Submitted in fulfillment of the Requirements of the Risk ManagementCourse of Post Graduate programme (PGP).Submitted By -:Mr. Abhay PratapSubmitted to -:Prof. Vandana Mehrotra
Contents1. About ICICI2. Shareholding pattern3. Risk-An Introduction4. Key Risks5. Risk management framework6. Managing Credit Risk7. Managing market Risks Interest rate risk Foreign Exchange risk Equity price risk8. Managing liquidity Risk9. Managing operational Risk10. Initiatives taken by the bank to minimize the risk
About ICICIICICI Bank is Indias second- largest bank with total assets of Rs. 3,634.00 billion (US$ 81billion) 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 bankingproducts 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 inthe United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, HongKong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices inUnited Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. OurUK subsidiary has established branches in Belgium and Germany. ICICI Banks equity sharesare listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limitedand its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange(NYSE).ICICI Bank is Indias 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 ofbanking 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, lifeand 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 andrepresentative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand,Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany.ICICI Banks 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).
Shareholding PatternThe shareholding pattern of a bank refers to the scenario of a bank’s equity capital amongvarious 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 listingin the foreign exchange . 2009 Shareholder Pattern Foreign Insts/ Banks 0% MFs 7% Depository Insurance Reciepts Companies 27% 15% Individuals 9% FIIs 36% Bodies Corporates 6%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 insurancecompanies 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.
Risk an IntroductionRisks are usually defined by the adverse impact on profitability of several distinct sources ofuncertainty. 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 ,regulatoryand 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 andcontrolling risks to ensure thata) The individuals who take or manage risks clearly understand it.b) The organization’s Risk exposure is within the limits established by Boardof Directors.c) Risk taking Decisions are in line with the business strategy and objectivesset by BOD.d) The expected payoffs compensate for the risks takene) Risk taking decisions are explicit and clear.f) Sufficient capital as a buffer is available to take risk Key risksWe 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 constitute‘forward- looking statements’. These forward- looking statements involve a number of risks,uncertainties and other factors that could cause actual results, opportunities and growth potentialto 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 reside, our ability to successfully implement our strategy, including our use of theInternet 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 oracquisitions into our operations and manage the risks associated with such acquisitions toachieve our strategic and financial objectives, our ability to manage the increased complexity ofthe risks we face following our rapid international growth, future levels of impaired loans, ourgrowth and expansion in domestic and overseas markets, the adequacy of our allowance forcredit and investment losses, technological changes, investment income, our ability to marketnew 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 bankingregulations 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 andavailability 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
or interest rates, our ability to roll over our short-term funding sources and our exposure tocredit, market and liquidity risks. Risk management frameworkThe Bank’s 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 withinternational best practices. The key principles underlying our risk 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 risksand 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 Bank’s balance sheet and reviews the status withrespect to implementation of Basel II norms. The CreditCommittee reviews developments in key industrial sectors and Bank’s exposure to these sectorsas well as to large borrower accounts. The Audit Committee provides direction to and alsomonitors 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 formthe governing framework for each type of risk. The business activities are undertaken within thispolicy framework.• Independent groups and sub-groups have been constituted across the Bank to facilitateindependent 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 Bank’s principal risks in accordance withwell-defined policies and procedures. GRMG is further organized into the Global Credit RiskManagement Group, the Global Market Risk Management Group and the Global OperationalRisk Management Group. These groups are completely independent of all business operationsand coordinate with representatives of the business units to implement ICICI Bank’s riskmanagement methodologies. The internal audit and compliance groups areresponsible to the Audit Committee of the Board.
Managing credit riskIn a bank’s portfolio, losses stem from outright default due to inability or unwillingness of acustomer 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 bank’s dealingwith individuals, corporate, financial institutions or a sovereign. For most banks, loans are thelargest and most obvious source of credit risk; however, credit risk could stem from activitiesboth on and off balance sheet. In addition to direct accounting loss, credit risk should be viewedin 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 sovereignwhich are risk-weighted at 0% and regulatory capital instruments of subsidiaries which arededucted from the capital funds have been excluded. Rupees in billionCategory Credit exposureFund-based 3,355.66Non-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 approvalprior to commitment and disbursement of credit facilities. Within retail, the Bank hasestablished centralized operations to manage operational risk in the various back officeprocesses of the Bank’s retail loan business except for a few operations, which aredecentralized to improve turnaround time for customers. A fraud prevention and controlgroup has been set up to manage fraud-related risks through fraud prevention and throughrecovery of fraud losses. The fraud control group evaluates various external agenciesinvolved in the retail finance operations, including direct marketing associates, externalverification associates and collection agencies. The Bank has a collections unit structuredalong various product lines and geographical locations, to manage delinquency levels. Thecollections unit operates under the guidelines of a standardized recovery process.The segregation of responsibilities and oversight by groups external to the busine ss groupsensure adequate checks and balances.
Measurement of Credit Risk in ICICI BankCredit 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 byRBI 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 Bank’sconsolidated capital funds and are regularly monitored. The utilization against specified limits isreported to the Committee of Executive Directors and Credit Committee on a periodic basis. Managing Market RiskIt 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 toearnings and capital.Financial institutions may be exposed to Market Risk in variety of ways. Market risk exposuremay 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 fromthese factors have been discussed as following:-1.Inte rest rate riskInterest rate risk arises when there is a mismatch between positions, which aresubject to interest rate adjustment within a specified period. The bank’s lending,funding and investment activities give rise to interest rate risk. The immediateimpact of variation in interest rate is on bank’s net interest income, while a longterm impact is on bank’s net worth since the economic value of bank’s assets,liabilities and off-balance sheet exposures are affected. Consequently there aretwo 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 bymeasuring 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
interest rates on economic value of a financial institution. Economic valueof the bank can be viewed as the present value of future cash flows. In thisrespect economic value is affected both by changes in future cash flowsand discount rate used for determining present value. Economic valueperspective considers the potential longer-term impact of interest rates onan institution.Interest rate risk occurs due toDifferences between the timing of rate changes and the timing of cash flows (re-pricing risk)changing rate relationships among different yield curves effecting bank activities (basis risk)Changing rate relationships across the range of maturities (yield curve risk)Interest-related options embedded in bank products (options risk).2.Foreign Exchange Risk:It is the current or prospective risk to earnings and capital arising from adversemovements in currency exchange rates. It refers to the impact of adversemovement in currency exchange rates on the value of open foreign currencyposition. The banks are also exposed to interest rate risk, which arises from thematurity mismatching of foreign currency positions. Even in cases where spotand forward positions in individual currencies are balanced, the maturitypattern of forward transactions may produce mismatches. As a result, banksmay suffer losses due to changes in discounts of the currencies concerned. Inthe foreign exchange business, banks also face the risk of default of the counterparties or settlement risk. Thus, banks may incur replacement cost, which depends upon thecurrency rate movements. Banks also face another risk called time-zone risk, which arises out oftime lags in settlement of one currency in one center and the settlement of another currency inanother time zone. The forex transactions with counter parties situated outside Pakistan alsoinvolve sovereign or country risk.3.Equity price riskIt is risk to earnings or capital that results from adverse changes in the value of equity relatedportfolios of a financial institution. Price risk associated with equities could be systematic orunsystematic. The former refers to sensitivity of portfolio’s value to changes in overall level ofequity prices, while the later is associated with price volatility that is determined by firm specificcharacteristics.
Managing Liquidity RiskLiquidity risk is considered a major risk for banks. It arises when the cushionprovided by the liquid assets are not sufficient enough to meet its obligation. Insuch a situation banks often meet their liquidity requirements from market.Accordingly an institution short of liquidity may have to undertake transaction at heavy costresulting in a loss of earning or in worst case scenario the liquidity risk could result inbankruptcy of the institution if it is unable to undertake transaction even at current market prices.An incipient liquidity problem may initially reveal in the banks financialmonitoring system as a downward trend with potential long-term consequencesfor earnings or capital. Given below are some early warning indicators that notnecessarily always lead to liquidity problem for a bank; however these have potential to ignitesuch a problem. Consequently management needs to watch carefully such indicators and exercisefurther scrutiny/analysis wherever it deems appropriate. Examples of such internal indicators are:a) A negative trend or significantly increased risk in any area or product line.b) Concentrations in either assets or liabilities.c) Deterioration in quality of credit portfolio.d) A decline in earnings performance or projections.e) Rapid asset growth funded by volatile large deposit.f) A large size of off-balance sheet exposure.g) Deteriorating third party evaluation about the bankA liquidity risk management involves not only analyzing banks on and off-balancesheet positions to forecast future cash flows but also how the fundingrequirement would be met.The formality and sophistication of risk management processes established tomanage liquidity risk should reflect the nature, size and complexity of aninstitution’s activities. Sound liquidity risk management employed in measuring,monitoring and controlling liquidity risk is critical to the viability of anyinstitution. Institutions should have a thorough understanding of the factors thatcould give rise to liquidity risk and put in place mitigating controls.Liquidity risk is the risk of inability to meet financial commitments as they fall due, throughavailable cash flows or through sale of assets at fair market value. It is the current andprospective risk to the Bank’s earnings and equity arising out of inability to meet the obligationsas and when they become due. It includes both, the risk of unexpected increases in the cost offunding an asset portfolio at appropriate maturities as well as the risk of being unable to liquidatea position in a timely manner at a reasonable price. The goal of liquidity risk management is tobe able, even under adverse conditions, to meet all liability repayments on time and to fund allinvestment opportunities by raising sufficient funds either by increasing liabilities or byconverting assets into cash expeditiously and at reasonable cost. The Bank has diverse sources ofliquidity to allow for flexibility in meeting funding requirements. For the domestic operations,current accounts and savings deposits payable on demand form a significant part of the Bank’sfunding and the Bank is working with a concerted strategy to sustain and grow this segment ofdeposits along with retail
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 ofinvestments also provide liquidity. The Bank holds unencumbered, high quality liquid assets toprotect 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 ALMPolicy 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, theBank 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 andcurrencies is targeted. The wholesale borrowings are in the form of bond issuances, syndicatedloans from banks, money market borrowings, inter-bank bilateral loans and deposits, includingstructured deposits. The Bank also raises refinance from banks against the buye r’s 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 isalso 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 frameworkhave 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 ofliquidity and has in place robust governance structure, policy framework and review mechanismto ensure availability of adequate liquidity even under stressed market conditions.
Managing Operational RiskOperational risk is the risk of loss resulting from inadequate or failed internal processes, peopleand 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; technology 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 institution’s operational risk exposure; to understand what drivesit, to allocate capital against it and identify trends internally and externally that would helppredicting 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 Bank’s operational risk managementgovernance and framework risk is defined in the Policy. While the Policy provides a broadframework, detailed standard operating procedures for operational risk management processesare 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 RiskManagement 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 riskmanagement framework include: 1. Identification and assessment of operational risks and controls; 2. New products and processes approval framework; 3. Measurement through incident and exposure reporting; 4. Monitoring through key risk indicators; and 5. Mitigation through process and controls enhancement and insurance
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 sothat 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 risksICICI bank has taken some initiatives which are as follows:-The institution’s plan to grant credit based on various client segments and products, economicsectors, 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 ofcredit 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 thebank’s 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 areadequate 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 relating 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. Ensuringrobustness of financial models and the effectiveness of all systems used to calculate market risk.The bank has robust Management information system relating to risk reporting.