtors
velocity indicates the average collection period allowed, every thing is fine. If it
exceeds the credit period allowed, which should be corrected. If ACP is less than credit
allowed, it can be considered as good, debtors velocity can be computed ,this vary also,
that: number of working days in the year.

DTR.Age of debtors :
Age of debtors refers how long debts are outstanding. Say 10% of accounts receivables
is 6 months old,15% is 5 months old,25% is 4 months old,25% is 3% months old,15%
is 2 months i.e., 15% is 2 months old and 10% is 1 month old.

RESEARCH ON CREDIT MANAGEMENT

The objectives of research non credit management could be:
 To study the credit policies adopted across firms/ industries or in a firm/
industry.
 To study the extent of impact of lenient and stringent credit policies on sales,
capital cost, profit, bad debts ,etc.
 To study the influence of different factors like –credit allowed by suppliers,
credit allowed by companies, etc. on credit policy.

Credit Management is a branch of accountancy, and is a function that falls under the
label of "Credit and Collection' or 'Accounts Receivable' as a department in many
companies and institutions. They will usually deal with the credit vetting of customers,
the resolution of any invoice queries or disputes, allocations of payments or cash
application, internal fund movements, reconciliations and also maintaining positive
working relationships with customer during the debt collection or credit review and
approval process.

39
A key requirement for effective revenue and receivables management is the ability to
intelligently and efficiently manage customer credit lines or credit limits. In order to
minimize exposure to bad debt, over-reserving, and bankruptcies, companies must have
greater insight into customer financial strength, credit score history and changing
payment patterns. Likewise, the ability to penetrate new markets and customers hinges
on the ability of a company to quickly make well informed credit decisions and set
appropriate lines of credit.Credit Management has evolved now from being a pure
accounting function into a front-end customer facing function. It involves screening of
customers and only those who are credit worthy are allowed to do business. A sound
review of the financial position of the customer, and understanding of their business
model is the first step in ensuring that the company does not end up selling to a
customer who ends up seriously delinquent or in default.

Hence, before the sales function commences its business with the particular customer,
the credit management role begins. Later as the customer starts dealing with the
company, the accounts receivable function is used to ensure recovery s per agreed terms
of credit is followed.

CREDIT ANALYSIS
Is the method by which one calculates the creditworthiness of a business or
organization. The audited financial statements of a large company might be analyzed
when it issues or has issued bonds. Or, a bank may analyze the financial statements of a
small business before making or renewing a commercial loan. The term refers to either
case, whether the business is large or small.Credit analysis involves a wide variety of
financial analysis techniques, including ratio and trend analysis as well as the creation
of projections and a detailed analysis of cash flows. Credit analysis also includes an
examination of collateral and other sources of repayment as well as credit history and
management ability. Before approving a commercial loan, a bank will look at all of
these factors with the primary emphasis being the cash flow of the borrower. A typical
measurement of repayment ability is the debt service coverage ratio. A credit analyst at
a bank will measure the cash generated by a business (before interest expense and
excluding depreciation and any other non-cash or extraordinary expenses). The debt
service coverage ratio divides this cash flow amount by the debt service (both principal

40
and interest payments on all loans) that will be required to be met. Bankers like to see
debt service coverage of at least 120 percent. In other words, the debt service coverage
ratio should be 1.2 or higher to show that an extra cushion exists and that the business
can afford its debt requirements.

CREDIT CONTROL
Policies aimed at serving the dual purpose of (1) increasing sales revenue by extending
credit to customers who are deemed a good Financial Risk , and (2) minimizing risk of
loss
from bad debts by restricting or denying credit to customers who are not a good credit
risk. Effectiveness of credit control lies in procedures employed for judging a prospect's
creditworthiness, rather than in procedures used in extracting the owed money. Also
called credit management. People have become increasingly dependent on credit.
Therefore, it's crucial that you understand personal credit reports and your credit rating
(or score). Here we'll explore what a credit score is, how it is determined, why it is
important and, finally, some tips to acquire and maintain good credit.

What is a Credit Rating?

When you use credit, you are borrowing money that you promise to pay back within
a specified period of time. A credit score is a statistical method to determine the
likelihood of an individual paying back the money he or she has borrowed. The credit
bureaus that issue these scores have different evaluation systems, each based on
different factors. Some may take into consideration only the information contained in
your credit report, which we look at below. The primary factors used to calculate an
individual’s credit score are his or her credit payment history, current debts, time length
of credit history, credit type mix and frequency of applications for new credit. Because
the scoring systems are based on different criteria which are weighted differently, the
three major credit bureaus in the U.S. (Equifax, TransUnion, and Experian) may issue
differing scores for an individual, even though the scores are based on the same credit
report information.
You may hear the term FICO score in reference to your credit score - the terms are
essentially synonymous. FICO is an acronym for the Fair Isaacs Corporation, the
creator of the software used to calculate credit scores.

41
Scores range between 350 (extremely high risk) and 850 (extremely low risk). Here is a
breakdown of the distribution of scores for the American population in 2003:

What About a Credit Rating?

In addition to using credit (FICO) scores, most countries (including the U.S. and
Canada) use a scale of 0-9 to rate your personal credit. On this scale, each number is
preceded by one of two letters: "I" signifies installment credit (like home or auto
financing), and "R" stands for revolving credit (such as a credit card).

Each creditor will issue its own rating for individuals. For example, you may have an
R1 rating with Visa (the highest level of credit rating), but you might simultaneously
have an R5 from MasterCard if you've neglected to pay your MasterCard bill for many
months. Although the "R" and "I" systems are still in use, the prevailing trend is to
move away from this multiple rating scale toward the single digit FICO score.
Nevertheless, here is how the scale breaks down:

How to manage Credit ?

When you borrow money, your lender sends information to a credit bureau which
details, in the form of a credit report, how well you handled your debt. From the
information in the credit report, the bureau determines a credit score based on five
major factors: 1) previous credit performance, 2) current level of indebtedness, 3) time
credit has been in use, 4) types of credit available, and 5) pursuit of new credit.

Although all these factors are included in credit score calculations, they are not given

42
equal weighting. Here is how the weighting breaks down:

As you can see by the pie graph, your credit rating is most affected by your historical
propensity for paying off your debt. The factor that can boost your credit rating the
most is having a past that shows you pay off your debts fairly quickly. Additionally,
maintaining low levels of indebtedness (or not keeping huge balances on your credit
cards or other lines of credit), having a long credit history, and refraining from
constantly applying for additional credit will all help your credit score.
Although we would love to explain the exact formula for calculating the credit score,
the Federal Trade Commission has a secretive approach to this formula.

Credit is a Fragile Thing

being aware of your credit and your credit score is very important, especially since you
can harm your credit without even being aware of it. Here's a true story of what can
happen: Paul applied for a travel reward miles card, but never received any response
from the credit card company. Since it was a high-limit travel card, Paul just assumed
that he'd been declined and never thought about it again. More than a year later, Paul
goes to the bank to inquire about a mortgage. The people at the bank pull up Paul's
credit report and find a bad debt from the credit card company. According to the credit
report, the company tried to collect for a year but recently wrote it off as a bad debt,
reporting it as an R9, the worst score you can get. Of course, all this is news to Paul.

Well, it turns out there was a clerical error, and Paul's apartment suite number was
missing from the address the credit card company had on file. Paul had been approved
for the card but never actually received it, and any subsequent correspondence didn't get
through either.

43
So the credit card company still charged Paul the annual fee, which he didn't pay,
because he didn't know the debt existed. The annual fee collected interest for a year
until the credit card company wrote it off. In the end, after jumping though several fiery
hoops, Paul was able to get the problem rectified, and the card company admitted fault
and notified the credit-reporting agency. The point is, even though it was a small
balance due (about $150), the administration error almost got in the way of Paul getting
a mortgage. Nowadays, since all data goes through computers, incorrect information
can easily get onto your credit report.
Tips to Improve or Maintain a High Credit Score:
 Make loan payments on time and for the correct amount.
 Avoid overextending your credit. Unsolicited credit cards that arrive by mail
may
be tempting to use, but they won't help your credit score.
 Never ignore overdue bills. If you encounter any problems repaying your debt,
call your creditor to make repayment arrangements. If you tell them you are
having difficulty, they may be flexible.
 Be aware of what type of credit you have. Credit from financing companies can
negatively affect your score.
 Keep your outstanding debt as low as you can. Continually extending your
credit
close to your limit is viewed poorly.
 Limit your number of credit applications. When your credit report is looked at,
or
"hit," it is viewed as a bad thing. Not all hits are viewed negatively (such as those
for monitoring of accounts, or prescreens), but most are.
 Credit is not built overnight. It's better to provide creditors with a longer
historical
time frame to review: a longer history of good credit is favored over a shorter
period of good history.
CREDIT POLICIES
Credit policies are decided by zonal manager and credit will be given to dealers based

44
Up on track record, history and credit worthiness of the distributors. It is depends on the
management and under control of the credit controller (zonal Manager and one of the
directors).

CREDIT STANDARDS:-
Depends on the credit market position if the position is down. The zonal manager or
Credit controller is looking (i.e., to extend the credit period or limit). Credit standards
are determined based on the economic conditions. If the economy is in the recession
more credit will be extended and if the economy is in boom less credit will be extended.

CREDIT PERIOD
The length of time for which credit is extended to customers.
Credit period = 90 days

CASH DISCOUNT PERIOD

A cash period is a reduction in payment offered to customers to induce them to repay
credit obligation within a specified period of time, which will be less than the normal
credit period.
 Cash discount period = 30 days
 Cash discount = 3%
 Credit discount = 40% on MRP

CREDIT LIMIT
Credit limit is a maximum amount of credit which the firm will extend at a point of
time.

 Credit limit is depending on the dealers deposit amount.

for example: if he deposit = 500,000

The credit limit = 25, 00,000 will be given.

ELIGIBILITY FOR TAKING DEALERSHIP:-

 5 years Bank statement

45
  2 cheques for security
 1 DD for the dealer deposit amount
 He should have the Tin number ( wholesaler, retailer )

THREE TYPES OF CUSTOMERS:-

1) Builders of contractors-sales:-
Company is giving discount depends on the volume of goods taking by the
builders.
2) Institutions-sales :-
Up to 6% giving.
3) ordinary dealers :-
Company standards discount.
 Payment terms 30 days for every sale.

Financial Risk Management

The basic system allows us to look at expected return and particularly
expected losses only, without regard to the variability of the losses over
time (the volatility). A good basic system assumes:
A well functioning classification (grading) system with preferably
around 10 classes. The classification should be based on controllable
quantitative and qualitative factors. Different classes should indicate
different probabilities of default only. The typical probability of default
should be estimated for each class.

For each customer the estimated loss in case of default should be

calculated. Normally the most important factor in this calculation would
be the estimated value of possible collateral in a default situation.

These two factors will give a satisfactory basis for the calculation of expected
loss for the total credit portfolio. The expected loss represents a fairly good
guidance for pricing, and for assessing the quality of the total portfolio. However,
it does not give any indication of concentrations of risks in the portfolio. Are the
losses likely to be nicely spread over time, or do we risk huge losses during a
limited period of time (which means high volatility)?

46
 The advanced system builds on the same basic factors, but should include
at least two additional factors:
The correlation of groups of credits (such as different industries) and
also of individual credits with the total credit portfolio of the enterprise
is important in assessing the volatility of losses. Preferably the
correlation with other activities of the enterprise should also be
considered.
Big individual credit exposures often contribute a lot to the volatility of
the losses of the portfolio, especially if these credits are also somewhat
weak.
The latter approach gives a better basis for internal allocation of equity capital, for
pricing, for calculating the maximum loss that can be expected and the need for
general/unspecific loan loss reserves. Important elements of Financial Risk
Management are illustrated below. The upper three boxes represent the basic system.

47
48
 CHAPTER-III
INDUSTRY &
COMPANY PROFILE

49
 INDUSTRY PROFILE
Financial institution that accepts deposits and channels those deposits into lending
activities. Banks primarily provide financial services to customers while enriching
investors. Government restrictions on financial activities by banks vary over time and
location. Banks are important players in financial markets and offer services such as
investment funds and loans. In some countries such as Germany, banks have
historically owned major stakes in industrial corporations while in other countries
such as the United States banks are prohibited from owning non-financial companies.
In Japan, banks are usually the nexus of a cross-share holding entity known as the
keiretsu. In France, bancassurance is prevalent, as most banks offer insurance services
(and now real estate services) to their clients.
The level of government regulation of the banking industry varies widely, with
countries such as Iceland, having relatively light regulation of the banking sector, and
countries such as China having a wide variety of regulations but no systematic
process that can be followed typical of a communist system.
The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in
Siena, Italy, which has been operating continuously since 1472.
History
Origin of the word
The name bank derives from the Italian word banco "desk/bench", used during the
Renaissance by Jewish Florentine bankers, who used to make their transactions above
a desk covered by a green tablecloth. However, there are traces of banking activity
even in ancient times, which indicates that the word 'bank' might not necessarily come
from the word 'banco'.
In fact, the word traces its origins back to the Ancient Roman Empire, where
moneylenders would set up their stalls in the middle of enclosed courtyards called
macella on a long bench called a bancu, from which the words banco and bank are
derived. As a moneychanger, the merchant at the bancu did not so much invest money
as merely convert the foreign currency into the only legal tender in Rome—that of the
Imperial Mint.
The earliest evidence of money-changing activity is depicted on a silver drachm coin
from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350–

50
325 BC, presented in the British Museum in London. The coin shows a banker's table
(trapeza) laden with coins, a pun on the name of the city.
In fact, even today in Modern Greek the word Trapeza (Τράπεζα) means both a table
and a bank.
Traditional banking activities
Banks act as payment agents by conducting checking or current accounts for
customers, paying cheques drawn by customers on the bank, and collecting cheques
deposited to customers' current accounts. Banks also enable customer payments via
other payment methods such as telegraphic transfer, EFTPOS, and ATM.
Banks borrow money by accepting funds deposited on current accounts, by accepting
term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend
money by making advances to customers on current accounts, by making installment
loans, and by investing in marketable debt securities and other forms of money
lending.
Banks provide almost all payment services, and a bank account is considered
indispensable by most businesses, individuals and governments. Non-banks that
provide payment services such as remittance companies are not normally considered
an adequate substitute for having a bank account.
Banks borrow most funds from households and non-financial businesses, and lend
most funds to households and non-financial businesses, but non-bank lenders provide
a significant and in many cases adequate substitute for bank loans, and money market
funds, cash management trusts and other non-bank financial institutions in many cases
provide an adequate substitute to banks for lending savings to.
Entry regulation
Currently in most jurisdictions commercial banks are regulated by government
entities and require a special bank licence to operate.
Usually the definition of the business of banking for the purposes of regulation is
extended to include acceptance of deposits, even if they are not repayable to the
customer's order—although money lending, by itself, is generally not included in the
definition.
Unlike most other regulated industries, the regulator is typically also a participant in
the market, i.e. a government-owned (central) bank. Central banks also typically have
a monopoly on the business of issuing banknotes. However, in some countries this is
not the case. In the UK, for example, the Financial Services Authority licences banks,

51
and some commercial banks (such as the Bank of Scotland) issue their own banknotes
in addition to those issued by the Bank of England, the UK government's central
bank.
Definition
The definition of a bank varies from country to country.
Under English common law, a banker is defined as a person who carries on the
business of banking, which is specified as:
 conducting current accounts for his customers
 paying cheques drawn on him, and
 collecting cheques for his customers.
In most English common law jurisdictions there is a Bills of Exchange Act that
codifies the law in relation to negotiable instruments, including cheques, and this Act
contains a statutory definition of the term banker: banker includes a body of persons,
whether incorporated or not, who carry on the business of banking' (Section 2,
Interpretation). Although this definition seems circular, it is actually functional,
because it ensures that the legal basis for bank transactions such as cheques do not
depend on how the bank is organised or regulated.
The business of banking is in many English common law countries not defined by
statute but by common law, the definition above. In other English common law
jurisdictions there are statutory definitions of the business of banking or banking
business. When looking at these definitions it is important to keep in mind that they
are defining the business of banking for the purposes of the legislation, and not
necessarily in general. In particular, most of the definitions are from legislation that
has the purposes of entry regulating and supervising banks rather than regulating the
actual business of banking. However, in many cases the statutory definition closely
mirrors the common law one. Examples of statutory definitions:
 "banking business" means the business of receiving money on current or
deposit account, paying and collecting cheques drawn by or paid in by
customers, the making of advances to customers, and includes such other
business as the Authority may prescribe for the purposes of this Act; (Banking
Act (Singapore), Section 2, Interpretation).
 "banking business" means the business of either or both of the following:

52
 1. receiving from the general public money on current, deposit, savings or other
similar account repayable on demand or within less than [3 months] ... or with
a period of call or notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers[6]
Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct
credit, direct debit and internet banking, the cheque has lost its primacy in most
banking systems as a payment instrument. This has led legal theorists to suggest that
the cheque based definition should be broadened to include financial institutions that
conduct current accounts for customers and enable customers to pay and be paid by
third parties, even if they do not pay and collect cheques.
Accounting for bank accounts
Bank statements are accounting records produced by banks under the various
accounting standards of the world. Under GAAP and IFRS there are two kinds of
accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit
Accounts are Assets and Expenses. This means you credit a credit account to increase
its balance, and you debit a debit account to decrease its balance.
This also means you debit your savings account every time you deposit money into it
(and the account is normally in deficit), while you credit your credit card account
every time you spend money from it (and the account is normally in credit).
However, if you read your bank statement, it will say the opposite—that you credit
your account when you deposit money, and you debit it when you withdraw funds. If
you have cash in your account, you have a positive (or credit) balance; if you are
overdrawn, you have a negative (or deficit) balance.
The reason for this is that the bank, and not you, has produced the bank statement.
Your savings might be your assets, but the bank's liability, so they are credit accounts
(which should have a positive balance). Conversely, your loans are your liabilities but
the bank's assets, so they are debit accounts (which should also have a positive
balance).
Where bank transactions, balances, credits and debits are discussed below, they are
done so from the viewpoint of the account holder—which is traditionally what most
people are used to seeing.
Economic functions
1. issue of money, in the form of banknotes and current accounts subject to
cheque or payment at the customer's order. These claims on banks can act as

53
 money because they are negotiable and/or repayable on demand, and hence
valued at par. They are effectively transferable by mere delivery, in the case of
banknotes, or by drawing a cheque that the payee may bank or cash.
2. netting and settlement of payments – banks act as both collection and paying
agents for customers, participating in interbank clearing and settlement
systems to collect, present, be presented with, and pay payment instruments.
This enables banks to economise on reserves held for settlement of payments,
since inward and outward payments offset each other. It also enables the
offsetting of payment flows between geographical areas, reducing the cost of
settlement between them.
3. credit intermediation – banks borrow and lend back-to-back on their own
account as middle men.
4. credit quality improvement – banks lend money to ordinary commercial and
personal borrowers (ordinary credit quality), but are high quality borrowers.
The improvement comes from diversification of the bank's assets and capital
which provides a buffer to absorb losses without defaulting on its obligations.
However, banknotes and deposits are generally unsecured; if the bank gets
into difficulty and pledges assets as security, to raise the funding it needs to
continue to operate, this puts the note holders and depositors in an
economically subordinated position.
5. maturity transformation – banks borrow more on demand debt and short term
debt, but provide more long term loans. In other words, they borrow short and
lend long. With a stronger credit quality than most other borrowers, banks can
do this by aggregating issues (e.g. accepting deposits and issuing banknotes)
and redemptions (e.g. withdrawals and redemptions of banknotes),
maintaining reserves of cash, investing in marketable securities that can be
readily converted to cash if needed, and raising replacement funding as needed
from various sources (e.g. wholesale cash markets and securities markets).

Law of banking
Banking law is based on a contractual analysis of the relationship between the bank
(defined above) and the customer—defined as any entity for which the bank agrees to
conduct an account.

54
The law implies rights and obligations into this relationship as follows:
1. The bank account balance is the financial position between the bank and the
customer: when the account is in credit, the bank owes the balance to the
customer; when the account is overdrawn, the customer owes the balance to
the bank.
2. The bank agrees to pay the customer's cheques up to the amount standing to
the credit of the customer's account, plus any agreed overdraft limit.
3. The bank may not pay from the customer's account without a mandate from
the customer, e.g. a cheque drawn by the customer.
4. The bank agrees to promptly collect the cheques deposited to the customer's
account as the customer's agent, and to credit the proceeds to the customer's
account.
5. The bank has a right to combine the customer's accounts, since each account is
just an aspect of the same credit relationship.
6. The bank has a lien on cheques deposited to the customer's account, to the
extent that the customer is indebted to the bank.
7. The bank must not disclose details of transactions through the customer's
account—unless the customer consents, there is a public duty to disclose, the
bank's interests require it, or the law demands it.
8. The bank must not close a customer's account without reasonable notice, since
cheques are outstanding in the ordinary course of business for several days.
These implied contractual terms may be modified by express agreement between the
customer and the bank. The statutes and regulations in force within a particular
jurisdiction may also modify the above terms and/or create new rights, obligations or
limitations relevant to the bank-customer relationship.
Some types of financial institution, such as building societies and credit unions, may
be partly or wholly exempt from bank licence requirements, and therefore regulated
under separate rules.
The requirements for the issue of a bank licence vary between jurisdictions but
typically include:
1. Minimum capital
2. Minimum capital ratio
3. 'Fit and Proper' requirements for the bank's controllers, owners, directors,
and/or senior officers

55
 4. Approval of the bank's business plan as being sufficiently prudent and
plausible.
Types of banks
Banks' activities can be divided into retail banking, dealing directly with individuals
and small businesses; business banking, providing services to mid-market business;
corporate banking, directed at large business entities; private banking, providing
wealth management services to high net worth individuals and families; and
investment banking, relating to activities on the financial markets. Most banks are
profit-making, private enterprises. However, some are owned by government, or are
non-profit organizations.
Central banks are normally government-owned and charged with quasi-regulatory
responsibilities, such as supervising commercial banks, or controlling the cash interest
rate. They generally provide liquidity to the banking system and act as the lender of
last resort in event of a crisis.
Types of retail banks
 Commercial bank: the term used for a normal bank to distinguish it from an
investment bank. After the Great Depression, the U.S. Congress required that
banks only engage in banking activities, whereas investment banks were
limited to capital market activities. Since the two no longer have to be under
separate ownership, some use the term "commercial bank" to refer to a bank or
a division of a bank that mostly deals with deposits and loans from
corporations or large businesses.
 Community Banks: locally operated financial institutions that empower
employees to make local decisions to serve their customers and the partners.
 Community development banks: regulated banks that provide financial
services and credit to under-served markets or populations.
 Postal savings banks: savings banks associated with national postal systems.
 Private banks: banks that manage the assets of high net worth individuals.
 Offshore banks: banks located in jurisdictions with low taxation and
regulation. Many offshore banks are essentially private banks.
 Savings bank: in Europe, savings banks take their roots in the 19th or
sometimes even 18th century. Their original objective was to provide easily
accessible savings products to all strata of the population. In some countries,
savings banks were created on public initiative; in others, socially committed

56
 individuals created foundations to put in place the necessary infrastructure.
Nowadays, European savings banks have kept their focus on retail banking:
payments, savings products, credits and insurances for individuals or small
and medium-sized enterprises. Apart from this retail focus, they also differ
from commercial banks by their broadly decentralised distribution network,
providing local and regional outreach—and by their socially responsible
approach to business and society.
 Building societies and Landesbanks: institutions that conduct retail banking.
 Ethical banks: banks that prioritize the transparency of all operations and
make only what they consider to be socially-responsible investments.
 Islamic banks: Banks that transact according to Islamic principles.
Types of investment banks
 Investment banks "underwrite" (guarantee the sale of) stock and bond issues,
trade for their own accounts, make markets, and advise corporations on capital
market activities such as mergers and acquisitions.
 Merchant banks were traditionally banks which engaged in trade finance. The
modern definition, however, refers to banks which provide capital to firms in
the form of shares rather than loans. Unlike venture capital firms, they tend
not to invest in new companies.
Both combined
 Universal banks, more commonly known as financial services companies,
engage in several of these activities. These big banks are very diversified
groups that, among other services, also distribute insurance— hence the term
bancassurance, a portmanteau word combining "banque or bank" and
"assurance", signifying that both banking and insurance are provided by the
same corporate entity.
Other types of banks
 Islamic banks adhere to the concepts of Islamic law. This form of banking
revolves around several well-established principles based on Islamic canons.
All banking activities must avoid interest, a concept that is forbidden in Islam.
Instead, the bank earns profit (markup) and fees on the financing facilities that
it extends to customers.
COMPANY PROFILE

57
India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion) at
March 31, 2015 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the year
ended March 31, 2015. The Bank has a network of 2,897 branches and 10,021 ATMs
in India, and has a presence in 19 countries, including India.

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 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).
Corporate Profile
ICICI Bank is India's second-largest bank with total assets of Rs. 3,562.28 billion
(US$ 77 billion) as on December 31, 2009.
Board Members
Mr. K. V. Kamath, Chairman
Mr. Sridar Iyengar
Mr. Homi R. Khusrokhan
Mr. Lakshmi N. Mittal
Mr. Narendra Murkumbi
Dr. Anup K. Pujari
Mr. Anupam Puri
Mr. M.S. Ramachandran
Mr. M.K. Sharma
Mr. V. Sridar
Prof. Marti G. Subrahmanyam
Mr. V. Prem Watsa

58
Ms. Chanda D. Kochhar,
Managing Director & CEO
Mr. Sandeep Bakhshi,
Deputy Managing Director
Mr. N. S. Kannan,
Executive Director & CFO

Mr. K. V. Kamath is a mechanical engineer and did his management studies from the
Indian Institute of Management, Ahmedabad. He joined ICICI in 1971 and worked in
the areas of project finance, leasing, resources and corporate planning. In 1988, he
joined the Asian Development Bank and spent several years in south-east Asia before
returning to ICICI as its Managing Director & CEO in 1996. He became Managing
Director & CEO of ICICI Bank in 2002 following the merger of ICICI with ICICI
Bank. Under his leadership, the ICICI Group transformed itself into a diversified,
technology-driven financial services group, that has leadership positions across
banking, insurance and asset management in India, and an international presence. He
retired as Managing Director & CEO in April 2009, and took up the position of non-
executive Chairman of ICICI Bank effective May 1, 2009. He was the President of the
Confederation of Indian Industry (CII) for 2008-09. He was awarded the Padma
Bhushan by the President of India in May 2008. He was conferred the Lifetime
Achievement Awards at the Financial Express Best Bank Awards 2008 and the
NDTV Profit Business Leadership Awards 2008; was named 'Businessman of the
Year' by Forbes Asia and The Economic Times' 'Business Leader of the Year' in
2007; Business Standard's "Banker of the Year" and CNBC-TV18's "Outstanding
Business Leader of the Year" in 2006; Business India's "Businessman of the Year" in
2005; and CNBC's "Asian Business Leader of the Year" in 2001. He has been
conferred with an honorary PhD by the Banaras Hindu University. He is a member of
the Board of the Institute of International Finance, a Director on the Board of Infosys
Technologies and a member of the Board of Governors of the Indian Institute of
Management, Ahmedabad.
Awards:
 For the second consecutive year, ICICI Bank won the NPCI's NFS
Operational Excellence Awards in the MNC and Private Sector Banks

59
 Category for its ATM network.
 Mr.K.V.Kamath was awarded the "Hall Of Fame" by Outlook Money for his
long standing contribution in the financial services sector.
 ICICI Bank won the Best Bank - India Award by The Banker.
 Ms. Chanda Kochhar ranked 18th in the Fortune's list of '2015
Businesspersons of the Year'. The 50 global leaders is Fortune's annual
ranking of leaders who are "the best in business".
 Ms. Chanda Kochhar tops the list of "50 Most Powerful Women in Business"
by Fortune India.
 ICICI Bank tops the list of "Private sector and Foreign Banks" by Brand
Equity, Most Trusted Brands 2015. It ranks 15th in the "Top Service 50
Brands".
 For the third consecutive year, ICICI Bank ranked second in "India's 50
Biggest Financial Companies" in The BW Real 500 by Businessworld.
 For the second year in a row, Ms. Chanda Kochhar, Managing Director &
CEO was ranked 5th in the International list of 50 Most Powerful Women In
Business by Fortune.
 Ms. Chanda Kochhar, Managing Director & CEO was awarded the "CNBC
Asia India Business Leader Of The Year Award". She also received the
"CNBC Asia's CSR Award 2011"
 For the third year in a row ICICI Bank has won The Asset Triple A Country
Awards for Best Domestic Bank in India
 ICICI Bank won the Most Admired Knowledge Enterprises (MAKE) India
2009 Award. ICICI Bank won the first place in "Maximizing Enterprise
Intellectual Capital" category, October 28, 2009
 Ms Chanda Kochhar, MD and CEO was awarded with the Indian Business
Women Leadership Award at NDTV Profit Business Leadership Awards ,
October 26, 2009.
 ICICI Bank received two awards in CNBC Awaaz Consumer Awards; one for
the most preferred auto loan and the other for most preferred credit Card, on
September 30, 2009
 Ms. Chanda Kochhar, Managing Director & CEO ranked in the top 20 of the
World's 100 Most Powerful Women list compiled by Forbes, August 2009
 Financial Express at its FE India's Best Banks Awards, honoured Mr. K.V.

60
 Kamath, Chairman with the Lifetime Achievement Award , July 25, 2009
 ICICI Bank won Asset Triple A Investment Awards for the Best Derivative
House, India. In addition ICICI Bank were Highly commended , Local
Currency Structured product, India for 1.5 year ADR GDR linked Range
Accrual Note., July 2009
 ICICI bank won in three categories at World finance Banking awards on June
16, 2009
o Best NRI Services bank
o Excellence in Private Banking, APAC Region
o Excellence in Remittance Business, APAC Region
 ICICI Bank Mobile Banking was adjudged "Best Bank Award for Initiatives
in Mobile Payments and Banking" by IDRBT, on May 18, 2009 in Hyderabad.
 ICICI Bank's b2 branchfree banking was adjudged "Best E-Banking Project
Implementation Award 2008" by The Asian Banker, on May 11, 2009 at the
China World Hotel in Beijing.
 ICICI Bank bags the "Best bank in SME financing (Private Sector)" at the
Dun & Bradstreet Banking awards 2009.
 ICICI Bank NRI services wins the "Excellence in Business Model Innovation
Award" in the eighth Asian Banker Excellence in Retail Financial Services
Awards Programme.
 ICICI Bank's Rural Micro Banking and Agri-Business Group wins WOW
Event & Experiential Marketing Award in two categories - "Rural Marketing
programme of the year" and "Small Budget On Ground Promotion of the
Year". These awards were given for Cattle Loan 'Kamdhenu Campaign' and
"Talkies on the move campaign' respectively.
 ICICI Bank's Germany Branch has been certified by "Stiftung Warrentest".
ICICI Bank is ranked 2nd amongst 57 savings products across 19 banks
 ICICI Bank Germany won the yearly banking test of the investor magazine
€uro in the "call money"category.
 The ICICI Bank was awarded the runner's up position in Gartner Business
Intelligence and Excellence Award for Asia Pacific for its Business
Intelligence functions.
 ICICI Bank's Organisational Excellence Group was recently awarded ISO

61
 9001:2008 certification by TUV Nord. The scope of certification comprised
processes around consulting and capability building on methods of quality &
improvements.
 ICICI Bank has been awarded the following titles under The Asset Triple A
Country Awards for 2009:
o Best Transaction Bank in India
o Best Trade Finance Bank in India
o Best Cash Management Bank in India
o Best Domestic Custodian in India
ICICI Bank has bagged the Best Cash Management Bank in India award for
the second year in a row. The other awards have been bagged for the third year
in a row.
 ICICI Bank Canada received the prestigious Canadian Helen Keller Award at
the Canadian Helen Keller Centre's Fifth Annual Luncheon in Toronto. The
award was given to ICICI Bank its long-standing support to this unique
training centre for people who are deaf-blind.
ICICI Foundation for Inclusive Growth (ICICI Foundation) was founded by the ICICI
Group in early 2008 to give focus to its efforts to promote inclusive growth amongst
low-income Indian households.

We believe our fundamental challenge is to create a “just” society – one where

everyone has equal opportunity to develop and grow. Towards this end, ICICI
Foundation is committed to making India’s economic growth more inclusive,
allowing every individual to participate in and benefit from the growth process.

We hold a set of core beliefs and values that defines our pathway towards inclusive
growth and guides our five strategic partnerships.
Vision

Our vision is a world free of poverty in which every individual has the freedom and
power to create and sustain a just society in which to live.
Mission
Our mission is to create and support strong independent organisations which work

62
towards empowering the poor to participate in and benefit from the Indian growth
process.
As a key partner in India's economic growth for more than five decades, the ICICI
Group endeavours to promote growth in all sectors of the nation ’s economy. To give
focus to its efforts to promote inclusive growth amongst low-income Indian
households, the ICICI Group founded ICICI Foundation for Inclusive Growth in
January 2010.

The foundations of ICICI Group’s approach towards human and social development
were established with the Social Initiatives Group (SIG), a non-profit resource group
within ICICI Bank, in 2000.
ICICI Foundation for Inclusive Growth (ICICI Foundation) has been set up as a
public charitable trust registered at Chennai vide registration of the Trust Deed with
the Sub-Registrar’s Office at Chennai on January 04, 2010.

The application for registration of the Foundation under section 12AA of the Income
tax Act, 1961 (“the Act”) was filed on February 7, 2008 and the application under
section 80G of the Act was filed on February 14, 2008. Subsequently, ICICI
Foundation was registered as a “PUBLIC CHARITABLE TRUST” under Section
12AA of the Act with effect from February 7, 2008. Further, ICICI Foundation
received approval under Section 80G(5)(vi) of the Act on March 19, 2008. This
approval is valid in respect of donation received by ICICI Foundation from February
14, 2008 to March 31, 2009. Accordingly, ICICI Bank and Group Companies will be
eligible to get a deduction under section 80G on donations made during this period.

ICICI Foundation has also obtained its Permanent Account Number (PAN) and Tax
deduction Account Number (TAN).
2015:
ICICI Bank opens its second branch in Hong Kong

ICICI Bank rolls out 25 electronic branches and launches many next generation
banking solutions

ICICI Bank was the first private sector bank in India to offer PPF account facility at
all bank branches.

Among the first banks to introduce account portability and also the only bank to offer
portability on two additional channels - Internet Banking and Phone Banking.

63
ICICI Bank launches first Electronic Toll Collection project on NH-1. A first of its
kind project initiated by the Ministry of Road, Transport & Highways, National
Highway Authority of India (NHAI) and ICICI Bank.

ICICI Bank receives approval from RBI to set up an Infrastructure Debt Fund. It is the
first debt fund to get government's go ahead.

ICICI Bank launches its official Facebook Page. First bank in India to offer one-of-its
kind "Your Bank Account" App, which allows access to bank account information on
Facebook.

Funds Flow 2010-2011

ICICI Foundation received Rs.617.80 million from the following sources as grants:
(January 4, 2008 to March 31, 2011) (spanning two financial years)

Amount (Rs.
Source (January 4, 2008 – March 31, 2011)
million)
ICICI Bank 500.00
ICICI Prudential Life Insurance 67.72
ICICI Lombard General Insurance 17.12
ICICI Securities 14.98
ICICI Securities PD 6.99
ICICI Home Finance 1.99
ICICI Venture 9.00
Total 617.80

ICICI Foundation also incurred total expenses of Rs.1.25 million during this period
and had a fund balance of Rs.61.55 million as on March 31, 2011.

Disbursements (January 4, 2008 to March 31, 2011)

Amount (Rs.
Grant Beneficiaries (January 4, 2010 – March 31, 2011)
million)
ICICI Foundation Programmes
ICICI Centre for Child Health and Nutrition 150.00
IFMR Finance Foundation 200.00
Environmentally Sustainable Finance 20.00
CSO Partners 50.00

64
CARE (Policy Unit) 5.00
Strategy and Advisory Group 20.00
ICICI Group Corporate Social Responsibility Programmes
Read to Lead 25.00
MITRA (ICICI Fellows Programme) 55.00
CARE (Disaster Management Unit) 5.00
Rang De 25.00
Total 555.00

Grant Beneficiaries for 2010-2011

ICICI Foundation Programmers

ICICI Centre for Child Health and Nutrition (ICCHN)

The grant of Rs.150.00 million was provided to ICCHN by way of corpus support and
for pursuing various projects consistent with its mission.

IFMR Finance Foundation (IFF)

The grant of Rs.200.00 million was provided to IFMR Finance Foundation by way of
corpus support and for pursuing various projects consistent with its mission.
Environmentally Sustainable Finance (ESF)

The grant of Rs.20.00 million was provided to ESF for their collaboration work with
Rural Energy Network Enterprise (RENE) on sustainable energy and environment
projects benefiting remote rural end users. The proposed projects will promote
developing tools and driving innovation to scale rural energy access for remote rural
users.

CSO Partners
The grant of Rs.50.00 million was provided to CSO Partners by way of corpus
support and for pursuing various projects consistent with its mission.

CARE (Policy Unit)

A grant of Rs.5.00 million was provided to CARE, an Indian NGO that is closely
affiliated with CARE (USA), to create a policy unit in Delhi. Learning from CARE’s
work in India and world-wide as well as from the work of ICICI Foundation and its
partners, the unit will serve as a platform to engage the government and policymakers
in an effort to bring about required policy changes in areas such as maternal and child
health.
Strategy and Advisory Group (SAG)
Charitable foundations in India and world-wide struggle to fully develop the strategy
formulation, knowledge management and impact assessment dimensions of their
work. A grant of Rs.20.00 million was provided to Strategy and Advisory Group
(SAG), a team at Centre for Development Finance that provides strategic advisory
services to clients in the development sector, to develop these functions and to offer
their expertise to foundations in general, including ICICI Foundation.

65
ICICI Group Corporate Social Responsibility Programmers

Read to Lead
Read to Lead is an initiative of ICICI Bank to facilitate elementary education for
disadvantaged children in the age group of 6-13 years. An amount of Rs.25.00 million
has thus far been disbursed to 100,000 children through 30 NGOs. The balance
amount of Rs.75.00 million is planned to be disbursed during the period 2009-2010.

MITRA (ICICI Fellows Programme)

MITRA is an affiliate of CSO Partners that is focused on addressing the challenge of
human resources for civil society organisations (CSOs). In partnership with CSO
Partners and MITRA, ICICI Foundation proposes to launch an ICICI Fellows
Programme. An amount of Rs.55.00 million has been disbursed to MITRA for
developing and launching the programme over the period 2009-2010.

CARE (Disaster Management Unit)

A grant of Rs.5.00 million has been given to CARE in India to enable it to prepare for
any future disasters that may strike and respond immediately with the required relief
efforts.

Rang De (Micro Enterprise Development)

Rang De, an affiliate of CSO Partners, has partnered with ICICI Venture to roll out
funds for micro enterprise development in rural and semi-urban locations. The amount
of Rs.25.00 million that has been disbursed to them will support micro enterprises to
the extent of Rs.15.00 million and the balance amount of Rs.10.00 million will go
towards meeting their expenses to build the platform.

66