FINAL REPORT

ON

A STUDY OF CREDIT RISK MANAGEMENT

IN ICICI BANK

SUBMITTED BY:

K.R.AKSHAYAA RAJESWARI

ICICI BANK
 A Report
On

A STUDY OF CREDIT RISK MANAGEMENT IN

ICICI BANK

By

K.R.AKSHAYAA RAJESWARI

A report submitted in Partial Fulfillment of the requirements of

MBA Program

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 ACKNOWLEDGEMENT

The report and analysis details which are being presented here are a tiresome and fruitiest effort
of many unseen hands that were continuously being a helping hand in all kind of conditions.

At this onset I would like to pay my sincere gratitude and thankfulness to all. Everyones
stimulating suggestions and encouragement helped me in completing this project.

I want to take this opportunity to extend my sincere thanks to my college mentor Prof.mrs
shenbagavalli mam for guiding me throughout the tenure of my project and giving me valuable
support throughout my project. I want to acknowledge with great respect to entire Loan department
which have been extremely helpful to complete my project.

I take this opportunity to thank SRM SCHOOL OF MANAGEMENT for providing me all
facilities and helping me to carry out my project successfully.

K.R.AKSHAYAA RAJESWARI

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 TABLE OF CONTENTS

Serial Number Particulars Page Number

1 Introduction 1

2 Objective 3

3 Research Methodology 3

4 Benefit to the organization 4

5 Limitations 4

6 About ICICI Bank 5

7 Indian banking industry 8

8 Risks in Banking 9

9 Credit risk management- the process 15

10 Risk Management in ICICI Bank 16

11 Risk Rating

12 Sources Of Risks Considered In The Tool

13 Credit Risk Mitigation

14 Various Techniques Of Credit Risk Mitigation

15 Credit Scoring Model At ICICI Bank

17 Data Description 36

18 Analysis Of The Data Through Discriminant Analysis 38

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19 Classification 49

20 Verification of the Model 51

21 Conclusion 53

22 Recommendations 55

23 References 56

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 ABSTRACT

The basic function of a bank is the acceptance of deposits from public and lending funds to
public/corporate and this business of lending has brought trouble to individual banks and entire
banking system. It is, therefore, vital that the banks have adequate systems for credit assessment
of individual projects and for evaluating risk associated therewith as well as the industry as a
whole. As banks move in to a new high powered world of financial operations and trading, with
new risks, the need is felt for more sophisticated and versatile instruments for risk assessment,
monitoring and controlling risk exposures.

With margin levels going down, banks are unable to absorb the level of loan losses. Most of the
banks have developed internal rating systems for their borrowers, but there has been very little
study to compare such ratings with the final asset classification and also to fine-tune the rating
system. Also risks peculiar to each industry are not identified and evaluated openly.

Hence, in this paper, I have tried to address how banks assess the creditworthiness of borrowers
which forms a vital part in the success and better performance of any bank across the globe. The
paper deals with the credit risk management of ICICI bank. It explains as to what is the
importance of credit risk as compared to many other risks in banks such as liquidity risk, market
risk, interest rate risk, etc. This project tries to analyze the reasons of bank failure. In this project
I have also dealt with ICICI Bank specific credit risk management techniques also

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 INTRODUCTION

Banking system in India is one of the most important ingredients in the Indian financial market.
Banks are the biggest purveyors of credit, and they also attract most of the savings from the
population. Banking industry, dominated by public sector banks, has so far acted as an efficient
partner in the growth and development of the Indian economy. Driven by the socialist
ideologists and the welfare state concept, public sector banks have long been the supporters of
agriculture and other priority sectors.
The Indian banking has come from a long way from being a sleepy business institution to a
highly proactive and dynamic entity. This transformation has been largely brought about by the
large dose of liberalization and economic reforms that allowed banks to explore new business
opportunities rather than generating revenues from conventional streams (i.e. borrowing and
lending).
The world of banking has assumed a new dimension at the dawn of the 21st century with the
advent of tech banking, thereby lending the industry a stamp of universality. In general, banking
may be classified as retail and corporate banking. Retail banking, which is designed to meet the
requirements of individual customers and encourage their savings, includes payment of utility
bills, consumer loans, credit cards, checking account balances, ATMs, transferring funds between
accounts and the like. Corporate banking, on the other hand, caters to the needs of corporate
customers like bills discounting, opening letters of credit and managing cash.

Commercial Banking mainly has two functions, which are a) Accepting deposits and b) Granting
credit. Out of these two, it is the latter which is a revenue generation activity for the bank. So, it
is imperative that banks carry out this function with utmost efficiency and due diligence. It is,
therefore, vital that the banks have adequate systems for credit assessment of individual projects
and for evaluating risk associated therewith as well as the industry as a whole. Generally, Banks
in India evaluate a proposal through the traditional tools of project financing, computing
maximum permissible limits, assessing management capabilities and prescribing a ceiling for an
industry exposure. As banks move in to a new high powered world of financial operations and
trading, with new risks, the need is felt for more sophisticated and versatile instruments for risk
assessment, monitoring and controlling risk exposures.

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Credit risk exists because an expected payment might not occur. Credit risk can be defined as
potential losses from the refusal or instability credit customer to pay what is owed in full and on
time. Trade credit involves a supplier providing a buyer with goods or services for which
payment is deferred. Bank lending involves a bank providing a loan in return for the promise of
interest and capital repayment in the future.

Hence, in this paper, we try to address how banks assess the creditworthiness of borrowers which
forms a vital part in the success and better performance of any bank across the globe. We
understand that banks consider, among other factors, the current and prospective profitability, the
borrower's history, as well as its industrial sector and how the borrower is positioned in it.

All the data collected in this project is sourced from various web sites and database sites such as
the RBI web site and database. They are secondary databases and no aid of primary data has
been taken.

In this paper a total of 46 Indian banks have been taken for the purpose of study. All the banks
belong to either public sector or the private sector. Out of 46 banks, 40 banks are then divided
into two groups of 20 each both having equal number of companies. They are used to develop
the co-efficient for the discriminant analysis and to test the accuracy of the model. Then various
information has been obtained regarding these banks for the purpose of the study. Rest 6 banks
have been used to verify the model developed in this paper.

OBJECTIVE OF THE PROJECT

To study the importance of credit risk in ICICI banks and its management.

To study the importance of banks Non-Performing Assets in the economy of a country.

To improve the current predicting power of financial risk factors of banks and thereby
reduces Non-Performing Assets in banks.

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METHODOLOGY

For undertaking the project, following research methodology are adopted:

TYPE OF RESEARCH:

Descriptive Studies, it comes under formal research, where the objectives are clearly established.
In Descriptive Studies, a researcher gathers details about all aspects of problem situation.
Descriptive research seeks to determine the answers to who, what, when, where, and how
questions.

TYPE OF DATA:

SECONDARY DATA

Required data for study will be collected from Secondary data sources. Secondary data include
some external sources such as company internal sources, Internet, books and periodicals,
published reports and study of research papers for extensive analysis.

DATA INTERPRETATION AND ANALYSIS

Use of research analysis tools such as SPSS software in order to run the data and develop the
model for risk management along with fundamental analysis of banking sector using financial &
internet data.

REVIEW OF LITERATURE

Financial sector is of pioneering importance for growing economies and any variation in its
performance can affect the economy in either way. Many researchers have disclosed the fact that
the financial development of the country contributes to the growth of the economy. Also,
researchers have found that the firms in countries which are more financially developed, have
active financial market, and large intermediary sector, are able to get more financial debt than the
firms in the other countries and that is the reason why they are able to develop much rapidly

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(Demirguc-Kunt and Maksimovic, 1998). Similarly, Rajagopal (1996) made an attempt to
overview the banks risk management and suggests a model for pricing the products based on
credit risk assessment of the borrowers. He concluded that good risk management is good
banking, which ultimately leads to profitable survival of the institution.

A proper approach to risk identification, measurement and control will safeguard the interests of
banking institution in long run.The role of banks in the financial sector is a crucial for the
economy. Its importance can be seen from the fact that economic downfalls of the countries
occur as a result of the banking crisis of that country. We can take the example of the Asian crisis
during the second half of the 1990s. There were sufficient events which showed that the weak
financial system and inadequate macroeconomic policies (The weakness in one area causing
problems in the other) were the reasons in aggravating the crises. Also the problems faced by the
Asian banks were only due to the bad lending practices adopted by them which were being
carried on for years. Several studies in the banking literature agree to the fact that banks lending
policy is a major driver of non-performing loans (McGoven, 1993, Christine 1995, Sergio, 1996,
Bloem and Gorters, 2001). Although this caused rapid growth in lending activities but it also
increase the risk of the banks (Lindgren et al, 1996; Caprio and Klingebiel, 2003). Gourinchas et.
al. (2001) emphasizes that, while most banking crisis may be preceded by a lending boom, most
lending booms are not followed by a banking crisis.

The problem of NPAs is related to several internal and external factors dealing with the
borrowers (Muniappan, 2002).

Sometimes when the managers obtain a reasonable return on their equity shareholdings, they
involve in activities that is against the firm's value maximization. Since they have limited
liability, they can adopt high risk-return strategies (i.e., over expansion of credit) in order to
increase the social presence of the bank managers in an organization (Williamson, 1963).

Strong competition among the banks also decreases their profits margins and forces them to take
risky measures. To expand their profits bank sometimes indulge in increasing loan growth
without taking much into consideration the credit evaluation standards. It focuses too much on its

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short-term objectives. Hence the bank managers finance negative NPV projects during
expansions (Rajan, 1994) that, later on, could become non-performing loans.

The increased time period since the last loan default can lead to an increase in the problem loans
of banks. This could be due to two reasons: First, the percentage of loan officers that experienced
the last default declines as the bank hires new officers, and the ones retire, leading to an overall
loss of experience. Second, some of the experienced officers might not be able to recollect
properly the previous default; due to these reasons there is an overall decrease in institutional
memory also leading to formation of groups that are less skillful at evaluating risk, resulting in
the increase of problem loans (Berger and Udell, 2004).

Sometimes the collaterals offered at the time of taking loans also play a major role in the creating
bad loans. What generally happens is during the upturn period of the economy the prices of the
assets generally increase forcing the banks to accept those properties as collaterals since it has a
much worthier asset to back the loans. Now as the upturn recedes and recession creeps in, there
is a decline in the assets values thereby leading to decline in the collateral values. This leads to
bad loans and increasing NPAs of banks (Gabriel et al, 2006).

Santanu das (2002) focuses on the increasing rate system to examine the reason of NPAs. He
says that in an increasing rate system, quality Borrowers more often than not switch over to other
avenues such as capital markets, internal accruals for their requirement of funds. Under such
circumstances, banks have no option but to dilute the quality of borrowers thereby increasing the
probability of generation of NPAs.

In India, Dilip K. Das (2000) has examined the aspect of the non-performing loan problem. He
says that problem loans are caused due to both macroeconomic and microeconomic factors. In a
downturn, borrowings generally decrease, thereby causing greater problem loans. At the same
time, factors, such as low operating efficiency and uncontrolled branch expansion, might also
lead to an increase in problem loans. This would mean that not only macroeconomic conditions,
but also microeconomic variables are important in explaining problem loans in banks.

The problems that troubled the Indian banking sector were also due to decades of directed
credit policies of successive Indian governments. During much of the second half of the

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twentieth century, the Indian banking sector had characteristics of social control. The supposed
role that banking sector played in the economy was that of providing financial support for
preferred sectors which would lead to development of the country. However, because of
inefficient lending practices, combined with poor monitoring, corruption, and a host of other
factors, the Indian banking sector became saddled with huge folios of non-performing loans. In
order to clean up its banking system, the Indian government has embarked upon major regulatory
reform in the last decade. Most recently, the Indian government has allowed Banks and Financial
Institutions to securitize non-performing assets. (Anshu S K Pasricha, 2007)

Hence, Credit Risk, that is, default by the borrower to repay lent money, still remains the most
important risk to manage till date. The power of credit risk is even reflected in the composition
of economic capital, which banks are required to keep aside in order to protection themselves
from various risks. It takes about 70% and 30% remaining is shared between the other two
primary risks, namely Market risk (change in the market price) and operational risk i.e., failure
of internal controls (Prof. Rekha Arunkumar).

NPAs are an inevitable burden on the banking industry. Hence the success of a bank depends
upon methods of managing NPAs and keeping them within tolerance level, of late, several
institutional mechanisms have been developed in India to deal with NPAs.

The future of banking will therefore undoubtedly rest on risk management dynamics. Only those
banks that have efficient risk management system will survive in the market in the long run. The
effective management of credit risk is a critical component of comprehensive risk management
essential for long-term success of a banking institution (Prof. Rekha Arunkumar, 2005).

Since credit risk includes the possibility of social, economic and financial harms, some control
setting and some credit risk management policies have to be determined in order to minimize the
harmful effects of disastrous risky events such as failures. Such a process requires defining and
measuring the combinations of events that are likely to cause a bankruptcy (Hayette Gatfaoui,
2008).

Edward I Altman in his paper Predicting Financial Distress of Companies: Revisiting the Z
score and Zeta model has used this model to examine the unique characteristics of business

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failure in order to specify and quantify the variables which are effective indicators and predictors
of corporate distress. He has explored not only the quantifiable characteristics of potential
bankrupts but also the utility of a much-maligned technique of financial analysis: ratio analysis
through the help of this technique. In this paper we have tested Altmans Z-score model approach
in Indian context.

Janet Mitchell and Patrick Van Roy in their working paper research Failure prediction models:
performance, disagreements, and internal rating systems has used Altmans Z Score model to in
the ranking of firms, and the design of internal rating systems. She also analyzes the design of
bank internal rating systems by looking at the performance of systems with differing numbers of
classes and distributions of borrowers across classes with the help of this model.

Since exposure to credit risk continues to be the leading source of problems in banks world-wide,
banks and their supervisors should be able to draw useful lessons from past experiences. Hence,
in this paper, we try to address how banks assess the creditworthiness of borrowers. We
understand that banks consider, among other factors, the current and prospective profitability, the
borrower's history, as well as its industrial sector and how the borrower is positioned in it. For
this purpose we are using Altmans Z score model in this paper.

BENEFIT TO THE ORGANIZATION

Following are the benefits that will accrue to the ICICI Bank:
The paper through the help of entire calculations and analysis has helped a lot in
improving the current predicting power of financial risk factors of banks and thereby
reduce Non-Performing Assets in banks, Non-Performing Assets which is a major
concern in todays hi-tech competitive world of real business.
Project helps the banks in increasing its efficiency.

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LIMITATIONS OF THE STUDY:

The study has the following limitations:-

Period of study under consideration is 6 years.

The primary drawback of the project is the lack of the primary data. The project is totally
based on the secondary data collected from various source such as books, journals,
research papers, articles, web sites etc.
All the data has been taken from reliable sources such as company website and sites such
as India infoline & kotak securities but still their can be some Manipulation that can
change our results.

ABOUT ICICI Bank

ICICI Bank, formerly Industrial Credit and Investment Corporation of India, is India's
largest private sector bank in market capitalization and second largest overall in terms of assets.
Bank has total assets of about USD 100 billion (at the end of March 2008), a network of over
1,399 branches, 22 regional offices and 49 regional processing centres, about 4,485 ATMs and
24 million customers. ICICI Bank offers a wide range of banking products and financial services
to corporate and retail customers through a variety of delivery channels and specialized
subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture
capital and asset management. ICICI Bank is also the largest issuer of credit cards in India. ICICI
Bank has got its equity shares listed on the stock exchanges at Kolkata and Vadodara, Mumbai
and the National Stock Exchange of India Limited, and its ADRs on the New York Stock
Exchange (NYSE).

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 Source: www.icicibank.com/pfsuser/aboutus/investorelations/investorpresentation/ppt/

The Bank is expanding in overseas markets and has the largest international balance sheet among
Indian banks. ICICI Bank now has wholly-owned subsidiaries, branches and representatives
offices in 18 countries, including an offshore unit in Mumbai. This includes wholly owned
subsidiaries in Canada, Russia and the offshore banking units in Bahrain and Singapore, an
advisory branch in Dubai, branches in Belgium, Hong Kong and Sri Lanka, and representative
offices in Bangladesh, China, Malaysia, Indonesia, South Africa, Thailand, the United Arab
Emirates and USA. Overseas, the Bank is targeting the NRI (Non-Resident Indian) population in
particular.

ICICI reported a 1.15% rise in net profit to Rs. 1,014.21 crore on a 1.29% increase in total
income to Rs. 9,712.31 crore in Q2 September 2008 over Q2 September 2007. The bank's
current and savings account (CASA) ratio increased to 30% in 2008 from 25% in 2007.

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 Source:

Diversified Portfolio of ICICI Bank

The asset composition change on account of statutory requirements and increase in retail assets is
contributing to de-risking the portfolio

Source: www.icicibank.com/pfsuser/aboutus/investorelations/investorpresentation/ppt/
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 Source:

INDIAN BANKING INDUSTRY

The Banking sector in India is all set to witness path breaking changes. While the decade of 90s
has witnessed a sea change in the way banking is done in India, Technology has made
tremendous impact in banking then provisioning norms for NPAs have considerably reduced
banks net NPAs and also made them strong financially. The future trends in Indian banking can
be captured through following points.

Basel II and risk management

To strengthen the capital base of the banks the Bank of International Standards (BIS) has come
up with Basel Accords. As per the recommendations of these accords every bank having an

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international presence has to set aside capital as a percentage of its Risk Weighted Assets
(RWAs)

Banks capital adequacy ratio = Total Capital

--------------------------------------------------------
RWAs of Credit Risk+ Market Risk+ Op. Risk

Consolidation

With the opening up of the banking sector in 2009 week/ small banks will find it tough to
compete with the large banks. Hence, it is likely that consolidation will soon catch up with the
banks. A recent example in this context is the merger of Centurion bank of Punjab with HDFC
bank. Though there is no confirmation yet, speculative signals arising from the market point to
the prospect of consolidation involving banks such as Union Bank of India, Bank of India, Bank
of Baroda, Dena Bank, State Bank of Patiala, and Punjab and Sind Bank. Further, the case for
merger between stronger banks has also gained ground a clear deviation from the past when
only weak banks were thrust on stronger banks.

Globalization
Indian Banking sector is all set to open up for foreign players with effect from April09 which
will allow them to operate in India through wholly owned subsidiaries. Also Indian banks are
increasingly going Global.

RISKS AND BANKING

Banks face the following main risks
Credit Risks
Operational Risks
Market Risks
o Liquidity Risk
o Interest rate Risk

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 o Foreign exchange Risk
o Commodities and Equity Risk

Keeping in view the scope of the project, I will be discussing only Credit risk and its
management in detail

CREDIT RISK
Credit risk is defined as the possibility of losses associated with diminution in the credit quality
of borrowers or counter-parties. 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 and other financial transactions.
Alternatively, losses result from reduction in portfolio value arising from actual or perceived
deterioration in credit quality.
The credit risk of a bank's portfolio depends on both external and internal factors. The external
factors can be economy wide as well as company specific.

Some of the economy wide factors are:

State of the economy
Wide swings in commodity prices
Fluctuations in foreign exchange rates and interest rates
Trade restrictions
Economic sanctions.
Government policies, etc.
Some company specific factors are:
Management expertise
Company policies
Labour relations

The internal factors within the bank, influencing credit risk for a bank is:
Deficiencies in loan policies/administration
Absence of prudential credit concentration limits

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 Inadequately defined lending limits for Loan Officers/Credit Committees
Deficiencies in appraisal of borrowers' financial position
Excessive dependence on collateral without ascertaining its quality/reliability
Lack of risk pricing mechanisms
Absence of loan review mechanism
Ineffective system of monitoring of accounts

The goal of credit risk management is to maximize a banks risk-adjusted rate of return by
maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit
risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks
should also consider the relationships between credit risk and other risks.

WHY CREDIT RISK MANAGEMENT?

The liberalization of the Indian economy has brought about sweeping changes in the economic
environment. Changes in economic environment have induced new anticipated and unforeseen
risks in lending. The assessment of these risks is essential to facilitate prudent credit decisions.

The terms and conditions of loans & advances sanctioned to borrowers (i.e. the price, the
maturity, the form of credit etc.) determine the profit that accrues to the bank from that loan. If
the terms are decided without proper assessment of the credit risk, the bank might be charging
low interest rates from poor quality customers thereby sustaining losses due to default, and
charging high rates from good quality customers thereby driving them away to other banks.

The increasing pressure on spreads in the banking industry as well as competition on both sides
of the balance sheet makes an efficient credit risk management system essential for banks. In this
increasingly competitive situation a sound credit risk management system can be a source of
competitive advantage for the bank.

BASEL II

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Basel II is the second of the Basel Accords, which are recommendations on banking laws and
regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II is to
create an international standard that banking regulators can use when creating regulations about
how much capital banks need to put aside to guard against the types of financial and operational
risks banks face.

Basel II accords are based on three pillars:

The First Pillar

The first pillar deals with maintenance of regulatory capital calculated for three major
components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are
not considered fully quantifiable at this stage. The credit risk component can be calculated in
three different ways of varying degree of sophistication, namely standardized approach,
Foundation IRB and Advanced IRB. IRB stands for "Internal Rating- Based Approach".2

Source: www.ssrn.com

The Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators much
improved 'tools' over those available to them under Basel I. It also provides a framework for

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dealing with all the other risks a bank may face, such as systemic risk, pension risk,
concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord
combines under the title of residual risk.

The Third Pillar

The third pillar greatly increases the disclosures that the bank must make. This is designed to
allow the market to have a better picture of the overall risk position of the bank and to allow the
counterparties of the bank to price and deal appropriately.

CAPITAL ADEQUACY RATIO RECOMMENDED BY BASEL II

The Basel II accord has recommended the following method of calculating the capital adequacy
ratio of the banks.

Total Capital
Banks CAR = ----------------------------------------------------
RWAs of Credit Risk+ MR+ OR

Here, CAR= Capital Adequacy Ratio RWA= Risk Weighted Assets

MR= Market Risk OR = Operational Risk

The Minimum Capital Adequacy as prescribed by the Basel II Accord is 9% of Risk weighted Asset.
Banks find out their capital requirement by putting the values of their RWAs and minimum
CAR in the above formula
With respect to capital, the Basel II accord permits banks to adopt one of two methods for risk
weighting of assets: the standardized approach and the internal ratings based (IRB) model.
The IRB model provides for two alternatives: Foundation and Advanced.

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Standardized Approach towards Credit Risk Management

Under this approach the banks are required to use ratings from External Credit Rating Agencies to
quantify required capital for credit risk. The standardized approach is the simplest of the three broad
approaches to credit risk. The other two approaches are based on banks internal rating systems, i.e
foundation IRB and Advanced IRB

Internal Ratings Based (IRB) Approach towards Credit Risk Management

A characteristic of the IRB approach is that the institution itself shall be able to determine, in a
reliable manner, the values for certain risk parameters for its exposures. Permission to use such an
approach is conditional on the institution demonstrating that it possesses such capability. Under IRB
approach the bank has to calculate the following for the purpose of capital requirements

i. Probability of Default (PD)

It measures the likelihood that the borrower will default over a given time-horizon.
ii. Loss given Default (LGD)
It measures the proportion of the exposure that will be lost if a default occurs.
iii. Exposure at Default (EAD)
It measures the amount of the facility that is likely to be drawn if a default occurs.
iv. Maturity (M)
It measures the remaining economic maturity of the exposure.

ICICI Bank has adopted both the Standardized as well as the IRB approach wherein it sources the
credit ratings country wise and industry wise from the ECAIs and also has an in house mechanism
for assigning the credit risk ratings to the individual borrowers based upon various risk rating
models.

CREDIT RISK MANAGEMENT- THE PROCESS

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RISK MANAGEMENT ICICI BANK
The Bank has taken major initiatives in putting in place the Risk Management Systems in order
to adopt advanced approaches prescribed in Basel II and detailed operational guidelines for these
initiatives have been issued through various circulars from time to time. Some of such initiatives
are:
Separate Risk Management Division has been established. The division looks after
management of all the three risks namely Credit Risk, Market Risk and Operational Risk.
Various policies like entry level benchmark, Delegation of loaning powers according to
risk, Pricing (for all accounts availing total limits above Rs. 20 lakhs) are linked to the
credit risk ratings.
The approval process of the credit risk rating is independent of the credit approval
process. A committee approach has been adopted for all accounts falling under the
powers of DGM and above.

RISK RATING

The credit risk rating tool has been developed with a view to provide a system for assigning a
credit risk rating to the borrowers of the bank according to their risk profile. This rating tool is
applicable to all large corporate borrowal accounts availing total limits (fund based and non-fund
based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100 crore.

Inputs to the tool are the financial data of the borrower, industry information and the evaluation
of the borrower on various objective and subjective parameters.

There are broadly seven types of rating which are assigned to the borrower ranging from AAA to
D.

SOURCES OF RISKS CONSIDERED IN THE TOOL

Signals for credit risks can be picked up from a number of sources. The credit risk-rating tool
considers the following broad areas in evaluating the default risk of a borrower
Financial Strength

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 Business Performance
Industry Outlook
Quality of Management
Conduct of account

These parameters are further evaluated under various sub-parameters. They are discussed in brief
as following:

Financial Strength

These parameters are taken normally from the annual financial statements of the company i.e.
Balance Sheet, Profit & Loss Statement and the Cash Flow statement. Past performance is taken
as a guide to realistically assess future performance.

The financials are evaluated under four broad areas as under:

Past financial performance

Turnover Growth
OPBDIT/Sales
Short term bank borrowings / Net sales
Operating Cash Flow/Total Debt
Debt Equity Ratio
TOL/TNW
Interest Coverage
Return on Capital Employed

Business Performance

This section measures operational efficiency and core competence of a company vis--vis its
competitors. The performance of a company is influenced both by its own set up as well as its
competitive position within the industry. Thus the two broad sub-areas used to assess the
business performance of a company are:
Operating Efficiency
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 Market Position

Operating efficiency can be gauged from the following parameters

Operating leverage
Inventory Turnover
Credit Period allowed/ availed
. Net Sales/Operating Assets
Net Sales/ Current Assets

Market Position Can be gauged through following parameters

Competitive Position
Input Related Risk
Product Related Risk
Price Competitiveness
Marketing

Industry Outlook
Industry performance very often has a direct bearing on the performance of a company. Two
companies in different industries would have different credit worthiness depending on the
outlook for their industries. The outlook and performance of an industry depend on a number of
parameters.

1. Expected industry growth rate

2. Capital market perception. The industry P/E ratio is an useful indicator in this regard.
3. Regulatory framework
Tax Concessions
Tariff Protection
4. Industry cyclicality
5. Demand-supply mismatch
6. Financial performance of industry
7. Technology used in the industry and its rate of obsolescence

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8. Threat from environmental factors
9. Threat from globalization
10. Structural attractiveness
Supplier power
Buyer power
Threat of product substitution
Threat of new entrants and entry barriers
Competition within the industry

Management Evaluation
Evaluation of management is important not only due to its impact on the companys
performance, which determines its capability to repay, but also from the point of view of its
integrity. This is because the intentions of the management determine the willingness of the
company to repay its debts. The management quality thus influences both aspects of default risk,
the ability as well as the willingness of the borrower to repay its debts.
Evaluation of management is done to determine both their competence as well as their integrity.
The two sub-areas considered for this purpose are:
Achievement of past targets by the company
Subjective assessment of management quality

Conduct of Account
The conduct of account refers to as to how the borrowers existing accounts with our Bank as
also with other banks are being conducted and whether any problems are being faced.

The following areas and factors are taken into consideration:

Status of Documentation/Security Creation/Terms of Sanction

Delay in creation of primary security
Delay in creation of personal/corporate guarantees
Delay in creation of collateral security
Non-compliance of terms & conditions of sanction

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Status of Financial Discipline
Credit summations in Cash Credit account being less than the sales realisations
Returning of cheques
Devolvement of LCs
Invocation of LGs
Requests for adhoc limits

Status of Feedback by the Borrower

Delay in submission of stock/book debt statements
Delay in submission of QMS forms
Delay in submission of audited balance sheet
Delay in submission of CMA data and other papers necessary for renewal of credit limits
Delay in renewal of credit limits

CREDIT RISK MITIGATION

Credit Risk Mitigation (CRM) refers to the process through which credit risk is reduced or is
transferred to counterparty. Strategies for risk reduction at the transaction level differ from that at
the portfolio level. At transaction level, the most common technique used by the bank is the
collateralization of the exposures, by first priority claims or obtaining a third party guarantee.
Other techniques include buying a credit derivative to offset credit risk at transaction level. At
portfolio level, asset securitization, credit derivatives etc. are used to mitigate risks in the
portfolio.
Basel II Accord allows a wider range of credit risk mitigants to be recognized for regulatory
capital purposes.

VARIOUS TECHNIQUES OF CREDIT RISK MITIGATION

Collateral Management
On- Balance Sheet Netting
Guarantees

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Collateral Management
The collateralized transaction are the one in which banks have a credit exposure and that credit
exposure is hedged in whole or in part by collateral posted by a counter party or by a third party
on behalf of the counter party.

Banks may opt for either the simple approach, which, substitutes the risk weighting of the
collateral for the risk weighting of the counterparty for the collateralized portion of the exposure
(generally subject to a 20% floor), or for the comprehensive approach, which allows fuller
offset of collateral against exposures, by effectively reducing the exposure amount by the value
ascribed to the collateral. Banks may operate under either, but not both, approaches in the
banking book, but only under the comprehensive approach in the trading book. Partial
collateralization is recognized in both approaches. Mismatches in the maturity of the underlying
exposure and the collateral will only be allowed under the comprehensive approach.

Before capital relief will be granted to any form of collateral, the standards set out in this section
must be met. Supervisors will monitor the extent to which banks satisfy these conditions, both at
the outset of a collateralized transaction and on an on-going basis.

Process of Collateral Management:

Collateral Management process covers the entire gamut of activities comprising interalia the
following aspects;-

Defining the criteria on acceptability of various forms of collaterals

Level/extent of collateralization,
Guidelines for valuation & periodical inspection of collateral
Measures for security and protection of collateral value
Legal aspects to ensure enforceability and reliasability of collateral in a timely and efficient
manner.

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On Balance Sheet Netting

On balance sheet netting is another technique of credit risk mitigation. This technique is
applicable in cases where a borrower has a deposit with the bank. In such a case it is possible that
the bank treats the deposit as collateral.
The advantage to the bank under this technique is that the capital requirement for that loan will
be calculated after offsetting the value of the deposit. Moreover there is NO HAIRCUT
APPLICABLE to the deposit.

Conditions

The bank should have a proper legal basis for affecting such an offsetting and such right should
be enforceable.
There is no time mismatch
There is no Currency Mismatch
The Credit balances (Deposit) and Debit Balances (Advance) should relate to the same
customer or the customer in the same company group.

At the present juncture, the Basle Committee is inclined to restrict the scope for on-balance-sheet
netting to loans and deposits only. However, recognizing that netting can be a beneficial part of
the risk management process, the Committee may be prepared to consider other circumstances
under which banks might be allowed to net on-balance-sheet claims in calculating capital
adequacy.

Guarantees
For the protected portion of an exposure, a bank may substitute the risk weight of the protection
provider for that of the obligor. However, in the case of a guarantee from a sovereign, central
bank or bank, there will be no additional capital requirement (i.e. w is zero); this equates to .pure
substitution.

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 CREDIT SCORING MODEL AT ICICI BANK

Details of parameters and

respective weightage
30%
FINANCIAL RISK
Non-
Coverage Manufacturing 8%
mfgrs.
Total
Parameter Range Range Scale Weight Weight
s
>= 5
Interest coverage ratio >=5 times 5 4%
times
4 to 5
4 to 5 times 4
times
3 to 4
3 to 4 times 3
times
2 to 3
2 to 3 times 2
times
1.5 to 2
1.5 to 2 times 1
times
< 1.5
<1.5 times 0
times
Total debt to net cash accruals <=4 <= 4 5 4%

4 to 6 4 to 6 4

6 to 7 6 to 7 3
7 to 8 7 to 8 2
8 to 10 8 to 10 1
>10 > 10 0
Ratio Analysis 22%
Debtors & Inventory turnover <= 30
<=90 days 5 4%
period days
90 to 120 30 to 45 4
120 to 150 45 to 60 3
150 to 210 60 to 90 2
210 to 270 90 to 120 1

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 >120
>270 days 0
days
TOL/TNW <= 1 <= 1 5 4%
1 to 1.5 1 to 1.5 4
1.5 to 2 1.5 to 2 3
2 to 2.5 2 to 3 2
2.5 to 3 3 to 4 1
>3 >4 0
>= 1.75
Current ratio >=1.75 times 5 4%
times
1.33 to
1.33 to 1.75 4
1.75
1.25 to
1.25 to 1.33 3
1.33
1.15 to
1.15 to 1.25 2
1.25
1 to 1.15 1 to 1.15 1
<1 <1 0
Sales Trend*
Increase in sales /gross receipts
over last two available audited Up to 25% Up to 25% 5 4%
years
Up to 20% Up to 20% 4
Up to 15% Up to 15% 3
Up to 10% Up to 10% 2
10-0% 10% - 0% 1

EBIDTA Trend*
Increase in EBIDTA over last two
Up to 25% Up to 25% 5 4%
available audited years
Up to 20% Up to 20% 4
Up to 15% Up to 15% 3
Up to 10% Up to 10% 2
10% - 0% 10% - 0% 1
TNW Trend*
Increase in TNW over last two Up to 25% Up to 25% 5 2%

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available audited years
Up to 20% Up to 20% 4
Up to 15% Up to 15% 3
Up to 10% Up to 10% 2
10-0% 10% -0% 1

*In case the trends are not

available, the score would be
allocated to other Financial
Performance norms in
proportion to the present
respective assigned scores

MANAGEMENT RISK 25%

Parameter Range Scale Weight
Business vintage (years) > =10 years 5 5%
Above 5 years
4
but up to 10 yrs
Above 2 years
but up to 5 3
years
Below 2 years 1
Personal net worth of promoters More than 50
5 5%
providing PG (Rs. in mn) mn
Between 25 mn
4
to Rs 50 mn
Between 25 mn
3
and Rs 10 mn
Below Rs 10 mn 2
Public limited
Constitution of the entity 5 5%
company
Private limited
4
company
Registered
3
partnership firm
Sole 2
proprietorship

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 concern
HUF 1

Sole business
Business Commitment & Fund
interest of 5 5%
Diversion Risk
promoter

Promoter has
other
firm/companies ,
but negligible 4
business
compared to
main entity
More than one
firm/ company
but not in
exactly same
3
line of business,
all entities have
comparable
business volume
More than one
firm/company in
exactly same
line of business
2
& all entities
have
comparable
business volume
Promoters legal
descendent(s)
is/are adult and
Succession Risk 5 5%
is/also also
Partner/Director
in the business
Promoters legal
descendents
is/are adult and
is/are involved 4
in business only
in executive
capacity

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 Promoters legal
descendent(s)
is/ are adult but
not involved in
3
the business
(borrowing
entity) in any
way
Promoters legal
descendents
2
have lot reached
18 years of age
Promoters dont
have any legal 0
descendent

TRANSACTION HISTORY 25%

Parameter Range Scale Weight

Inward Cheque Returns Up to 1 4 5%

Up to 2 3
Up to 3 2
Up to 4 1
Up to 5 0
Average Balance in 6 month
period (For Current Account
Customers Only)

In case of Cash Credit and

Overdraft Accounts - Refer next 200,000 High 5 10%
point.

150,000
4
200,000
100,000
3
150,000
75,000
2
100,000
50,000 75,000 1

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 < 50000 0
Overdrawings in the last six
months in case of Cash Credit
and Overdraft Account
Customers
Up to 1 event 5 10%
Up to 2 events 4
Up to 3 events 3
Up to 4 events 2
Up to 5 events 1
Up to 6 events 0
Credit summation in 6 month
period
As a percentage of latest
Up to 40% 5 5%
audited turnover
(As 6 months is compared with
One year, percentages reduced Up to 35% 4
by 50%)
Up to 30% 3

Up to 25% 2

Up to 20% 1

Up to 15% 0

No. of Credits in 6 month period

101 High 5 5%
26 100 4
11 25 3

3 10 1

02 0

30
**In case, where customer does
not has the respective Current
Account, Cash Credit account or
Overdraft account with ICICI
Bank, the respective score

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would be proportionately
allocated in the scoring model.

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DATA DESCRIPTION:
All the data collected in this project is sourced from various web sites and database sites such as the
RBI database web site and various database. They are secondary databases and no aid of primary
data has been taken.
In this paper a total of 40 Indian banks have been taken for the purpose of study. All the banks
belong to either public sector or the private sector. The total group of 40 banks is then divided
into two groups of 20 each both having equal number of companies. The first group is used to
develop the co-efficient for the discriminant analysis. The other group is used to test the accuracy
of the model. Then various information have been obtained regarding these banks for the purpose
of the study.
This information includes:
Working Capital to Total Assets

Retained Earnings to Total Assets

Earnings before Interest and Tax to Total Assets

Market Capitalization3 to Book Value of Debt

Sales to Total Assets

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 ANALYSIS & FINDINGS

RISK MANAGEMENT

As a financial intermediary, we are exposed to risks that are particular to our lending, transaction
banking and trading businesses and the environment within which we operate. Our goal in risk
management is to ensure that we understand, measure and monitor the various risks that arise
and that the organization adheres strictly to the policies and procedures, which are established to
address these risks.

ICICI Bank is primarily exposed to credit risk, market risk, liquidity risk, operational risk and
legal risk.

ICICI Bank has three centralized groups:

the Global Risk Management Group

the Compliance Group and
the Internal Audit Group ;
with a mandate to identify, assess and monitor all of ICICI Bank's principal risks in accordance
with well-defined policies and procedures.

The Global Risk Management Group is further organized into:

the Global Credit Risk Management Group

the Global Market and Operational Risk Management Group.

In addition, the

Credit and Treasury Middle Office Groups and the Global Operations Group monitor operational
adherence to

regulations, policies and internal approvals.

The Global Risk Management Group, Middle Office Groups and Global Operations
Group report to a whole time Director.
The Compliance Group reports to the Audit Committee of the board of directors and the
Managing Director and CEO.

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 The Internal Audit Group reports to the Audit Committee of the board of directors.
These groups are independent of the business units and coordinate with representatives of the
business units to implement ICICI Bank's risk management methodologies.

Committees of the board of directors have been constituted to oversee the various risk
management activities. The Audit Committee provides direction to and also monitors the quality
of the internal audit function.

The Risk Committee reviews risk management policies in relation to various risks including
portfolio, liquidity, interest rate, investment policies and strategy, and regulatory and compliance
issues in relation thereto. The Credit Committee reviews developments in key industrial
sectors and our exposure to these sectors as well as to large borrower accounts.

The Asset Liability Management Committee is responsible for managing the balance sheet and
reviewing the asset-liability position to manage ICICI Bank's liquidity and market risk exposure

The Compliance Group is responsible for the regulatory and anti-money laundering compliance
of ICICI Bank.

CREDIT RISK

Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender. We
measure, monitor and manage credit risk for each borrower and also at the portfolio level. We
have standardized credit approval processes, which include a well-established procedure of
comprehensive credit appraisal and rating. We have developed internal credit rating
methodologies for rating obligors. The rating factors in quantitative, qualitative issues and credit
enhancement features specific to the transaction. The rating

serves as a key input in the approval as well as post-approval credit processes. Credit rating, as a
concept, has been well internalised within the Bank. The rating for every borrower is reviewed at
least annually. Industry knowledge is constantly updated through field visits and interactions
with clients, regulatory bodies and industry experts. In our retail credit operations, all products,
policies and authorisations are approved by the Board or a Board Committee or pursuant to

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authority delegated by the Board. Credit approval authority lies only with our credit officers who
are distinct from the sales teams. Our credit officers evaluate credit proposals on the basis of the
approved product policy and risk assessment criteria. Credit scoring models are used in the case
of certain products like credit cards. External agencies such as field investigation agencies and
credit processing agencies are used to facilitate a comprehensive due diligence process including
visits to offices and homes in the case of loans to individual borrowers. Before disbursements are
made, the credit officer conducts a centralised check on the delinquencies database and review of
the borrowers profile. We continuously refine our retail credit parameters based on portfolio
analytics. It also draws upon reports from the Credit Information Bureau (India) Limited
(CIBIL).

CREDIT RISK MANAGEMENT BY ICICI BANK

Credit risk, the most significant risk faced by ICICI Bank, is managed by the Credit Risk
Compliance & Audit Department (CRC & AD) which evaluates risk at the transaction level as
well as in the portfolio context. The industry analysts of the department monitor all major sectors
and evolve a sectoral outlook, which is an important input to the portfolio planning process. The
department has done detailed studies on default patterns of loans and prediction of defaults in the
Indian context. Risk-based pricing of loans has been introduced.

The functions of this department include:

Review of Credit Origination & Monitoring

- Credit rating of companies/structures
- Default risk & loan pricing
- Review of industry sectors
- Review of large exposures in industries/ corporate groups/ companies
- Ensure Monitoring and follow-up by building appropriate systems such as CAS

Design appropriate credit processes, operating policies & procedures

Portfolio monitoring
- Methodology to measure portfolio risk
- Credit Risk Information System (CRIS)

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 Focused attention to structured financing deals
- Pricing, New Product Approval Policy, Monitoring
Monitor adherence to credit policies of RBI

During the year, the department has been instrumental in reorienting the credit processes,
including delegation of powers and creation of suitable control points in the credit delivery
process with the objective of improving customer response time and enhancing the effectiveness
of the asset creation and monitoring activities.

Availability of information on a real time basis is an important requisite for sound risk
management. To aid its interaction with the strategic business units, and provide real time
information on credit risk, the CRC & AD has implemented a sophisticated information system,
namely the Credit Risk Information System. In addition, the CRC & AD has designed a web-
based system to render information on various aspects of the credit portfolio of ICICI Bank.

ICICI Bank also uses RAM to manage its credit risk.

1. Credit Risk Assessment Procedures for Corporate Loans

In order to assess the credit risk associated with any financing proposal, ICICI Bank assesses a
variety of risks relating to the borrower and the relevant industry. Borrower risk is evaluated by
considering:

the financial position of the borrower by analyzing the quality of its financial statements, its
past financial

performance, its financial flexibility in terms of ability to raise capital and its cash flow
adequacy;

the borrower's relative market position and operating efficiency; and

the quality of management by analyzing their track record, payment record and financial
conservatism.

Industry risk is evaluated by considering:

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8
 certain industry characteristics, such as the importance of the industry to the economy, its
growth outlook,

cyclicality and government policies relating to the industry;

the competitiveness of the industry; and

certain industry financials, including return on capital employed, operating margins and
earnings stability.

After conducting an analysis of a specific borrower's risk, the Global Credit Risk Management
Group assigns a credit rating to the borrower. ICICI Bank has a scale of 10 ratings ranging from
AAA to B, an additional default rating of D and short-term ratings from S1 to S8. Credit rating is
a critical input for the credit approval process.

ICICI Bank determines the desired credit risk spread over its cost of funds by considering the
borrower's credit rating and the default pattern corresponding to the credit rating. Every proposal
for a financing facility is prepared by the relevant business unit and reviewed by the appropriate
industry specialists in the Global Credit Risk

Management Group before being submitted for approval to the appropriate approval authority.
The approval process for non-fund facilities is similar to that for fund-based facilities. The credit
rating for every borrower is reviewed at least annually. ICICI Bank also reviews the ratings of all
borrowers in a particular industry upon the occurrence of any significant event impacting that
industry.

Working capital loans are generally approved for a period of 12 months. At the end of the 12
month validity period (18 months in case of borrowers rated AA- and above), ICICI Bank
reviews the loan arrangement and the credit rating of the borrower and takes a decision on
continuation of the arrangement and changes in the loan covenants as may be necessary.

2.Project Finance Procedures

3.Corporate Finance Procedures

4.Working Capital Finance Procedures

5.Credit Monitoring Procedures for Corporate Loans -The Credit Middle Office Group
monitors compliance with the terms and conditions for credit facilities prior to

disbursement. It also reviews the completeness of documentation, creation of security and

insurance policies for assets financed. All borrower accounts are reviewed at least once a year.

Retail Loan Procedures

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8
 Small Enterprises Loan Procedures
Rural and Agricultural Loan Procedures
Credit Approval Authorities

CREDIT RATINGS

ICICI Banks credit ratings by various credit rating agencies at March 31, 2007 are given below:

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8
 CAPITAL ADEQUACY

(1) USD 750 million (Rs. 32.60 billion) of foreign currency bonds raised for Upper Tier II capital
have been excluded from the above capital adequacy ratio computation, pending clarification

5
8
required by RBI regarding certain terms of these bonds. If these bonds were considered as Tier II
capital, the total capital adequacy ratio would be 12.81%.

ICICI Bank is subject to the capital adequacy requirements of the RBI, which are primarily based
on the capital adequacy accord reached by the Basel Committee of Banking Supervision, Bank
of International Settlements in 1988. It is required to maintain a minimum ratio of total capital to
risk adjusted assets of 9.0%, at least half of which must be Tier I capital.

Its total capital adequacy ratio calculated in accordance with the RBI guidelines at year-end
fiscal 2007 was 11.69%, including Tier I capital adequacy ratio of 7.42% and Tier II capital
adequacy ratio of 4.27%. In accordance with the RBI guidelines, the risk-weighted assets at year-
end fiscal include home loans to individuals at a risk weightage of 75%, other consumer loans
and capital market exposure at a risk weightage of 125%. Commercial real estate exposure and
investments in venture capital funds have been considered at a risk weightage of 150%. The risk-
weighted assets at year-end fiscal 2006 and year end fiscal 2007 also include the impact of
capital requirement for market risk on the held for trading and available for sale portfolio.
Deferred tax asset amounting to Rs. 6.10 billion and unamortised amount of expenses on Early
Retirement Option Scheme amounting to Rs. 0.50 billion at year-end fiscal 2007, have been
reduced from Tier I capital while computing the capital adequacy ratio.

Classification of gross assets (net of write-offs and unpaid interest on non-performing

assets).

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8
(1) Includes loans, debentures, lease receivables and excludes preference shares.

(2) All amounts have been rounded off to the nearest Rs. 10.0 million.

NON-PERFORMING ASSETS

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8
(1) Net of write-offs and interest suspense.

(2) Excludes preference shares.

(3) Customer assets include advances and credit substitutes like debentures and bonds.

(4) All amounts have been rounded off to the nearest Rs. 10.0 million.

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ANALYSIS OF THE DATA THROUGH DISCRIMINANT ANALYSIS

Group Statistics

Valid N (listwise)
Fin_health Mean Std. Deviation Unweighted Weighted
Bad Fin_Health liquidity .0746 .01860 20 20.000
leverage .0047 .00728 20 20.000
profitability .0792 .00956 20 20.000
solvency .0432 .02627 20 20.000
activity .0002 .00086 20 20.000
Good Fin_Health liquidity .0965 .04007 20 20.000
leverage .0063 .00798 20 20.000
profitability .0855 .01118 20 20.000
solvency .1327 .16347 20 20.000
activity .0000 .00022 20 20.000
Total liquidity .0856 .03277 40 40.000
leverage .0055 .00758 40 40.000
profitability .0823 .01075 40 40.000
solvency .0879 .12414 40 40.000
activity .0001 .00063 40 40.000

This table provides the mean and standard deviation for the variables for two groups. From the
group statistics table it is clear that the mean and standard deviation of the variables is not very
high.

Log Determinants

Log
Fin_health Rank Determinant
Bad Fin_Health 5 -49.812
Good Fin_Health 5 -47.514
Pooled within-groups 5 -45.885
The ranks and natural logarithms of determinants
printed are those of the group covariance matrices.

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Log determinants are a measure of the variability of the groups. Larger log determinants
correspond to more variable groups. Large differences in log determinants indicate groups that
have different covariance matrices.

Tests of Equality of Group Means

Wilks'
Lambda F df1 df2 Sig.
liquidity .886 4.907 1 38 .033
leverage .989 .430 1 38 .516
profitability .913 3.637 1 38 .064
solvency .867 5.847 1 38 .021
activity .987 .515 1 38 .477

The tests of equality of group means measure each independent variable's potential before the
model is created. Each test displays the results of a one-way ANOVA for the independent
variable using the grouping variable as the factor. If the significance value is greater than 0.10,
the variable probably does not contribute to the model. According to the results in this table, only
liquidity, profitability and solvency variable in the discriminant model is significant.
Wilks' lambda is another measure of a variable's potential. Smaller values indicate the variable is
better at discriminating between groups. The table suggests that solvency is best.

Standardized Canonical Discriminant Function Coefficients

Function
1
liquidity 1.195
leverage .220
profitability .615
solvency .959
activity .068

The standardized coefficients allow you to compare variables measured on different scales.
Coefficients with large absolute values correspond to variables with greater discriminating
ability. It indicates the importance of the independent variables in predicting the dependent
variables. This table downgrades the importance of leverage ratio, but the order is otherwise the
same.

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 Canonical Discriminant Function Coefficients

Function
1
liquidity 38.258
leverage 28.835
profitability 59.104
solvency 8.190
activity 108.495
(Constant) -9.033
Unstandardized coefficients

The co-efficients given in this table is used to develop the actual equation used for predicting and
help to classify new variables.

Calculating the discriminant scores

The canonical standardized coefficients are the coefficients of the discriminant function and are
used in forming the discriminant equation

THE DISCRIMINANT EQUATION

Discriminant score = -9.033+38.258*X1+ 28.835*X2+59.104*X3+8.19*X4+108.495*X5

Classification of companies
Now the next step is deciding the range which will categorize the company as of sound financial
health or of bad financial health.

This is done by taking out the mean of group Centroids.

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Functions at Group Centroids
Original Group Function
Critical Value 0
Bad Financial Health -.986
Good Financial Health 0.986
Unstandardized canonical discriminant functions evaluated at group means

The range comes out to be

Bad financial health company< 0 < good health financial company

Thus the new means for group 1 (performing banks) is -0.986 and for group 2(non-performing
banks) is 0.986. this means that the midpoint of these two is zero. This is clear when the two
means are plotted on a straignt line, and their mid points are located as shown below:

-0.986 0.0 +.986

Mean of group 1 mean

of group 2

(Defaulters) (Non -
Defaulters)

Therefore any positive (greater than zero) value of the discriminant score will lead to
classification as defaulters, and any negative (less than zero) value of the discriminant score will
lead to classification as non-defaulters banks

So in future when we want to predict whether a company has a bad or good health, we can
simply use the discriminant equation to calculate the discriminant scores and predict the group
membership.

Therefore the model helps us in evaluating the financial health of a company and see if its
position is in good or dire state so that we can manage our risk.

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CONCLUSION

In this paper, an attempt has been made to study the Credit Risk Management Framework of
ICICI BANK and also to arrive at a model that can help other indian banks to manage their credit
risk in a better way. From all the above calculations it is now very easy for the banks to identify
their future defaulters.
Hence the paper helps the banks in increasing its efficiency. The banks through the help of this
paper can identify their defaulters and then can lay down their strategies accordingly. The ratio
analysis done in this project gave us some valuable insights regarding the banks, it helped in
clearly viewing the solvency, profitability, liquidity, activity and leverage positions of the banks.
The paper can be of immense use in the Indian scenario as it takes into consideration the current
positions of the Indian banks. It gives some valuable insights to the banks as to how to enhance
their performance in the present situation.
Presently the financial system of the entire world is passing through a very sensitive phase. There
is a global financial turmoil prevalent in the world economy which is affecting the Indian
economy as well. The country thus needs to strengthen its financial system. Banks form a major
part of the Indian financial system. Hence there is a need to strengthen the Indian banks and this
paper can help in doing so.

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RECOMMENDATIONS:

Following are some of the recommendations based on the study done on credit risk management
in banks:

The use of derivatives in banks for credit risk management is almost negligible. Its use
should be implemented meticulously as it is a very effective method to reduce risk.

This paper uses some very logical calculations. If it implemented properly in the banks
can lead to increased efficiency of the banks.

The Indian banks should use this technique of enhancing its performance as it uses some
very strong calculations and interpretations which can prove to be of immense help.

Banks should sharpen their credit assessment skills by providing better training to
enhance their conceptual understanding of credit risk and improving their skills in
handling it which lay more emphasis in providing finance to the wide range of activities
in the services sector.

The effectiveness of risk management depends on efficient information system,

computerization and networking of the branch activities. An objective and reliable
database has to be built up for which bank has to analyze its own past performance data
relating to loan defaults, operational losses etc. this can lead to efficient credit risk
management in banks.

REFERENCES:

Books

Dr. Bhattacharya, K.M., 2003. Risk Management in Indian Banks, Mumbai: Himalaya
Publishing House Pvt. Ltd., 2nd Edition.

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8
 Risk Management In Commercial Banks (A Case Study Of Public And Private Sector
Banks) (Rekha Arunkumar, G. Kotreshwar)
Marketing Research: Texts and Cases. ( David L Loudon, Robert E Stevens, Bruce
Wrenn)
Business Research Methods: Using SPSS in Business Research ICMR Publications.

Websites

www.ssrn.com
www.icici.org.in
www.iba.org.in
www.nseindia.com
http://www.dfid.gov.uk/Pubs/files/finsecworkingpaper.pdf

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=565343
http://www.unctad.org/en/docs/dp_152.en.pdf
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139825
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=636119

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APPENDIX

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 Profit & Loss - ICICI Bank Ltd.
Mar'10 Mar'09 Mar'08 Mar'07 Mar'06
12 Months 12 Months 12 Months 12 Months 12 Months
INCOME:
Sales Turnover 32,747.36 38,250.39 39,467.92 28,457.13 17,517.83
Excise Duty 0.00 0.00 0.00 0.00 0.00
NET SALES 32,747.36 38,250.39 39,467.92 28,457.13 17,517.83
Other Income 0.00 0.00 0.00 0.00 0.00
TOTAL INCOME 33,052.72 38,581.03 39,533.50 28,766.30 17,983.86
EXPENDITURE:
Manufacturing Expenses 0.00 0.00 0.00 0.00 0.00
Material Consumed 0.00 0.00 0.00 0.00 0.00
Personal Expenses 1,925.79 1,971.70 2,078.90 1,616.75 1,082.29
Selling Expenses 236.28 669.21 1,750.60 1,741.63 840.98
Administrative Expenses 7,440.42 7,475.63 6,447.32 4,946.69 2,727.18
Expenses Capitalised 0.00 0.00 0.00 0.00 0.00
Provisions Made -253.09 -511.17 -509.77 -421.30 22.68
TOTAL EXPENDITURE 9,349.40 9,605.37 9,767.05 7,883.77 4,673.13
Operating Profit 5,552.30 5,407.91 5,706.85 3,793.56 3,269.94
EBITDA 5,857.66 28,464.49 29,256.68 20,461.23 13,333.41
Depreciation 619.50 678.60 578.35 544.78 623.79
Other Write-offs 0.00 0.00 0.00 0.00 0.00
EBIT 5,238.15 27,785.89 28,678.32 19,916.45 12,709.61
Interest 17,592.57 22,725.93 23,484.24 16,358.50 9,597.45
EBT -12,101.33 5,571.13 5,703.85 3,979.25 3,089.49
Taxes 1,600.78 1,830.51 1,611.73 984.25 556.53
Profit and Loss for the Year -13,702.10 3,740.62 4,092.12 2,995.00 2,532.95
Non Recurring Items 134.52 17.51 65.61 115.22 7.12
Other Non Cash Adjustments 0.00 -0.5 0.00 0.00 0.00
Other Adjustments 17,592.57 0.58 0.00 0.00 0.00
REPORTED PAT 4,024.98 3,758.13 4,157.73 3,110.22 2,540.07
KEY ITEMS
Preference Dividend 0.00 0.00 0.00 0.00 0.00
Equity Dividend 1,337.95 1,224.58 1,227.70 901.17 759.33
Equity Dividend (%) 120.00 109.99 110.33 100.20 85.33
Shares in Issue (Lakhs) 11,148.45 11,132.51 11,126.87 8,992.67 8,898.24
EPS - Annualised (Rs) 36.10 33.76 37.37 34.59 28.55

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