icicibankrmproject

8/6/2019 icicibankrmproject

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Submitted in fulfillment of the Requirements of the Risk Management

Course of Post Graduate programme (PGP).

Submitted By -:Mr. Abhay Pratap

Submitted to -:Prof. Vandana Mehrotra


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Contents

1.About ICICI2.Shareholding pattern3.Risk-An Introduction4.Key Risks5.Risk management framework6.Managing Credit Risk7.Managing market Risks

Interest rate riskForeign Exchange riskEquity price risk

8.Managing liquidity Risk9.Managing operational Risk10.Initiatives taken by the bank to minimize the risk


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About ICICIICICI Bank is India's second- largest bank with total assets of Rs. 3,634.00 billion (US$ 81

billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the yearended March 31, 2010. The Bank has a network of 2,518 branches and 5,808 ATMs in India, andhas 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 deliverychannels and through its specialized subsidiaries in the areas of investment banking, life andnon-life insurance, venture capital and asset management. The Bank currently has subsidiaries in

the United Kingdom, Russia and Canada, branches in United States, S ingapore, Bahrain, HongKong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in

United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. OurUK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity sharesare 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).ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$

81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the yearended March 31, 2010. The Bank has a network of 2,518 branches and about 5,808 ATMs inIndia, 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 ofdelivery channels and through its specialized subsidiaries in the areas of investment banking, life

and non-life insurance, venture capital and asset management. The Bank currently hassubsidiaries 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 Natio nal StockExchange of India Limited and its American Depositary Receipts (ADRs) are listed on the NewYork Stock Exchange (NYSE).


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Shareholding Pattern The shareholding pattern of a bank refers to the scenario of a banks equity capital among

various entities from whom the bank has financed its capital. These include Individuals,Insurance companies, MFs, Bodies Corporate and the most important are the depository receiptsthrough which the bank can finance its capital by issuing shares in other countries through listing

in the foreign exchange .

The pie charts above show that only 9% is the individual holding in comparison to 11% of lastyear along with decrease in FIIs holdings from 57% to 36%.The holding in shares by insurance

companies is the same. Also the holding by the mutual funds is only 7% as compared to 9% ofearlier year. The bank has gone for the Depository Receipts for funding of the capital in 2009 i.e.

American Depository Receipts and Global Depository Receipts .

MFs

7%

Foreign Insts/ Banks

0%

Insurance

Companies

15%

FIIs

36%

Bodies Corporates

6%

Individuals

9%

Depository

Reciepts

27%

2009 Shareholder Pattern


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Risk an Introduction

Risks are usually defined by the adverse impact on profitability of several distinct sources of

uncertainty. While the types and degree of risks an organization may be exposed to depend upona number of factors such as its size, complexity business activities, volume etc, it is believed thatgenerally the banks face Credit, Market, Liquidity, Operational, Compliance ,legal ,regulatory

and reputation risks.Risk Management is a discipline at the core of every financial institution and encompasses all theactivities that affect its risk profile. It involves identification, measurement, monitoring and

controlling risks to ensure thata) The individuals who take or manage risks clearly understand it.

b) The organizations Risk exposure is within the limits established by Board of Directors.c) Risk taking Decisions are in line with the business strategy and objectives

set by BOD.d) The expected payoffs compensate for the risks taken

e) Risk taking decisions are explicit and clear.f) Sufficient capital as a buffer is available to take risk

Key risks

We have included statements in this annual report which contain words or phrases such as will,expected to,etc., and similar expressions or variations of such expressions, may constituteforward-looking statements. These forward-looking statements involve a number of risks,

uncertainties and other factors that could cause actual results, opportunities and growth potential

to differ materially from those suggested by the forward-looking statements. These risks anduncertainties include, but are not limited to, the actual growth in demand for banking and otherfinancial products and services in the countries that we operate or where a material umber of ourcustomers res ide, our ability to successfully implement our strategy, including our use of the

Internet and other technology, our rural expansion, our exploration of merger and acquisitionopportunities both in and outside of India, our ability to integrate recent or future mergers or

acquisitions into our operations and manage the risks associated with such acquisitions toachieve our strategic and financial objectives, our ab ility to manage the increased complexity ofthe risks we face following our rapid international growth, future levels of impaired loans, our

growth and expansion in domestic and overseas markets, the adequacy of our allowance forcredit and investment losses, technological changes, investment income, our ability to market

new products, cash flow projections, the outcome of any legal, tax or regulatory proceedings inIndia and in other jurisdictions we are or become a party to, the future impact of new accountingstandards, our ability to implement our dividend policy, the impact of changes in banking

regulations and other regulatory changes in India and other jurisdictions on us, the state of theglobal financial system and other systemic risks, the bond and loan market conditions and

availability of liquidity amongst the investor community in these markets, the nature of creditspreads, interest spreads from time to time, including the possibility of increasing credit spreads


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or interest rates, our ability to roll over our short-term funding sources and our exposure tocredit, market and liquidity risks.

Risk management framework

The Banks risk management strategy is based on a clear understanding of various risks,disciplined risk assessment and measurement procedures and continuous monitoring. Thepolicies and procedures established for this purpose are continuously benchmarked with

international best practices. The key principles underlying our r isk management framework areas follows:

The Board of Directors has oversight on all the risks assumed by the Bank. SpecificCommittees of the Board have been constituted to facilitate focused oversight of various risks.The Risk Committee reviews risk management policies of the Bank in relation to various risks

and regulatory compliance issues. It reviews key risk indicators covering areas such as creditrisk, interest rate risk, liquidity risk, and foreign exchange risk and the limits framework,

including stress test limits, for various risks. It also carries out an assessment of the capitaladequacy based on the risk profile of the Banks balance sheet and reviews the status withrespect to implementation of Basel II norms. The Credit

Committee reviews developments in key industrial sectors and Banks exposure to these sectorsas well as to large borrower accounts. The Audit Committee provides direction to and also

monitors the quality of the internal audit function. The Asset Liability Management Committeeis responsible for managing the balance sheet and reviewing asset- liability position of the Bank. Policies approved from time to time by the Board of Directors/Committees of the Board form

the governing framework for each type of risk. The business activities are undertaken within this

policy framework. Independent groups and sub-groups have been constituted across the Bank to fac ilitateindependent evaluation, monitoring and reporting of various risks. These groups functionindependently of the business groups/sub-groups.

The Bank has dedicated groups namely the Global Risk Management Group (GRMG),

Compliance Group, Corporate Legal Group, Internal Audit Group and the Financial CrimePrevention and Reputation Risk Management Group (FCPRRMG), with a mandate to identify,assess and monitor all of the Banks principal risks in accordance with

well-defined policies and procedures. GRMG is further organized into the Global Credit RiskManagement Group, the Global Market Risk Management Group and the Global Operational

Risk Management Group. These groups are completely independent of all business operationsand coordinate with representatives of the business units to implement ICICI Banks riskmanagement methodologies. The internal audit and compliance groups are

responsible to the Audit Committee of the Board.


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Managing credit risk

In a banks portfolio, losses stem from outright default due to inability or unwillingness of a

customer or counter party to meet commitments in relation to lending, trading, settlement andother financial transactions. Alternatively losses may result from reduction in portfolio value dueto actual or perceived deterioration in credit quality. Credit risk emanates from a banks dealing

with individuals, corporate, financial institutions or a sovereign. For most banks, loans are thelargest and most obvious source of credit risk; however, credit r isk could stem from activitiesboth on and off balance sheet. In addition to direct accounting loss, credit risk should be viewed

in the context of economic exposures. This encompasses opportunity costs, transaction costs andexpenses associated with a non-performing asset over and above the accounting loss.

Total credit risk exposures (March 31, 2010)

Credit risk exposures include all exposures as per RBI guidelines on exposure norms subject tocredit risk and investments in held-to-maturity category. Direct claims on domestic sovereign

which are risk-weighted at 0% and regulatory capital instruments of subsidiaries which arededucted from the capital funds have been excluded.

Rupees in billion

Category Credit exposure

Fund-based 3,355.66

Non-fund based 2,109.75Total 5,465.41

Credit risk monitoring process of ICICI BankFor effective monitoring of credit facilities, a post-approval authorisation structure hasbeen laid down. For corporate, small enterprises and rural micro -banking and agri-

business group, Credit Middle Office Group verifies adherence to the terms of the approval

prior to commitment and disbursement of credit facilities. Within retail, the Bank has

established centralized operations to manage operational risk in the various back officeprocesses of the Banks retail loan business except for a few operations, which are

decentralized to improve turnaround time for customers. A fraud prevention and control

group has been set up to manage fraud-related risks through fraud prevention and through

recovery of fraud losses. The fraud control group evaluates various external agencies

involved in the retail finance operations, including direct marketing associates, external

verification associates and collection agencies. The Bank has a collections unit structuredalong various product lines and geographical locations, to manage delinquency levels. The

collections unit operates under the guidelines of a standardized recovery process.

The segregation of responsibilities and oversight by groups external to the business groupsensure adequate checks and balances.


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Measurement of Credit Risk in ICICI Bank

Credit exposure for ICICI Bank is measured and monitored using a centralized exposuremanagement system. The analysis of the composition of the portfolio is presented to the RiskCommittee on a quarterly basis.ICICI Bank complies with the norms on exposure stipulated by

RBI for both single borrower as well as borrower group at the consolidated level. Limits havebeen set by the risk management group as a percentage of the Banksconsolidated capital funds and are regularly monitored. The utilization against specified limits is

reported to the Committee of Executive Directors and Credit Committee on a periodic basis.

Managing Market Risk

It is the risk that the value of on and off-balance sheet positions of a financial institution will beadversely affected by movements in market rates or prices such as interest rates, foreignexchange rates, equity prices, credit spreads and/or commodity prices resulting in a loss to

earnings and capital.Financial institutions may be exposed to Market Risk in variety of ways. Market risk exposure

may be explicit in portfolios of securities ,equities and instruments that are actively traded.Conversely it may be implicit such as interest rate risk due to mismatch of loans and deposits.Besides, market risk may also arise from activities categorized as off-balance sheet item.

Therefore market risk is potential for loss resulting from adverse movement in market riskfactors such as interest rates, forex rates, equity and commodity prices. The risk arising from

these factors have been discussed as following:-

1.Interest rate risk

Interest rate risk arises when there is a mismatch between positions, which are

subject to interest rate adjustment within a specified period. The banks lending, funding and investment activities give rise to interest rate risk. The immediateimpact of variation in interest rate is on banks net interest income, while a long term impact is on banks networth since the economic value of banks assets, liabilities and off-balance sheet exposures are affected. Consequently there are

two common perspectives for the assessment of interest rate risk.

a)Earning perspective: In earning perspective, the focus of analysis is theimpact of variation in interest rates on accrual or reported earnings. This isa traditional approach to interest rate risk assessment and obtained by

measuring the changes in the Net Interest Income (NII) or Net InterestMargin (NIM) i.e. the difference between the total interest income and thetotal interest expense.

b)Economic Value perspective: It reflects the impact of fluctuation in the


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term deposits. These deposits are augmented by wholesale deposits, borrowings and throughissuance of bonds and subordinated debt from time to time. Loan maturities and sale of

investments also provide liquidity. The Bank holds unencumbered, high quality liquid assets to

protect against stress conditions. For domestic operations, the Bank also has the option ofmanaging liquidity by borrowing in the inter-bank market ona short-term basis. The overnight market, which is a significant part of the inter-bank market, issusceptible to volatile interest rates. To limit the reliance on such volatile funding, the ALM

Policy has stipulated limits for borrowing and lending in the inter-bank market. The Bank alsohas access to refinancing facilities extended by the RBI. For the overseas operations too, the

Bank has a well-defined borrowing program. The US dollar is the base currency for the overseasbranches of the Bank, apart from the branches where the currency is not freely convertible. Inorder to maximize the borrowings at reasonable cost, liquidity in different markets and

currencies is targeted. The wholesale borrowings are in the form of bond issuances, syndicatedloans from banks, money market borrowings, inter-bank bilateral loans and deposits, including

structured deposits. The Bank also raises refinance from banks against the buye rs credit andother forms of trade assets. The loans that meet the criteria of the Export Credit Agencies arerefinanced as per the agreements entered with these agencies. Apart from the above the Bank is

also focused on increasing the share of retail deposit liabilities, in accordance with the regulatoryframework at the host countries. Frameworks that are broadly similar to the above framework

have been established at each of the overseas banking subsidiaries of the Bank to manageliquidity risk. The frameworks are established considering host country regulatory requirementsas applicable. In summary, the Bank follows a conservative approach in its management of

liquidity and has in place robust governance structure, policy framework and review mechanismto ensure availability of adequate liquidity even under stressed market conditions.


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Managing Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people

and system or from external events. Operational risk is associated with human error, systemfailures and inadequate procedures and controls. It is the risk of loss arising from the potentialthat inadequate information system; techno logy failures, breaches in internal controls, fraud,

unforeseen catastrophes, or other operational problems may result in unexpected losses orreputation problems. Operational risk exists in all products and business activities. The objectiveof operational risk management is the same as for credit, market and liquidity risks that is to findout the extent of the financial institutions operational risk exposure; to understand what drivesit, to allocate capital against it and identify trends internally and externally that would help

predicting it. The management of specific operational risks is not a new practice; it has alwaysbeen important for banks to try to prevent fraud, maintain the integrity of internal controls, andreduce errors in transactions processing, and so on. The Banks operational risk management

governance and framework risk is defined in the Policy. While the Policy provides a broadframework, detailed standard operating procedures for operational risk management processes

are established. For the purpose of robust quality of operational risk management across theBank, the operational risk management processes of the Bank have been certified for ISO 9001standard. The Policy specifies the composition, roles and responsibilities of Operational Risk

Management Committee(ORMC). In line with the RBI guidelines, an independent OperationalRisk Management Group (ORMG) was set up in 2006. The key elements in the operational risk

management framework include:1. Identificat ion and assessment of operational risks and controls;2. New products and processes approval framework;3. Measurement through incident and exposure report ing;4. Monitoring through key risk indicators; and5. Mitigation through process and controls enhancement and insurance


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Initiatives taken by the bank to minimize the Risk

In each type of business to reap out maximum profits an organization has to leverage itself so

that it can achieve targeted and projected growth, which cannot be achieved without taking risk.So it does not mean that by increasing some extent of risk there will be higher possibility of moreprofit since higher risk does not mean higher profit. Hence the company will have to take somesteps bring the risks to which it is exposed to its minimum level. Under each category of risks

ICICI bank has taken some initiatives which are as follows:-The institutions plan to grant credit based on various client segments and products, economic

sectors, geographical location, currency and maturity. Target market within each lendingsegment, preferred level of diversification/concentration. Ensure that the bank implements soundfundamental principles that facilitate the identification, measurement, monitoring and control of

credit risk. It is essential that banks give due consideration to their target market while devisingcredit risk strategy. The credit procedures should aim to obtain an in depth understanding of the

banks clients, their credentials & their businesses in order to fully know their customers. Devisepolicies and guidelines for identification, measurement, monitoring and control for all major riskcategories. The committee also ensures that resources allocated for risk management are

adequate given the size nature and volume of the business and the managers and staff that take,monitor and control risk possess sufficient knowledge and expertise. The bank has clear,

comprehensive and well-documented policies and procedural guidelines relat ing to riskmanagement and the relevant staff fully understands those policies. Reviewing and approvingmarket risk limits, including triggers or stop losses for traded and accrual portfolios. Ensuring

robustness of financial models and the effectiveness of all systems used to calculate market r isk.The bank has robust Management information system relating to risk reporting.

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