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ICICI Bank Ltd.

Assessment as on March 31,2014

Risk Assessment Report (RAR)

Major Areas of Financial Divergence
Findings on Capital and Earnings
Major Areas of Non Compliance


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Table of Contents

Introduction................................................................................. 2
Part I: Preliminary Risk Assessment Report... ... ... ... ... 2
Summary of Aggregate Risk at Bank Level... . .. . .. . . . . .. ... .. 2
Findings on Risks and Control Gaps Assessed... 3
Governance & Oversight... . 3
Credit Risk... ... ... ... 6
Market Risk... .. . .. . . . . . . . . .. . . . . . . ...... . .. . . . . . . . .. 10
Liquidity Risk............... ...................................................... 14
Operational (Non-IT) Risk..................................................... 17
Operational (IT) Risk............................................................ 21
Pillar II Risks..................... ........................................ 22
Part II: Major Areas of Financial Divergence... 23
Part III: Findings on Capital and Earnings....................................... 24
Pillar I Capital & CRAR... . .. ... .. . . .. ... .. . ... ... ... ... . . . ... ... . .. . . . ... . . . ... 24
Capital Management, ICAAP and Stress Tests (including SREP)... 25

Assessment of Internal Generation of Capital. . 28

Scope & ability to infuse capital . 29

Assessment of Leverage Ratio... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Part IV: Major Areas of Non-Compliance... 30
Part V: Annex... 32-45
Annex-1: Major Areas of Financial Divergence... 32
Annex-2: Computation of Outside Liabilities............................... 37
Annex-3: Assessed Net Worth... 38
Annex-4: Computation of Assessed Capital...... . 39
Annex-5: Assessment of Internal Generation of Capital... 42
Annex-6: Leverage Ratio... 45

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The risk assessment of ICICI Bank for 2013-14 under the Supervisory Program for
Assessment of Risk and Capital (SPARC) was completed with March 31, 2014 as th~
reference date. The assessment has been made based on the off-site analysis of the
data and information furnished by the bank as well as the findings of the on-site
Inspection for Supervisory Evaluation (ISE) undertaken from September 16, 2014 to
November 07, 2014 and various explanations offered by the bank in course of
As per the SPARC process, the aggregate Risk Score of the bank is arrived at 2.194,
which is indicative of medium risk. On applying the assessed CRAR (17.02%) to the
aggregate risk score, the Risk of Failure score of the bank is arrived at 1.85.


Summary of Aggregate Risk at Bank Level

Inherent Risk Control Gap Aggregate Risk

Risk Category
A (1-4) B (1-4) A+B
Board 1.811

Senior Management 1.553

Risk Governance 1.733

Internal Audit 1.723


Credit Risk 2.776 1.965 2.533

Market Risk 2.032 2.000 2.022

Liquidity Risk 2.164 2.036 2.126

Operational (non-IT) Risk 2.462 1.897 2.293

Operational (IT) Risk 1.715 1.534 1.661

Other Pillar II Risk 1.811 1.763 1.797



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1. Governance & Oversight: Aggregate Score (1.705)

Major findingsl observations
1.1 Board I, ' Score: 1.811
1.1.1 The bank has a well-functioning Board, which provides strategic directions.
1.1.2 ICAAP was recognized as a central tool driving risk management and capital
planning; but the Board did not have adequate time to deliberate on these
issues. A summary of the ICAAP was placed before the Risk Committee (RC)
at its meeting held on July 28, 2014. Even before the RC's guidance was
available (except for stress tests submitted to RC on July 8), the document was
sent to the Board for approval at its meeting on July, 31, 2014.
1.1.3 Risk appetite and controls were interchangeably used although the latter was
supposed to be a tool to implement risk appetite. Clarity on risk capacity, risk
appetite, risk controls and risk profiles was required for the 'tone at the top' to
be clearer.
1.1.4 Compensation policy conformed to regulatory requirements. However, variable
pay in the policy was kept at the maximum permissible level of 70% showing
inherent compensation risks. Apart from bonus and normal ESOS, there was a
special grant of stock options to whole time directors, officials of equivalent
position in group companies and select officers.
1.1.5 Based on intrinsic value of options, compensation cost on account of ESOS
was recognized at ~ 20.90 mn for the year (last year: ~ 21.00 mn). According to
statutory auditors, the costs could be higher by ~ 2359 mn and proforma profit
after tax readjusted to ~ 95 bn (instead of ~ 98 bn) had the bank used fair value
of options based on binomial tree model.
1.2 Senior Management Score: 1.553
1.2.1 The organizational structure was generally suitable to the complexity of the
bank. The vigilance framework remained an adjunct to the audit department
and the role of the Chief of Internal Vigilance fell short of regulatory
1.2.2 There was large scale transfer! sale of stressed loans from overseas branches
(especially from Singapore) to other branches (Bahrain, DIFC) and OBU. The
loan book at Singapore fell by 57.8% from SGD 5.00 bn to SGD 2.11 bn on

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account of such transfers I sales. Although the numbers were reported in the
quarterly reviews of overseas operations, the Board was not apprised of the full
situation. The Board was informed about such transfers and about other
intense engagements with the MAS as late as in July 2014 following a direction
(April 2014) from the Board in this regard.
1.2.3 Overall priority sector lending (PSL) target was achieved in 2011, but the same
was missed in 2012 and 2013. Sub-targets including advances to direct
agriculture were missed continuously for the last three years. As regards the
current year (2014), overall PSL target was met (43.40% achieved), but
advances to direct agriculture could be achieved to the extent of only 6.30%
(target 13.5%) and that to weaker section, 2.70% (target 10%).
1.2.4 At the instance of the SSM's office, a strategy was drawn up by the bank to
realistically estimate the date by which PSL targets I sub-targets could be
achieved. In terms of this estimate, the target for direct agriculture would be
met by 2018 by growing at a CAGR of 44% while that for weaker sections has
no date for accomplishment even after a planned CAGR of 53% upto 2018.
Strategic plans to meet PSL targets needed to be integrated with the risk
appetite driven growth.
1.2.5 Discretion and arbitrariness in provisioning and valuation (details in market risk
- control gap) did not receive adequate attention of the senior management.
Same was the case for derivatives sold to SME customers and restructuring of
crystallized overdue. Client suitability of derivative products and meeting
minimum regulatory standards in dealing with crystallized amounts were
1.3 Risk Governance Score: 1.733
1.3.1 With continuous supervisory engagement under RBS, significant issues of non-
compliance came to light during the off-site risk discovery process. It was found
that the compliance function essentially engaged itself in explaining to
supervisors, commissions and omissions by the business lines with little or no
involvement from the business functionaries. This did not indicate a healthy
compliance culture.
1.3.2 The Overseas Banking Unit (OBU) was hardly serving the purpose for which it
was started. Out of its total loan exposure of USD 420.00 mn, it had only 10%
loan exposure (USD 45.00 mn) to SEZ companies. Of late, it had reduced itself

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to a repository of inter-bank derivative deals and stressed loan transfers from
overseas branches. After the recent transfer of loan assets in December 2013
from Singapore branch, its exposure to domestic tariff area increased from
7.9% to 21.1 % of its total liabilities. Technicalities of compliance aside, the
Board was not adequately informed about the OBU's transformation from being
a catalyst in the SEZ to; a repository of bad assets transferred from other
jurisdictions and funding of the same through inter-branch borrowings.
1.3.3 Robustness of compliance certification was verified by looking into the
framework of transaction testing within the bank [by Internal Audit Department
(lAD) and compliance group (CG)]. Coordination between the two and stress on
the spirit of compliance rather than technical/ legal stance (by the CG) would
promote a desirable compliance culture. Some of the observations in this
regard are as follows:
• Non-compliance in certain aspects was under active supervisory
engagement, yet it was reported as 'complied' (risk categorization of
customers, automation of NPA identification, name-check by upfront
reference to the negative list in new accounts, achievement of PSL
targets, etc.);
• In several instances lAD found a regulatory instruction 'not complied'
based on sample verification, but CG certified the same as 'compliant'
merely because policy framework was put in place (information sharing
among banks, reporting of integrally connected cash transactions, PSL
classification of education loans, etc.). CG's certification was reflective of
mere technical compliance.
• Compliance certification was based on inadequate sample verification or
only on the basis of secondary reports (loan against NRE/ FCNR
deposit, ALM gaps, HFT sales, sale of products that can be
independently priced, reporting of frauds to police authorities, etc.).
1.3.4 Price calculator (used for loan pricing) determined the minimum quote to the
customer, which was then recorded as the extant base rate plus a resultant
spread. The spread did not represent risk premium nor did the base rate have
any connection with the price calculator. Base rate was set as a floor merely as
compliance to regulatory instructions. The real floor to the price-quote was the
marginal cost of one-year TO that went into the price calculator. The price

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calculator took into account cost of funds (methodology followed was different
from that under the base rate), overhead costs, expected loss and capital
charge in respect of a borrower. Different methodologies followed in arriving at
the base rate and price calculator limited the effectiveness of base rate as a
monetary policy transmission tool. Risk based differential pricing was less
evident as rating and pricing were not demonstrably correlated. The actual
quoted price was mainly dependent on competition and other relationships with
the client.
1.3.5 The price calculator contained an upward discretionary bias as evident from the
following: i) capital charge (unexpected loss charge) was set higher at 150% for
the clients for which the current capital charge was only 75% (CRE-RH cases),
ii) RoE, the most crucial element in the calculator, was taken as 16.5% while
the Board had approved targeted RoE of 14% in its strategy for the year.
1.3.6 The bank amended its existing guideline on product approval process in
February 2014 including compliance aspects. The effect of this change would
require close watch internally considering the fact that several rounds of
engagement during the last one year pertained to key issues of non-
1.4 Internal Audit Score:1.723
1.4.1 The link between risk appetite and examination of internal controls through
internal audit function was not clear. There was no system of net risk based on
internal audit inputs.
1.4.2 Internal audit function had well-defined role and responsibilities. However, lAD
did not provide an aggregate view of control risks in major risk areas.

2. Credit Risk: Aggregate Score (2.533)

2.1 Inherent Risk Score: 2.776
Major findings/ observations
2.1.1 On-balance sheet assets increased by 10.78% during 2013-14, whereas RWA
increased by 12.82%. Further, credit RWA to total credit exposure had
increased from 50% to 56% during 2013-14.

2.1.2 Concentration risk was manifest in many dimensions. Top 20 borrowers

contributed to a significant part of the exposure (15.29%), but only one third of
the same belonged to the highest rating category. Group exposure also

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showed significant concentration while the top rating category contributed
16.5% of the exposure. Large-industry concentration was very high.
2.1.3 Sensitive sector exposure stood at 22.48% of total assets, which was
significantly higher than the corresponding figure of 17.30% for new private
sector banks and 10.76% for the industry. The Capital Market Exposure as a
percentage of capital funds stood at a high of 19.57% even after a reduction
(by 10.20%) over the last year.
2.1.4 Out of project loans (7.82% of total exposure), those under implementation
accounted for a high of 88.41 %. Out of projects where DCCO had not been
reached, 62.95% of the loans pertained to CRE and infrastructure loans. For
projects under moratorium, approximately 76.7% belonged to Infrastructure &
Engineering. These measures indicated build-up of inherent risks.
2.1.5 Weighted average residual maturity of exposures at 4.51 years contributed to
tenor risk.
2.1.6 Un-hedged forex exposure of corporates was high.
2.1.7 Exposures fully unsecured (no tangible security) stood at 36.25% of total
exposure. Under-collateralized loans stood at 11.16% of total collateralized
exposure. On the one hand, the extent of fully/ partially unsecured loans was
high, while on the other, only 17.73% of the non-financial collateral could be
readily liquidated.
2.1.8 Exposures that were unrated and that remained obsolete (>1 year) comprised
5.97% of total exposure. A substantial part of standard exposures (32.40% of
total standard) remained at the hurdle rate and one notch around the same.
Downgrades during the year were almost twice that of upgrades, indicative of
higher risk profile of the portfolio.
2.1.9 Recovery performance was poor considering the fact that only 4.38% of sub-
standard assets could be upgraded to standard category. Standard advances
overdue for more than 30 days as at the end of the FY 2014 stood at 2.86%.
2.1.10 Restructured standard exposure as a percentage of total (standard) exposure
more than doubled from the last financial year (1.18% to 2.72%), suggesting
further deterioration. There were large slippages from the restructured
accounts, which included Falcon Tyres (~ 2897.00 mn), K S Oil (~1551.00 mn),
Glodyne Technoserve (~ 948.00 mn) etc.

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2.1.11 There was significant underreporting of expected loss as revealed from the
divergence in asset classification and provisioning.
2.1.12 Most corporate loan agreements incorporated a clause providing for conversion
of loan-overdue to equity at the option of the bank. This could be a gross
circumvention of IRAC norms as this would result in conversion of overdue
installments on the verge of becoming NPA, to equity. The option of converting
any loan to equity as part of the sanction term could have implication for
treating them as potential capital market exposure.
2.1.13 Provision coverage ratio fell from a high of 76.80% in March 2013 to 68.60% in
March 2014. This decline just over a year reflected increased pressure on
profitability arising out of bad loans.

2.2 Control Gap I Score: 1.965

Major findings/ observations
2.2.1 Appetite for concentration risk appeared to be high considering liberal credit
exposure to large single! group borrowers. Collateral concentration was not
considered as a dimension of concentration risk control.
2.2.2 Position of exposure to various Industries vis-a-vis internal limits was monitored
quarterly; thus, a breach was possible during the quarter at the time of
sanction. It occurred in 04 in case of negative-outlook industries.
2.2.3 Sacrifice in compromise-settlement cases continued to be high. There was no
system of reporting large differences between 'realized value' and that as per
last valuation, to any higher authority.
2.2.4 The system of rating overrides was reviewed internally and certain changes
were brought about. Many subjective parameters (e.g., group has supported in
the past, group has good market reputation, likely change in management, etc.)
continued to form part of the overriding factors. Many objective parameters
remained outside the model (like asset classified as NPAIrestructured, material
un-hedged forex risk, arrears persisting for more than 60 days, consistent
appearance in irregularity list for last three months etc.) but were purportedly
used to increase the weights of objective parameters. Upgrades! downgrades
on account of subjective parameters had come down to 2-3% during H1 FY15.
However, some accounts were upgraded by more than two notches in 01 FY15
even after the modified internal rules had come into effect.
2.2.5 The bank had a system of opening of separate account for each devolved LC

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facility. Though the irregularity could be checked by aggregation of all facilities
parked in different CBS modules for any given day, such separate accounting
of each devolvement only added to process complexity and it did not allow the
bank to generate a consolidated account statement of such irregular facilities
for any borrower for audit purpose.
2.2.6 In order to prevent slippage as on the reference date, the bank had resorted to
bilateral restructuring of accounts even though the CDR process was in
progress. Such restructuring (covering approx. 50% of CDR cases in number
and value) did not conform to regulatory guidelines and the process
undermined the multilateral approach to restructuring underlying CDR.
2.2.7 In many cases of restructuring, promoters' contribution did not come up-front,
but the matter was brushed aside without follow-up. Payments made before the
cut-off date, pledge of land, mere unsecured loans, etc. were accepted as
substitute for promoters' equity. The fact that in large number of restructured
cases, promoters were unable to bring additional equity reflected poorly on
their creditworthiness and inherent weakness in the accounts.
2.2.8 In some restructuring arrangements, any future overdue amount during the
period of restructuring could be converted to equity as per the terms of
restructuring. This clause could avoid detection of slippages in the accounts
and subvert detection of performance failure during the 'specified period'.
2.2.9 During last three years, gross NPA increased continuously (from ~ 94753.30
mn in 2012 to ~ 96077.50 mn in 2013 and further to ~105058.40 mn in 2014)
while up-gradation from NPA to standard category gradually reduced (from
~7381.1 0 mn in 2012 to ~6600.80 mn in 2013 and further to ~3856.70 mn in
2014). Recovery from NPA accounts other than up-gradations also showed
declining trend (from ~16234.50 mn in 2012 to ~11486.70 mn in 2013 and
~10707.30 mn in 2014). Write off was the main tool to contain NPA numbers,
which showed an increasing trend (from ~11834 mn in 2012 to ~16458 mn in
2013 and ~ 21769 mn in 2014). Retail loans accounted for 87.08% of the total
write off made during the year.
2.2.10 Refusal to honour commitments under invoked bank guarantees on some
ground or the other came under supervisory engagement due to several
complaints and LFAR findings (current year and the previous year). In some of
these cases, mere dispute between the parties (without explicit prohibition to

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the bank to pay) was a pretext to delay payment on invocation.
2.2.11 Policy for asset classification of agricultural loans was not in conformity with
regulatory norms. It classified short duration crops as NPA 365 days after the
due date. Clarity and transparency on actual crop durations was not ensured
by linking the same to the SLBC.
2.2.12 NPA identification process was in various stages of up-gradation so as to
address the concerns (especially the issue of quarterly identification of NPA
rather than monthly) brought out during the last Inspection for Supervisory
Evaluation (ISE). The same needed expeditious implementation.
2.2.13 NPV computation in case of restructured loans used discount rates derived
from price calculators and not linked with the base rate. Non-transparency in
the discount rate used for NPV created ambiguity and non-compliance in an
important area.
2.2.14 Guarantors were used more for putting pressure on the borrower than for
actual recovery in case of default. Guarantor's assets were not subjected to
2.2.15 No borrower was classified as willful defaulter since June 2011 raising doubts
about the appropriateness of bank's policy and procedures in place and
sincerity of implementation.

3. Market Risk: Aggregate Score (2.022)

3.1 Inherent Risk Score: 2.032
Major findings! observations
3.1.1 The overall market risk appetite did not flow from the bank-level risk appetite.
PV01 defined for each group was a mere control tool.
3.1.2 Product wise and group wise PV01 limits for the trading portfolio had a daily
utilization in the range of 30-40% although the average peak utilization was
approximately 60% of the limit. Aggregate PV01 was consumed by Proprietary
Trading Group (PTG) upto 80% and a large portion came from corporate
bonds. Further, most of PTG's PV01 arose from the long dated securities.
3.1.3 The average peak NOOP utilization stood at 1!3rd of the limit (~6000 mn); but
intra-day peak net open position was more than 8 times the average NOOP.
The average of top three forex VaR at ~33 mn with utilization only at 6-7% was
considered moderate.

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3.1.4 Un-listed equity portfolio in the trading book at ~7327.44 mn constituted
approximately 43% of equity portfolio and it could significantly contribute to
3.1.5 There was large depreciation of ~42,OOO.00 mn (approx.) in the HTM portfolio,
indicating high risk. The risk was elevated in view of the recent policy of
gradual reduction in statutory SLR and related protection under HTM.
3.1.6 MVE at ~42520 mn (at 200bps shock) constituting 6.44% of the equity reflected
moderate risk. However, the inspection team observed certain deficiencies in
the assumptions and bucketing of rate sensitive assets and liabilities in the IRS
statement and related calculation of duration gap. Out of the entire I-base
linked term loans grouped under 'upto 1 year' bucket, 83% was placed under
'upto 3 months' bucke . This was not backed by any study of the direction of
the interest rate mOVE ment and estimating the re-pricing date based on the
past experience and future forecast for the changes in the base rate. Savings
deposit was bucketed differently in structural and IRS statements. Almost 90-
95% of the core portion was bucketed under 6 months to 1 year under IRS
statement whereas in case of SLS statement 50% of the core portion was
bucketed under 3-5 years and the rest 50% under >5 years. These deficiencies
may have resulted in very low MDG and MVE (200bps shock) in the range of
0.11- 0.16 and 4% to 6.5% respectively.
3.1.7 EaR for a 200 bps shock was considered high in relation to the trailing Nil of
previous quarters. However, this was internally assessed as moderate.
3.1.8 Prepayment out of the total fixed tenor loans posed moderate risk. However,
volatility in term deposits (both individual and institutional) was more than 50%
posing rollover risks.
3.2 Control Gap Score: 2.000
Major findings! observations
3.2.1 Certain preference shares and debentures (~22 bn approximately), acquired in
lieu of restructured loans had back-end redemption premium or option of
conversion attached to them. In a few optionally convertible MFI related
preference shares, the bank had arbitrarily capped its valuation to the face
value of the shares ignoring redemption premium agreed at the time of
conversion of these instruments.
Not recognizing the redemption premium on a subsequent date diluted the

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earlier NPV calculation (that had recognized the premium) and the promoter
contribution based on it. Specific provision of 50% was made arbitrarily and
reversed after few months. Such specific provisions in respect of credit risk
were netted to reduce the book value whereas the market values were
calculated on gross book value. The matter was handled in most clumsy
manner with little senior management oversight.

3.2.2 There were cases of application money outstanding for more than one to two
years. Treating them as 'investments' and carrying out valuation through break-
up value, defied any rationale. Provision of 20% and 100% was made arbitrarily
for delay in issue of the security for more than one and two years respectively.
3.2.3 AFS securities were subjected to amortization based on assumption of keeping
the acquisition-time YTM fixed and holding the security till maturity. AFS being
a trading book, such assumption could not be right.
3.2.4 Risk monitoring (mid office), confirmation/settlement team and accounting team
were all part of treasury control services group (TCSG) reporting to the same
Joint General Manager.
3.2.5 There were 87 instances of execution errors in treasury deals during 2013-14.
As many as 13 instances of breaches of internal risk limits came to light in
treasury besides instances of breaches of overall Fx VaR and NOOP limit in
overseas branches. There were also several instances of breaches (5 in
January 2014) in deal size, which were approved with considerable delay.
3.2.6 The market risk group independently validated the models used for valuation of
various fixed income, forex and derivative products. However, valuation of
certain structured products was undertaken on excel sheets with cash flow and
discount factor assumptions, which gave rise to model/people risk in such
valuations. There was an independent third party review of these valuation
models during 2013-14. Out of 57 forex and derivative products, 6 products
entailed deviation of more than 1 % of notional value between the price of the
independent valuer and the value obtained through the model.
3.2.7 Stress testing of market risk factors was not a comprehensive exercise. In view
of the approx 16% forex movement during August 2013 within a short span of
15-20 days, the assumed 20% movement in 'severe' stress scenario did not
appear to be adequate. Further, market risk propelled credit risk stress
scenarios were not considered for their impact on the derivative portfolio.

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3.2.8 The bank is a benchmark submitter in case of 7 benchmarks. Despite 9 t010
months having passed after the regulatory report on financial benchmarks, a
proper process and policy was not in place on these submissions.
3.2.9 Although there was overall NOOP limit and specific limits for overseas
branches, there was no intra-day open position limit.
3.2.10 Generally, the bank signs ISDA documentation with its derivative clients.
However, it had also undertaken derivative deals with non-ISDAI low rated
clients. Three of the low-rated clients had turned NPA (Oceanic Edible
International, Gupta Exim, Sambros Textile Global). There was no proper
margining agreement or CSA system prevalent for derivative transactions.
3.2.11 The process of assessing the suitability and appropriateness of clients for
offering derivative products was very lax. The bank had undertaken cost
reduction option structure or currency swap with rupee loan as underlying,
providing very little protection (only 5-6% of rupee depreciation over a 5 year
period). The counterparties were low-rated SME clients, whose suitability for
being offered such products on the grounds of prescribed net-worth and rating
parameters was highly questionable. The credit officer in his assessment of
Oceanic Tropical Fruits had clearly mentioned that the customer was not
eligible for such derivatives. Oceanic Edible International (BB rated) had
become NPA within two years of entering into such derivative deals.
3.2.12 In case of Oceanic Tropical Fruits Pvt. Ltd. (BB rated) the contract covering
over 5 year period had to be terminated on September 20, 2013 just within two
years of inception. The crystallized amount of ~78 mn was converted into a
term loan and the account kept standard notwithstanding irregularities in the
CC account on the grounds of restructuring and the customer was allowed to
pay the overdue till the year 2023. Repayment period of the crystallized
derivative overdue was out of tune with regulatory standards.
3.2.13 The amount of deferred premium in respect of option derivatives was
increasing over the years (from ~3680 mn as on March 31, 2013 to ~5938 mn
as on March 31, 2014 and further to ~7417 mn as on June 30,2014). In certain
cases a large amount of option premium, viz.; ~1679 mn (Dhariwal Industries)
and ~1144 mn (JP Power Venture Ltd.) were outstanding in the books of the
bank. This required greater internal control.

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4. Liquidity Risk: Aggregate Score (2.126)
4.1 Inherent Risk Score: 2.164
Major findings/ observations
4.1.1 Risk appetite statement of the bank set 'low' tolerance towards liquidity risk.
However, the liquidity profile and its controls suggested otherwise in view of the
• It took higher liquidity risk especially in the 5th (-ve gap upto 20% in 28
days to 3 months bucket) and 6th (-ve gap of 25% in 3 to 6 months)
buckets in case of domestic operations;
• A very high negative gap limit was set up ($ 1.50 bn upto three months
and $ 2.00 bn upto six months buckets) for IBG operations. Structural
liquidity position in respect of foreign currency indicated negative
cumulative mismatch upto six months in the range of 15-20%;
• For domestic liquidity, it depended on excess SLR. However, excess
SLR holding was not very high (1-2% of NDTL);
• As regards international operations, there was no line of credit other
than $ 350.00 mn CP programme in US for the negative gap limits and
funding by HO was the only option;
• The overall short term liquidity stress was reflected in the low LCR
4.1.2 Deficiencies were observed in the bucketing of certain asset and liability items;
the actual gap could increase if these were adjusted. Some major deficiencies
• Grouping of the entire excess SLR portion (unencumbered) under 'next-
day bucket' without accounting for the defeasance period;
• Continuous availment of MSF (2% of NDTL comprising mandatory SLR)
was assumed and the same was placed under the 'next-day bucket'.
Corresponding outflows were shown in the 3m-6m bucket assuming roll-
over of the MSF.
• The entire ~18000 mn of corporate bonds in HFT were placed under 1-
28 days buckets without accounting for the depth of the market and the
share a specific bond had in the corporate bond market.
4.1.3 Volatile portion of CASA was high (23% in case of wholesale current account
deposits), considering one-year outflow.

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4.1.4 Approximately 34% of the long term earning assets was funded by volatile
liabilities adding to risk levels. Dependence on bulk deposits was moderately
high as fortnightly average of bulk deposits stood at 21.79%.
4.1.5 There was significant borrowing from Repo/LAF and CBLO markets (average
borrowing at 12-15% of total liabilities) and only 29% of liquid asset stood
unencumbered. The bank's dependence on money market liabilities was quite
high (approx. 36% of short term liabilities). Dependence on short term
interbank market was reflected in the bank being a net borrower most part of
the year (313 days). Its dependence had increased as compared to the
previous year.
4.1.6 Dependence of domestic operations on wholesale funds declined over the
years. However, it was still substantially dependent on short term and long term
borrowings (35%). The overseas operations were dependent on wholesale
borrowings. In this scenario, rollover and interest rate risks were high.
4.1.7 Long-term loans dominated the loan book bringing in high illiquidity to the
balance sheet.
4.1.8 Cash flow analysis indicated that the core funding source i.e. deposits is not
keeping pace with the increase in advances and investments in the bank and
its dependence on borrowings had increased from <'50680 mn to <'93080 mn
(by 83.66%) over the last year.
4.1.9 Weighted average cost of TDs in general and bulk deposits in particular stayed
higher than the market average putting pressure on the overall cost of funds.
4.1.10 On analysis of the cash/cash equivalent and liquid asset for the period from
June 2013 to October 2014 at the Singapore branch, it is observed that the
branch witnessed a situation of trapped liquidity; its cash/cash equivalent (short
term placement with banks) and liquid asset position were rising and the
branch was not able to find eligible borrowers either due to local supervisory
restrictions or lack of wherewithal to compete in the local market. The cash and
cash equivalent which used to be in the range of USD 200-400 mn from June
2013 to February 2014 had increased to USD 800-1100 mn during March 2014
to October 2014. The total liquid assets had increased from USD 478 mn as of
June 2013 to USD 1223 mn as of March 2014 to USD 1530 mn as of June
2014. Incidentally, the branch had transferred assets worth USD 1633 mn to
other overseas branches during December 2013 to February 2014.

Confidential Page 150(45

4.2 Control Gap Score: 2.036
Major findings/ observations
4.2.1 The anomaly in liability pricing (discriminatory and discretionary manner of
pricing) observed in the previous year's ISE report was substantially corrected.
However, the structure of the interest rate grid was subject to change under
special circumstances. During the year, the grid was reported to have been
changed thrice. Clarity in the circumstances under which grid structure could
be changed and a greater role for the RMC in the matter could improve the
4.2.2 Changes were brought about in the FTP, which, inter alia, covered most of the
concerns expressed in the last supervisory review. However, basis risk
remained to be captured in arriving at the bid and offer curves. Optionality risk
in the form of premature withdrawal of deposits was neither properly identified
nor was it assigned suitable weights under the current methodology of arriving
at bid-offer curve. Charging FTP rate for prematurely terminated term deposits
for the tenor for which it has run might be an ad-hoc measure.
4.2.3 Un-swapped FC funds stood only at 37% of FC funds leaving fewer avenues
for forex liquidity. For foreign currency operations, it was assumed that the
inflows from premature termination of deposits held with HO would be sufficient
to cover the overseas outflows in stress. However, it had not taken into account
the P& L impact of such swaps in the ICAAP.
4.2.4 The bank had sanctioned a large amount under intra-day facility. The peak
rollover of such facility was at ~14130 mn during 2013-14.
4.2.5 Overseas operations contributed almost one-fourth of the aggregate assets
and liabilities. In this scenario, assumption of 'nil' impact on the entire overseas
operations both under bank-specific and market specific stress-situation
seemed unrealistic.
4.2.6 Illiquidity in investments was assessed by the bank and haircuts applied for
various assets under stress scenarios. However, taking a single haircut in all
stress scenarios was too simplistic.

Confidential Page 16 of45

5. Operational (Non- IT) Risk: Aggregate Score (2.293)
5.1 Inherent Risk I Score: 2.462
Major findingsl observations
5.1.1 Vulnerability to regulatory penalty and supervisory reprimand was found to be
high during the year. A penalty of ~1 0.01 mn was levied on June 10, 2013 for
violation of KYC guidelines and ~4 mn on July 25, 2014 for ineffective
monitoring of end-use of funds.
5.1.2 Guideline on product approval process including compliance aspects was
amended in February 2014. The effect of this change would require closer
watch internally considering the fact that several rounds of engagements during
the last one year pertained to key issues of non-compliance.
5.1.3 Cost of outsourcing jumped by 47.25% (from ~ 10112 mn to ~14890 mn) during
the year while Y-o-Y increase in the number of outsourced employees stood
high at 30.92% last year and 61.81 % in the current year. Outsourcing covered
areas like business sourcing, customer enrolment, technology platform etc. The
scale of outsourcing added greatly to higher inherent risk. The risk view was
further enhanced as complaints against outsourced employees stood on the
higher side. However, internal reviews of vendors (3i Infotech, 3i Infotech SPO)
did not reflect the rising risks.
5.1.4 Attrition level in the sales 1 front office employees was high and increasing.
Attrition at senior management level was also high.
5.1.5 The number of terminations due to unethical behaviour increased from 522 to
562 in FY14 mainly in non-managerial grades. Three vigilance cases (out of
166 in FY14) were filed against senior grade officials, which pertained to
misuse of position.
5.1.6 The number of outstanding consumer Ilegal action cases stood at 2253 at the
end of the year. There were as many as 2921 fresh cases filed during the year.
5.1.7 There was a jump in the amount reported under external frauds by customers
( '7321.60 mn against '468.20 mn last year). Even frauds by non-customers in
terms of amount showed a significant jump. The general reluctance in the bank
to recognize high-value frauds was noticed during the last ISE; no change in
the processes was, however, observed. Delay in detection of frauds was as
long as four years in few cases.

Confidential Page 17 of45

5.1.8 Coverage of re-KYC exercise was found to be tardy as only 26% of accounts
were completed as on June 30, 2014. It was particularly of concern that only
14% of high-risk accounts stood verified under re-KYC. Yet, compliance to
certain KYC norms was planned to be taken up along with re-KYC viz.;
(a) Integrating the details of beneficial owners (legacy accounts prior to June
2014). For non-individual accounts, there was no visible time frame;
(b) Updation of customer profiles of proprietorship concerns, deadline for
which was December 31,2010.
5.1.9 Complaints that emanated from bank's customers using non-bank ATMs (third
party ATMs - 134161) were not included as complaints. For cards, resolution
time prescribed by NPCI was 7 days. The bank reported only those complaints
outstanding beyond 7 days as complaints. This understated the number of
complaints And distorted the disclosure in the Annual Report.
5.1.10 The bank was directly attending to complaints received from customers of its
subsidiary, ICICI Home Finance Co (IHFC). From the customer perspective,
the distinction between the two entities was hardly clear.
5.2 Control Gap I Score: 1.897
Major findings/ observations
5.2.1 Specific non-compliances examined during the year showed that compliance
sign-off process was weak and non-formal.
5.2.2 Name-check exercise at the time of on-boarding of a customer was done on
t+2 basis and the same was not yet UCIC based. The process failed in carrying
out pre-boarding checks against lists of terrorist organizations. De-duping in
case of multiple accounts was deficient, as several core systems were in
operation and automation was confined only to certain current and SB (limited
to household accounts) accounts.
5.2.3 Contrary to regulatory guidelines, internal instructions on KYC documentation
in respect of sole proprietorship entities envisaged a diluted process (two levels
of documentation reduced to one in a discretionary manner). Despite direct
supervisory engagement in this regard, implementation continued to be
incomplete with newer internal interpretations and continued non-compliance.
Incidentally, several complaints and frauds reported during the year contained
the above deficiency (in implementing KYC norms) in common.
5.2.4 On-site verification revealed that implementation of UCIC was far below the

Confidential Page 18 of45

reported coverage of 88% of accounts. UCIC was yet to cover joint account
holders (contrary to internal submissions), certain asset side accounts, banking
customers and prepaid cards.
There was no front-end linkage to UCIC. Reported back-end AML monitoring
and de-duping of new customers at the back-end were also verified on-site.
The test checks conducted on four occasions at different time intervals
revealed the following: i) de-duping was done at the sole customer 10 level
rather than at the level of UCIC, ii) integrally connected transaction alerts in
AM LOCK were restricted only to few cash transaction triggers on daily basis
while integrally connected non-cash triggers (transfers) were not captured.
5.2.5 The bank adopted UCC for corporate accounts, which could not, however, be
accessed from the front-end and such (corporate) accounts were marked by
multiple customer IDs.
5.2.6 Risk profiling of customers suffered from many deficiencies: prescribed
parameters for risk categorization were not fully implemented (e.g., nature and
location of a customer's clients, mode of payments, turnover, etc.); risk
categorization covered accounts residing only in Finacle and ignored the ones
in the other systems; risk categorization of legacy accounts (prior to July 2012)
was planned to be covered along with re-KYC process although the prescribed
deadline was March 31, 2013.
5.2.7 As per internal policy on risk profiling/ categorization, the system ignored
account-level risk wherever data was not available or where no risk was
assigned for a parameter. This had resulted in the risk score being 'low' in a
large number of accounts. Further, in terms of internal policy, a customer with
multiple accounts having different risk rating for different accounts would be
assigned the worst risk among them. However, aggregation of risk
categorization at Cust 10 level could not be demonstrated in the system during
the on-site verification.
5.2.8 Thresholds for suspicious transaction monitoring were changed/ diluted with
effect from April 2013 by the MLRO without the same having been referred till
date to the Product and Process Approval Committee, as per internal
requirements. This reflected weak internal control in a significant area falling
repeatedly under supervisory scrutiny.
The above enhanced monitoring limits (~1.50 mn from ~1 mn for individual

Confidential Page 19 of45

cash transactions, from ~ 1 mn to ~5 mn for non-individual cash transactions
and ~5 mn for integrally connected cash transactions on a monthly basis)
diluted transaction monitoring especially for cash transactions between ~1 mn
(covered under CTR) to ~1.50 mn.
Many instances of inadequate due diligence in suspicious transaction
monitoring came to light (Deccan Chronicle, Riddhi Exim, Ramshyam Exports
and Harmony Diamonds, to name a few). There were also instances of large
inward fund transfers from multiple accounts with immediate transfer abroad
right from the day of opening of certain accounts (a major fraud related to fake
Bill of Entry under ED's scanner). STRs were filed after closure / freezing of the
accounts. Monitoring of forex transactions from AML perspective was not linked
to risk rating of the counter-party countries/ locations and in case of new
accounts, focus confined only to inward remittances.
5.2.9 Branches were unaware about the CTRs filed in respect of the accounts
maintained by them.
5.2.10 Though bank had submitted certain reviews based on Risk Mitigation Plan on
recording and reporting of customer contacts in the nature of grievances, the
internal instructions were not suitably amended. On being pointed out during
the inspection, the bank informed about a revised process note, which was yet
to be shared with the inspection team.
5.2.11 Unutilized time share units (~240 mn) of a holiday resort were treated as other
assets. As the units were held with an intention of being utilized by employees
and not held for sale in the normal course of business, these were best
represented as fixed assets. This would make 'other assets' more transparent
and depreciation / amortization discernible.
5.2.12 A sum of ~242 mn was outstanding as receivable from government of India,
which pertained to erstwhile ICICI Ltd (related to loans from IBRD where Gol
was required to bear cost of exchange rate fluctuation). The amount lying in
other assets was required to be expeditiously recovered as the bank had not
received any amount since March 2013.

Confidential Page 20 of45

6. Operational (IT) Risk: Aggregate Score (1.661)
6.1 Inherent Risk Score:1.715
Major findings! observations
6.1.1 The number of reconciliation processes (18 in number) between the main and
subsidiary systems added to the complexity of the IT structure.
6.1.2 As the bank had a number of systems, the bugs detected were also on the
higher side.
Control Gap
I Score: 1. 534
In the absence of a data warehouse system, the present practice of using
reports from different sub-systems seemed ad-hoc. Further, the practice of
using back-up tapes as a primary source of historical data is fraught with risks
including the fact that the tapes are slow and suffer from wear and tear.
Considering the scale and complexity of operations, regulatory! supervisory
requirement of integrity of data and dynamic MIS needs, the present system
was considered inadequate. The RBS data requirement during the off-site risk
discovery process exposed the limitations in the bank's ability to supply data
cutting across business verticals.

7. Pillar II Risk: Aggregate Score (1.797)

7.1 Inherent Risk Score: 1.811
Major findings! observations
7.1.1 Large number of credit cards did not have chip and PIN. Road map presented to
CSC held that all cards would be chip and PIN enabled only by 2017.
Considering frauds in this area, this timeframe was quite long
7.1.2 The amount of foreign currency guarantees devolved rose sharply from ~2841
mn in FY12 to ~4294 mn FY13 and further to ~11236 mn in FY14.
7.1.3 Investments in capital of group entities was within the prescribed limit of USD
1600 mn; however group risk stood elevated on account of presence in venture
funds, overseas banking subsidiaries etc. The bank had issued Letter of Comfort
(LoC) to its overseas banking subsidiaries and LoC ! letter of awareness to its
housing subsidiary and life insurance arm. There were several reputational risk
related issues during the year; viz., fraud by employees of the insurance arm,
liquidity problem faced by I-venture, and mis-selling allegation by groups of
overseas investors

Confidential Page 210(45

7.1.4 A loan of ~15500 mn was sanctioned in the month of April 2014 for a tenor of
five years to I-venture so as to enable the latter to purchase units of its real
estate fund from willing investors. Poor performance of some of the funds of
ICICI venture is about to result in prolonged litigation with certain NRI investors.
7.1.5 Consolidation of the associate concern, Mis 3i InfoTech did not take place
despite supervisory comment last year. Considering that the company has
several subsidiaries and that its financial condition is under stress, the bank was
exposed to elevated group risk.
7.2 Control Gap Score: 1.763
Major findingsl observations
7.2.1 Strategic risk was not an explicit factor in risk assessment. Performance reviews
captured performance against targets, but the depth of strategic risk evaluation
was missing. The risk dashboard also missed the same although it elaborated
other matters under 'management risk'.
7.2.2 Clearing and Settlement Services on the Singapore Mercantile Exchange (SMX)
was started in September, 2010 by the Singapore Branch. However the services
were discontinued from January 2014 due to lack of enrolment.

Confidential Page 22 of45



The summary of major areas of financial divergence, including assessed risk weighted
assets, which determined assessed capital of the bank, is given below. Details are in

1. Divergences (shortfall) in Provisioning

Areas/ Description @ Shortfall (In ~ mn)

Reclassification of Standard Assets as NPAs 27211
Additional Provision on account of supervisory concerns 11187
Non Performing Investments 275
Other Assets 4
Others (Claim not acknowledged as debt) 5
Total Additional Provisions 38682

2. Divergence in Risk Weighted Assets (RWAs)

RWAs (In ~ mn)

Risks Reported Assessed

Credit Risk 4409130 4381640

Market Risk 265735 265735
Operational Risk 311163 311163
Total RWAs 4986028 4958538

Confidential Page 23 of45


1. Pillar I Capital & CRAR

The summary of reported and assessed capital position of the bank is given below:
Details are in Annex-4.
A. Basel III Capital as relevant for current year (2013-14)
Admissible Capital under Basel III (In ~ mn)

Particulars Reported Assessed

Total capital (TC) 882512 843830
Common Equity Tier 1 (CET1) capital 637381 597429
Tier 1 (T1) capital 637381 597429
Tier 2 (T2) capital 245131 246401

Admissible CRAR under Basel III (in %)

Particulars Reported Assessed

Total capital (TC) 17.70% 17.02%

Common Equity Tier 1 (CET1) capital 12.78% 12.05%
Tier 1 (T1) capital 12.78% 12.05%
Tier 2 (T2) capital 4.92% 4.97%

B. Basel III Capital

Available Capital under Basel III (In ~ mn)

Particulars Reported Assessed

Total capital (TC) 882512 843830
Common Equity Tier 1 (CET1) capital 637381 597429
Tier 1 (T1) capital 637381 597429
Tier 2 (T2) capital 245131 246401

Available CRAR under Basel III (in %)

Particulars Reported Assessed

Total capital (TC) 17.70% 17.02%

Common Equity Tier 1 (CET1) capital 12.78% 12.05%
Tier 1 (T1) capital 12.78% 12.05%
Tier 2 (T2) capital 4.92% 4.97%

Confidential Page 24 0'45

2. Capital Management, ICR, ICAAP and Stress Tests

(a) Capital Planning and Business Projections

(i) Capital planning was based on a four year projection of activities both under normal
and stress conditions. Financial projections approved by the Board in the month of
February 2014 constituted the basis for capital planning for 2014-15 at the solo and
group levels. ICAAP of the current year showed substantial scaling down of projections
compared to the previous year's projections for the same year/so There was little
explanation to support changes made in assumptions in this regard.
(ii) Impact on projected capital adequacy under stress was captured in the ICAAP
document after reckoning the impact of supposed management action, likely to be
taken during stress. The requirement of maintaining capital conservation buffer was
dropped in the stress case to assess capital adequacy. There was a need to present
the complete impact of stress before considering mitigation through all other means.
(iii) Although management action was the key to projected CRAR under stress, analysis
of feasibility of such action was conspicuously missing. Board had raised no question
either. As such, there could be no supervisory review of the same.
(iv) COED was given a blanket authorization to decide on the issue of AT1 and Tier II
bonds upto the entire available headroom including their terms and conditions. It did not
speak well about Board's involvement in the actual capital planning.
(v) The bank had achieved LCR of only 51 % as of June 2014; however, it had not taken
into account the additional requirement of SLR/ other eligible investments while
projecting total investments. Rather, projected investment in ICAAP 2014 was less than
that in the last year.
(vi) The bank was mainly dependent on internal accrual for maintaining the CRAR
which had increased from 18.74% as on March 31, 2013 to 19.08% under Basel-II but
declined to 17.70% under Basel-III due to various deductions from capital as per Basel-
III norms.

(b) Assessment of Pillar I & II Capital and Internal Capital Ratio

There was no internal minimum/ trigger for CRAR. Regulatory minimum capital
continued to be the basis for internal assessment both under normal and stress
situations. This was not in line with the supervisory expectation.

(i) The bank had assessed ~128 bn additional capital under moderate stress scenario.
At the current level of RWA, this would reduce the CRAR by approximately 300 bps.
The ICAAP drew comfort from the current (March 31,2014) reported CRAR of 17.70%.

Confidential Page 250f45

(ii) A retail loan product, Loan against Property, was risk weighted at 100%. However,
the purpose of the loan depended on a broad declaration taken from the borrower as
"Business or Other" in most of the cases. As the risk weight for a loan for consumption
purpose was higher at 125%, the bank was required to identify all such loans and apply
risk weight to them accordingly. Exposure to such cases was' 166.22 bn as on March
31, 2014.
(iii) Unconditionally cancellable amount with zero CCF/capital continued to be very high
at ~1479 bn as on March 31, 2014. The bank had reviewed the clause of
Unconditionally Cancellable Commitments and cancelled limits in 24 cases during FY
2014. However, most of these cancellations were on account of unavailment. There
was no policy on cancellation on the basis of deterioration in credit worthiness to take
advantage of zero CCF for capital adequacy purpose.
(iv) There were supervisory concerns in a few large accounts. In one case, external
commercial borrowing (ECB) was utilized to refinance existing rupee loans with maturity
of ECB longer than the rupee loan it had replaced. The account was already under
stress. In case of another borrower, project expansion was approved after the original
DCCO. Project delays had resulted in renegotiation of supply contracts and certain
litigation against the borrower.

(i) One of the six general risk appetite statements stated that the bank would endeavor
to maintain AAA rating from domestic rating agencies at all times. The statement
explained that rating agencies usually expect a minimum CRAR of 12% for the highest
rating. Internal capital planning kept the regulatory minimum as the anchor.
(ii) Risk appetite continued to be expressed in the form of risk limits for various risks
without a single metric or aggregated number (say, in the form of capital, CRAR, Nil,
VaR), which could be linked with the strategy of the bank. The bank had tried to link
the volatility in Nil as a factor to set exposure limits for various rating grades in the
corporate portfolio. Similarly, portfolio default rate had been used to decide the limit and
monitoring of exposure for various retail loan products.
(iii) Risk appetite and risk limits were inter-changeably used (i.e., they could not clearly
be told apart) although the latter was expected to be a tool to allocate risk appetite to
business lines. Risk appetite across all risk dimensions required to be disaggregated for
an effective comparison of 'risk profile' (representing a point-in-time net risk exposure)
against allocated risk appetite. The current quarterly risk-dial needed to distinctly

Confidential Page 26 of45

articulate risk capacity, risk appetite, risk limits and risk profiles so as to make it an
effective management tool.
(iv) There was no progress in designing a system of capital allocation in line with risk
appetite. The desire to achieve a more balanced capital allocation between fund and
non-fund credit risk was merely repeated in the current ICAAP. Incidentally, stress
tolerance limits (present instrument to allocate risk appetite among credit verticals)
remained the same for the last two years.
(v) There was no attempt to take conduct risk as a qualitative input in the analysis of
business line risks.
(vi) Compensation was determined essentially on the basis of achievement of business
targets annually; the link with the risk appetite being hardly discernible.
(vii) ICAAP was submitted to RBI late in August 2014 (not before end of first quarter as
per regulatory guidelines).

(d) Stress Testing

(i) Stress testing was a silo exercise for three main risks i.e. credit, market and liquidity
risks. The market risk factors; say, exchange rate movement, interest rate movement,
volatility were not taken into account for impact on credit risk exposure under ICAAP.
Incidentally, the market related aBS exposure had increased almost by 48% during last
August, 2013, which were neither discussed nor assessed while carrying out credit risk
stress testing.
(ii) While undertaking the credit risk stress test all unrated exposures were treated as
(iii) Under stress testing for country risk, the assumption that down gradation of one
notch of sovereign rating would downgrade the various corporate credit exposures by
one notch only was too simplistic.
(iv) Sector! industry concentrations were not considered while assessing concentration
risk and related default and impact under ICAAP. The large number of sectors (80) and
consequent low HHI could not provide comfort on sectoral stress.
(v) Under factor based stress testing, credit concentration risk was clubbed with
corporate credit and no separate impact on account of credit concentration risk and its
impact under various scenarios were considered. Under RBI stress testing guidelines
three separate shocks pertaining to credit concentration were prescribed.
(vi) The bank had not undertaken reverse stress testing exercise.

Confidential Page 27 of45

(vii) For liquidity stress situation the bank had taken haircut for the available liquid
assets only of 2.5%, 12.5% and 15.0% - much less than the RBI stress testing

3. Assessment of Internal Generation of Capital

(i) The total income of the bank had increased by 12.57% from ~484213 mn in FY-13 to
~546060 mn during FY-14. The significant contributions to the increase pertained to
interest income, which improved by 10.24% (from ~400756 mn in 2012-13 to ~441782
mn) as compared to 23.54% during the previous period while other income comprising
commission, exchange and brokerage and other operating income recorded a 23.83%
(ii) Due to increase in Net Interest Income (Nil) by 18.81% from ~138664 mn in FY13 to
~164756 mn in FY14, the Net Interest Margin (NIM) increased from 3.11 % to 3.33%
during the period.
(iii) Net stable income had increased from ~190302 mn to ~226524 mn during FY2014
as compared to previous year. It was stable at 93% of the net total income during FY-
13 and FY-14, however, had declined as compared FY-2012(96%). The proportion of
fee-based income to gross stable income had increased from 11.41 % during FY-13 to
11.78% during FY-14. However, this ratio was high at 13.16% during FY-2012.
(iv) The operational expenses as percentage of net stable income had improved from
47.36% during FY-13 to 45.50% during FY-14.
(v) The reported net profit had increased from ~83254 mn to ~98104 mn during 2013-
. ......._ 14. However, the assessed net profit had declined from ~82014 mn to ~59422 mn due
to ~38682 mn additional provisions suggested by the inspection team.
(vi) The dividend payout ratio had declined marginally from 27.72% to 27.08%
subsequently the internal retention rate had increased from 72.28% to 72.92% during
(vii) There was deviation to the extent of 1 % and 3% in the actual vs. budgeted gross
income and net profit of the bank respectively.

4. Scope & ability to infuse capital

Currently, with reported CET1 at the level of 12.78%, the bank had adequate headroom
to raise non-common equity capital in the form of AT1 (~165 bn) and T2 (~73 bn).
Considering the fact that AT-1 capital instruments would have specific loss absorbing

Confidential Page 28 of45

conditions, these could get costlier, going forward. The bank enjoyed adequate
headroom and ability to infuse capital.

5. Assessment of Leverage Ratio

The assessed leverage ratio deteriorated from 7.33% as on March 31,2013 to 7.20%
as on March 31, 2014. However, it was well above the regulatory limit of 4.5%. The
details are given at Annex-6.

Confidential Page 29 of45

Regulation Reference Area I Subject of Nature & Description of Non- Compliance
(Para & Circular no.) Non-Compliance
Para 15.2.2 (v) of Credit IRAC Norms - Promoter's contribution to be
Master Circular on brought in cash and also in the form of de-
IRAC Norms dated July rating of equity, conversion of unsecured
1, 2013 loan brought by the promoter into equity and
interest free loans
Para 2.1.3 of the MC on Credit Asset Classification on account of overdue
IRAC dated July 1, interest in TL
Para 14.2.1 of MC on Credit Asset Classification in CDR cases- not
IRAC dated July 2, complied
Para 4.2.2 of MC on Credit Establish an internal system of responsibility
IRAC Norms and validation for ensuring proper asset
classification for large accounts
RPCD.CO. Plan.BC.9/0 Credit PSL targets were not achieved agriculture
4.09.01/2013-14 July 1, (direct and overall) and weaker section
Para 4.2.13 of MC on Credit The bank fixed crop duration as 6 months for
IRAC dated July 2, short duration crops on its own, is stead of
2013 taking up the matter in SLBC
Para 2.5 of MC on Bank Credit The bank delayed in making payment of
Guarantees invoked BGs in some cases
Part A Section-I Para A Market Risk lax system of suitability and appropriateness
(1) (iv) of MC on Risk management for the derivative deals with low rated and
management and Inter- SME clients
Bank Dealings dated
July 01, 2013
Para 3 of DBOD circular Deferment of The bank deferred the crystallized derivative
No. BP.BC.31 dated crystallized MTM beyond the original term of derivative
July 23,2012 derivative MTM contract and restructured it into a term loan.
Para 2.11 (b) of MC on Liquidity Risk Asset rating and pricing was not linked
Interest rate date July
DBOD Master Circular Capital - ICAAP ICAAP document not submitted in time.
NCAF dated July 1,
Para 1 and 6 of MC on Fraud The general reluctance in the bank to
Frauds. recognize high-value frauds was noticed
during the last ISE; no change in the
processes was, however, observed. Delay in
detection of frauds was as long as four years
in few cases. In several cases police
complaint was not filed.

Confidential Page 30 of45


Regulation Reference Area I Subject of Nature & Description of Non- Compliance

(Para & Circular no.) Non-Compliance
Para 2.3, 2.4 of MC on KYC Coverage of re-KYC exercise was found to
KYC and DBOD circular be tardy and certain KYC norms were
dated June 08, 2012. planned to be taken up along with re-KYC :
Integrating the details of beneficial owners
(legacy accounts prior to June 2014). For
non-individual accounts there was no visible
time frame.
Updation of customer profiles of
proprietorship concerns, deadline for which
was December 31,2010.
Para 5 and 16 on MC Complaints Complaints that emanated from bank's
on Complaints and customers using non-bank ATMs (Third party
customer service A TMs - 134161) were not reckoned as
complaints and hence the overall number of
complaints actually worked out to 404667.
The number of complaints reported in the
Annual report was hence distorted.
Para 2.3, 2.4 and 2.17 KYC Name-check exercise at the time of on-
of MC on KYC boarding a customer was done on t+2 basis.
This failed in pre-boarding checks against
lists of terrorist organizations.
MC on KYC KYC Contrary to regulatory guidelines, internal
instructions on KYC documentation in
respect of sole proprietorship entities
envisaged a diluted process (two levels of
documentation reduced to one in a
discretionary manner).
Para 2.25 (b) of MC on AML monitoring There was no front-end linkage to UCIC.
KYC Reported back-end AML monitoring.
Integrally connected transaction alerts in
AMLOCK were restricted only to few cash
transaction triggers on daily basis and
integrally connected non-cash triggers
(transfers) were not captured.
Para 2.3 of MC on KYC KYC and AML Prescribed parameters for risk categorization
were not fully implemented (e.g., nature and
location of a customer's clients, mode of
payments, turnover, etc.) and covered only
accounts in Finacle. Risk categorization of
legacy accounts (prior to July 2012) was
planned to be covered along with re-KYC
process although the prescribed deadline
was March 31, 2013.

Confidential Page 31 of45



(All figures in the Annex are in ~ mn)

Annex 1: Major Areas of Financial Divergence

Table-I: Divergence in Provisioning
A - Re-classification of Standard Assets

Borrower Name Date of Facili Net Ols Date of NPA Classification Security/valuatio Provision Remarks
Last ty
(Net of n details
Sanction Type
As per As per As per As per As per As per Held Requi- Short
Bank SSM Bank SSM Bank SSM red Fall
FB Promoters' contribution
19/06/ 28.06.
PSL Ltd & 5595 Std Sub Std 8833 8833 839 839 given in the form of land,
2013 2013
NFB not acceptable.
Promoters' Contribution
Tulip Telecom 25/03/ 25.03. not brought as unsecured
FB 4660 Std 0-1 5959 5959 1165 1165
Ltd 2013 2013 loan was not converted
into equity
Funding was done
through additional loans
25/09/ 29.03. and extension of abnormal
3i Infotech Ltd FB 6548 Std 0-2 12794 12794 2619 2619
2013 2012 advance payment for
services in order to keep
the account standard.
Hanjer Biotech 25/09/ 31.07. Std ,. Sub Std Bilateral Restructuring
FB 1119 1824 1824 168 168
Energies Pvt Ltd 2013 2013 during COR process
Y'brant Media 01/09/ 31.03. Principal and interest of
(- FB 300 Std ~Sub Std 5808 5808 45 45
Acquisition 2012 2014 Q3FY14 not paid
Continuously overdrawn
ABG Shipyard 06/03/ 14.09.
FB 8815 Std ~Sub Std 11005 11005 1322 1322 and NPA before COR
Ltd 2014 2013
reference date
Hanung Toys 23/12/ 27.10. Bilateral Restructuring
FB 2519 Std vSub Std 3285 3285 378 378
and Textiles Ltd 2013 2013 during COR process
Oceanic FB+ The crystallised MTM was
18/12/ 21.12.
Tropical Fruits O'tiv 710 Std. /' / Sub Std. 374 374 78 173 95 outstanding for more than
2013 2013
Ltd. e 90 days and later on

Confidential Page 320f45


deferred beyond the

original term of the
derivative contract.
Total 30266 78 6709 6631
The amount was taken to
income without
FITL accounts of
provision/SLlCA. The
borrowers (prior
FB 20580 Std. - 20580 20580 Balance Sheet is required
to be cleansed by
to 2008)
adjusting the amount
against Capital within the
----'-- ---
FY 2015.

B - Additional Provision on account of supervisory concerns

Borrower Name Date Faeilit Net Ols ( Classif Provision Remarks

of y Net of ieation
Last Type ECGS
Sane Claims)

As per Held Requi Short

bank red fall
Project expansion was approved after the original DCCO. Project delays
Essar Steel had resulted in renegotiation of supply contracts and certain litigation
Minnesota LLC
1 FB 14943 Std - 2241 2241
against the borrower. In view of the impending problems in the account,
the bank is directed to hold specific provision of 15% of the outstanding.
The account was earlier restructured. External commercial borrowing
19/06 FB (ECB) was subsequently utilized to refinance the existing rupee loans with
59640 8946 8946
Essar Oil Ltd 1 Der. Std - maturity of ECB longer than the rupee loan. As the account was already
2013 (MTM) under stress and in view of the impending problems in the account, the
bank is directed to hold specific provision of 15% of the outstanding.
Total 74583 - 11187 11187

Confidential Page 33 of45

Table-II: Non Performing Investments

Investment Out Security/valuation

Date of NPI Classification Provision Remarks
Details Standing details
As As
As per As per As per per As per per Require Shortfal
bank SSM bank SSM bank SSM Held d I

Tulip Telecom Loan facility downgraded to

- Debentures 1100 25.3.13 o-i 275 275 NPA J

Total 1100 275 275 I

Confidential Page 34 of45

Table-III: Other Assets

Details of Receivables Provision Remarks

Held Required Shortfall
The shortage is
detected since 2009
but not provided as
police has recovered
the amt but not
Cash theft of Rs.4.4 mn 0.00 4.40 4.40 returned to the bank.
Total 4.40 4.40

Table-IV: Claims against bank Not Acknowledged as Debt

Details of Non- Acknowledged Provision Remarks

Held Required Shortfall
Sh. Krishnamurthy- The 0 2.4 2.4 The complainant filed a consumer
complainant filed a consumer complaint against ICICI Bank, Trichy
complaint Road Branch before the District
Consumer Disputes Redressal
Forum (DCDRF), Coimbatore, which
has passed an order against the
bank. The bank has gone in an
R. L. Steel & Energy-The 0 2.4 2.4 R. L. Steel & Energy- The company
company had filed a civil suit had filed a civil suit against bank
against bank before Civil Judge before Civil Judge Sr. Div
Sr. Div Aurangabad claiming Rs Aurangabad claiming Rs
24,90,341. 24,90,341. The matter was
proceeded exparte against bank. The
bank had filed an appeal.
Total 0 4.8 4.8

Table-V: Priority Sector Classification

SI Parameter Amount reported by Misclassificati Actual Shortfall Reasons for

s bank on identified Achievement declassificati
N by SSM as assessed on
0 by SSM
Target Achieved

1 Agriculture 419099 244472* 5459 239012 180088

Small &
2 Medium
- 388633 271 388362 - Reasons
Enterprises and list of
Weaker given
3 Section
232788 62782 0.3 62782 170006 separately
4 Loans - 289 3 286 -
TOTAL 931156 1010304** 5733 1004570 -

Confidential Page 35 0'45

R easons f or P'nonty
lt S ect or D ec asstTrcaf Ion
S.N. Parameters Misclassification Reasons for Declassification
(Rs. in Mn.)
1. Indirect Agriculture 5452 Advances to State Co-Op Marketing
Federations and State Civil Supplies
Corporations - 5 such accounts (Mailbox
Clarification dated Feb 22,2011)

2. Direct Agriculture 7 3 accounts declassified- 1 has been

declassified from the priority sector (~ 3.1
mn) and 1 account each has been correctly
classified to Micro ( ~ 3.1 mn) and Small
service ( ~ 1.6 mn)

3. Micro Manufacturing 182 The account of Brandavan Food Products

had been wrongly classified earlier
4. Medium Service 94

5. Weaker Sections 0.3 2 accounts where women beneficiaries

were given more than ~ 50000.0

6. Education Loans 3 2 accounts, where the loan was given to

educational institutions

As per Bank As per SSM

Adjusted Net Bank Credit 2327889 2327889

*This does not include RIDF investments done by the Bank in order to meet the shortfall in
Agriculture target
** Includes the investments in RIDF to the tune of~ 208293.6 mn


Confidential Page 36 of45



(All figures in the Annex are in ~ mn)

Annex 2: Computation of Outside Liabilities

Particulars Amount
A Total Liabilities excluding capital & reserves as
on March 31, 2014
Upper Tier II Instruments 152091
Subordinated debt 216412
Deposits 3319137
Borrowings 1179088
Other liabilities and provisions 643121
B Internal Liabilities 136040
Provision for standard assets 19318
Provision for diminution in fair value of
restructured accounts*
Provision for NPAs* 72077
Floating provision* 2
Provision for NPI* 4272
Provision for depreciation in investments* 19503
Any other (to be specified) -
Provision for assets on lease* 290
Provision for other assets* 2612
DICGC/ECGC claim received 36
Provision for securitization sell down 1541
Provision for contingencies 729
Provision for operational risk 288
Provision for country risk exposure 135
Reserve for Profit on sell down to ARCILlPhoenix 2198
Fraud Risk Recovery from staff 15
Other provisions 15
C Total outside liabilities [A-B] 5373809
* These provisions are netted off from the respective assets in the Balance Sheet.

Confidential Page 370'45

Annex 3: Assessed Net Worth

Particulars Amount
A Paid up capital [including ESOP outstanding & interest
free funds from H.O. (foreign banks)]
B Reserves and Surplus 720517
Statutory Reserve 135267
Share Premium 314976
Capital Reserve (excluding revaluation reserve) 22933
Special Reserve 54790
Revenue Reserve 96
General Reserve 35658
Investment Reserve Account 1270
Remittable surplus retained in Indian books [Foreign
banks] 0
Credit Balance in P&L Alc 133186
Any other free reserve (Foreign currency translation
reserve) 22342
C Intangible assets (including net deferred tax assets) &
accumulated losses
D Net Worth (book value) [A+B-C] 724665
E Adjustments following inspection findings 62294
Investment Reserve Account 1270
Additional Loan Loss Provision and other items 38398
Additional provisions for NPI 275
Foreign currency translation reserve 22342
Any other Item ( other assets-4.4 mn and claim not
acknowledged as debt-4.8 mn 9
F Assessed net worth or real/exchangeable value of paid
up capital and reserves [D-E] 662371
G Reported net worth of the bank [if different from (D)]

Confidential Page 38 of45

'-- __'
Annex 4: Computation of Assessed Capital

Sr. Particulars I Items Eligible amount


Computation of Common Equity Tier 1 capital (CET1)

A Common Equity Tier 1 capital (CET1): instruments and 709791

reserves before regulatory I supervisory lustments
C Reported Common Equity Tier 1 capital (CET1) [A-B] 637381
o Adjustments I deductions applied on CET 1 following 39952
Inspection for Supervisory Evaluation (ISE) findings under
1 Additional Loan Loss Provision and other items 38398
2 Additional pvn. For NPI 275
3. Investment Reserve Account 1270
4. Any other item +Other provisions-- other assets-4.4 mn and 9
cliam not acknowledged as debt-4.8 mn)
Computation of Additional Tier 1 capital (AT1)
F Additional Tier 1 capital (AT1) : instruments before 25976
regulatory a ustments
G Total regulatory adjustments to Additional Tier 1 capital 45466
H Reported AT1 capital available [F-G]
I Adjustments I deductions applied on AT1 following ISE

K Reported AT1 admissible for capital adequacy (Basel III

L Assessed AT1 admissible for capital adequacy (Basel III

Computation of Tier 1 Capital (T1)

Reported Total Tier 1 (T1) capital available [C+H]

o Reported Tier 1 capital (T1 ) admissible for capital 637381

[C+ K]
P Assessed Tier 1 capital (T1) adm_IbJet for capital 597429
Computation of Tier 2 Capital (T2)
Q Tier 2 capital: instruments and provisions 286726

Confidential Page 39 0'45

R Tier 2 capital: regulatory adjustments 41595
STier 2 capital available [Q-R] 245131
T Reported Total Tier 2 (T2) capital available, including 245131
excess AT1
U Adjustments I deductions applied on T2 following ISE 1270
other item to be specified (Investment Reserve Account)

BB Assessed Total capital (TC) admissible for capital 843830

Risk Weighted Assets (RWAs)
CC Total risk weighted assets (RWAs) 4986028
DO Adjustments I additions applied on RWAs following 27490
Inspection for Supervisory Evaluation (ISE) findings
under RBS
EE Assessed RWAs [CC-DD] 4958538
Capital Ratios I Summary
FF Reported Common Equity Tier 1 (CET1) Ratio 12.78%
GG Reported Tier 1 (T1) or Core Capital Ratio 12.78%

HH Reported Tier 2 (T2) Ca ital Ratio [W/CC*100%] 4.92%

II Reported Total capital (TC) Ratio or CRAR 17.70%
JJ Assessed Common Equity Tier 1 (CET1) Ratio 12.05%

KK 12.05%

LL 4.97%
MM 17.02%

Capital Ratios I Summary

NN Reported Common Equity Tier 1 (CET1) Ratio 12.78%


Confidential Page 40 of45

00 Reported Tier 1 (T1) or Core Capital Ratio 12.78%
PP Reported Tier 2 (T2) Capital Ratio [T/CC*100%] 4.92%
QQ Reported Total capital (TC) Ratio or CRAR 17.70%

Confidential Page 41 of45

Annex 5: Assessment of Internal Generation of Capital

Sr Break-up of income and Current FY T FYT-1 FYT-2

. expenditure (Mar 14) (Mar-13) (Mar-12)
1 431850 388934 323051
Income (2+3+4+5)
Interest/discount on
2 314279 273411 221299
3 Income on investments 115571 110093 96840
4 Interest on balances with RBI 0 0 0
Interest on market lending!
5 Income on other interest 2000 5430 4912
earning assets
Fee based & stable misc.
6 71701 63460 65777
income [6(a)+6(b)
6a Fee based income 59350 51628 51185
Misc. income from stable
6b 12351 11832 14592
7 Gross stable income (1 +6) 503550 452394 388828
8 Interest Expended (9+10) 277026 262092 228085
Interest on deposits! all other
9 178682 168889 143041
interest expense
10 Interest on borrowings 98344 93202 85044
11 Net Stable Income (7-8) 226524 190302 160743
12 Income from trading 7654 4,364 (740)
Realised gains on derivatives
13 6650 14650 (2859)
(P&L on forex operations)
14 Gains on sale of asset 1364 353 (17)
15 recovery from w!offs 1118 770 497
Extra-ordinary income!
16 Dividend income & other 26843 12452 25242
miscellaneous income
Gross volatile income
17 43628 32589 22124
Provisions and
18 contingencies (excluding 2361 -1058 -160
tax) (19+20+21)
19 Provisions for Loan losses 371 (3832) (3837)
Provisions for depreciation in
20 (576) 164 2794
21 Other provisions 2566 2610 883
22 Extra-ordinary expenses 0 0 0
23 Write-ofts 25021 19853 16488

Net Volatile Income (17-18-

24 16246 13794 5796

Confidential Page 42 of45

Sr Break-up of income and Current FY T FYT-1 FYT-2
. expenditure (Mar 14) (Mar-13) (Mar-12)
Assessed provision by
25 18102 1,240 928
26 Provisions for frauds 4 1,131 0
Provisions for understatement
27 of NPAs and other problem 17818 0 928
Provisions for divergence in
evaluation of investments and
other assets between the
28 275 110 0
assessment made by the
bank and the supervisory
Provisions for un-reconciled
- - -
Provisions for claims not
acknowledged as debt
5 - -
31 Provisions for derivatives - - -
Provisions for wage
32 settlements, pension & - - -
33 Other Provisions - - -
Assessed net volatile
34 (1856) 12,553 4,868
Income (24-25)
Reported net total income
35 242770 204096 166539
Assessed net total income
36 224668 202855 165611
(11 +34)
Operational expenses
37 103089 90129 78504
Staff expenses, Director's
38 fees/Board Members' fees & 42206 38937 35157
Depreciation on bank's
39 13065 11563 10875
property and repairs
40 Other Operating Expenses 47818 39629 32473
41 Provisions for tax 41577 30712 23382
42 Reported profit (35-37-41) 98105 83255 64653
43 Assessed profit (36-37-41) 80002 82014 63725
44 Dividend paid (excluding tax) 26572 23074 19024
Assessed Retained
45 53430 58940 44701
Earnings (43-44)

Confidential Page 43 of45

Earnings Stability I Volatility Assessment

Sr. Earnings I Profit Ratios Current FYT-1 FYT-2

No FYT (Mar-13) (Mar-12)
(Mar 14)
46 Gross Stable Income 1 Interest Expended
181.77% 172.61% 170.47%
47 Net Stable Income 1 Assessed Profit
423.96% 232.04% 252.25%
48 Gross Volatile Income / (Provisions &
Contingencies + Extraordinary Expenses + 159.33% 173.39% 135.50%
Write-ofts) [17/(18+22+23)*100%]
49 Assessed Net Volatile Income / Assessed
(2.32%) 15.31% 7.64%
Profit [34/43*100%]
50 Assessed Retained earnings / Assessed
66.79% 71.87% 70.15%
Profit [45/43*100%]
51 Actual vs budgeted income [expressed as
1.00% 6.00% (4.00%)
+ve 1 -ve percentage]
52 Actual vs budgeted profit [expressed as +ve
(3%) 9% (5%)
I-ve percentage]
53 Gross MTM Gains on Derivatives [as shown
81,519 65,622 87,669
in Balance sheet as on March 31, 2014)
54 Gross MTM Losses on Derivatives [as
shown in Balance sheet as on March 31, (82,360) (59,117) (70,816)

Confidential Page 44 of45

Annex 6: Leverage Ratio under Basel III

Sr. Particulars Reported by Assessed by

No. Bank SSM
A Basel III Tier 1 Capital (T1) 637381 597429

B Total Assets 8331759 8293082

On balance sheet 5946416 5907739

Derivatives 166763 166763

Credit Contingent Commitments 2218580 2218580

C Leverage Ratio (AlB*100%) 7.65% 7.20%

Confidential Page 45 of45