Project Report

A study of Management of Assets and Liabilities in relation to performance and profitability in ICICI bank

Contents:
Chapter 1: Introduction o o o o

Introduction of Indian Banking System Structure of Banking Sector Concept of ALM ALM Objectives Risk Management and ALM Credit Risk Market Risk Operational Risk ALM System in Banks RBI Guidelines 1999

Chapter 2: Review of Literature and Research Methodology

o

o o o o o

Review of Literature Research Methodology Need of Study Objectives of Study Methodology Scope and Need Limitations Chapter scheme

Chapter 3: Overview & Performance of ICICI Bank o Brief Profile of ICICI Bank Subsidiaries of ICICI Bank Credit Deposit Ratio Loans and Advances Deposit Mobilization Investment Priority Sector Advances Net Interest Margin
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Non-Interest Income Conclusions

Chapter 4: Assets Management of ICICI Bank o o o Measuring Areas of Asset Management Reserve Position Management Investment Management Liquidity Management and Managing Liquidity Risk Conclusions

Chapter 5: Liabilities Management of ICICI Bank o o o o o Capital Reserves and Surplus Deposits Fixed Deposit/ Term Deposit Saving Bank Deposit Demand Deposit Borrowings Other Liabilities and Provisions Conclusions

Chapter 6: Profitability Analysis of ICICI Bank

o o o o o

Analysis of Ratios Income Expenditure Spread Ratios Burden Ratios Net Profit Ratios Conclusions

Chapter 7: Loan Portfolio Management of ICICI Bank Loan Portfolio Management

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Loan Portfolio Objectives Types of Loans Constituent of Loan Portfolio of Banks Conclusions

Chapter 8: Findings and Suggestions Findings Suggestions

Bibliography

Chapter 1 Introduction

Introduction:
Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935
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during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, Statesponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of re-organization of princely States, the associate banks came into fold of public sector banking. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal, more particularly to the unorganized sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organized sectors of industry and trade, while the farmers, small entrepreneurs, transporters, professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilization of resources. The scheme however, did not provide any remedy. Though a no. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalized which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced the Lead Bank Scheme on the recommendations of FK Narasimham Committee. Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors. In the post-nationalization period, there was substantial increase in the no. of branches opened in rural/semi-urban centers bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multiagency credit system for agriculture and rural development. The Service Area Approach was introduced during 1989. While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularly during early 90s, with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. The banking sector in India consists of vast and diversified network operating at several tiers, linked operationally to the international, multilateral financial organization, national government machinery and other sectors of the economy at various other points. Over the last three decades, however the role of banking in the process of financial intermediation has undergone complete metamorphosis due to changes in the global financial system. It is now clear that a thriving and vibrant banking system requires a well developed financial structure with multiple intermediaries operating in the market, with different risk profiles. The present banking system in India was evolved to
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meet the financial needs of trade and industry and also to satisfy the credit needs of the institutions of the country. The constituent of the present banking system in India are of varying origin and sizes. At the apex is the Reserve Bank of India, the central bank of the country.

1.1 Structure of Banking Sector:

Banking Structure

Scheduled Commercial Banks Commercial Banks (168)

Non- scheduled (4)

Public Sector Banks Regional Rural Banks (28) (88)

Private Sector Banks (22)

Foreign Banks (30)

New Private Sector Banks Sector Banks (7) (15)

Old

Private

SBI Group Nationalized Banks (8) (19)

Other Public Sector Banks (1)

SBI (1)

Subsidiary Banks (7)

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. The banks included in this schedule list should fulfill two conditions. 1. The paid capital and collected funds of bank should not be less than Rs. 5 lac. 2. Any activity of the bank will not adversely affect the interests of depositors. Non-Scheduled Commercial Banks: The banks which are not under the purview of second schedule of RBI Act. A private sector bank is made up of all businesses and firms owned by ordinary members of the general public whereas, public sector bank is owned and controlled by a government while the banks owned by foreign entities are called as foreign banks. Regional Rural Banks are special in there type. The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.

1.2 Concept of ALM

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ALM is the process involving decision making about the composition of assets and liabilities including off balance sheet items of the bank / FI and conducting the risk assessment. In banking, asset liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset Liability Management is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies and corporations. Banks manage the risks of Asset Liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization.

ALM is concerned with strategic management of Balance Sheet by giving due weightage to market risks viz. Liquidity Risk, Interest Rate Risk & Currency Risk.

ALM function involves planning, directing, controlling the flow, level, mix, cost and yield of funds of the bank ALM builds up Assets and Liabilities of the bank based on the concept of Net Interest Income (NII) or Net Interest Margin (NIM).

ALM is concerned with strategic management involving all market risks

Balance

Sheet

It involves in managing both sides of balance sheet to minimize market risk

ALM Objectives: Liquidity Risk Management. Interest Rate Risk Management.

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 Currency Risks Management. Profit Planning and Growth Projection. Liquidity Risk: Liquidity risk refers to the risk that the institution might not be able to generate sufficient cash flow to meet its financial obligations. The factors affecting liquidity risk are: Over extension of credit High level of NPAs Poor asset quality Mismanagement Non recognition of embedded option risk Reliance on a few wholesale depositors Large undrawn loan commitments Lack of appropriate liquidity policy & contingent plan Interest Rate Risk Management Interest Rate risk is the exposure of a banks financial conditions to adverse movements of interest rates. Though this is normal part of banking business, excessive interest rate risk can pose a significant threat to a banks earnings and capital base. Changes in interest rates also affect the underlying value of the banks assets, liabilities and off-balance-sheet item. Interest rate risk refers to volatility in Net Interest Income (NII) or variations in Net Interest Margin(NIM). Therefore, an effective risk management process that maintains interest rate risk within prudent levels is essential to safety and soundness of the bank.

Currency Risk Management It is the risk that the value of an asset/ liability/ financial instrument will change due to changes in FX rates. It has a direct relation with the volatility of currencies, if the currencies are more volatile then the currency risk is higher. Currency risk is
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evaluated using probability distributions. Capital investment in an external market depends largely upon the expected rate of return on the investment as measured relative to the investment currency. The expected return is derived almost entirely from volume projections, expenditure estimates, and the resulting cash flow in the operations currency. These projections are then translated into the investment currency for comparison with other capital investment opportunities on an equivalent basis. As a result, investment decisions rely almost entirely on translations exposure when considering currency risk. Profit Planning and Growth Projection Profit planning is must for bank. It largely depends upon the growth of the sector and the handling of deposits and investments by the bank. It is an organized method of collecting and analyzing banks operating information for the purpose of providing the bank manager with the information he needs to effectively manage the bank. It is a simple procedure by which information collected is used to design strategies for the bank. It is based on the development of standards for the key costs and revenues in the business and the regular comparison of actual costs and revenues to the standards. Simple projections will provide a picture of operating results daily. Bad news will be known almost immediately, while there is time to correct the cause.

1.3

RISK MANAGEMENT AND ALM

Risk is the potentiality that both the expected & unexpected events may have an adverse impact the banks capital & earnings. It is essential to have an understanding of the risk faced by the bank so as to effectively manage & control them. As per RBI guidelines issued in 1999, there are 3 major types of risks encountered by the banks:
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1. Credit Risk 2. Market Risk 3. Operational Risk

(1)

Credit Risk: It is the risk related to the possibility of the default in the repayment obligation by the borrowers of the funds. It is most simply defined as the potential of a bank borrower or counter party to fail to meet its obligation in accordance with agreed terms. For most banks, loans are the largest and most obvious source of credit risk. Counter Party Risk: It is related to non performance of the trading partners due to counterpartys refusal and or inability to perform. Country Risk: It is also a type of credit risk where non performance by a borrower or counterparty arises due to constrained or restrictions imposed by a country.

(2)

Market Risk: It is defined as the possibility of loss to a bank caused by the changes in the market variables i.e. movement in equity and interest rate markets, currency exchange rates and commodity prices.

(3)

Operational Risk: It is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It may loosely be comprehended as any risk which is not characterized as market or credit risk.
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The Narasimham Committee reports on the banking sector reforms highlighted the weakness in the Indian Banking system and suggested reforms based on the Basel Norms. ALM System in Banks RBI Guidelines 1999 RBI has issued guidelines for ALM system in banks. RBI gave some instruction with reference to the implementation of the guidelines. Banks should give adequate attention to putting in place an effective ALM System. Banks should set up an internal Asset-Liability Committee (ALCO), headed by the CEO/CMD or the ED. The Management Committee or any specific Committee of the Board should oversee the implementation of the system and review its functioning periodically. Also in order to enable the banks to monitor their liquidity on a dynamic basis over a time horizon spanning from 1-90 days, an indicative format is given. The statement of short-term Dynamic Liquidity should be prepared as on each reporting Friday and put up to the ALCO/ Top Management within 2/3 days from the close of the reporting Friday. RBI guidelines for ALM cover the banks operations in domestic currency. In regard to foreign currency risk, banks should follow the instructions contained in Circular AD No. 52 dated December 27, 1997 issued by the Exchange Control Department. Keeping in view the level of computerization and the current MIS in banks, adoption of a uniform ALM System for all banks may not be feasible. The final guidelines have been formulated to serve as a benchmark for those banks which lack a formal ALM System. Banks which have already adopted more sophisticated systems may continue their existing systems but they should ensure to fine-tune their current information and reporting system so as to be in line with the ALM System suggested in the Guidelines. Other banks should examine their existing MIS and arrange to have an information system to meet the prescriptions of the new ALM System. To begin with, banks should ensure coverage of at least 60% of their liabilities and assets. As for the remaining 40% of their assets and liabilities, banks may include the position based on their estimates. It is necessary that banks set targets in the interim, for covering 100
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per cent of their business by April 1, 2000. The MIS would need to ensure that such minimum information/data consistent in quality and coverage is captured and once the ALM System stabilizes and banks gain experience, they must be in a position to switch over to more sophisticated techniques like Duration Gap Analysis, Simulation and Value at Risk for interest rate risk management. They are: ALM Information Systems o Management Information Systems o Information availability, accuracy, adequacy and expediency ALM Organization o Structure and responsibilities o Level of top management involvement ALM Process o Risk parameters o Risk identification o Risk measurement o Risk management o Risk policies and tolerance levels (i) ALM Information Systems: ALM has to be supported by a management philosophy which clearly specifies the risk policies and tolerance limits. This framework needs to be built on sound methodology with necessary information system as back up. Thus, information is the key to the ALM process. It is, however, recognized that varied business profiles of banks in the public and private sector as well as those of foreign banks do not make the adoption of a uniform ALM System for all banks feasible. There are various methods prevalent world-wide for measuring risks. These range from the simple Gap Statement to extremely sophisticate and data intensive Risk Adjusted Profitability Measurement methods. However, the central element for the entire ALM exercise is the availability of adequate and accurate information with expedience and the existing systems in many Indian banks do not generate information in the manner required for ALM. Collecting accurate data in a timely manner will be the biggest challenge before the banks,
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particularly those having wide network of branches but lacking full scale computerization. However, the introduction of base information system for risk measurement and monitoring has to be addressed urgently. As banks are aware, internationally, regulators have prescribed or are in the process of prescribing capital adequacy for market risks. A pre-requisite for this is that banks must have in place an efficient information system. Considering the large network of branches and the lack of (an adequate) support system to collect information required for ALM which analyses information on the basis of residual maturity and behavioral pattern, it will take time for banks in the present state to get the requisite information. The problem of ALM needs to be addressed by following an ABC approach i.e. analyzing the behavior of asset and liability products in the sample branches accounting for significant business and then making rational assumptions about the way in which assets and liabilities would behave in other branches. In respect of foreign exchange, investment portfolio and money market operations, in view of the centralized nature of the functions, it would be much easier to collect reliable information. The data and assumptions can then be refined over time as the bank management gain experience of conducting business within an ALM framework. The spread of computerization will also help banks in accessing data. (ii)ALM Organization: a) Successful implementation of the risk management process would require strong commitment on the part of the senior management in the bank, to integrate basic operations and strategic decision making with risk management. The Board should have overall responsibility for management of risks and should decide the risk management policy of the bank and set limits for liquidity, interest rate, foreign exchange and equity price risks. b) The Asset - Liability Committee (ALCO) consisting of the bank's senior management including CEO should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank (on the assets and liabilities sides) in line with the bank's budget and decided risk management objectives.
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c) The ALM Support Groups consisting of operating staff should be responsible for analyzing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to the balance sheet and recommend the action needed to adhere to bank's internal limits. The ALCO is a decision making unit responsible for balance sheet planning from risk -return perspective including the strategic management of interest rate and liquidity risks. Each bank will have to decide on the role of its ALCO, its responsibility as also the decisions to be taken by it. The business and risk management strategy of the bank should ensure that the bank operates within the limits / parameters set by the Board. The business issues that an ALCO would consider, inter alia, will include product pricing for deposits and advances, desired maturity profile and mix of the incremental assets and liabilities, etc. In addition to monitoring the risk levels of the bank, the ALCO should review the results of and progress in implementation of the decisions made in the previous meetings. The ALCO would also articulate the current interest rate view of the bank and base its decisions for future business strategy on this view. In respect of the funding policy, for instance, its responsibility would be to decide on source and mix of liabilities or sale of assets. Towards this end, it will have to develop a view on future direction of interest rate movements and decide on funding mixes between fixed vs floating rate funds, wholesale vs retail deposits, money market vs capital market funding , domestic vs foreign currency funding, etc. Individual banks will have to decide the frequency for holding their ALCO meetings.
(iii)ALM Process:

The scope of ALM function can be described as follows:

Liquidity risk management Management of market risks Trading risk management Funding and capital planning Profit planning and growth projection
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The guidelines given in this note mainly address Liquidity and Interest Rate risks. Measuring and managing liquidity needs are vital for effective operation of commercial banks. By assuring a bank's ability to meet its liabilities as they become due, liquidity management can reduce the probability of an adverse situation developing. The importance of liquidity transcends individual institutions, as liquidity shortfall in one institution can have repercussions on the entire system. Banks management should measure not only the liquidity positions of banks on an ongoing basis but also examine how liquidity requirements are likely to evolve under different assumptions. Experience shows that assets commonly considered as liquid like Government securities and other money market instruments could also become illiquid when the market and players are unidirectional. Therefore liquidity has to be tracked through maturity or cash flow mismatches. For measuring and managing net funding requirements, the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at selected maturity dates is adopted as a standard tool. The phased deregulation of interest rates and the operational flexibility given to banks in pricing most of the assets and liabilities imply the need for the banking system to hedge the Interest Rate Risk. Interest rate risk is the risk where changes in market interest rates might adversely affect a bank's financial condition. The changes in interest rates affect banks in a larger way. The immediate impact of changes in interest rates is on bank's earnings (i.e. reported profits) by changing its Net Interest Income (NII). A long-term impact of changing interest rates is on bank's Market Value of Equity (MVE) or Net Worth as the economic value of bank's assets, liabilities and off-balance sheet positions get affected due to variation in market interest rates. The interest rate risk when viewed from these two perspectives is known as 'earnings perspective' and 'economic value' perspective, respectively. The risk from the earnings perspective can be measured as changes in the Net Interest Income (NII) or Net Interest Margin (NIM). There are many analytical techniques for measurement and management of Interest Rate Risk. In the context of poor MIS, slow pace of computerization in banks and the absence of total deregulation, the traditional Gap analysis is considered as a suitable method to measure the Interest Rate Risk in the first
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place. It is the intention of RBI to move over to the modern techniques of Interest Rate Risk measurement like Duration Gap Analysis, Simulation and Value at Risk over time when banks acquire sufficient expertise and sophistication in acquiring and handling MIS. The Gap Report should be generated by grouping rate sensitive liabilities, assets and offbalance sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier. The difficult task in Gap analysis is determining rate sensitivity. All investments, advances, deposits, borrowings, purchased funds, etc. that mature/reprice within a specified timeframe are interest rate sensitive. Similarly, any principal repayment of loan is also rate sensitive if the bank expects to receive it within the time horizon. This includes final principal payment and interim installments. Certain assets and liabilities receive/pay rates that vary with a reference rate. These assets and liabilities are repriced at pre-determined intervals and are rate sensitive at the time of repricing. While the interest rates on term deposits are fixed during their currency, the advances portfolio of the banking system is basically floating. The interest rates on advances could be repriced any number of occasions, corresponding to the changes in PLR.

Chapter 2 Review of Literature and Research Methodology

Review of Literature and Research Methodology:

One of the major imperatives of the financial sector reforms has been to strengthen the banking sector by improving the financial health of banks through better capital adequacy and asset
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quality. The traditional phase of banks as near financial intermediaries has since altered and Risk management has emerged as the defining attribute. With the initiation of the reforms banks were required to evolve strategies rather than ad-hoc fire fighting solutions. These strategies are executed in the form of ALM practices. ALM involves quantification of risks and conscious decision making with regard to asset-liabilities structure in order to maximize interest earning within the framework of perceived risk. ALM is the only solution for the banks to survive in this rapid changing environment where the composition, duration and risk profile of a banks assets and liabilities have an important impact on their growth and profitability. Many studies have been concluded in India and abroad to investigate the major structural changes in the field of banking and the relevance of ALM for commercial banks in marinating their interest spreads and profitability. In this context the present chapter is an attempt to review the studies already done and draw some important conclusions that can serve as a guide mark for the study.

2.1 Review of Literature

Kumar, Ravi T. (2000) in the study, Asset Liability Management, has discussed the ALM in different models. According to him, ALM is basically a hedging response to the risk in financial intermediation with ALM in place, managers can evaluate the impact of alternative decisions on the future risk profiles. Managing the spread income and controlling the risk associated with generating the spread are the crucial part of the ALM process for any Bank. He concluded that intense competition for business on the Asset and Liability side coupled with increasing
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volatility in both domestic interest rates and foreign exchange rates is putting pressure on the management of banks to maintain spreads, profitability and long term viability. He further concluded that to remain competitive Indian financial institutions can not afford to remain aloof and they should evolve necessary system for the adoption of ALM. Joshi, C. Vasant and Joshi, C. Vinay (2002) in the study, Managing Indian Banks: The Challenges Ahead, emphasized on the importance of ALM in the planning process. According to them ALM focused on the net interest income of the institution. The principal purpose of ALM has been to control the size of NII. To achieve transparency a bank must provide accurate, relevant and sufficient disclosure of qualitative and quantitative information activities and risk profiles. In the light of the recommendations of the Basel Committee, the balance sheet must truly highlight the state of the banks health. They concluded that bank should take some amount of risk on their asset liability management, but it should never be on interest rate predictions, as in a globally competitive environment. The Indian banks need to build on their strengths and reach the desired standards as soon as possible. Rajwade, A. V. (2002) in the study, Issues in Asset Liability Management III: More on Regulatory Framework, emphasized on different issues involved in ALM by bank and focused mainly on points arising from the regulatory framework. The study showed that deregulation of interest rates, itself was a recent idea and that RBI had an inflation as well as exchange rate target or objective. Again RBIs mechanism for implementing monitoring policy was undergoing changes and refinement. The study found that of the reserved money, around 72% came from holding of foreign currency reserves and around 28% from RBI holdings of government securities. The study concluded that fro predicting changes in interest rates, one will have to take a view of the exchange market demand supply in future and this was a very difficult exercise as it depended on many factors such as
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sentiment, other political or economic scenario, which are beyond anybodys control. Sehgal, M. and Kher, R. (2002) in the study, Asset Liability Management in the Indian Banks, stressed on the objective and aspects of ALM in bank, and to some extent, on the broader aspects of risk management. They viewed that a sound ALM system for the bank should encompass review of interest rate outlook, fixation of interest, product pricing of both assets and liabilities, review of credit portfolio and credit risk management of foreign exchange operations and management of liquidity risks. In the present context, ALM exercised should comprise of prudential management of funds with respect to size and duration minimizing undesirable maturity mismatch to avoid liquidity problem and reducing the gap between risks sensitive assets and rate sensitive liabilities with the given risk taken capacity. Qamar, F. (2003) in the study, Profitability and Resource use Efficiency in Scheduled Commercial Banks in India: A Comparative Analysis of Foreign New Private Sector, Old Private Sector and Public Sector Banks, presented that banking sector reforms on one hand, strive to increase efficiency and profitability of banking institutions and on the other hand brought the existing banking institutions face to face with global competition. The objective of the study was to examine whether foreign banks, new private sector banks, old private sector banks and public sector banks differ significantly in terms of their endowment and risk factors, revenue diversification initiatives, profitability and resource use efficiency. The study concluded that public sector banks were better endowed in their assets based share capital and share holders equity than most other types of banking institutions in the country. Gurumoorthy, T. R. (2004) in the study, Analysis of Income and Expenditure ion Banks, attempted to analyze the income, expenditure and operating profit of public sector banks, foreign banks, old private sector banks and new private sector banks.
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The new private sector banks have been in the stage of branch expansion and have spent for full fledged internet banking. Thus, the percentage rise in expenditure of the new private sector banks has been greater than that of the other banks. As far as operating profits are concerned the new private sector banks stand first, followed by old private sector banks, public sector banks and foreign banks. In this competitive environment the efficient asset liability management, project appraisal and recovery mechanism will help to earn the interest income substantially. Thimmaiah, G. (2004) in the study, Asset Liability Management in Post Indian Banking Sector Reforms, focused on Asset Liability Management in the bank and to some extent on broader aspects of risk management. The objective of the study was to review the interest rate, credit portfolio, investment portfolio, credit risk management, risk management and management of liquidity risk. In the study four principal approaches were used to quantify the risk i.e. Gap Method, Duration Method, Simulation Method and Value at Risk Method. The study concluded that there was a need of ALM in India because to maximize income with acceptable risk there was need to emphasize on interest margin/spread, liquidity and capital which were having desired maneurability. Prasad, L and Pande, M. C. (2005) in the study, Asset-Liability Management: An emerging trend in Banking Sector, presented the role and importance of asset-liability management in commercial banks. The study selected the Nainital Bank Limited as sample which has rendered its services in four states Uttaranchal, Uttar Pradesh, Delhi and Haryana. The study was based on secondary data and the period of the study was four years. The study showed that process of Globalization has arrived in India, without proper advance planning. The study found the slow pace of computerization was barring the progress of ALM in bank. The study concluded that ALM has been proved of great use in curtailing NPAs, increasing profitability and facing competition with other banks. This study suggested that the
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commercial banks should improve their Management Information System as per the needs of ALM. Raghavan, R. S. (2005) in the study, Risk Management An Overview, discussed the implication of Basel-II Accord on the capital structure of banks. The purpose of Basel-II is to introduce a more risk sensitive capital framework with incentives for good risk management practices. Under Basel-II approach, capital requirements will increase for those banks that hold high risk assets/ low quality assets and those with low risk assets (high quality assets), a balanced portfolio as well as effective risk management control systems may need less capital requirements. He concluded that the financial system has to cope constantly with changes in the broader environment in which it operates and face new challenges that those developments impose on it. Sharma, K. and Kulkarni, P. R. (2006) in the study, Asset Liability Management Approach in Indian Banks: A Review and Suggestions, emphasized that Assets Liability Management should ensure a proper balance between funds mobilization and their deployment with respect to their maturity profiles, cost, yields and risk exposures. For this Indian Banks need to reorient their credit deployment strategies. They suggested that Bank should diversify the portfolio suitably between the small and large borrowers as this will help in reducing risks. Bank should withdraw their exposure to sunset industries as their loans may turn into NPAs. Bank should think in terms of loan exposures to different regions in the country. It is highly essential to look at credit deployment in terms of managing credit portfolio and its diversification, both geographically and industry-wise which helps them to reduce the portfolio risk of credit. Bhasin, A. (2007) in the study, Understanding Risks in Banking: A Note, endeavored to discuss the important concepts in tasks management as applicable to banks against the backdrop of Basel-II. The article aims to develop a basic understanding on major risks surrounding a bank institution as also the more
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popular means of managing them. She concluded that risk management calls for consolidating on the techniques and structures already built rather than going haphazardly for new techniques as effort have been made already to create an environment for all market participants in terms of regulation, infrastructure and instruments. R. P. Sinha (2007) in the study entitled Asset Quality Based Ranking of Indian Commercial Bank a Non-Parametric Approach - tried to make an asset quality based ranking of selected (28) Indian commercial Banks. The period of the study was five years from 2000-01 to 2005-06. The study used data Envelopment Analysis a Non-Parametric Tool. The study compared the observed Banks in terms of total factor productivity growth for the study period. The study found that the exercise indicated improvement in technical efficiency scores in 2004-05 related to the previous four years. The observed private sector banks exhibited higher mean technical efficiency relative to the observed public sector banks. The study concluded that both types of banks were focusing their attention on fee-based activities as opposed to fund based activities. This was probably the reason for negative total factor productivity growth exhibited by them during the observed years. Batra, N. K. and Kapoor, R. (2008) in the study, Profitability Analysis of New Private Sectors Bank in India, emphasized that banks exerted influence on economic growth and profit was main cause of business. The study also showed that if the domestic financial resources of the country were properly channelized towards productive investment then the economy of that country could be fully developed. The objective of the study was to evaluate profitability of new private sector banks and to analyze their relative efficiency in India. The period of the study was from 2001-05. The data for the study was collected from IBA Bulletins annual issues and monthly issues, statistical tables relating to banks in India and from RBI bulletins and from Annual Reports. The study analyzed the performance of various private sector banks. The study concluded that evaluation of banks in terms of
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profitability was very essential because with the help of profits a business could be flourished to the maximum extent which was the due need for the existence of Business.

2.2 Research Methodology

2.2.1 Need of the Study: Now a days, the Indian banking sector is waking up to the concept of ALM. The uncertainty of interest rate movements gave rise to interest rate risk, thereby causing banks to look for processes to manage their risks. In the wake of interest rate risk, came liquidity risk and credit risk as interest components of risks for banks. The recognition of these risks has brought ALM to the center stage of financial intermediation. With the RBI framing up a regulatory framework to monitor the ALM from March 31, 1999, the ALM has attained tremendous importance in the banking sector. Banks are now operating in a fairly deregulated environment and are required to determine on their own, interest rate on deposits and advances on a dynamic basis. Managing the spread income and controlling the risk associated with generating the spread is a vital area of ALM, as it requires simultaneous decisions and maturity structure of the institution. The present study aims to analyze the importance of ALM for banks and its impact on the profitability performance of ICICI bank. Management of net interest is one of the most important means of earning of banks. The choice of assets portfolio of banks is expected to be influenced by the kinds of liabilities held by them and vice versa. In this context, the bank has to identify its assets and liability structure which is not only compatible but also capable to generate net interest revenue that helps is attaining the earnings objective. There is a need to study the various aspects of ALM that directly affect profitability because commercial viability is essential for the existence and growth of banks.

2.2.2 Objective of the study:

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The specific objectives are: To analyze the growth and performance of ICICI bank. To study the extent to which the ICICI bank has efficiently managed their assets and liabilities during the period under study. To analyse the profitability of the bank. To examine the loan portfolio management of the bank.
To suggest the future strategies for assets and liabilities for ICICI

bank.

2.2.3 Methodology The study covers ICICI bank. The period of the study is from 2003-2004 to 2007-2008. The study is based on secondary data. The secondary data has been collected from various sources i.e RBI bulletins, trends & progress of banking sector in India, IBA bulletins, economic surveys, website of ICICI bank etc. The various methods used are:

Compound Growth Rate: Compound Annual Growth Rate isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of Compound Annual Growth Rate as a way to smooth out the returns.

The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered. This can be written as follows:

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The percentage rate, generally stated on an annual basis, at which a variable grows adjusted for compounding. For example, a 7% compound growth rate for ten years results in $100 growing to slightly less than $200. Without compounding, the $100 would earn $7 per year and grow to only $170. Financial analysts frequently use historical and projected compound growth rates in analyzing earnings, sales, and dividends.

Trend Analysis: Trend means any general tendency. Analysis of these is called trend analysis. It has major importance in interpretation of financial statements. It is done to know the trend of available financial institutions. It gives information about increase or decrease in the ratios of the data. For trend analysis, various trend ratios of different items are calculated for various periods for comparison purpose. The trend ratios are the index numbers of the movement of reported financial items in the financial statements which are calculated for more than one year. They help in making horizontal analysis of comparative statements. It reflects the behavior of items over a period of time.

Ratio Analysis: According to J. Batty, The term accounting ratio is used to describe significant relationship which exist between figures shown in the balance sheet in a profit and loss account, in a budgetary control system or in any other part of the accounting organization.
28

The study and interpretation of the relationships between various financial variables by investors or lenders. Ratios are regarded as the true test of earning capacity, financial soundness and operating efficiency of a business organization. It is used to know inter relationship among figures appearing in the financial statements and to analyze the past performance and to make further projections. The following are the ratios: Asset Management Ratios Liability Management Ratios Liquidity Ratios Burden Ratios Spread Ratios Profitability Ratios

2.2.4

Limitations

1. The financial information collected for the present study is entirely secondary in nature. In such a case, the study carries all the limitations inherent with the secondary data. 2. Scope of the study is limited due to the constraint of time and research. 2.2.5 Chapter Scheme

Chapter 1: Introduction
Introduction of Indian Banking System is introduced and then Structure of Banking Sector is discussed. Concept of ALM and ALM objectives are discussed in detail. Then is Risk Management and ALM in which Credit Risk, Market Risk and Operational Risk are discussed. After it ALM System in Banks RBI guidelines are explained in detail.
29

Chapter 2: Review Methodology

of

Literature

and

Research

This chapter has details of all the literature reviewed and then the research methodology in which rationale of study, objectives of study, methodology, scope and need and limitations are discussed.

Chapter 3: Overview & Performance of ICICI Bank

In this chapter, first of all ICICI banks profile is written and then is information about its subsidiaries with major subsidiaries explained. Then credit deposit ratio, Loans and Advances, Deposit Mobilization and Investment are discussed. After that Priority Sector Advances, Net Interest Margin, Non-Interest Income and then at then end conclusions from the study of above ratios is discussed

Chapter 4: Assets Management of ICICI Bank

First of Assets Management is introduced and then in the areas of assets management, Reserve Position Management, Investment Management, Liquidity Management, Measuring and Managing Liquidity Risk and then at the ends final conclusions from the above study.

Chapter 5: Liabilities Management of ICICI Bank

In this after introducing Liabilities Management, Capital, Reserves and Surplus, Deposits are discussed. In deposits, Fixed Deposit/ Term Deposit, Saving Bank Deposit, Demand Deposit, Borrowings and other Liabilities and Provisions are explained in detail. At the end again conclusions made from the study of above ratios are given.

Chapter 6: Profitability Analysis of ICICI Bank

In this first of all profitability trends are introduced and then trends in various ratios are discussed. Trends in Income,

30

Expenditure, Spread Ratios, Burden Ratios and Net Profit are discussed. Again conclusion at the end.

Chapter 7: Loan Portfolio Management of ICICI Bank

In this Loan Portfolio Management is introduced and its objectives are discussed. Then various types of loan are talked about extending to the constituents of Loan Portfolio of Banks and then the final conclusions discussing about the interpretations made from the above study.

Chapter 8: Findings and Suggestions

This includes various findings of the study done for the span of five years for ICICI bank and then the list of suggestions made. Bibliography

31

Chapter 3 Overview and Performance of ICICI Bank

32

3.1

Brief Profile of ICICI Bank

ICICI Bank is India's second-largest bank. The Bank has a network of about 573 branches and extension counters and over 2,000 ATMs. ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. In 2001, ICICI bank acquired Bank of Madura Limited. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic banking strengths to offer products internationally. ICICI Bank currently has subsidiaries in the United Kingdom, Canada and Russia, branches in Singapore and Bahrain and representative offices in the United States, China, United Arab Emirates, Bangladesh and South Africa. Today, ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the
33

areas of investment banking, life and non-life insurance, venture capital and asset management. In 2008 the major initiative taken is that ICICI Bank enters US, launches its first branch in New York. Also Bank enters Germany, opens its first branch in Frankfurt. ICICI Bank launched iMobile, a breakthrough innovation in banking where practically all internet banking transactions can now be simply done on mobile phones. ICICI Bank concluded India's largest ever securitization transaction of a pool of retail loan assets aggregating to Rs. 48.96 billion (equivalent of USD 1.21 billion) in a multi-tranche issue backed by four different asset categories. It is also the largest deal in Asia (ex-Japan) in 2008 till date and the second largest deal in Asia (ex-Japan & Australia) since the beginning of 2007. In 2007 it introduced a new product - 'NRI smart save Deposits' a unique fixed deposit scheme for nonresident Indians. Representative offices opened in Thailand, Indonesia and Malaysia. ICICI Bank became the largest retail player in the market to introduce a biometric enabled smart card that allow banking transactions to be conducted on the field. A low-cost solution, this became an effective delivery option for ICICI Bank's micro finance institution partners. Financial counseling centre Disha launched. Disha provides free credit counseling, financial planning and debt management services. In 2006, ICICI Bank became the first private entity in India to offer a discount to retail investors for its follow-up offer. Bank became the first Indian bank to issue hybrid Tier-1 perpetual debt in the international markets. ICICI Bank subsidiary set up in Russia. In 2005, Bank and CNBC TV 18 announced India's first ever awards recognising the achievements of SMEs, a pioneering initiative to encourage the contribution of Small and Medium Enterprises to the growth of Indian economy. ICICI Bank opened its 500th branch in India. ICICI Bank introduced partnership model wherein ICICI Bank would forge an alliance with existing micro finance institutions (MFIs). The MFI would undertake the promotional role of identifying, training and promoting the micro-finance clients and ICICI Bank would finance the clients directly on the recommendation of the MFI. ICICI Bank introduced 8-8 Banking wherein all the branches of the Bank would remain open from 8a.m. to 8 p.m. from Monday to Saturday. ICICI Bank introduced the concept of floating rate for home loans in India. First rural branch and ATM launched in Uttar Pradesh at Delpandarwa,
34

Hardoi. "Free for Life" credit cards launched wherein annual fees of all ICICI Bank Credit Cards were waived off. In 2004, the Max Money, a home loan product that offers the dual benefit of higher eligibility and affordability to a customer, introduced. Mobile banking service in India launched in association with Reliance Infocomm. India's first multi-branded credit card with HPCL and Airtel launched. Kisaan Loan Card and innovative, low-cost ATMs in rural India launched.

Subsidiaries of the ICICI Bank are: Following are the subsidiaries of ICICI:

ICICI Personal Financial Services Limited ICICI Capital Services Limited ICICI Prudential Life Insurance Company ICICI Bank UK, Russia, Canada, branches in US, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar Dubai International Finance Centre ICICI General Insurance Company, Lombard ICICI Securities ICICI Capital Services ICICI Web Trade ICICI Personal Finance

Major Subsidiaries are: ICICI Prudential Life Insurance Company ICICI Prudential Life Insurance Company (ICICI Life) continued to maintain its market leadership among private sector life insurance companies with a retail market share of about 12.7% in the overall industry in fiscal 2008 (on weighted received premium basis) as against 9.1% in fiscal 2007. ICICI Lifes new business premium (on weighted received premium basis) grew by 68.3% from Rs. 39.71 billion in fiscal 2007 to Rs. 66.84 billion in fiscal 2008. Life insurance companies worldwide make losses in the initial years, in view of business set-up and customer acquisition costs in the initial years as well as reserving for actuarial liability. While the growing operations of ICICI Life had a negative impact of Rs. 10.31 billion on the Banks consolidated profit after tax in fiscal 2008 on account of the above reasons, the companys unaudited New Business Profit (NBP) for fiscal
35

2008 was Rs. 12.54 billion as compared to Rs. 8.81 billion in fiscal 2007. NBP is a metric for the economic value of the new business written during a defined period. It is measured as the present value of all the future profits for the shareholders, on account of the new business based on standard assumptions of mortality, expenses and other parameters. Actual experience could differ based on variance from these assumptions especially in respect of expense overruns in the initial years. ICICI Lombard General Insurance Company ICICI Lombard General Insurance Company (ICICI General) enhanced its leadership position with a market share of 29.8% among private sector general insurance companies and an overall market share of about 11.9% during fiscal 2008. ICICI Generals gross written premium (excluding share of motor third party insurance pool) grew by 11.4% from Rs. 30.03 billion in fiscal 2007 to Rs. 33.45 billion in fiscal 2008. The industry witnessed a slowdown in growth on account of detariffication of the general insurance industry whereby insurance premiums were freed from price controls, resulting in a significant reduction in premium rates. The industry also witnessed the formation of the motor third party insurance pool for third party insurance of commercial vehicles. Accordingly, all insurance companies are required to cede 100% of premiums collected and claims incurred for this segment to the pool. At the end of the year, the results of the pool are shared by all insurance companies in proportion to their overall market share in the industry. The motor third party pool had a negative impact of Rs. 0.53 billion on the profit of ICICI General. ICICI General is also required to expense upfront, on origination of a policy, all sourcing expenses related to the policy. ICICI General achieved a profit after tax of Rs. 1.03 billion in fiscal 2008, a growth of 50.5% over fiscal 2007. ICICI Prudential Asset Management Company ICICI Prudential Asset Management Company (ICICI AMC) was the second largest asset management company in India with average assets under management of Rs. 543.55 billion for March 2008. ICICI AMC achieved a profit after tax of Rs. 0.82 billion in fiscal 2008, a growth of 69.7% over fiscal 2007. ICICI Venture Funds Management Company Limited ICICI Venture Funds Management Company Limited (ICICI Venture) strengthened its leadership position in private equity in India, with
36

funds under management of about Rs. 95.50 billion at year-end fiscal 2008. ICICI Venture achieved a profit after tax of Rs. 0.90 billion in fiscal 2008 compared to Rs. 0.70 billion in fiscal 2007. ICICI Securities Limited and ICICI Securities Primary Dealership Limited The securities and primary dealership business of the ICICI group have been reorganised. ICICI Securities Limited has been renamed as ICICI Securities Primary Dealership Limited. ICICI Brokerage Services Limited has been renamed as ICICI Securities Limited and has become a direct subsidiary of ICICI Bank. ICICI Securities achieved a profit after tax of Rs. 1.50 billion and ICICI Securities Primary Dealership achieved a profit after tax of Rs. 1.40 billion, in fiscal 2008. ICICI Bank UK PLC ICICI Bank UK PLC (ICICI Bank UK) is a full-service bank offering retail and corporate and investment banking services in the UK and Europe. ICICI Bank UKs total assets increased by 81.4% from US$ 4,868 million at March 31, 2007 to US$ 8,829 million at March 31, 2008 while total deposits grew by 84.2% from US$ 2,812 million at March 31, 2007 to US$ 5,180 million at March 31, 2008. ICICI Bank UKs profit after tax was US$ 38.4 million during fiscal 2008 after taking into account investment valuation charges. ICICI Bank Canada ICICI Bank Canada is a full-service direct bank established in Canada as a wholly-owned subsidiary of ICICI Bank, and offers a wide range of financial solutions to cater to personal, commercial, corporate, investment, treasury and trade requirements. ICICI Bank Canadas total assets increased by 92.3% from US$ 2,002 million at March 31, 2007 to US$ 3,849 million at March 31, 2008. Total deposits increased by 77.7% from US$ 1,796 million at March 31, 2007 to US$ 3,191 million at March 31, 2008. ICICI Bank Canada recorded a net loss of US$ 14.3 million during fiscal 2008, after taking into account investment valuation charges. As per the financial statement of ICICI bank for the year ended 200708 ICICI Banks credit ratings by various credit rating agencies at March 31, 2008 are given below:

37

Agency Moodys Investor Service (Moodys) Standard & Poors (S&P) Credit Analysis & Research Limited (CARE) Investment Information and Credit Rating Agency (ICRA) CRISIL Limited Japan Credit Rating Agency (JCRA)

Rating Baa2 BBBCARE AAA AAA AAA BBB+

3.2

Credit Deposit Ratio

Credit Deposit Ratio indicates the total advances as a percentage of total deposits. It is a measure of utilization of resources by banks and has a direct bearing on the size and the loan portfolio. This ratio indicates the bank aggressiveness to improve income. Although the deployment of credit and time pass of Credit Deposit ratio in general, are influenced by the structural transformation of the economy.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Credit Deposit Ratio % Inc/Dec to prev. (%) Year 94.59 -----95.35 0.803 90.61 - 4.97 85.03 - 6.15 90.76 6.73

Compounded Growth Rate (CGR)= -0.82%

38

CGR is negative, which shows that credit deposit ratio has decreased over the period of study and the above table depicts the same.

3.3

Loans and Advances

Loans and Advances represent that part of customer deposit which the bank considers may be safely lent, while the remainder is in the form of cash and other assets. It includes working capital and term finance, for different types of borrowers, various forms of bank lending by way of loans (demand loans and term loans) and advances over drafts, cash credit, letter of credit and bill finance.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Loans and Advances (Rs % Inc/Dec to prev. in 000s) Year 643,958,205 -----964,099,562 49.71 1,562,603,202 62.07 2,113,994,413 35.28 2,514,016,693 18.92

Compounded Growth Rate (CGR)= 31.31% Positive value of CGR says about the increase in loans and advances over the last five years of study but after 2005-06 the increment rate has declined.

3.4

Deposit Mobilization

Deposits constitute a vital source of funds in a bank which places an almost exclusive reliance on public deposits for its operations, for the fact that equity capital invested in a bank is very insignificant part of the total funds of the bank. Lending an investment operations of a bank are influenced by the magnitude of deposits. Deposits expansion of the banking system can only be done by co39

operation of all banks and by a willingness on the part of monetary and fiscal authorities to permit such expansion by making additional reserves available. Various types of deposits from public, banks and another financial institutions are: (a) (b) Demand Deposits Saving Bank Deposits

(c)Fixed Deposits Year 2003-04 2004-05 2005-06 2006-07 2007-08 Deposits (Rs 000s) 680,787,334 1,011,086,273 1,724,509,830 2,486,136,330 2,769,832,312 in % Inc/Dec to prev. Year -----48.51 70.56 44.16 11.41

Compounded Growth Rate (CGR)= 32.40% CGR shows a favorable response to social obligation, there management devised various schemes of deposit mobilization and started providing many facilities to their depositors and the table shows the same.

3.5

Investments

Investment is the sacrifice of the certain present value for (possibly uncertain) future value. Classification of investments given in schedule VI:There are three categories: (a) (b) Government Securities Share Debenture and Bonds

(c)Immovable properties

40

The principal objective of investment by a commercial bank is to maximize earnings and to keep the funds liquid and safe. Banks invests in Indian securities as well as foreign securities. Year 2003-04 2004-05 2005-06 2006-07 2007-08 Investments (Rs in % share in % Inc/Dec to 000s) total assets prev. Yr (Investments) 455,747,851 34.85 -----546,527,266 30.63 19.91 840,138,822 30.30 53.72 1,206,166,898 30.58 43.56 1,600,467,579 32.95 32.69

Compounded Growth Rate (CGR)= 28.55% CGR is positive showing that investments has increased over the period of study but in the last three years, the rate of increment has decline. Still as a whole, CGR has increased over the total span of five years.

3.7 Priority Sector advances

Priority sector advances is an important element of social banking. It is an advances given by bank to the priority sectors which requires development. If bank fail to meet priority sector lending target through direct lending the bank can invest the shortfall amount. Year 200304 200405 200506 200607 200708 Priority Sector Advances (Rs in 000s) 145,307,396 215,591,362 447,310,487 555,491,571 606,025,758 % share total advances 22.56 22.36 28.62 26.27 24.10 in % Inc/Dec to prev. Yr. (Priority Sector Advances) -----48.36 107.48 24.18 9.09

41

Compounded Growth Rate (CGR)= 33.05% CGR is positive. Thus ICICI has started giving more advances to priority sector but the increment rate has declined over the years and the table also depicts the rising trend.
3.8

Net Interest Margin (NIM)

NIM is defined as net interest income divided by average total assets. Net interest margin can be viewed as the spread on earning assets. The net income of banks comes mostly from the spreads maintained between total interest income and total interest expense. The higher the spread the more will be the NIM. There exists a direct correlation between risks & return. As a result, greater spreads only imply enhanced risk exposure. But since any business is conducted with the objective of making profits & achieving higher profitability is the target, it is the management of risks that holds key to success & not risk elimination.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

NIM (%) 1.8 2.4 2.4 2.6 2.2

% Inc/Dec to prev. Year -----33.33 0.0 8.33 - 15.38

Compounded Growth Rate (CGR)= 4.09%

42

Increase in NIM reflects that spread in earning assets has increased over the period of study. Positive CGR says about this and table above too depicts the same.

3.9

Non Interest Income

It is also known as fee based income and it has become an important source of income for banks. NII consists of income from commission, exchange and brokerage transaction and other miscellaneous incomes. This stream of revenue is not dependent on the banks. Capital adequacy and consequently, potential to increase this transaction is vast.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

NII (Rs in 000s) 45,530,184 70,971,868 111,469,028 163,625,427 259,581,255

% Inc/Dec to prev. Year -----55.87 57.00 46.70 58.64

Compounded Growth Rate (CGR)= 41.64%

CGR is positive and is quite high too which shows a large increase in NII for the bank. This shows that over the past five years noninterest income has increased manifold for the bank and this is clear from the table too.

43

Conclusions:
1. Credit Deposit Ratio: It shows the utilization of resources by the bank and has a direct bearing on the size and the loan portfolio. It shows a declining trend which is a matter of concern for the bank. Bank lending policy have an inherent in the size of the ratio. 2. Loans and Advances: It represent that part of the customer deposit which the bank considers may be safely lent and it shows an increment till 2005-06 and it declines thereafter. 3. In the recent years, market risks associated with the holding of securities has increased, so greater awareness is required while extending loans. 4. Deposits shows a favorable response to social obligation, there management devised various schemes of deposit mobilization and started providing many facilities to their depositors. 5. Greater orientation towards investment activities and a aversion to credit risk exposure have deterred banks from undertaking their core functions of providing loans and advances. 6. Due to the liberalization and reluctant competition and soft interest rates prevalent in the Indian economy, risk arising out of traditional banking business are on increase and the net interest margin over the period under study is almost at steady rate.

44

Chapter 4 Assets Management of ICICI Bank

45

Assets Management:
While a banks asset can be conceptually subdivided into components such as reserves, investments and loans, management policies and decisions should serve to identify and measure the inter-relationships among these elements. The decisions concerning loan and investment strategies are closely linked to management of banks liquidity position and the other element such as the structure and variability of deposits, capital structure and international operations also are seen to be interrelated with effective asset management. In managing its liquidity position a bank is confronted by a trade off between liquidity and profitability. Because liquid assets often provide zero or low return, bank manager must constantly analyze the opportunity cost involved in not reducing liquid assets and increasing high yielding assets. Recent changes in the structure of bank assets and liabilities place doubt on the significance of traditional liquidity ratios. According to a article by James L. Pierce also questions the traditional measures in view of new techniques by which banks can affect their liquidity particularly by means of endogenous deposit determination. He suggests that an appropriate concept of liquidity must consider the time dimension involved in selling an asset and demonstrates that the liquidity decision is closely linked to the loansupply function of banks. Mismatch of assets and liabilities is the cause of many risks. Banks need to address these risks in a structured manner by upgrading their risk management and adopting more comprehensive ALM practices than has been done earlier. As per RBI guidelines, dated Feb. 10, 1999, issued to all scheduled commercial banks. ALM is also concerned with risk management and provides a comprehensive and dynamic framework for measuring monitoring and managing liquidity, interest rates, and foreign exchange, equity and commodity price risks of a
46

bank. The focus of the Asset Liability Management should be on the profitability and long term operating viability. Components of Assets are: Cash and balance with RBI Cash in hand Balance with RBI Balances with notice banks and money at call and short

Investments Advances Cash credits, overdrafts and loans repayable on demand Term loans Bills purchased and discounted Secured/unsecured advances Secured by tangible assets Covered by bank/government guarantees Unsecured advances

Fixed assets Other assets Inter - office adjustments Interest accrued Tax paid in advance/tax deducted at source Stationary and stamps

47

Non banking assets acquired in satisfaction of claims others

4.1 AREAS OF ASSET MANAGEMENT

Reserve position management Investment management Liquidity management 4.1.1 Reserve position management Reserve position management is based on the statutory requirements along with maintenance of working reserves for operational needs. The primary objective of reserve position management is minimizing risks & maximizing returns by achieving an optimum risk reward ratio.
(A)

Primary reserves:

Primary reserves are those non-earning assets of commercial banks made uoto cash or its equivalent. The objective of primary reserves is to maintain liquidity and solvency. It consists of cash in hand, balance with central bank and demand deposits with other banks. From the liquidity point of view/the primary reserves plays the role of first dayto-day business needs but to comply with the obligation imposed on it by law. The primary reserves divided into two categories: Legal reserves Working reserves

A.1 Legal reserves The legal reserves represent that portion of the primary reserve which the law requires a bank to maintain. These reserves are computed on the basis of average deposits outstanding on the banks books over the short periods (one or two weeks). Originally, legal reserve requirements were expected to compel commercial banks to maintain prudent standards of liquidity which would enable them to meet the withdrawals of deposits in cash.
48

Through the years the above conception of legal reserves has changed. It is now generally recognized that the legal reserve does not serve as a safty fund to protect banks against the hazards of liquidity. The primary function of legal reserve is to serve as a potent control tool in the hands of central banking authority to affect the supply of money. By changing the reserve requirements, the central bank can regulate the magnitude of credit. A.2 Working Reserve Since the legal reserve cannot be depended upon for overcoming illiquidity crises, commercial banks have to carry cash reserves in excess of the legal minimum reserve to meet the depositors claims, satisfy the credit needs of the community, & provide protection against unforeseen withdrawals. This excess cash reserves held by the banks to fulfill day-to-day business requirements is designated as working reserve. It consists of : Cash in their own vaults; Demand deposits with other banks; and Excess reserve with central bank

The principal function of the working reserve is to take care of both regular & exceptional requirements. How much of its total deposit liabilities should be held in the form of working reserve is a basic problem which confronts a commercial bank because it involves a trade off between liquidity & profitability.
(a) Cash & balance with RBI in current account: It has shown the

steady increase in it and it is clear from the table. (b) Balance with other banks in current account: Again the continuous increase in this year by year says about the victory path of ICICI bank. (c)Primary reserves as % of total deposits: This shows the declining trend up to 2005-06 and then it is increasing till 2007-08.

49

Year

200304 200405 200506 200607 200708

Cash & balance with RBI in current account 49,613,712 57,966,103 77,259,488 166,407,662 265,353,394

Balance with other banks in current account 6,909,886 12,732,346 12,292,632 25,235,925 28,953,021

Primary % inc. / reserves as dec. to % of total prev. year deposits 8.30 6.99 5.19 7.7 10.62 ------15.78 -25.75 48.36 37.92

Compounded Growth Rate (Primary Reserves as percentage of Total Reserves)=5.05% CGR is positive which shows that primary reserves as percentage of total reserves has increased in the past five years but the increase was not continuous as it declined for the first three years and then increased thereafter.

(B)

Secondary Reserves:

The aggregate of highly liquid earning assets is designated as the secondary reserves in banking circles. The principal objective of holding the secondary reserves is to impart adequate liquidity to funds without adversely affecting the profitability of a bank. It must, therefore, comprise such assets as yield some income to the bank and at the same time, are highly liquid. Only such assets as fulfill the three conditions of shift ability, low risk & yield can be included in the secondary reserves. The shift ability of asset is possible if there is a ready market for it. Apart from the high degree of shift ability, an asset must be free from the money rate risk- the risk arising out of fluctuation in security prices due to variations in interest rate. Secondary reserve assets must yield income. But it should be
50

emphasized; for the sake of income the liquidity attribute should not be foregone. The income factor has to receive secondary emphasis while choosing assets for the secondary reserves.

Constituents are: Call loans to stock brokers & commercial banks Short term loans to commercial banks Short term loans secured against self liquidating assets for blue chips Investment in treasury bill Promissory notes to short period maturity Discounting of usance bills eligible for rediscounting from the RBI Short period debentures of company with an unimpeachable credit standing.

Year

200304 200405 200506 200607

Money at call & short notice & balance with banks 4,150,66 7 41,534,9 60 33,750,7 13 56,809,9 59

Bill discount ed & purchase d

Cash Gov. credit, securitie overdraf s t & loans payable on demand 61,254,57 6 123,344,4 10 258,593,0 77 334,781,8 82 318,551,6 12 360,243,8 38 538,681,7 76 717,115,9 58

Deb and Sec. bonds res. as % of Tota l Dep. 64,916,05 6 335,035,5 25 27,896,23 8 458,299,4 59 68.6 1 62.2 1 56.0 4 49.3 3

% inc/ dec to the prev yr -----9.32 -9.91 11.9 7

51

18,267,00 9 68,868,43 0 107,554,8 57 71,995,34 4

200708

91,995,7 84

68,903,03 3

351,458,6 827,450,0 70 43

49,447,03 2

50.1 5

1.66

Compounded growth rate (Sec Res as % of Total Deposits) (CGR)= -6.07% CGR is negative and the position of the secondary reserve is different and secondary reserves are more than the primary reserves and the tables shows the declining trend till 2007-08 and small increase in 2007-08.

4.1.2 Investment management

The foremost concern of a bank is to ensure its liquidity by maintaining adequate primary & secondary reserves. Investment is then, residual in nature. It includes gilt edged securities & stock exchange securities as well as the shares & bonds of highly reputed companies. The principal objective of investment by a commercial bank is to maximize earnings & to keep the funds liquid & safe. As a matter of fact security investment is supposed to act as the third line of defense & to replenish the secondary reserves to meet the unexpected withdrawals of deposit & usual loan demands.

Classification of investment portfolio is: Government securities Approved securities Shares Debentures & bonds Subsidiaries/or joint ventures Other investments. Year Govt. % Securitie inc/dec Other Approv % inc/dec Shares % inc/dec
52

s 200304 200405 200506 200607 200708 318,551, 612 360,243, 838 538,681, 776 717,115, 958 827,450, 043

to prev ed to prev yr Securiti yr es ----301,155 ----29,491,7 36 13.08 318,890 5.88 32,027,9 36 49.53 356,349 11.74 38,738,1 78 33.12 601 -99.83 40,895,6 98 15.38 97,946 16,197. 47,118,7 17 26

to prev yr ---8.59 20.95 5.56 15.21

Year

Deb and Bonds

200304 200405 200506 200607 200708

% Others inc/dec to prev yr 64,916,0 ----42,473,9 56 94 35,035,5 -46.02 118,887, 25 766 27,896,2 -20.37 234,466, 38 281 45,829,4 64.28 273,418, 59 879 49,447,0 7.89 427,893, 32 111

% inc/dec to prev yr ----179.90 97.20 16.61 56.49

Compounded Growth Rate (Govt. Securities) (CGR)= 21.03% Compounded -20.11% Growth Rate (Other Approved Securities) (CGR)=

Compounded Growth Rate (Shares) (CGR)= 9.82% Compounded Growth Rate (Deb. and Bonds) (CGR)= -5.29% Compounded Growth Rate (others) (CGR)= 53.95%
53

CGR for various investments over the period shows a positive trend accept other approved securities and debentures and bonds and the table proves the same.

Investment deposit ratio

This ratio is commonly used indicator of the investment policy of the bank.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Investment deposit % Inc/Dec to prev. ratio(%) Year 66.94 -----54.05 -19.25 48.71 -09.87 48.51 -0.41 57.78 19.10

Compounded Growth Rate (CGR)= -2.90% CGR is negative which shows that the deposits have gone down, it can effect the operations of the bank & its expansion etc. & the table verifies the same.

4.1.3 Liquidity Management

Banks need liquidity to meet deposit withdrawal and to fund loan demands. The variability of loan demands and variability of deposits determine banks liquidity needs.It represents the ability to accommodate decreases in liability and to fund increases in assets. It demonstrates the market place that the bank is safe and therefore capable of repaying its borrowings.
54

 It enables bank to meet its prior loan commitments,whether formal or informal. It enables bank to avoid the unprofitable sale of assets. It lowers the size of the default risk premium the bank must pay for funds. Types of liquidity risk: -Funding Risk -Time Risk -Call Risk.

Funding Risk:
Need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits arises due to Fraud causing substantial loss Systemic Risk Loss of confidence Liabilities in foreign currencies

Time Risk:
Need to compensate for non-receipt of expected inflow of funds,arises due to,

Severe deterioration in the asset quality Standard assets turning into non-performing assets Temporary problems in recovery Time involved in managing liquidity

Call Risk:

55

Crystallization of contingent liabilities and inability to undertake profitable business opportunities when desirable, arises due to, Conversion of non-fund based limit into fund based. Swaps and options.

Measuring and Managing Liquidity Risk

Developing a structure for managing liquidity risk. Setting tolerance level and limit for liquidity risk.

Stock Approach:
Stock Approach is based on the level of assets and liabilities as well as off balance sheet exposures on a particular date. The following ratios are calculated to assess the liquidity position of the bank: (i) Loan to Deposit Ratio: This ratio indicates the degree of already used available resources by the bank to accommodate the credit needs of the customers. The portion of deposits invested in loan rises with the decline in liquidity.

Year 2003-04 2004-05 2005-06 2006-07

Loan to ratio(%) 94.59 95.35 90.61 85.03

deposit % Inc/Dec to prev. Year ------0.80 -4.97 -6.15

56

2007-08

90.76

6.73

Compounded Growth Rate (CGR)= -0.82%

CGR is negative and is a matter of great concern for the bank as it creates problem for the bank in providing loan to the outsiders and the table verifies the same.

(ii)Liquid Assets to Total Asset Ratio Cash in hand, balances with RBI and money at call in short notice are included under the category of cash and near cash assets (liquid assets). The prudential limit for this ratio has been fixed at five percent.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Liquid asset/total asset (%) 6.87 7.63 6.58 10.06 9.33

% Inc/Dec to prev. Year -----11.06 -13.76 62.00 -7.25

Compounded Growth Rate (CGR)= 6.31%

CGR is positive but this increase is very small showing the fact that over the years there has been a slight increase in the

57

liquid asset to total asset ratio. The table depicts the fluctuating trend over the period under study. (iii) Current Ratio Current assets consist of cash and near cash assets and government securities. Current liabilities comprises of bills payable, branch adjustment, interest accrued and other provisions. This ration is commonly used to measure the liquidity of bank.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Current Ratio 0.81 0.65 0.80 0.78 0.83

% Inc/Dec to prev. Year ------19.75 23.07 -2.5 6.41

Compounded Growth Rate (CGR)= 0.49%

CGR is positive but this increase is very small showing the fact that over the years current ratio has increased by a small amount only. The table depicts the declining and rising trend alternatively over the period under study.

4.1.4 Conclusions
1. Reserve position management: ICICI bank has less primary reserves in relation to deposits. The position in case of secondary
58

reserve is different. The secondary reserve as percentage to total deposits, increased at a declining rate. 2. Investment Management: The investment portfolio of the ICICI bank, showed that government securities form a major chunk of the investment portfolio. The share of investment in deb. and bonds has decreased till 2005-06 and increased thereafter. Bank has increased investment in shares and its subsidiaries etc. 3. Liquidity Management: Various liquidity ratios have been calculated to ascertain the liquidity position of the ICICI bank like current ratio, liquid asset to total asset ratio, loan to deposit ratio etc.

In general, bank has become cautious with regard to their assetliability mismatch.

Chapter 5 Liabilities Management of ICICI Bank

59

Liabilities Management:
Liability Management as it was called initially originated in USA and Canada in 70s. Its purpose is to finance holdings of remunerative assets efficiently and profitably. According to Basel study paper measuring and managing liquidity are the important activities of commercial banks, whereby banks can ensure that they have the ability to meet their liabilities as they come due. Thus, liquidity needs to be maintained to avoid the effect of assets liabilities mismatch as liquidity shortfall in a single institution can have re-percussion across the whole banking sector. Often liabilities are accepted in advance of commitments, such liabilities being deployed subsequently in the acquisition of remunerative assets. At the time of maturity, mismatches occur which can be dangerous for banks. The sources of funds for the lending and investment activities constitute the liabilities side of banks balance sheet. The liability management involves:(a) Choosing the sources of financing to be used, that is choosing between deposit financing and non-deposit financing
(b) Determining the amount of funds needed 60

(c)Obtaining funds at possible cost with the least risk exposure Constituents of Bank Liabilities The sources of funds for the lending and investment activities constitute liabilities side of balance sheet. Capital Reserves and Surplus Deposits Demand Deposits Saving Deposits Term Deposits/ Fixed Deposits

Borrowings Borrowings in India - From RBI - From other banks and institutions Borrowings from outside India

Other Liabilities and Provisions Bills Payable Inter Office adjustments Interest accrued Others Contingent Liabilities

5.1 Capital
61

All Banks need capital and extend fixed assets and business investments, to enable trading, to continue an increase and to maintain the confidence of depositors and to ensure viability in the face of loss arising from inevitable business and political fluctuation and uncertainty particularly in an inflationary climate. Banks will have to show in their capital account the various classes of capital viz. Authorized Issued Subscribed Called-Up The capital account will be represented by the paid up capital which will be arrived at after deducting calls and arrears and adding up the paid value of forfeited shares to the called-up capital. Trends in capital adequacy A number of criteria have been devised to determine capital adequacy. A bank must have an adequate capital fund to cover the normal hazards inherent in its operations. It may have to incur unforeseen operational losses from time to time or there may be an unanticipated crash in the value of its assets, particularly its security investment. To provide these contingencies the bank must have an adequate capital fund.

Year 2003-04 2004-05 2005-06 2006-07

Capital (%) 10.36 11.77 13.35 11.69

Adequacy % Inc/Dec to prev. Year -----13.61 13.42 -12.43

62

2007-08

13.97

19.50

Compounded Growth Rate (CGR)= 6.16% CGR is positive and table above depicts capital adequacy ratio. Adequacy needs to be attained by the bank at any cost.

5.2 Reserves and Surplus

After the capital, the next item on the liability side of balance sheet of a bank is reserves and surplus. It compliment the capital of the bank and aid in meeting financial commitments of a commercial bank. Constituents of reserves and surplus:-- Statutory Reserve -- Capital Reserve -- Re-evaluation Reserve -- Share Premium -- Investment fluctuation reserve -- Contingency Reserve -- General Reserve -- Redemption Reserve -- Revenue and other reserves -- Foreign Currency Translation Reserve

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Reserves and (Rs in 000s) 71,395,199 115,376,012 213,519,487 230,656,945 436,095,477

Surplus % Inc/Dec to prev. Year -----61.60 85.06 8.02 89.06

63

Compounded Growth Rate (CGR)= 43.60% CGR is positive within the period. From the table, Reserves and Surplus has increased which can help the bank in its expansion for increasing its profit.

5.3 Deposits
In the commercial banking system, the level of deposits depend primarily on the amount of credit extended by banks in the form of loans and advances. Deposits are the vital source of funds for commercial banks which are used in rendering credit services to their customers. Compound rates of interest, loan facility of deposits, safety and liquidity, allowing old-age benefits, incentive of percentage on interest, children education and marriage, the benefit of life insurance cover, trial of luck, easy transfer of funds and so on are some of the important attraction offered to the depositors. Types of deposits: (i) Fixed Deposits/ Term Deposits:

Under this scheme money is deposited for a fixed period of time so it is also called Fixed Deposit. Investor can withdraw the money only after the time period. Premature withdrawals are also allowed by paying a penalty. Interest is calculated on monthly, quarterly or yearly depends on the bank and scheme. Many banks offers loan or overdraft facility as an added features with fixed deposits. Term deposits is a safe investment and it is therefore a very good option for conservative, low-risk investors.

64

 Fixed Deposit from Public:

The table depicts a rising trend in the fixed deposit from public, over the period under study.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Fixed Deposits 000s) 474,195,226 704,131,438 1,210,989,770 1,749,198,396 1,857,448,625

(Rs

in % Inc/Dec to prev. Year -----48.48 71.98 44.44 6.18

Compounded Growth Rate (CGR)= 31.39%

It shows the positive trend which is a good sign for the bank and in future bank should adopt such methods which can attract more and more deposits from public.

Fixed Deposit from Banks: The table depicts the rising trend up to 2006-07 and slight decline in 2007-08.

Year 2003-04 2004-05 2005-06

Fixed Deposits 000s) 50,418,828 64,467,974 107,092,998

(Rs

in % Inc/Dec to prev. Year -----27.86 67.11

65

2006-07 2007-08

147,107,672 125,024,337

37.36 -15.01

Compounded growth Rate (CGR)= 19.91% CGR shows fixed deposits from banks has been increased over the past five years, which can help them in their lending activities. (ii)Saving Bank Deposits: This is a kind of demand deposit with limited number of withdrawals during any specific period. Savings Accounts provides principal security and a modest interest rate. Now banks also put some restriction on the minimum balance. If customer dont maintain the minimum balance customer has to pay a penalty. Now saving account comes with many features like ATM and Debit Card, Cheque Book, Free Internet Banking with Bill Pay, Fund Transfer, Prepaid mobile charging, Free Telephone Banking etc.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Saving Bank (Rs in 000s) 83,722,246 116,596,089 242,571,556 375,330,044 537,563,405

Deposits % Inc/Dec to prev. Year -----39.26 108.04 54.72 43.22

Compounded growth rate (CGR)= 45.05% CGR is positive and is a good sign for the bank and more and more efforts should be made to increase the same. Table finds the rising trend in the saving bank deposits from public and another institutions which is good for the bank.

66

(iii)

Demand Deposits: Here money is not deposited for a specific time period. Investor can withdraw money at any time. Bank is responsible to return the money on customers demand. This account allows you to demand your money at any time.

Demand Deposit from Public: Table depicts the rising trend in the demand deposit from the public which helps the bank for lending activities and investment in other key areas.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Demand Deposits (Rs in % Inc/Dec to prev. 000s) Year 71,097,860 -----123,914,225 74.28 159,158,492 28.44 209,693,799 31.75 244,114,127 16.41 Compounded growth rate (CGR)= 27.98% CGR is positive which is beneficial for the bank and bank should make such type of policies which attract more and more depositors. Demand Deposit from Banks: The following data depicts the rising trend in the demand deposits from other banks during the period under study.

Year 2003-04 2004-05

Demand Deposits (Rs in % Inc/Dec to prev. 000s) Year 1,353,174 -----1,976,547 46.06
67

2005-06 2006-07 2007-08

4,697,014 4,806,419 5,681,818

137.63 2.32 18.31

Compounded growth rate (CGR)= 33.23% CGR is positive which is a good sign for the bank and in future bank should follow such types of policies which further increase the demand deposits. (iv) Borrowings: These are of non-depository nature and are useful when a bank temporarily needs for funds then are being being deposited and experiences paucity of funds. The borrowings can be from the following sources:

Borrowings from RBI: RBI is traditionally the lender of last resort. It provides liquidity to the banks when all other sources of funds have been exhausted. The RBI usually provides such liquidity to the scheduled commercial banks by way of credit refinance, export credit refinance, standby refinance against pledge of government securities in terms of mismatch between sources and uses of funds and discretionary refinance to tide over temporary financial stringencies during the busy season. ICICI bank over the years, has stopped approaching the RBI for borrowings which is clear from the given table.

Year 2003-04

Borrowings (Rs in 000s) ------

% Inc/Dec to prev. Year -----68

2004-05 2005-06 2006-07 2007-08

----------1,400,000 ------

---------------------

Compounded Growth Rate = NIL

Borrowings From Other Banks: In order to transact business, banks in India, quite frequently, open their current accounts with other banks in India and abroad at places where they are not represented and make overdraft arrangements with them on secured or unsecured basis.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Borrowings (Rs in 000s) 36,831,073 47,413,551 73,138,752 78,545,412 72,605,734

% Inc/Dec to prev. Year ----28.73 54.25 7.39 -7.56

Compounded growth rate (CGR)= 14.53% The borrowings from other banks shows a positive growth rate which means rising of borrowings from them. The following table depicts the rising of borrowings from other banks upto the year 2006-07 but slightly declining trend in 2007-08.

Borrowings From institutions and Agencies:

69

Apart from borrowings from RBI, banks supplement their sources by refinancing or bill rediscounting facilities from many financial institutions: IDBI, SIDBI, NABARD, EXIM, NHB and DFHI.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Borrowings (Rs in 000s) 62,870,999 56,241,312 41,357,682 40,153,633 49,884,631

% Inc/Dec to prev. Year -----10.54 -26.46 -2.91 24.23

Compounded growth rate (CGR)= -4.52% CGR is negative and thus contribution from institutions and agencies in borrowings has decreased in the last five years. . The following data depicts, the declining trend as bank does not rely only on institutions and agencies for borrowings.

Borrowings From outside India: ICICI bank also borrows from outside India. The table depicts rising trend in all the five years of study. It can accessed foreign capital as now FDI has been allowed upto 74%.

Year 2003-04 2004-05 2005-06

Borrowings (Rs in 000s) 82,424,694 149,618,940 241,444,958

% Inc/Dec to prev. Year ----81.52 61.37

70

2006-07 2007-08

437,065,654 651,413,245

81.02 49.04

Compounded growth rate (CGR)= 51.20% CGR shows that borrowing from outside India has increased over the span as too much dependence on single source may cause problem, therefore ICICI bank has been borrowing from outside India also. (v)Other Liabilities and Provisions: It includes bills payable, interoffice adjustments, interest accrued and others (including provisions). Bills Payable: It includes drafts, calligraphic transfers, travelers cheque, pay-slips, mail transfers payable, bankers cheque and other miscellaneous items. Bills payable has increased up to 2006-07 but it showed a declining trend in 2007-08.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Bills Payable 000s) 16,872,412 27,944,845 33,336,184 42,476,957 29,285,903

(Rs

in % Inc/Dec to prev. Year ----65.62 19.29 27.41 -31.05

Compounded growth rate (CGR)= 11.65% Over the period, compounded growth rate shows a rising trend. Interoffice Adjustments:

71

The credit balance of the net interoffice adjustments. The following data is not showing any definite trend.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Interoffice Adjustments (Rs % Inc/Dec to prev. in 000s) Year 3,419,337 ----5,614,186 64.18 3,496,486 -37.72 -----100.00 4,293,542 ----Compounded growth rate (CGR)= 4.65% The growth rate of the interoffice adjustments during the period shows positive trend. Interest Accrued: The interest accrued but not due on deposits and borrowings. Interest accrued has increased significantly during the period under study i.e. of five years.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Interest Accrued (Rs in % Inc/Dec to prev. 000s) Year 13,691,233 ----13,418,493 -1.99 14,563,000 8.53 21,167,766 45.35 26,780,408 26.52 Compounded growth rate (CGR)= 14.36% CGR regarding the interest accrued shows a positive trend which should also be considered by the bank.

72

 Provisions and Others: All other liability items like provision for income tax, tax deducted at source, interest tax, provisions etc. Provisions has risen due to the introduction of asset classification and provisioning norms adopted by the bank during the period under study.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Provisions and Others (Rs % Inc/Dec to prev. in 000s) Year 60,285,438 ----97,998,803 62.56 129,144,096 31.78 168,094,683 30.16 230,087,056 36.88 Compounded growth rate (CGR)= 30.71% CGR is positive and it should be considered by the bank.

5.4

Conclusions:
Liability management has become a vital area of concern for banks today as assets have to be managed in tandem with liability for commercial banks. On the basis of the study undertaken with regard to the liabilities of ICICI bank, the following observations have been made:1. Capital is the most important constituent of the liability of the bank. Hence, its adequacy needs to be attained by the bank at all costs. Moreover, with the introduction of Basel-II norms, the operational risk has also come into focus along with credit risk and market risk, for which more capital has to be provided. 2. Reserves and surplus compliment the capital of the bank and have risen significantly.

73

3. The deposits are the major sources of funds for banks. Deposits from public provide the funds for lending to the bank. All the types of deposits from public has increased significantly. 4. There is a need to open the branches in such areas where more deposits can be mobilized. Moreover, with the introduction of liberalized economy, FDI has paved the way for generating funds 5. Bank has stopped approaching RBI for borrowings. 6. ICICI bank should access foreign capital as now FDI, has been allowed upto 74%. It should borrow from other banks also as too much dependence on single source may cause problems in the long run. 7. Among the other liabilities and provisions of bank, bills payable have increased till 2006-07 and declined in 200708. 8. Interest accrued and provisions has increased due to the introduction of asset classification and provisioning norms adopted by ICICI bank as a result of economic reforms.

74

Chapter 6 Profitability Analysis of ICICI Bank

75

Profitability Trends:

Up to 1969, banking sector was in the hands of private operators and banks had been pursuing their commercial motive of augmenting their earnings. However in the post nationalization era banks lost their commercial character and social banking concept and pushed motive to the background. The reforms sought to improve the banks profitability by lowering pre-emption and to strengthen the banking system through the institution of 8%

76

capital adequacy norms. The profits are needed by banks for the number of reasons.

Profitability is the measure of returns generated by the firm on its sales and investment. Overall profit figures do not convey any idea of how effectively the firm is managed, when considered as proportions to sales and investment, the profit figures disclose the yields or returns. There are several constraints on the return on sales and investment. Market conditions, scale of operations, efficiency of activity may be lower than those on manufacturing activity. As a general rule profitability ratios of a firm should be interpreted after taking into account the firms policy and exceptions and the averages of the industry or trade as whole. The RBI bulletin (monthly), stock exchange directories of listed companies and other generals are useful sources of comparative financial data.

Today the bank management of India is facing a two faceted challenge to improve their profitability on the one hand and to serve the public in new ways and means with greater efficiency and effectiveness on the other.

The profitability of banks is of interest to bank management, financial markets, bank supervisors and academics. This interest is driven by increasing consolidation in the banking sector, changes in production technology and regulation, and dissolving borders, both internationally and vis--vis related financial products and industries. As a result, explaining (changes in) the profitability of banks is the implicit or explicit subject of much of the banking literature. When we estimate a market power model, we look for the abuse of market power as a means of explaining increases and differences in profitability. And when we employ an efficient

77

frontier model, we expect sub-optimal management decisions regarding production factors to lead to differences in profitability. Trends in Profitability Ratios: In order to analyze the context of profitability of the banks, some indicators have been selected. (i) Income (ii) Expenditure (iii) Spread (iv) Burden (v) Net Profit (i) Income

(a) Interest Income of Banks: The constituents of bank income are interest and discount, income from investment and interest on balance with RBI and other inter bank balances. After the advent of the reforms the trends in the interest income of the private sector banks has increase manifold. Year 2003-04 2004-05 2005-06 2006-07 2007-08 Interest Income 000s) 92,443,183 98,337,452 146,141,891 250,012,495 340,949,565 (Rs in % Inc/Dec to prev. Year ----6.38 48.61 71.08 36.37

Compounded growth rate (CGR)= 29.82% CGR is positive saying that interest income of banks has increased which is a good and positive sign for a bank. (b) Interest and Discount Income:

After the reforms the interest and the discount income has increased in the private sector banks. The following data shouts about the increasing trend in the increment of
78

interest and discount income but the increment has decreased in the last financial year.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Interest & discount income % Inc/Dec to prev. (Rs in 000s) Year 61,989,102 ----69,811,266 12.62 101,142,652 44.88 169,700,875 67.78 240,683,557 41.83 Compounded growth rate (CGR)= 31.16% CGR is quite high which says that interest and discount income has increased over the period and this is good for the bank.

(c)Income from investments: Though there is net increase in the income in total span of five years but decrease in 2007-08 is a matter of concern.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Income from investments % Inc/Dec to prev. (Rs in 000s) Year 26,453,853 ----23,921,900 -9.57 40,607,809 69.75 68,460,679 68.59 34,042,178 -50.27 Compounded growth rate (CGR)= 5.17%

79

In the past five years, the income from investment has increased and this is a good sign for the organization if viewed over the period.

Income from investments decreased during 2004-05 as compared to 2003-04 & it increased during the years 200506 as well as 2006-07 as compared to previous years while it again decreased during the year 2007-08 as compared to 2006-07. In the declining interest rate scenario, such investments became attractive due to their high yields & non risky nature.

(d) Interest on Cash Balance which are kept with RBI and other inter bank funds: The following data depicts that income has increased till 2006-07 but it decreased slightly in 2007-08 and it is a matter of concern for the bank.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Interest (Rs in 000s) 2,193,950 2,334,833 3,433,183 9,037,876 8,747,745

% Inc/Dec to prev. Year ----6.42 47.04 163.25 -3.21

Compounded growth rate (CGR)= 31.86%

80

This positive value of CGR shows that the income on cash balance which are kept with RBI and other inter bank funds has increased over the period.

(e)

Income from other sources of Interest: Table shows the flexible trend in income from other sources.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Income from other sources % Inc/Dec to prev. (Rs in 000s) Year 1,806,278 ----2,269,453 25.64 958,247 -57.78 2,813,065 193.56 2,472,835 -12.09 Compounded growth rate (CGR)= 6.48% CGR is positive during the period.

(f) Other Incomes of banks: Other Income refer to all non-interest earnings of bank viz. income from commissions, exchange and brokerage, sale of investment, sale of lend, building, exchange transactions, income derived from dividend, leasing business etc. Income from commission, exchange and brokerage Table says about the rising trend in the income from commission, exchange and brokerage during five years.

Year

Income from comm., Brok.(Rs in 000s)

exch.

And % Inc/Dec prev. Yr.

to
81

200304 200405 200506 200607 200708

12,037,235 20,746,655 32,546,535 54,432,414 67,673,441

----72.35 56.87 67.24 24.33

Compounded growth rate (CGR)= 41.24% Positive value of CGR says that bank is doing a better job to gather income from commission, exchange and brokerage.

Income from Sale of Investment Table clearly shows the flexibility in the income from the sale of investment i.e. in 2004-05 it declined but in 200506 it has increased manifold and then it again declined in 2006-07 and then further increased in 2007-08.

Year 200304 200405 200506 200607 200708

Income from sale of investment(Rs % Inc/Dec in 000s) prev. Yr. 14,175,352 ----7,560,560 32,546,535 14,061,769 34,042,178 -46.66 303.48 -56.79 142.09

to

82

Compounded growth rate (CGR)= 19.15% CGR is positive and it gives information regarding rising in the investment income during the period of study.

Income from Exchange Transactions Table gives information about the income from exchange transactions has increased till 2006-07 but it has declined in 2007-08.

Year 200304 200405 200506 200607 200708

Income from Exchange % Inc/Dec Transactions(Rs in 000s) prev. Yr. 2,086,142 ----2,781,079 4,451,911 8,435,218 1,279,786 33.31 60.08 89.47 -84.82

to

Compounded growth rate (CGR)= -9.31%

CGR is negative which depicts that the bank is not earning much profits or income from the exchange transactions. The bank should adopt different measures to increase the exchange income.

(ii)

Expenditures

83

(a)

Interest Expanded

Interest paid on deposits and borrowings (from RBI and Banks) form a major chunk of total expenses incurred by banks.

Interest expanded on deposits Table depicts that the interest paid by the bank on the deposits which has increased very much till 2006-07 but increment is at a declining rate in 2007-08.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Interest expanded 000s) 30,194,309 32,622,753 59,590,224 124,565,606 187,220,141

(Rs

in % Inc/Dec prev. Yr. ----8.04 82.66 109.04 50.30

to

Compounded growth rate (CGR)= 44.04%

CGR is quite high and says that banks interest expanded on deposits has increased in the last five years. It shows that the deposits in the bank has increased over the period. Interest on RBI/ Inter Bank Borrowings It shows the increasing trend of the interest on RBI/ Inter bank borrowings during the period under study i.e. of five years.

Year

Interest

expanded

(Rs

in %

Inc/Dec

to
84

2003-04 2004-05 2005-06 2006-07 2007-08

000s) 3,230,976 2,334,833 11,888,142 16,659,290 23,140,065

prev. Yr. -----27.74 409.16 40.13 38.90

Compounded growth rate (CGR)= 48.25%

CGR is positive and is quite high, nearly equal to 50% which shouts about the great increase in interest on RBI and Inter bank borrowings.

Interest Expanded on other Borrowings Table depicts that interest expanded on other borrowings has decreased up to 2005-06 but it increased thereafter.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Interest exp on other Borrowings % Inc/Dec (Rs in 000s) prev. Yr. 38,251,291 ----31,373,162 -17.98 29,536,430 -5.85 35,532,297 20.30 47,309,548 33.15 Compounded growth rate (CGR)= 4.34%

to

CGR is positive and says about the increased interest expanded on other borrowings in the span of five years.

85

 Expenses (Component Wise) Table depicts the interest expenditure has declined up to 2005-06 but it increased manifold in 2006-07 but incremented at a declining rate in 2007-08 while the operating expenditure has also increased till 2006-07 but it declined during 2007-08 .

Year 200304 200405 200506 200607 200708

Interest Exp % Inc/Dec to Operating (Rs in billion) prev. Yr. Exp. (Rs billions) 70.15 ----19.99 65.71 41.87 163.58 234.84 -6.33 -36.28 290.69 43.56 25.17 35.47 125.50 64.29

% inc/dec to in prev. yr ----25.91 40.92 253.82 -48.77

Compounded growth rate (Interest Expenditure) (CGR)= 27.33% Compounded growth rate (Operating Expenditure) (CGR)= 26.31%

CGR is positive for both interest expenditure as well as operating expenditure, the main reason for that is the expansion of the branches by the bank in different areas.

(iii) Spread Ratios:

86

The difference between interest earned and interest paid constitutes the spread. Spread along with non-interest income earned as commission, service charges etc. form the revenue pool, out of which man power and other expanses are met. Hence it is the amount of the spread and its components that is interest earned and interest paid in relation to the average working funds which is significant for the banks to analyze their profitability. RBI has issued guidelines for banks to disclose certain ratios i.e interest income, non-interest income, hence all spread and burden ratios are calculated in terms of average working funds to enable comparison of all ratios. Interest earned as percentage of average working funds. (a) Interest earned working funds as percentage of average

Interest earnings relate to funds based income earned from the traditional banking business i.e. of lending funds. The ratio of interest earned as percentage of average working funds indicates the rate of income a bank earns on its total assets. Interest has declined till 2005-06 but it increased thereafter.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Interest earned/ Avg Working % Inc/Dec funds(%) prev. Yr. 172.04 ----134.10 -22.05 128.27 -4.34 154.27 20.26 170.84 10.74

to

87

Compounded growth rate (CGR)= -0.13%

Negative CGR says about the declining trend in the interest earned by the bank which should be considered as a matter of concern.

(b)

Interest paid by average working funds

Interest expenditure consists of funds based expenditure incurred to earn interest income. The major constituents of interest expenditure consist of interest paid on deposits, borrowing on balances from RBI and inter bank borrowings. The trend has declined till 2005-06 but it has increased thereafter, which should be considered by the bank.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Interest paid/ funds(%) 133.39 92.79 88.66 109.07 129.11

Avg

Working % Inc/Dec prev. Yr. -----30.43 -4.45 23.02 18.37

to

Compounded growth rate (CGR)= -0.65%

88

CGR is negative for the interest paid as percentage of average working funds, which is a good sign for the bank.

(iv) Burden Ratios:

(a) Non-Interest Expenditure average working funds

as

percentage

of

Non-interest expenditure of commercial banks consists of manpower expenses like salaries, allowances, provident fund and other current and non-current expenses. Expenditure has increased annually over the period under study.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Non-Interest exp/ Working funds(%) 93.98 113.41 116.39 129.92 156.19

Avg % Inc/Dec prev. Yr. ----20.67 2.62 11.62 20.22

to

Compounded growth rate (CGR)= 10.69%

CGR is positive which says that expenditure has increased which is due to the branch expansion.

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(b) Non-Interest Income as percentage of average working funds Other incomes of the bank constitute income by way of commission, exchange, brokerage, service charges and other miscellaneous receipts. NII has increased in the last five years. For the bank it is good sign.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Non-Interest Inc/ Avg Working % Inc/Dec funds(%) prev. Yr. 84.73 ----96.78 14.22 97.83 1.08 100.96 3.19 130.07 28.83 Compounded growth rate (CGR)= 8.95%

to

CGR is positive over the period of study.

(v)

Net-Profit Profitability Ratios

(a)

Net-Profit as percentage of total income

Profitability of banks can also be related to the total income of the banks. Total income includes both
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interest income and non-interest income of the banks. It shows declining trend over the period under study.

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Non Profit/ total income(%) 11.44 10.69 9.31 6.36 5.18

% Inc/Dec prev. Yr. -----6.55 -12.90 -31.68 -18.55

to

Compounded growth rate (CGR)= -14.65%

CGR shows the negative trend which is a great concern for the bank and bank should take positive measures to improve its position.

(b)

Net Profit as percentage of Total Deposits:

The ratio reveals profit per 100 rupee of total deposits. Total deposits consist of fixed saving and demand deposits both for public and banks. The ratio shows a declining trend till 2006-07 but increase in 2007-08.

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Year 2003-04 2004-05 2005-06 2006-07 2007-08

Non Profit/ total deposits(%) 2.32 1.79 1.35 1.01 1.22

% Inc/Dec prev. Yr. -----22.84 -24.58 -25.19 20.79

to

Compounded growth rate (CGR)= -12.06%

CGR is negative which shows the deposits which are made are not sufficient for earning profits to the bank. So bank should take immediate measures.

(c)Earning per Share: Earning per share is calculated by dividing net profit by number of equity shares. EPS has increased over the period and it fluctuates.

Year 2003-04 2004-05

Earning Per Share 26.66 27.6

% Inc/Dec prev. Yr. ----3.52

to

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2005-06 2006-07 2007-08

32.5 34.8 39.4 Compounded growth rate (CGR) = 8.12%

17.75 7.07 13.21

CGR being positive shows increase in the earnings per share during the period under study which is a good sign for the bank.

(vi) Conclusions: 1. The major source of income that is income from income from commission, exchange and brokerage, commission has increased significantly for ICICI bank. 2. Foreign exchange income has increased significantly till 2006-07 but it declines in 2007-08.
3. The share of the operating expenses of the ICICI bank

has increased manifold till 2006-07 because bank was initially in the stage of branch expansion and had spent heavily on technology intensive systems. 4. ICICI bank have installed ATMs and have been expanding internet banking to their customers since the day of there inception. 5. Bank has recorded a rise in all the sources of interest income i.e. interest discount income, income on investment, income from balance with RBI and other inter bank funds till 2006-07. 6. As far as interest expanded is concerned, the interest expanded on deposits has increased significantly up to 2006-07 and declined in 2007-08.

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7. The non-interest income for ICICI bank scaled new heights to augment their total income. 8. ICICI bank emerged strong on most of the major parameters of profitability. 9. ICICI bank increased income from major non-fund activities. 10. ICICI bank has been able to consolidate its position after the merger, the merger as all the indicators of profitability responded in its favor. 11. The reforms have granted flexibility to banks in meeting their targets of priority sector lending.

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95

Chapter 7 Loan-Portfolio Management of ICICI Bank

Loan-Portfolio Management:
Lending is the principal business activity for most commercial banks. The loan portfolio is typically the largest asset and the predominate source of revenue. As such, it is one of the greatest sources of risk to a banks safety and soundness. Whether due to lax credit standards, poor portfolio risk management, or weakness in the economy, loan portfolio problems have historically been the major cause of bank losses and failures. Effective management of the loan portfolio and the credit function is fundamental to a banks safety and soundness. Loan
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portfolio management (LPM) is the process by which risks that are inherent in the credit process are managed and controlled. Because review of the LPM process is so important, it is a primary supervisory activity. Assessing LPM involves evaluating the steps bank management takes to identify and control risk throughout the credit process. The assessment focuses on what management does to identify issues before they become problems. This booklet, written for the benefit of both examiners and bankers, discusses the elements of an effective LPM process. It emphasizes that the identification and management of risk among groups of loans may be at least as important as the risk inherent in individual loans. For decades, good loan portfolio managers have concentrated most of their effort on prudently approving loans and carefully monitoring loan performance. Although these activities continue to be mainstays of loan portfolio management, analysis of past credit problems, such as those associated with oil and gas lending, agricultural lending, and commercial real estate lending in the 1980s, has made it clear that portfolio managers should do more. Traditional practices rely too much on trailing indicators of credit quality such as delinquency, nonaccrual, and risk rating trends. Banks have found that these indicators do not provide sufficient lead time for corrective action when there is a systemic increase in risk. Effective loan portfolio management begins with oversight of the risk in individual loans. Prudent risk selection is vital to maintaining favorable loan quality. Therefore, the historical emphasis on controlling the quality of individual loan approvals and managing the performance of loans continues to be essential. But better technology and information systems have opened the door to better management methods. A portfolio manager can now obtain early indications of increasing risk by taking a more comprehensive view of the loan portfolio. Loan Portfolio Objectives: Loan Portfolio objectives establish specific, measurable goals for the portfolio. They are an outgrowth of the credit culture and risk profile. The board of directors must ensure that loans are made with the following three basic objectives in mind: To grant loans on a sound and collectible basis. To invest the banks funds profitably for the benefit of shareholders and the protection of depositors. To serve the legitimate credit needs of their communities
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Types of Loans:
1. Commercial loans: Loans intended to fulfill the credit needs of

business enterprises, including farm operations, are commercial loans. On the basis of security, commercial loans can be secured or unsecured. Loans can be made at either fixed rate of interest or floating rates. It can be further classified as:(a) Seasonal Loans:

This loan is taken out only for seasonal needs and is repaid when inventory and receivables are partially converted into cash at the end of the seasonal upsurge. (b) Working Capital Loans:

This type of business loan is needed for financing current assets inventories, receivables and for other operational expenses. The need for working capital may arise for many purposes:(i) (ii) (iii) To finance increasing level of sales. To finance the provision of longer credit terms to customers. To finance large stock holdings.

(c)Term Loans: Bank provide term loans primarily to finance fixed assets such as plant and machinery, construction of factory building, purchase of factory land etc. Loans are sanctioned for a period more than one year, without specific scheduled repayment.
2. Consumer Loans: These are loans granted by banks to individuals

who may feel inclined to purchase articles to improve their standard of living. In broad usage, short and intermediate term consumer loans include both installment credit and noninstallment credit.
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3. Real Estate Lending, Mortgage Loans: These are specialized form

of consumer and commercial lending. Two considerations dominate on financial institutions decisions of whether to approve a mortgage loan application. (a) The applicants ability and willingness to make timely interest and principal payment. (b) The value of the collateral underlines the loan.

Constituents of Loan Portfolio of Banks:

(a) Priority Sector Lending: The Narasimham committee recommends

that the advances to the priority sector should be fixed at the 10% of the total advances has not been accepted by the government. But banks have been given operational autonomy in meeting the priority sector target. If the target is not achieved then amount equal to the shortfall can be invested in NABARD/ SIDBI. Now, banks have several profitable avenues included in the priority sector to extend loans. Table depicts priority sector lending which has increased ery much till 2005-06 but increment has shown a declining trend thereafter.

Year 200304 200405 200506 200607 200708

Priority Sector Lending (Rs % Inc/Dec to prev. Yr. in 000s) (Priority Sector Lending) 145,307,396 -----215,591,362 447,310,487 555,491,571 606,025,758 48.36 107.48 24.18 9.09

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Compounded Growth Rate (CGR)= 33.05% CGR is positive over the period of study but since the initiation of reforms, there has been a decline in the priority sector lending due to greater flexibility by the bank. (b) Trends in Cash Credit, Overdrafts and Loans:

Table depicts that the trends in cash credit, overdraft & loans payable on demand for all the five years of ICICI bank under study has shown significant increase till 2005-06 but the increment has shown a declining trend thereafter.

Year

200304 2004123,344,410 101.36 05 2005258,593,077 109.65 06 2006334,781,882 29.46 07 2007351,458,670 4.98 08 Compounded Growth Rate (CGR)= 41.82%

CC, OD and Loans (Rs in % Inc/Dec to prev. Yr. 000s) 61,254,576 ------

CGR shows positive trend and is quite high and is good sign for the bank as Cash Credit, Overdrafts and Loans have increased over the past five years but increment has shown a declining trend from 2006-08 which is a matter of concern for the bank.

(c)Trends in Bills Purchased and Discounted

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The table exhibits the trends in another vital component of loans & advances i.e. bills purchased & discounted. The share in 200405 has increased manifold but later on it starts declining.

Year 200304 200405 200506 200607 200708

Bills Purchased and Discounted % Inc/Dec to prev. Yr. (Rs in 000s) 18,267,009 -----68,868,430 107,554,857 71,995,344 68,903,033 277.00 56.17 -33.06 -4.29

Compounded Growth Rate (CGR)= 30.41%

Positive value of CGR speaks of the increasing trend in the Bills Purchased and Discounted of ICICI Bank which is a vital component of Loans and Advances.

(d)

Trends in Term Loans:

The table depicts the rising trend in the term loans during all the five years but in 2005-06 the rise in the term loans has been spontaneous than the other years.

Year 200304 2004-

Term Loans (Rs in 000s) 556,944,528 772,559,072

% Inc/Dec to prev. Yr. -----38.71

101

05 200506 200607 200708

1,209,251,205 1,659,223,017 2,009,110,336

56.52 37.21 21.08

Compounded Growth Rate (CGR)= 29.25%

CGR depicts that there is increasing trend in the Term Loans over the period under study which is a good sign for the ICICI bank.

(e)

Trends in Secured Advances to total advances:

This ratio indicates the proportion of advances granting after securing them. The table highlights the trends in the ratio. It highlights the declining trend in the ratio from 2003-04 to 200708.

Year 200304 200405 200506 200607 200708

Secured Adv/ Total Adv (%) % Inc/Dec to prev. Yr. 93.13 85.96 83.59 79.90 78.39 ------7.69 -2.75 -4.41 -1.88

Compounded Growth Rate (CGR) = -3.38%

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CGR is negative here and shows that secured advances to total advances had a declining trend over the study period.

(f) Trends in Term Loans to Total Advances: This ratio indicates the proportion of term loans granted by a bank in the entire advances which is depicted in the table. It is a preferred mode of financing by banks, it has decreased for first three years & increased thereafter.

Year 200304 200405 200506 200607 200708

Term Loans/ Total Adv (%) 86.48 80.13 77.38 78.49 79.91

% Inc/Dec to prev. Yr. ------7.34 -3.43 1.43 1.80

Compounded Growth Rate (CGR) = -1.56% CGR shows there is a declining trend in the above ratio over the five years period. Also it is clear from the table above that there is an increasing trend in the increment too.

Conclusions:
1. However, with flexibility provided to banks to invest in apex institutions on failure to meet the priority sector targets, the bank has started lending on commercially viable terms.

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2. The various constituents of loans and advances i.e. cash credit, overdraft and loans payable on demand shown a significant rise till 2005-06 but increment has shown a declining trend thereafter. 3. Term loans constituted the largest proportion of advances, followed by cash credit, overdraft and loans repayable on demand and bills purchased and discounted.

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Chapter 8 Finding and Suggestions

105

Finding and Suggestions:

The introduction of financial and banking sector reforms has brought some major policy measures, deregulation, decontrol, liberalizing of control in trade/ foreign exchange etc. deregulation and integration have led to Indian banks and financial institutions into competition both on assets side and liabilities side of balance sheet, forcing them to assume greater and newer risks in their quest for higher returns. Though the ALM process is too complex to practice, it is perhaps the only solution for the banks to survive in this rapidly changing environment where the composition, duration and risk profile of their assets and liabilities have an important bearing on their growth and profitability.

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The narasimham committee report on the banking sector reforms highlighted the weaknesses in the Indian banking system & suggested reforms based on the Basel norms.

Suggestions: 1. While providing credit to the priority sector, sound principles of lending should be followed by the public sector banks to avoid NPAs. 2. Bank should follow the essentials of Basel committee regarding the management of interest rate risks to avoid reduction in spread. 3. Of balance sheet activities should be undertaken as they generate fee income and increase the non-interest revenue of bank. 4. Bank should move from deposit orientation to profit orientation. However, the shift in focus to profitability rather than the balance sheet doesnt mean that targeted resource mobilization and asset build up should take a back seat. 5. Bank is in dubious position of having more secondary reserves and less primary reserves. 6. The decline in the investment in the debentures has been due to the lack of development of corporate bond market. The secondary market has not developed commensurately and market liquidity remains an issue. 7. Bank needs to increase loans so that the loans/ assets ratio reaching the prudential limit of 50%. 8. ICICI bank which is the largest private sector bank, needs to increase lending to the priority sector as its lending is short of the stipulated target. It is highly imperative that the private sector banks also shoulder their responsibility towards the priority sector.
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9. If 50% of the liabilities are maturing within 1 year but only 10% of

the assets are maturing within the same period. Though the financial institution has enough assets, it may become temporarily insolvent due to a severe liquidity crisis. Thus, ALM is required to match assets & liabilities and minimize liquidity as well as market risk.
10. There should be thorough awareness about ALM among the staff

at all levels, supportive management & dedicated teams.

11. For reporting data from branches/ other departments strong

management information system should be used.

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