UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] Registration statement pursuant to section 12(b) or (g) of the Securities
Exchange Act of 1934
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 2003
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_____________
Commission File Number 001-15002
ICICI BANK LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Vadodara, Gujarat, India
(Jurisdiction of incorporation or organization)
ICICI Bank Towers
Bandra-Kurla Complex
Mumbai 400051, India
(Address of principal executive offices)
Securities registered or to be registered pursuant
to Section 12(b) of the Act.
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act.
American Depositary Share
each represented by 2 Equity Shares, par value Rs. 10 per share.
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
Not Applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report - 613,031,404 Equity Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 month (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes.........x............ No.....................
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17.................. Item 18.........x......
TABLE OF CONTENTS
Page
Cross Reference Sheet........................................................ 3
Certain Definitions ......................................................... 5
Forward-Looking Statements................................................... 6
Exchange Rates .............................................................. 7
Risk Factors................................................................. 8
Business ....................................................................25
Overview ................................................................25
History .................................................................27
Shareholding Structure and Relationship with the Government of India.....29
Strategy ................................................................31
Overview of ICICI Bank's Products and Services...........................36
Funding .................................................................57
Risk Management..........................................................61
Loan Portfolio...........................................................75
Impaired Loans...........................................................80
Subsidiaries and Affiliates .............................................88
Technology ..............................................................91
Competition..............................................................92
Employees ...............................................................94
Properties ..............................................................96
Legal and Regulatory Proceedings.........................................96
Selected Consolidated Financial and Operating Data...........................99
Operating and Financial Review and Prospects................................104
Management .................................................................145
Overview of the Indian Financial Sector.....................................162
Supervision and Regulation..................................................172
Exchange Controls...........................................................187
Market Price Information....................................................190
Restriction on Foreign Ownership of Indian Securities.......................192
Dividends...................................................................195
Taxation ...................................................................197
Presentation of Financial Information.......................................202
Additional Information......................................................204
Index to Consolidated Financial Statements..................................F-1
Exhibit Index...............................................................206
2
CROSS REFERENCE SHEET
Form 20-F Item Number and Caption Location Page
-------- ----
Part - I
1 Identity of Directors, Senior
Management and Advisers Not applicable
2 Offer Statistics and Expected
Timetable Not applicable
3 Key Information Selected Consolidated Financial and Operating Data......... 99
Exchange Rates............................................. 7
Risk Factors............................................... 8
4 Information on the Company Business................................................... 25
Operating and Financial Review and Prospects--Capital
Expenditures............................................... 134
Operating and Financial Review and Prospects--Effect of
Other Acquisitions......................................... 106
Operating and Financial Review and Prospects--Segment
Revenues and Assets........................................ 135
Overview of the Indian Financial Sector.................... 162
Supervision and Regulation................................. 172
5 Operating and Financial
Review and Prospects Operating and Financial Review and Prospects............... 104
Business--Risk Management.................................. 61
6 Directors, Senior Management and
Employees Management................................................. 145
Business--Employees........................................ 94
7 Major Shareholders and Business--Shareholding Structure and Relationship with the
Related Party Transactions Government of India........................................ 29
Operating and Financial Review and Prospects--Related
Party Transactions......................................... 137
Management--Interest of Management in Certain Transactions. 161
Management--Compensation and Benefits to Directors and
Officers--Loans............................................ 160
Market Price Information................................... 190
Note 30 in Notes to Consolidated Financial Statements...... F-51
8 Financial Information Report of Independent Auditors on Consolidated
Financial Statements....................................... F-2
Consolidated Financial Statements and the notes
thereto.................................................... F-3
Operating and Financial Review and Prospects --
Significant Changes........................................ 135
Business--Legal and Regulatory Proceedings................. 96
Dividends.................................................. 195
9 The Offer and Listing Market Price Information................................... 190
Restriction on Foreign Ownership of Indian
Securities................................................. 192
3
10 Additional Information Additional Information..................................... 204
Exchange Controls.......................................... 187
Taxation................................................... 197
Restriction on Foreign Ownership of Indian
Securities................................................. 192
Dividends.................................................. 195
11 Quantitative and Qualitative Business--Quantitative and Qualitative Disclosures About
Disclosures About Market Risk Market Risk................................................ 68
12 Description of Securities Other than
Equity Securities Not applicable
Part - II
13 Defaults, Dividend Arrearages and
Delinquencies Not applicable
14 Material Modifications to the
Rights of Security Holders and Use of
Proceeds Not applicable
15 Controls and Procedures Business - Risk Management................................. 61
16 [Reserved] Not applicable
16A Audit Committee Financial Expert Not applicable
16B Code of Ethics Not applicable
16C Principal Accountant Fees and Services Not applicable
16D Exemptions from the Listing Standards
for Audit Committees Not applicable
Part - III
17 Financial Statements See Item 18
18 Financial Statements Report of Independent Auditors on Consolidated
Financial Statements....................................... F-2
Consolidated Financial Statements and the notes
thereto.................................................... F-3
19 Exhibits Exhibit index and attached exhibits........................ 206
4
CERTAIN DEFINITIONS
ICICI Limited, ICICI Personal Financial Services Limited and ICICI
Capital Services Limited amalgamated with and into ICICI Bank Limited,
effective April 1, 2002 for accounting purposes under US GAAP. In this annual
report, all references to "we", "our" and "us" are, as the context requires, to
ICICI Bank Limited and its consolidated subsidiaries and other consolidated
entities subsequent to the amalgamation or to specific subsidiaries or other
consolidated entities of ICICI Bank Limited. References to specific data
applicable to particular subsidiaries or other consolidated entities are made
by reference to the name of that particular company. References to "ICICI Bank"
are, as the context requires, to ICICI Bank Limited on an unconsolidated basis
subsequent to the amalgamation, to ICICI Bank Limited on an unconsolidated
basis prior to the amalgamation, or to both. References to "ICICI" are to ICICI
Limited and its consolidated subsidiaries and other consolidated entities prior
to the amalgamation. References to "ICICI Personal Financial Services" are to
ICICI Personal Financial Services Limited. References to "ICICI Capital
Services" are to ICICI Capital Services Limited. References to the
"amalgamation" are to the amalgamation of ICICI, ICICI Personal Financial
Services and ICICI Capital Services with and into ICICI Bank. References to
"the Scheme of Amalgamation" are to the Scheme of Amalgamation of ICICI, ICICI
Personal Financial Services and ICICI Capital Services with ICICI Bank
sanctioned by the High Court of Gujarat at Ahmedabad on March 7, 2002 and by
the High Court of Judicature at Bombay on April 11, 2002 and approved by the
Reserve Bank of India on April 26, 2002.
Statement on Financial Accounting Standards No. 141 on "Business
Combinations", issued by the Financial Accounting Standards Board, requires
that business combinations be accounted for in the period in which the
combination is consummated. Accordingly, under US GAAP, the amalgamation has
been reflected in the financial statements contained in this annual report for
fiscal 2003, as it was consummated in April 2002. The effective date of the
amalgamation for accounting purposes under US GAAP was April 1, 2002. Under US
GAAP, the amalgamation was accounted for as a reverse acquisition. This means
that ICICI was recognized as the accounting acquirer in the amalgamation,
although ICICI Bank was the legal acquirer. Accordingly, the financial
statements and other financial information contained in this annual report for
fiscal 2002 and prior years, except where specifically stated otherwise,
present the assets, liabilities and results of operations of ICICI.
In the financial statements contained in this annual report and the notes
thereto, all references to "the Company" are to ICICI Bank Limited and its
consolidated subsidiaries and other consolidated entities subsequent to the
amalgamation, all references to the "acquiree" are to ICICI Bank Limited prior
to the amalgamation and all references to the "acquirer" are to ICICI Limited
and its consolidated subsidiaries and other consolidated entities prior to the
amalgamation.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation, with ICICI Bank
recognized as the accounting acquirer.
As ICICI Bank is the surviving legal entity in the amalgamation, the
other subsidiaries and affiliates of ICICI have become subsidiaries and
affiliates of ICICI Bank.
5
FORWARD-LOOKING STATEMENTS
We have included statements in this annual report which contain words or
phrases such as "will", "would", "aim", "aimed", "will likely result", "is
likely", "are likely", "believe", "expect", "expected to", "will continue",
"will achieve", "anticipate", "estimate", "estimating", "intend", "plan",
"contemplate", "seek to", "seeking to", "trying to", "target", "propose to",
"future", "objective", "goal", "project", "should", "can", "could", "may",
"will pursue" and similar expressions or variations of such expressions, that
are "forward-looking statements". Actual results may differ materially from
those suggested by the forward-looking statements due to certain risks or
uncertainties associated with our expectations with respect to, but not limited
to, our ability to successfully implement our strategy, our ability to
integrate recent or future mergers or acquisitions into our operations, future
levels of impaired loans, our growth and expansion, the adequacy of our
allowance for credit and investment losses, technological changes, investment
income, our ability to market new products, cash flow projections, the outcome
of any legal or regulatory proceedings we are or become a party to, the future
impact of new accounting standards, our ability to implement our dividend
policy, the impact of Indian banking regulations on us, which includes the
assets and liabilities of ICICI, a former financial institution not subject to
Indian banking regulations, our ability to roll over our short-term funding
sources, our exposure to market risks and the market acceptance of and demand
for Internet banking services. By their nature, certain of the market risk
disclosures are only estimates and could be materially different from what
actually occurs in the future. As a result, actual future gains, losses or
impact on net interest income and net income could materially differ from those
that have been estimated.
In addition, other factors that could cause actual results to differ
materially from those estimated by the forward-looking statements contained in
this annual report include, but are not limited to general economic and
political conditions in India, southeast Asia, and the other countries which
have an impact on our business activities or investments, political or
financial instability in India or any other country caused by any factor
including any terrorist attacks in India, the United States or elsewhere, any
anti-terrorist or other attacks by the United States, a United States-led
coalition or any other country or any other acts of terrorism world-wide, the
monetary and interest rate policies of India, political or financial
instability in India or any other country caused by tensions between India and
Pakistan related to the Kashmir region or military armament or social unrest in
any part of India, inflation, deflation, unanticipated turbulence in interest
rates, changes in the value of the rupee, foreign exchange rates, equity prices
or other rates or prices, the performance of the financial markets and level of
Internet penetration in India and globally, changes in domestic and foreign
laws, regulations and taxes, changes in competition and the pricing environment
in India and regional or general changes in asset valuations. For a further
discussion on the factors that could cause actual results to differ, see the
discussion under "Risk Factors" contained in this annual report.
6
EXCHANGE RATES
Fluctuations in the exchange rate between the Indian rupee and the US
dollar will affect the US dollar equivalent of the Indian rupee price of the
equity shares on the Indian stock exchanges and, as a result, will affect the
market price of the ADSs in the United States. These fluctuations will also
affect the conversion into US dollars by the depositary of any cash dividends
paid in Indian rupees on the equity shares represented by ADSs.
On an average annual basis, the Indian rupee has consistently declined
against the dollar since 1980. In early July 1991, the government adjusted the
Indian rupee downward by an aggregate of approximately 20.0% against the
dollar. The adjustment was effected as part of an economic package designed to
overcome economic and foreign exchange problems. Since the Indian rupee was
made convertible on the current account in March 1993, it has steadily
depreciated on an average annual basis at a rate of approximately 5-6%. The
rupee has, however, shown a trend of appreciation against the US dollar during
the recent past. After reaching Rs. 49.06 per US$ 1.00 on May 31, 2002, it
gradually strengthened against the US dollar to Rs. 47.53 per US$ 1.00 on March
31, 2003 and Rs. 45.77 per US$ 1.00 on September 23, 2003. Reflecting the
improving structure of India's current account and the weakening of the US
dollar, the Indian rupee appreciated by about 3.7% against the US dollar
between April-September (through September 23), 2003.
The following table sets forth, for the periods indicated, certain
information concerning the exchange rates between Indian rupees and US dollars
based on the noon buying rate:
Fiscal Year Period End(1) Average(1) (2)
------------------------------------------------------------------------------
1999......................................... 42.50 42.27
2000......................................... 43.65 43.46
2001 ........................................ 46.85 45.88
2002......................................... 48.83 47.80
2003 ........................................ 47.53 48.43
2004 (through September 23, 2003) ........... 45.77 46.57
Month High Low
------------------------------------------------------------------------------
March 2003................................... 47.85 47.53
April 2003................................... 47.46 47.34
May 2003..................................... 47.35 46.85
June 2003 ................................... 47.15 46.40
July 2003.................................... 46.49 46.06
August 2003 ................................. 46.18 45.80
September 2003 (through September 23, 2003).. 45.98 45.72
-------------
(1) The noon buying rate at each period end and the average rate for each
period differed from the exchange rates used in the preparation of our
financial statements.
(2) Represents the average of the noon buying rate on the last day of each
month during the period.
Although certain rupee amounts in this annual report have been translated
into dollars for convenience, this does not mean that the rupee amounts
referred to could have been, or could be, converted into dollars at any
particular rate, the rates stated below, or at all. Except in the section on
"Market Price Information", all translations from rupees to dollars are based
on the noon buying rate in the City of New York for cable transfers in rupees
at March 28, 2003. The Federal Reserve Bank of New York certifies this rate for
customs purposes on each date the rate is given. The noon buying rate on March
28, 2003 was Rs. 47.55 per US$ 1.00 and on September 23, 2003 was Rs. 45.77 per
US$ 1.00.
7
RISK FACTORS
You should carefully consider the following risk factors as well as the
other information contained in this annual report in evaluating us and our
business.
Risks Relating to India
A slowdown in economic growth in India could cause our business to suffer.
The Indian economy has shown sustained growth over the last few years
with real GDP growing at 4.3% in fiscal 2003, 5.6% in fiscal 2002 and 4.4% in
fiscal 2001. However, growth in industrial production in India has been
variable. The Index of Industrial Production grew at 5.8% in fiscal 2003
compared to 2.7% in fiscal 2002 and 5.0% in fiscal 2001. Any slowdown in the
Indian economy or future volatility of global commodity prices, in particular
oil and steel prices, could adversely affect our borrowers and contractual
counterparties. With the increasing importance of retail loans to our business,
any slowdown in the growth of sectors like housing and automobiles could
adversely impact our performance. Further, with the increasing importance of
the agricultural sector in our business, any slowdown in the growth of the
agricultural sector could also adversely impact our performance. Any such
slowdown could adversely affect our business, including our ability to grow our
asset portfolio, the quality of our assets, our financial performance, our
stockholders' equity, our ability to implement our strategy and the price of
our equity shares and our ADSs.
A significant increase in the price of crude oil could adversely
affect the Indian economy, which could adversely affect our business.
India imports approximately 75.0% of its requirements of crude oil. The
sharp increase in global crude oil prices during fiscal 2001 adversely affected
the Indian economy in terms of volatile interest and exchange rates. This
adversely affected the overall state of liquidity in the banking system leading
to intervention by the Reserve Bank of India. Crude oil prices declined in
fiscal 2002 due to weaker demand. During fiscal 2003, crude oil prices
initially rose as a result of Middle-East tensions and in particular the US-led
military action in Iraq before declining on account of the relatively short
duration of the war. Conditions, however, remain volatile in the Middle-East
where most of the world's oil production facilities are located. Continuing or
further tensions or hostilities could lead to increases in oil prices or higher
volatility in oil prices. Any significant increase in oil prices could affect
the Indian economy and the Indian banking and financial system. This could
adversely affect our business including our ability to grow, the quality of our
assets, our financial performance, our stockholders' equity, our ability to
implement our strategy and the price of our equity shares and our ADSs.
A significant change in the Indian government's economic
liberalization and deregulation policies could disrupt our business
and cause the price of our equity shares and our ADSs to go down.
Our assets and customers are predominantly located in India. The Indian
government has traditionally exercised and continues to exercise a dominant
influence over many aspects of the economy. Its economic policies have had and
could continue to have a significant effect on private sector entities,
including us, and on market conditions and prices of Indian securities,
including our equity shares and our ADSs.
Since 1996, the government of India has changed four times. The most
recent parliamentary elections were completed in October 1999. The next
parliamentary elections are scheduled for 2004. Following the parliamentary
elections in 1999, a coalition government led by the Bharatiya Janata Party was
formed with Mr. A.B. Vajpayee as the prime minister of India. Although the
Vajpayee government has continued India's current economic liberalization and
deregulation policies, a
8
significant change in the government's policies could adversely affect business
and economic conditions in India and could also adversely affect our business,
our future financial performance, our stockholders' equity and the price of our
equity shares and our ADSs.
Financial instability in other countries, particularly emerging
market countries, could disrupt our business and cause the price of
our equity shares and our ADSs to go down.
The Indian market and the Indian economy are influenced by economic and
market conditions in other countries, particularly emerging market countries in
Asia. Financial turmoil in Asia, Latin America, Russia and elsewhere in the
world in the past years has affected the Indian economy even though India was
relatively unaffected by the financial and liquidity crises experienced
elsewhere. Although economic conditions are different in each country,
investors' reactions to developments in one country can have adverse effects on
the securities of companies in other countries, including India. A loss of
investor confidence in the financial systems of other emerging markets may
cause increased volatility in Indian financial markets and indirectly, in the
Indian economy in general. Any worldwide financial instability could also have
a negative impact on the Indian economy. This in turn could negatively impact
the Indian economy, including the movement of exchange rates and interest rates
in India, which could adversely affect the Indian financial sector, including
us. Any financial disruption could have an adverse effect on our business, our
future financial performance, our stockholders' equity and the price of our
equity shares and our ADSs.
If regional hostilities, terrorist attacks or social unrest in some parts
of the country increase, our business could suffer and the price of our
equity shares and our ADSs could go down.
India has from time to time experienced social and civil unrest and
hostilities both internally and with neighboring countries. In recent years,
there have been military confrontations between India and Pakistan in the
Kashmir region and present relations between India and Pakistan continue to be
tense on the issues of terrorism, armament and Kashmir. India has also
experienced terrorist attacks in some parts of the country. These hostilities
and tensions could lead to political or economic instability in India and a
possible adverse effect on our business, our future financial performance and
the price of our equity shares and our ADSs. For example, the terrorist attacks
in the United States on September 11, 2001 and subsequent military action in
Afghanistan and Iraq affected the markets all over the world. The United
States' continuing battle against terrorism could lengthen these regional
hostilities and tensions. Further, India has also experienced social unrest in
some parts of the country. If such tensions occur in other parts of the
country, leading to overall political and economic instability it could have an
adverse effect on our business, our future financial performance and the price
of our equity shares and our ADSs.
Trade deficits could cause our business to suffer and the price of our
equity shares and our ADSs to go down.
India's trade relationships with other countries can also influence
Indian economic conditions. In fiscal 2003, India experienced a trade deficit
of Rs. 371.7 billion (US$ 7.8 billion), an increase of Rs. 42.6 billion (US $
0.9 billion) from fiscal 2002. If trade deficits increase or are no longer
manageable, the Indian economy, and therefore our business, our financial
performance, our stockholders' equity and the price of our equity shares and
our ADSs, could be adversely affected.
A significant change in the composition of the Indian economy may affect
our business.
The Indian economy has experienced significant structural change over the
last few years. The share of the services sector of total GDP has risen while
that of the agricultural sector has declined. Provisional estimates indicate
that the share of the services sector of total GDP has increased to 56.1% in
fiscal 2003 from 49.9% in fiscal 1997 and the share of the agricultural sector
in total GDP has declined to 22.1% in fiscal 2003 from 28.0% in fiscal 1997. It
is difficult to gauge the long-term
9
impact of such fundamental economic changes on our business. We cannot be
certain that these changes will not have a material adverse effect on our
business.
Natural calamities could have a negative impact on the Indian economy and
could cause our business to suffer and the price of our equity shares and
our ADSs to go down.
India has experienced natural calamities like earthquakes, floods and
drought in the past few years. The extent and severity of these natural
disasters determine their impact on the Indian economy. In fiscal 2003, many
parts of India received significantly less than normal rainfall. As a result of
the drought conditions in the economy during fiscal 2003, the Index of
Agricultural Production declined by 12.6%. Further prolonged spells of below
normal rainfall in the country or other natural calamities could have a
negative impact on the Indian economy, affecting our business and causing the
price of our equity shares and our ADSs to go down.
Financial difficulty and other problems in certain long-term lending
institutions and investment institutions in India could cause our business
to suffer and the price of our equity shares and our ADSs to go down.
Unit Trust of India, a large investment institution in India with
substantial exposure to equity investments, faced problems from fiscal 2001 due
to a significant decline in the market value of its securities portfolio caused
by depressed equity capital markets. In response, Unit Trust of India was
restructured under a package of reform measures announced by the government.
IFCI Limited, a long-term lending institution in India, is also facing
financial difficulty due to inadequate capitalization, asset-liability mismatch
and deteriorating asset quality. Several co-operative banks have also faced
serious financial and liquidity crises. In April 2003, unsubstantiated rumours,
believed to have originated in Gujarat, alleged that we were facing liquidity
problems, although our liquidity position was sound. We witnessed higher than
normal deposit withdrawals during the period April 11 to 13, 2003, on account
of these unsubstantiated rumours. We successfully controlled the situation, but
if such situations were to arise in future, any failure to control such
situations could result in large deposit withdrawals, which would adversely
impact our liquidity position. These and other similar developments could
create adverse market perception about financial institutions and banks, which
in turn could adversely affect our business, our future financial performance,
our stockholders' equity and the price of our equity shares and our ADSs.
The Indian regulatory framework for the prevention of money laundering is
still evolving and any failure of this framework to effectively prevent
money laundering could adversely impact us.
The Indian Parliament passed the Prevention of Money Laundering Act in
fiscal 2003 to implement the Political Declaration adopted by the special
session of the United Nations General Assembly held from June 8 to June 10,
1998 and the Global Programme of Action annexed to Resolution S-17/2 adopted by
the United Nations General Assembly on February 23, 1990. However, the
provisions of this Act are yet to be declared effective by the Indian
government. Any failure or delay in the bringing into effect of this
legislation or any failure of this legislation to effectively prevent money
laundering could create an adverse perception about the Indian financial system
in general and Indian banks in particular, which in turn could adversely affect
our business, our future financial performance, our stockholders' equity and
the price of our equity shares and our ADSs. See also "Supervision and
Regulation - Regulations relating to Knowing the Customer and Anti-Money
Laundering".
A decline in India's foreign exchange reserves may affect liquidity and
interest rates in the Indian economy which could adversely impact us.
India's foreign exchange reserves increased 38.3% during fiscal 2003 and
16.8% during fiscal 2004 (through September 5, 2003) to US$ 87.4 billion. A
decline in these reserves could result in reduced liquidity and higher interest
rates in the Indian economy. The redemption of Resurgent India
10
Bonds issued by the State Bank of India in 1998, due in October 2003, is
expected to result in an outflow of approximately US$ 5.5 billion. Reduced
liquidity or an increase in interest rates in the economy following a decline
in foreign exchange reserves could adversely affect our business, our future
financial performance, our stockholders' equity and the price of our equity
shares and our ADSs. See also "- Risks Relating to Our Business".
Any down-grading of India's debt rating by an international rating agency
could cause our business to suffer and the price of our equity shares and
our ADSs to go down.
Any adverse revisions to India's credit ratings for domestic and
international debt by international rating agencies may adversely affect our
business, our future financial performance, our stockholders' equity and the
price of our equity shares and our ADSs.
Risks Relating to Our Business
We are likely to classify and reserve against impaired loans significantly
later than our counterparts in more developed countries, such as the US.
We identify a commercial loan as a "troubled debt restructuring" or an
"other impaired loan" (collectively referred to as an impaired loan) and place
it on a non-accrual basis (that is, we do not recognize interest accrued or due
unless and until payments are actually received) when it is probable that we
will be unable to collect the scheduled payments of principal and interest due
under the contractual terms of the loan agreement. Until year-end fiscal 2003,
a commercial loan was also considered to be impaired and placed on a
non-accrual basis when interest or principal was greater than 180 days overdue.
This time period of 180 days was substantially longer than in more developed
countries, like the US, where loans are generally placed on a non-accrual basis
when any payment, including any periodic principal payment, is not made for a
90 day period. In India, payments on most loans are generally on a quarterly
basis unlike in more developed countries, like the United States, where
payments on most loans are on a monthly basis. Pursuant to revised guidelines
issued by the Reserve Bank of India, with effect from fiscal 2004, a commercial
loan will be considered to be impaired and placed on a non-accrual basis, when
interest or principal is overdue continuously for more than 90 days. This may
impact the classification of, and reserving against, impaired loans. For a
discussion of impaired loans under Indian GAAP, see "Supervision and
Regulation--Loan Loss Provisions and Impaired Assets".
A large proportion of ICICI's loans comprised project finance assistance,
a substantial portion of which was particularly vulnerable to completion
risk.
Long-term project finance assistance was a significant proportion of
ICICI's asset portfolio. Although over the last year, retail loans have
significantly increased in our balance sheet, long-term project finance
continues to be a significant proportion of our loan portfolio. The viability
of these projects depends upon a number of factors, including completion risk,
market demand, government policies and the overall economic environment in
India and international markets. We cannot be sure that these projects will
perform as anticipated. Over the last several years, ICICI experienced a high
level of impaired loans in its project finance loan portfolio to manufacturing
companies as a result of the downturn in certain global commodity markets and
increased competition in India. In addition, a significant portion of
infrastructure projects financed by us are still under implementation and
present risks, including delays in the commencement of operations and breach of
contractual obligations by counterparties, that could impact the project's
ability to generate revenues. We have provided project assistance to a large
private sector power generation project in the state of Maharashtra. On account
of a dispute between the power project and the purchaser, the state electricity
board, the project implementation is currently suspended. The matter is
currently pending before the Indian courts, while parallel efforts are
continuing for an out of court settlement, including re-negotiation of the
relevant power tariff. The principal sponsor of the project has filed for
bankruptcy in the United States. The assets of the project are in the
possession of a receiver appointed by the High Court of
11
Judicature at Bombay on a plea by the lenders to the project, including us.
Efforts are continuing for sale of the project to new sponsors. We cannot
assure you that future credit losses on account of this assistance and such
other assistances would not have a materially adverse effect on our
profitability. Our infrastructure project finance loans are largely recent
loans and, as a result, asset quality problems may not appear until the future.
If a substantial portion of these loans were to become impaired, the quality of
our loan portfolio could be adversely affected.
We have high concentrations of loans to certain customers and to certain
sectors and if a substantial portion of these loans were to become
impaired, the quality of our loan portfolio could be adversely affected.
At year-end fiscal 2003, our 20 largest borrowers, based on gross
outstanding balances, totaled approximately Rs. 145.3 billion (US$ 3.1
billion), which represented approximately 21.2% of our total gross loans
outstanding. Our largest single borrower by outstanding at that date was
approximately Rs. 15.3 billion (US$ 322 million), which represented
approximately 2.2% of our total gross loans outstanding. The largest group of
companies under the same management control accounted for approximately 4.9% of
our total gross loans outstanding. Credit losses on these large single borrower
and group exposures could adversely affect our financial performance, our
stockholders' equity and the prices of our equity shares and our ADSs.
At year-end fiscal 2003, we had extended loans to several industrial
sectors in India. At that date, approximately 53.0% of our gross restructured
loan portfolio was concentrated in three sectors: iron and steel (35.5%),
textiles (10.6%) and cement (6.9%). At that date, approximately 39.9% of our
gross other impaired loan portfolio was concentrated in three sectors: power
(21.3%), iron and steel (10.2%) and metal products (8.4%). Our total loan
portfolio also had a significant concentration of loans in these sectors. These
sectors have been adversely affected by economic conditions over the last few
years in varying degrees. Although our loan portfolio contains loans to a wide
variety of businesses, financial difficulties in these sectors could increase
our level of impaired loans and adversely affect our business, our future
financial performance, our stockholders' equity and the price of our equity
shares and our ADSs.
If we are not able to control or reduce the level of impaired loans in
our portfolio, our business will suffer. A significant increase in the
level of restructured loans forming part of impaired loans in our
portfolio could affect our business.
Our gross restructured loans represented 21.5% of our gross loan
portfolio at year-end fiscal 2003. At year-end fiscal 2002, ICICI's gross
restructured loans represented 17.0% of its gross loan portfolio and ICICI
Bank's gross restructured loans represented 1.0% of its gross loan portfolio.
Our gross other impaired loans represented 12.1% of our gross loan portfolio at
year-end fiscal 2003. At year-end fiscal 2002, ICICI's gross other impaired
loans represented 9.1% of its gross loan portfolio and ICICI Bank's gross other
impaired loans represented 6.2% of its gross loan portfolio. Our net
restructured loans represented 19.5% of our net loans at year-end fiscal 2003.
At year-end fiscal 2002, ICICI's net restructured loans represented 14.8% of
its net loans and ICICI Bank's net restructured loans represented 0.8% of its
net loans. Our net other impaired loans represented 8.8% of our net loans at
year-end fiscal 2003. At year-end fiscal 2002, ICICI's net other impaired loans
represented 6.3% of its net loans and ICICI Bank's net other impaired loans
represented 2.9% of its net loans.
Although we believe that our allowance for loan losses is adequate to
cover all known losses in our portfolio of assets, the level of our impaired
loans was significantly higher than the average percentage of impaired loans in
the portfolios of banks in more developed countries. In addition, in absolute
terms, our gross impaired loans grew by 52.4% in fiscal 2003 over the total
combined gross impaired loans of ICICI and ICICI Bank at year-end fiscal 2002.
ICICI's gross impaired loans grew by 70.7% in fiscal 2002 and 23.6% in fiscal
2001. ICICI Bank's gross impaired loans grew by 2.3% in fiscal 2002 and 276.1%
in fiscal 2001. In fiscal 2001, impaired loans aggregating Rs. 2.2 billion
12
(US$ 46 million) were added to ICICI Bank's portfolio consequent to ICICI Bank's
acquisition of Bank of Madura.
The growth in our impaired loans can be attributed to several factors,
including increased competition arising from economic liberalization in India,
variable industrial growth, a sharp decline in commodity prices, the high level
of debt in the financing of projects and capital structures of companies in
India and the high interest rates in the Indian economy during the period in
which a large number of projects contracted their borrowings, which reduced
profitability for certain of our borrowers, and the resultant restructuring of
certain Indian companies in sectors such as iron and steel, textiles and
cement. As a result, the level of restructured loans and other impaired loans
in our portfolio increased substantially in fiscal 2003. It is expected that
this restructuring process will continue in fiscal 2004.
Further, ICICI Bank's and ICICI's growth-oriented strategy involved a
significant increase in their loan portfolio, including retail loans, over the
past few years. We cannot assure you that there will be no additional impaired
loans in our portfolio on account of these new loans.
The directed lending norms of the Reserve Bank of India require that
every bank should extend 40.0% of its net bank credit to certain eligible
sectors, which are categorized as "priority sectors". Priority sectors are
specific sectors such as agriculture and small-scale industries, and also
include housing finance loans up to certain limits. Considering that the
advances of ICICI were not subject to the requirement applicable to banks in
respect of priority sector lending, the Reserve Bank of India directed us to
maintain an additional 10.0% over and above the requirement of 40.0%, i.e., a
total of 50.0% of our net bank credit on the residual portion of our advances
(i.e. the portion of our total advances excluding advances of ICICI at year-end
fiscal 2002) in the form of priority sector loans. This additional 10.0%
priority sector lending requirement will apply until such time as our aggregate
priority sector advances reach a level of 40.0% of our total net bank credit.
As a result, we may experience a significant increase in impaired loans in our
directed lending portfolio, particularly loans to the agriculture sector and
small-scale industries, since economic difficulties are likely to affect those
borrowers more severely and we would be less able to control the quality of
this portfolio.
A number of factors will affect our ability to control and reduce
impaired loans. Some of these, including developments in the Indian economy,
movements in global commodity markets, global competition, interest rates and
exchange rates, are not within our control. Although we are increasing our
efforts to improve collections and to foreclose on existing impaired loans, we
cannot assure you that we will be successful in our efforts or that the overall
quality of our loan portfolio will not deteriorate in the future. If we are not
able to control and reduce our impaired loans, or if there is a further
significant increase in our restructured loans, our business, our future
financial performance, our stockholders' equity and the price of our equity
shares and our ADSs could be adversely affected.
If there is a further deterioration in our impaired loan portfolio and we
are not able to improve our allowance for loan losses as a percentage of
impaired loans, the price of our equity shares and our ADSs could go down.
At year-end fiscal 2003, our allowance for loan losses on restructured
loans represented 16.8% of gross restructured loans and our allowance for loan
losses on other impaired loans represented 33.5% of gross other impaired loans.
At year-end fiscal 2002, ICICI's allowance for loan losses on restructured
loans represented 18.6% of gross restructured loans and ICICI's allowance for
loan losses on other impaired loans represented 34.6% of gross other impaired
loans. At year-end fiscal 2002, ICICI Bank's allowance for loan losses on
restructured loans represented 21.9% of gross restructured loans and ICICI
Bank's allowance for loan losses on other impaired loans represented 55.7% of
gross other impaired loans.
Although we believe that our allowances for loan losses will be adequate
to cover all known losses in our asset portfolio, we cannot assure you that
there will be no further deterioration in the allowance for loan losses as a
percentage of gross impaired loans or otherwise or that the percentage
13
of impaired loans that we will be able to recover will be similar to ICICI's
and ICICI Bank's past experience of recoveries of impaired loans. In the event
of any further deterioration in our impaired loan portfolio, there could be an
adverse impact on our business, our future financial performance, our
stockholders' equity and the price of our equity shares and our ADSs.
We may experience delays in enforcing our collateral when borrowers
default on their obligations to us which may result in failure to recover
the expected value of collateral security exposing us to a potential loss.
A substantial portion of our loans to corporate customers, primarily
comprising loans made by ICICI, is secured by real assets, including property,
plant and equipment. Our loans to corporate customers also include working
capital credit facilities that are typically secured by a first lien on
inventory, receivables and other current assets. In some cases, we may have
taken further security of a first or second lien on fixed assets, a pledge of
financial assets like marketable securities, corporate guarantees and personal
guarantees. A substantial portion of our loans to retail customers is also
secured by the assets financed, predominantly property and vehicles. Although
in general our loans are over-collateralized, an economic downturn could have
resulted for ICICI and could in future result for us, in a fall in relevant
collateral values.
In India, foreclosure on collateral generally requires a written petition
to an Indian court. An application, when made, may be subject to delays and
administrative requirements that may result, or be accompanied by, a decrease
in the value of the collateral. In the event a corporate borrower makes a
reference to a specialized quasi-judicial authority called the Board for
Industrial and Financial Reconstruction, foreclosure and enforceability of
collateral is stayed. We cannot guarantee that we will be able to realize the
full value on our collateral, as a result of, among other factors, delays in
bankruptcy foreclosure proceedings, defects in the perfection of collateral and
fraudulent transfers by borrowers. A failure to recover the expected value of
collateral security could expose us to a potential loss. Any unexpected losses
could adversely affect our business, our future financial performance, our
stockholders' equity and the price of our equity shares and our ADSs.
The Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002, has strengthened the ability of lenders to
resolve non-performing assets by granting them greater rights as to enforcement
of security and recovery of dues from corporate borrowers. Petitions
challenging the constitutional validity of this legislation are currently
pending before the Indian Supreme Court. There can be no assurance that the
legislation in its current form will be upheld by the Indian Supreme Court or
that it will have a favorable impact on our efforts to resolve non-performing
assets. See also "Overview of the Indian Financial Sector - Recent Structural
Reforms - Legislative Framework for Recovery of Debts Due to Banks."
We face greater credit risks than banks in developed countries.
Our principal business is providing financing to our clients, a
predominant number of whom are based in India. In the past, ICICI focused its
activities on financing large-scale projects. Increasingly, we are focusing on
large corporate customers, many of whom have strong credit ratings, as well as
on select small and middle market companies, and individuals. Our loans to
middle market companies can be expected to be more severely affected by adverse
developments in the Indian economy than loans to large corporations. In all of
these cases, we are subject to the credit risk that our borrowers may not pay
in a timely fashion or may not pay at all. The credit risk of all our borrowers
is higher than in more developed countries due to the higher uncertainty in the
Indian regulatory, political, economic and industrial environment and
difficulties that many of our borrowers face in adapting to instability in
world markets and technological advances taking place across the world.
Increased competition arising from economic liberalization in India, variable
industrial growth, a sharp decline in commodity prices, the high level of debt
in the financing of projects and capital structures of companies in India and
the high interest rates in the Indian economy during the period in which a
14
large number of projects contracted their borrowings reduced the profitability
of certain of our borrowers.
There was substantial growth in our retail loans in fiscal 2003 and in
the retail loans of ICICI in fiscal 2002. Our retail loans were Rs. 188.3
billion (US$ 4.0 billion) or 27.5% of our gross loans outstanding at year-end
fiscal 2003. ICICI's retail loans were Rs. 73.0 billion (US$ 1.5 billion) or
13.0% of its gross loans outstanding at year-end fiscal 2002. ICICI Bank's
retail loans were Rs. 7,150 million (US$ 150 million) or 9.4% of its gross
loans outstanding at year-end fiscal 2002. Our retail loans are relatively new
and we cannot assure you that there will be no additional impairment on account
of these loans and that such impairment will not have a materially adverse
impact on the quality of our loan portfolio.
The directed lending norms of the Reserve Bank of India require that
every bank should extend 40.0% of its net bank credit to certain eligible
sectors, such as agriculture, small-scale industries and housing finance loans
up to certain limits, which are categorized as "priority sectors". Considering
that the directed lending norms were not applicable to ICICI, the Reserve Bank
of India directed us to maintain 50.0% of our net bank credit on the residual
portion of our advances (i.e. the portion of our total advances excluding
advances of ICICI at year-end fiscal 2002) in the form of priority sector loans
until such time as our aggregate priority sector advances reach a level of
40.0% of our total net bank credit. As a result, we may experience a
significant increase in impaired loans in our directed lending portfolio,
particularly loans to the agriculture sector and small-scale industries, since
economic difficulties are likely to affect those borrowers more severely and we
would be less able to control the quality of this portfolio.
Higher credit risk may expose us to a potential loss, which would
adversely affect our business, our future financial performance, our
stockholders' equity and the price of our equity shares and our ADSs.
Our business is particularly vulnerable to volatility in interest rates
caused by deregulation of the financial sector in India.
Over the last few years, the Indian government and the Reserve Bank of
India have substantially deregulated interest rates. As a result, interest
rates are now primarily determined by the market. This has increased the
interest rate risk exposure of all banks and financial institutions, including
us.
Our results of operations are substantially dependent upon the level of
our net interest income. Interest rates are highly sensitive to many factors
beyond our control, including deregulation of the financial sector in India,
the Reserve Bank of India's monetary policies, domestic and international
economic and political conditions and other factors. Changes in interest rates
could affect the interest rates charged on interest-earning assets differently
than the interest rates paid on interest-bearing liabilities. This difference
could result in an increase in interest expense relative to interest income
leading to a reduction in our net interest income. Based on our asset-liability
position at year-end fiscal 2003, an increase in interest rates would result in
an increase in our interest expense relative to our interest income leading to
a reduction in our net interest income.
Income from treasury operations is particularly vulnerable to interest
rate volatility. Following the amalgamation, the liabilities of ICICI became
subject to the statutory liquidity ratio requirement, which requires that an
amount equal to a specified percentage, currently 25.0%, of a bank's demand and
time liabilities be invested in government of India securities. This has
increased our interest rate risk exposure. An increasing interest rate
environment is likely to adversely affect the income from treasury operations
of banks in India, such as us. The estimated negative impact of a 1.0% rise in
interest rates on the value of our trading portfolio (including the trading
portfolio of ICICI Securities, ICICI Bank's investment banking subsidiary) at
year-end fiscal 2003 would have been Rs. 1,824 million (US$ 38 million).
Declines in the value of our trading portfolio in such an environment will
adversely affect our income. In addition, the value of government of India
securities, held for meeting
15
the statutory liquidity ratio requirement, and classified as available for sale
securities would be adversely impacted by any increase in interest rates.
Interest rates in India, including yields on government of India
securities, have declined significantly during fiscal 2002 and fiscal 2003,
reflecting the liquidity in the system. The rate of interest on government
small savings and public provident fund schemes was lowered by 100 basis points
in the government of India's budget for fiscal 2004. The Reserve Bank of India
subsequently reduced the rate of interest on savings deposits taken by banks by
50 basis points. However, no assurance can be given as to the likely trend of
interest rates in the future.
Volatility in interest rates could adversely affect our business, our
future financial performance and the price of our equity shares and our ADSs.
If we are not able to succeed in our retail products and services, we may
not be able to meet our projected earnings and growth targets.
We see retail products and services as the primary driver of our growth.
Retail products and services are a critical component of our projections of
earnings. However, we recognize that retail products and services are
substantially different from corporate products and services and require very
different personnel, skills and infrastructure. We cannot assure you that we
have accurately estimated the relevant demand for our new banking products.
Retail products and services could expose us to the risk of financial
irregularities by various intermediaries and customers. We cannot assure you
that we will be able to master and deliver the skills and management
information systems necessary to successfully manage these retail products and
services.
Our retail loans were Rs. 188.3 billion (US$ 4.0 billion) or 27.5% of our
gross loans outstanding at year-end fiscal 2003. ICICI's retail loans were Rs.
73.0 billion (US$ 1.5 billion) or 13.0% of its gross loans outstanding at
year-end fiscal 2002. ICICI Bank's retail loans were Rs. 7,150 million (US$ 150
million) or 9.4% of its gross loans outstanding at year-end fiscal 2002. Our
retail loans are relatively new and we cannot assure you that there will be no
additional impairment on account of these loans and that such impairment will
not have a materially adverse impact on the quality of our loan portfolio. Our
inability to grow or succeed in retail products and services business may
adversely affect our business, our future financial performance, our
stockholders' equity and the price of our equity shares and our ADSs.
If we are not able to succeed in our new business areas, we may not be
able to meet our projected earnings and growth targets.
We are continuing to look at business opportunities in certain sectors of
the economy with which we have not traditionally been involved, including
governments, the public sector and the agriculture sector. ICICI entered the
life insurance business in fiscal 2001 and the non-life insurance business in
fiscal 2002 through its subsidiaries, which are now subsidiaries of ICICI Bank.
We are also seeking to expand internationally by leveraging on our home country
links and technology competencies in financial services. We are a new entrant
in international business and the skills required for this business could be
different from those for our domestic businesses. The life insurance and
non-life insurance businesses and the international business are expected to
require substantial capital in the initial period. We cannot be certain that
these new businesses will perform as anticipated. Our inability to grow or
succeed in new business areas may adversely affect our business, our future
financial performance, our stockholders' equity and the price of our equity
shares and our ADSs.
A determination against us in respect of disputed tax assessments may
adversely impact our financial performance.
At year-end fiscal 2003, we had been assessed an aggregate of Rs. 20.4
billion (US$ 429 million) in excess of the provision made in our accounts, in
income tax, interest tax, wealth tax and sales tax demands by the government of
India's tax authorities. We have appealed each of these tax demands.
16
While we expect that no additional liability will arise out of these disputed
demands, there can be no assurance that these matters will be settled in our
favor, and that no further liability will arise out of these demands. Of the
Rs. 20.4 billion (US$ 429 million) aggregate tax assessments in excess of the
provision made in our accounts, a major portion relates to the treatment of
depreciation claim on leased assets. In respect of depreciation claimed by us
for fiscal 1993 on two sale and lease back transactions, the Income Tax
Appellate Tribunal, Mumbai held in August 2003 that no depreciation is
allowable to us. The additional tax impact of this decision is Rs. 189 million
(US$ 4 million). We intend to appeal against this decision before the High
Court and believe that we will receive a favorable decision in the matter. As
the Income Tax Appellate Tribunal's decision is based on the facts of two
specific transactions, we believe that the Income Tax Appellate Tribunal's
decision will not have an adverse tax impact on other sale and lease back
transactions entered into by us. Moreover, the lease agreements provide for
variation in the lease rental to offset any loss of depreciation benefit to us.
Any additional tax liability may adversely impact our financial performance and
the price of our equity shares and our ADSs.
The success of our Internet-related strategy will depend, in part, on the
development of adequate infrastructure for the Internet in India.
We offer several Internet-based products for our retail and corporate
customers. There can be no assurance that the Internet infrastructure will be
able to support the demands of our anticipated growth. Inadequate
infrastructure could result in slower response times and adversely affect usage
of the Internet generally. If the infrastructure for the Internet does not
effectively support growth that may occur, we will not be able to execute our
growth strategy for our Internet-related businesses. Our inability to grow in
this business area may adversely affect our business, our future financial
performance, our stockholders' equity and the price of our equity shares and
our ADSs.
Our business is very competitive and our growth strategy depends on our
ability to compete effectively.
Interest rate deregulation and other liberalization measures affecting
the financial sector have increased our exposure to competition. The
liberalization process has led to increased access for our customers to
alternative sources of funds, such as domestic and foreign commercial banks and
the domestic and international capital markets. We will continue to face
competition from Indian and foreign commercial banks in our corporate products
and services. Over the last couple of years, almost all Indian banks have
increased their focus on retail loans. We will face competition from Indian and
foreign commercial banks and non-bank finance companies in our retail products
and services. In addition, as we raise our funds from market sources and
individual depositors, we will face increasing competition for such funds. The
Indian financial sector may experience further consolidation, resulting in
fewer banks and financial institutions, some of which may have greater
resources than us. Our future success will depend upon our ability to compete
effectively. Due to competitive pressures, we may be unable to successfully
execute our growth strategy and offer products and services at reasonable
returns and this may adversely impact our business, our future financial
performance, our stockholders' equity and the price of our equity shares and
our ADSs.
If we are not able to integrate recent acquisitions or if we are not able
to integrate any future acquisitions, our business could be disrupted and
the price of our equity shares and ADSs could go down.
In July 2003, ICICI OneSource Limited, an entity consolidated in our US
GAAP financial statements, acquired First Ring, a business process outsourcing
company based in India. In May 2003, we acquired Transamerica Apple
Distribution Finance Private Limited (subsequently renamed ICICI Distribution
Finance Private Limited), a non-bank finance company based in India. In
September 2002, ICICI Infotech, an entity consolidated in our US GAAP financial
statements, acquired the remaining 50.0% ownership interest in Tricolor
Infotech International Inc., Mauritius. In May 2002, ICICI OneSource Limited
acquired CustomerAsset, a contact center services company based in India.
17
In fiscal 2002, ICICI Infotech acquired Insyst Technologies Limited, a software
development company based in India. The challenges in integration of some or
all of these recent acquisitions could adversely affect our business, our
financial performance and the price of our equity shares and our ADSs.
We have no understanding, commitment or agreement with respect to any
material future acquisition or investment, though we may seek opportunities for
growth through future acquisitions. Any future acquisition may involve a number
of risks, including deterioration of asset quality, diversion of attention of
our management, attention required to integrate the acquired business and the
failure to retain key acquired personnel and clients, some or all of which
could have an adverse effect on our business, our future financial performance,
our stockholders' equity and the price of our equity shares and our ADSs.
The businesses formerly conducted by ICICI are, after the amalgamation,
subject to a number of banking regulations under Indian law, which may
impact our profitability.
The businesses of ICICI conducted by us after the amalgamation, are now
subject to a number of banking regulations under Indian law, including
maintenance of statutory liquidity and cash reserve ratios and directed lending
requirements. Compliance with these regulations may impact the profitability of
our combined businesses in our initial years. We have a different mix of assets
and funding sources than ICICI and ICICI Bank as independent and separate
entities. The impact of the statutory liquidity ratio, which requires that a
significant portion of an Indian bank's liabilities be held in Indian
government securities, has increased our market risk exposure and reduced our
interest income. Our income, profitability and market risk profile may
therefore be adversely affected by the impact of these regulatory requirements.
This may result in lower income in the initial years after the amalgamation.
The directed lending norms of the Reserve Bank of India require that every bank
should extend 40.0% of its net bank credit to certain eligible sectors, such as
agriculture, small-scale industries and housing finance up to certain limits,
which are categorized as "priority sectors". Considering that the directed
lending norms were not applicable to ICICI, the Reserve Bank of India directed
us to maintain 50.0% of our net bank credit on the residual portion of our
advances (i.e. the portion of our total advances excluding advances of ICICI at
year-end fiscal 2002) in the form of priority sector loans until such time as
our aggregate priority sector advances reach a level of 40.0% of our total net
bank credit. We may experience a significant increase in impaired loans in our
directed lending portfolio, particularly loans to the agriculture sector and
small-scale industries, since economic difficulties are likely to affect those
borrowers more severely and we would be less able to control the quality of
this portfolio. We may not be able to maintain the business, growth and
financial performance of ICICI and ICICI Bank and any failure to do so could
adversely affect our stockholder's equity and the price of our equity shares
and our ADSs.
Our funding is primarily short-term and if depositors do not roll over
deposited funds upon maturity our business could be adversely affected.
Most of our incremental funding requirements, including replacement of
maturing liabilities of ICICI which generally had longer maturities, are met
through short-term funding sources, primarily in the form of deposits including
inter-bank deposits. However, a large portion of our assets, primarily the
assets of ICICI, have medium or long-term maturities, creating a potential for
funding mismatches. Our customer deposits are generally of less than one year
maturity. If a substantial number of our depositors do not roll over deposited
funds upon maturity, our liquidity position could be adversely affected. The
failure to obtain rollover of customer deposits upon maturity or to replace
them with fresh deposits could have a material adverse effect on our business,
our future financial performance and the price of our equity shares and our
ADSs.
In April 2003, unsubstantiated rumours believed to have originated in
Gujarat, alleged that we were facing liquidity problems, although our liquidity
position was sound. We witnessed higher than normal deposit withdrawals during
the period April 11 to 13, 2003, on account of these
18
unsubstantiated rumours. We successfully controlled the situation, but if such
situations were to arise in future, any failure to control such situations
could result in large deposit withdrawals, which would adversely impact our
liquidity position.
Material changes in the regulations which govern us could cause our
business to suffer and the price of our equity shares and our ADSs to go
down.
Banks in India operate in a highly regulated environment. The Reserve
Bank of India extensively supervises and regulates banks. In addition, these
banks are subject generally to changes in Indian law, as well as to changes in
regulation and government policies, income tax laws and accounting principles.
The laws and regulations governing the banking sector could change in the
future and any such changes could adversely affect our business, our future
financial performance and the price of our equity shares and our ADSs.
Significant security breaches could adversely impact our business.
We seek to protect our computer systems and network infrastructure from
physical break-ins as well as security breaches and other disruptive problems
caused by our increased use of the Internet. Computer break-ins and power
disruptions could affect the security of information stored in and transmitted
through these computer systems and network infrastructure. We employ security
systems, including firewalls and password encryption, designed to minimize the
risk of security breaches. Although we intend to continue to implement security
technology and establish operational procedures to prevent break-ins, damage
and failures, there can be no assurance that these security measures will be
successful. A significant failure in security measures could have a material
adverse effect on our business, our future financial performance and the price
of our equity shares and our ADSs.
Our business operations are transaction-oriented. Although we take
adequate measures to safeguard against fraud, there can be no assurance that we
would be able to prevent fraud. Our reputation could be adversely affected by
significant fraud committed by employees, customers or outsiders.
System failures could adversely impact our business.
Given the increasing share of retail products and services and
transaction banking services in our total business, the importance of systems
technology to our business has increased significantly. Our principal delivery
channels include ATMs, call centers and the Internet. Any failure in our
systems, particularly for retail products and services and transaction banking,
could significantly affect our operations and the quality of customer service
and could result in business and financial losses.
If we are unable to adapt to rapid technological changes, our business
could suffer.
Our success will depend, in part, on our ability to respond to
technological advances and emerging banking industry standards and practices on
a cost-effective and timely basis. The development and implementation of such
technology entails significant technical and business risks. There can be no
assurance that we will successfully implement new technologies effectively or
adapt our transaction-processing systems to customer requirements or emerging
industry standards. If we are unable, for technical, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions, customer
requirements or technological changes, our business and our future financial
performance could be materially affected.
19
If we are required to change our accounting policies with respect to the
expensing of stock options, our earnings could be adversely affected.
We currently deduct the expense of employee stock option grants from our
income based on the intrinsic value method and not on the fair value method.
The Financial Accounting Standards Board and the International Accounting
Standards Board are considering requiring companies to change their accounting
policies to account for stock options issued to employees based on the fair
value method. Many companies have or are in the process of voluntarily changing
their accounting policies to expense the cost of stock options based on the
fair value method. Stock options are an important part of our employee
compensation package. If we change our accounting policy with respect to the
treatment of stock options, our earnings could be adversely affected. We have
adopted the pro forma disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Had compensation cost for our stock-based
compensation plan been determined in a manner consistent with the fair value
approach described in SFAS No. 123, our net loss in fiscal 2003 as reported
would have been increased to the pro forma amount of Rs. 8,334 million (US$ 175
million) and ICICI's net income as reported would have been reduced to the pro
forma amounts of Rs. 1,515 million (US$ 32 million) and Rs. 6,539 million (US$
138 million) in fiscal 2002 and fiscal 2001 respectively.
Risks Relating to the ADSs and Equity Shares
You will not be able to vote your ADSs.
ADS holders have no voting rights unlike holders of the equity shares who
have voting rights. The depositary will exercise its right to vote on the
equity shares represented by the ADSs as directed by ICICI Bank's board of
directors. If you wish, you may withdraw the equity shares underlying the ADSs
and seek to vote the equity shares you obtain from the withdrawal. However, for
foreign investors, this withdrawal process may be subject to delays. For a
discussion of the legal restrictions triggered by a withdrawal of the equity
shares from the depositary facility upon surrender of ADSs, see "Restriction on
Foreign Ownership of Indian Securities".
US investors will be subject to special tax and interest charges if ICICI
Bank is considered to be a passive foreign investment company.
Based upon certain proposed Treasury Regulations which are proposed to be
effective for taxable years beginning after December 31, 1994 and upon certain
management estimates, ICICI Bank does not expect to be a Passive Foreign
Investment Company (PFIC). ICICI Bank has based the expectation that it is
currently not a PFIC on, among other things, provisions in the proposed
Treasury Regulations that provide that certain restricted reserves (including
cash and securities) of banks are assets used in connection with banking
activities and are not passive assets, as well as the composition of ICICI
Bank's income and ICICI Bank's assets from time to time. Since there can be no
assurance that such proposed Treasury Regulations will be finalized in their
current form or not at all, and since the composition of income and assets of
ICICI Bank will vary over time, there can be no assurance that ICICI Bank will
not be considered a PFIC for any taxable year. If ICICI Bank is a PFIC for any
taxable year during which a US holder holds equity shares or ADSs of ICICI
Bank, the US holder would be treated in a manner comparable to that described
under "Taxation - United States Tax - Passive Foreign Investment Company
Rules".
Your ability to withdraw equity shares from the depositary facility is
uncertain and may be subject to delays.
India's restrictions on foreign ownership of Indian companies limit the
number of shares that may be owned by foreign investors and generally require
government approval for foreign ownership. Investors who withdraw equity shares
from the depositary facility will be subject to Indian regulatory restrictions
on foreign ownership upon withdrawal. It is possible that this withdrawal
process may be subject to delays. For a discussion of the legal restrictions
triggered by a withdrawal of equity shares
20
from the depositary facility upon
surrender of ADSs, see "Restriction on Foreign Ownership of Indian Securities".
Your ability to sell in India any equity shares withdrawn from the
depositary facility may be subject to delays if specific approval of the
Reserve Bank of India is required.
ADS holders seeking to sell in India any equity shares withdrawn upon
surrender of an ADS will require Reserve Bank of India approval for each such
transaction unless the sale of such equity shares is made on a stock exchange
or in connection with an offer made under the regulations regarding takeovers.
We cannot guarantee that any approval will be obtained in a timely manner or at
all. Because of possible delays in obtaining requisite approvals, investors in
equity shares may be prevented from realizing gains during periods of price
increases or limiting losses during periods of price declines.
Restrictions on withdrawal of ADSs from the depositary facility and
redeposit of equity shares in the depositary facility could adversely
affect the price of our ADSs.
An ADS holder who surrenders an ADS and withdraws equity shares may be
able to redeposit those equity shares in the depositary facility in exchange
for ADSs. In addition, an investor who has purchased equity shares in the
Indian market may be able to deposit them in the ADS program. However, in
either case, the deposit or redeposit of equity shares may be limited by
securities law restrictions and will be restricted so that the cumulative
aggregate number of equity shares that can be deposited or redeposited as of
any time cannot exceed the cumulative aggregate number represented by ADSs
converted into underlying equity shares as of such time. An investor who has
purchased equity shares in the Indian market could, therefore, face
restrictions in depositing them in the ADS program. This increases the risk
that the market price of the ADSs will be below that of the equity shares. For
a discussion of the legal restrictions triggered by withdrawal of ADSs from the
depositary facility and redeposit of equity shares in the depositary facility,
see "Restriction on Foreign Ownership of Indian Securities".
There may be restrictions on resales in the United States or to US persons
of ICICI Bank shares or ADSs by affiliates of ICICI and/or ICICI Bank.
The equity shares and ADSs of ICICI Bank issued pursuant to the
amalgamation were not registered under the US Securities Act of 1933, as
amended (the Securities Act) in reliance upon the exemption from the
registration requirements of the Securities Act provided by Section 3(a)(10) of
the Securities Act. ICICI Bank received a "no-action letter" from the staff of
the United States Securities and Exchange Commission (SEC) stating that it
would not recommend that the SEC take enforcement action if ICICI Bank shares
were issued to ICICI shareholders pursuant to the amalgamation without
compliance with the registration requirements of the Securities Act in reliance
on the exemption from registration contained in Section 3(a)(10) thereof. As a
result, in the hands of most holders, the shares and ADSs issued pursuant to
the amalgamation will not be treated as "restricted securities" within the
meaning of Rule 144(a)(3) under the Securities Act, and may be resold by former
holders of ICICI shares (except affiliates as described below) without regard
to Rules 144 or 145(c) and (d) under the Securities Act.
Persons who received the shares or ADSs pursuant to the amalgamation and
who were affiliates of ICICI before the amalgamation but are not affiliates of
ICICI Bank after the amalgamation, or are affiliates of ICICI Bank after the
amalgamation, are permitted to resell these shares or ADSs in the United States
in the manner permitted by Rule 144(d) under the Securities Act, in each case
without regard to the holding period requirement (one year) of Rule 144(d)
under the Securities Act. Persons who may be deemed to be affiliates of ICICI
include individuals who, or entities that, directly or indirectly controlled,
or were controlled by, or were under common control with ICICI and would
include certain officers and directors of ICICI and would likely include
principal shareholders as well. Persons who may be deemed to be affiliates of
ICICI Bank include individuals who, or entities that,
21
directly or indirectly control, or are controlled by, or are under common
control with ICICI Bank and would include certain officers and directors of
ICICI Bank and would likely include principal shareholders as well. The persons
referred to above in addition to reselling the shares or ADSs received pursuant
to the amalgamation in the United States in the manner permitted by Rule 145(d)
under the Securities Act may also sell such securities pursuant to any other
available exemption under the Securities Act. Former ICICI shareholders or ADS
holders who believe they may be affiliates for the purposes of the Securities
Act, should consult their own legal advisers in the event they plan to sell
such shares or ADSs to a United States person or in the United States.
Certain shareholders own a large percentage of our equity shares. Their
actions could adversely affect the price of our equity shares and our
ADSs.
Our principal shareholders include the Life Insurance Corporation of
India, the General Insurance Corporation of India, government-owned general
insurance companies and the Unit Trust of India, each of which is directly or
indirectly controlled by the Indian government. At August 29, 2003,
government-controlled entities owned approximately 17.8% of our outstanding
equity shares. As a result of such share ownership, the Indian government will
continue to have the ability to exercise influence over most matters requiring
approval of our shareholders, including the election and removal of directors
and significant corporate actions. Our other large shareholders include Orcasia
Limited, Government of Singapore and Bajaj Auto Limited. Any substantial sale
of our equity shares by these or other large shareholders could adversely
affect the price of our equity shares and our ADSs.
Conditions in the Indian securities market may affect the price or
liquidity of our equity shares and our ADSs.
The Indian securities markets are smaller and more volatile than
securities markets in developed economies. The Indian stock exchanges have in
the past experienced substantial fluctuations in the prices of listed
securities.
Indian stock exchanges have also experienced problems that have affected
the market price and liquidity of the securities of Indian companies. These
problems have included temporary exchange closures, broker defaults, settlement
delays and strikes by brokers. The Stock Exchange, Mumbai, or the BSE, was
closed for three days in March 1995 following a default by a broker. In March
2001, the BSE dropped 667 points or 15.6% and there were also rumors of insider
trading in the BSE leading to the resignation of the BSE president and several
other members of the governing board. In the same month, the Kolkata Stock
Exchange, formerly known as the Calcutta Stock Exchange, suffered a payment
crisis when several brokers defaulted and the exchange invoked guarantees
provided by various Indian banks. In April 2003, the decline in the price of
the equity shares of a leading Indian software company created volatility in
the Indian stock markets and created temporary concerns regarding our exposure
to the equity markets. In addition, the governing bodies of the Indian stock
exchanges have from time to time imposed restrictions on trading in certain
securities, limitations on price movements and margin requirements. Further,
from time to time, disputes have occurred between listed companies and stock
exchanges and other regulatory bodies, which in some cases may have had a
negative effect on market sentiment. In recent years, there have been changes
in laws and regulations for the taxation of dividend income, which have
impacted the Indian equity capital markets. See "Dividends". Similar problems
or changes could occur in the future and, if they did, they could affect the
market price and liquidity of our equity shares and our ADSs.
Settlement of trades of equity shares on Indian stock exchanges may be
subject to delays.
The equity shares represented by the ADSs are currently listed on the
Chennai, Delhi, Kolkata, Vadodara Stock Exchanges, the BSE and the National
Stock Exchange of India. Settlement on those stock exchanges may be subject to
delays and an investor in equity shares withdrawn from the depositary facility
upon surrender of ADSs may not be able to settle trades on such stock exchanges
in
22
a timely manner. We have also received shareholder approval in our Annual
General Meeting held on August 25, 2003 for the delisting of our equity shares
shares from the Chennai, Delhi, Kolkata and Vadodara stock exchanges.
As a result of Indian government regulation of foreign ownership, the
price of our ADSs could go down.
Foreign ownership of Indian securities is heavily regulated and is
generally restricted. ADSs issued by companies in certain emerging markets,
including India, may trade at a discount or premium to the underlying equity
shares, in part because of the restrictions on foreign ownership of the
underlying equity shares.
Your holdings may be diluted by additional issuances of equity and any
dilution may adversely affect the market price of our equity shares and
ADSs.
There is a risk that growth in our business, including in our
international operations and our insurance business, could require us to fund
this growth through additional equity offerings. In addition, up to 5.0% of
ICICI Bank's issued equity shares following the amalgamation, was permitted to
be issued in accordance with ICICI Bank's employee stock option scheme to
eligible employees of ICICI Bank and its subsidiaries. At August 31, 2003,
ICICI Bank had granted a total of 21,396,475 stock options, of which 193,545
had been exercised, 6,585,758 had vested but had not been exercised and
1,506,775 had lapsed or been forfeited. The total stock options granted, less
options lapsed or forfeited, were 3.2% of ICICI Bank's issued equity shares.
Any future issuance of equity shares would dilute the positions of
investors in the ADSs and equity shares, and could adversely affect the market
price of our equity shares and our ADSs.
You may be unable to exercise preemptive rights available to other
shareholders.
A company incorporated in India must offer its holders of equity shares
preemptive rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any new
equity shares, unless these rights have been waived by at least 75.0% of the
company's shareholders present and voting at a shareholders' general meeting.
US investors in ADSs may be unable to exercise preemptive rights for equity
shares underlying ADSs unless a registration statement under the Securities Act
is effective with respect to such rights or an exemption from the registration
requirements of the Securities Act is available. Our decision to file a
registration statement will depend on the costs and potential liabilities
associated with any such registration statement as well as the perceived
benefits of enabling US investors in ADSs to exercise their preemptive rights
and any other factors we consider appropriate at the time. We do not commit
that we would file a registration statement under these circumstances. If ICICI
Bank issues any such securities in the future, such securities may be issued to
the depositary, which may sell such securities in the securities markets in
India for the benefit of the investors in the ADSs. There can be no assurance
as to the value, if any, the depositary would receive upon the sale of these
securities. To the extent that investors in ADSs are unable to exercise
preemptive rights, their proportional interests in ICICI Bank would be reduced.
Because the equity shares underlying the ADSs are quoted in rupees in
India, you may be subject to potential losses arising out of exchange rate
risk on the Indian rupee and risks associated with the conversion of rupee
proceeds into foreign currency.
Investors that purchase ADSs are required to pay for the ADSs in US
dollars. Investors are subject to currency fluctuation risk and convertibility
risks since the equity shares are quoted in rupees on the Indian stock
exchanges on which they are listed. Dividends on the equity shares will also be
paid in rupees, and then converted into US dollars for distribution to ADS
investors. Investors that seek to convert the rupee proceeds of a sale of
equity shares withdrawn upon surrender of ADSs into
23
foreign currency and export the foreign currency will need to obtain the
approval of the Reserve Bank of India for each such transaction. In addition,
investors that seek to sell equity shares withdrawn from the depositary
facility will have to obtain approval from the Reserve Bank of India, unless
the sale is made on a stock exchange or in connection with an offer made under
the regulations regarding takeovers. Holders of rupees in India may also
generally not purchase foreign currency without general or special approval
from the Reserve Bank of India. However, dividends received by the depositary
in rupees and, subject to approval by the Reserve Bank of India, rupee proceeds
arising from the sale on an Indian stock exchange of equity shares, which have
been withdrawn from the depositary facility, may be converted into US dollars
at the market rate.
On an average annual basis, the rupee has declined against the US dollar
since 1980. As measured by the Reserve Bank of India's reference rate, the
rupee lost approximately 15.3% of its value against the US dollar from
September 1998 to May 2002, depreciating from Rs. 42.52 per US$ 1.00 on
September 1, 1998 to Rs. 49.03 per US$ 1.00 on May 31, 2002 before appreciating
to Rs. 45.78 per US$ 1.00 on September 12, 2003. In addition, in the past, the
Indian economy has experienced severe foreign exchange shortages.
You may be subject to Indian taxes arising out of capital gains.
Generally, capital gains, whether short-term or long-term, arising on the
sale of the underlying equity shares in India are subject to Indian capital
gains tax. For the purpose of computing the amount of capital gains subject to
tax, Indian law specifies that the cost of acquisition of the equity shares
will be deemed to be the share price prevailing on the BSE or the National
Stock Exchange on the date the depositary advises the custodian to redeem
receipts in exchange for underlying equity shares. The period of holding of
such equity shares, for determining whether the gain is long-term or
short-term, commences on the date of the giving of such notice by the
depositary to the custodian. Investors are advised to consult their own tax
advisers and to consider carefully the potential tax consequences of an
investment in the ADSs.
There may be less company information available in Indian securities
markets than securities markets in developed countries.
There is a difference between the level of regulation and monitoring of
the Indian securities markets and the activities of investors, brokers and
other participants and that of markets in the United States and other developed
countries. The Securities and Exchange Board of India is responsible for
improving disclosure and other regulatory standards for the Indian securities
markets. The Securities and Exchange Board of India has issued regulations and
guidelines on disclosure requirements, insider trading and other matters. There
may, however, be less publicly available information about Indian companies
than is regularly made available by public companies in developed countries.
24
BUSINESS
Overview
We offer a wide range of banking products and services to corporate and
retail customers through a variety of delivery channels. In fiscal 2003, we
made a net loss of Rs. 7.98 billion (US$ 168 million) compared to a net income
of Rs. 1.55 billion (US$ 33 million) in fiscal 2002. We made a loss primarily
due to the high level of provision for loan losses, which was Rs. 19.65 billion
(US$ 413 million) in fiscal 2003 as a result of large additions to restructured
and other impaired loans during the year. At year-end fiscal 2003, we had
assets of Rs. 1,180.3 billion (US$ 24.8 billion) and stockholders' equity of
Rs. 92.2 billion (US$ 1.9 billion).
ICICI Bank was organized under the laws of India in 1994 as a private
sector commercial bank. ICICI Bank was an affiliate company of ICICI. ICICI was
organized under the laws of India in 1955 and together with its subsidiaries
and affiliates was a diversified financial services group. In April 2002, ICICI
and two of its subsidiaries, ICICI Personal Financial Services and ICICI
Capital Services merged with and into ICICI Bank in an all-stock amalgamation.
Pursuant to the amalgamation, the shareholders of ICICI were issued ICICI Bank
equity shares in the ratio of one fully paid-up equity share, par value Rs. 10
per share, of ICICI Bank for every two fully paid-up equity shares, par value
Rs. 10 per share, of ICICI. As there were five ICICI equity shares underlying
each ICICI ADS and two ICICI Bank equity shares underlying each ICICI Bank ADS,
holders of ICICI ADSs were issued five ICICI Bank ADSs for every four ICICI
ADSs.
Statement on Financial Accounting Standards No. 141 on "Business
Combinations", issued by the Financial Accounting Standards Board, requires
that business combinations be accounted for in the period in which the
combination is consummated. The effective date of the amalgamation for
accounting purposes under US GAAP was April 1, 2002. Accordingly, under US
GAAP, the amalgamation has been reflected in the financial statements for
fiscal 2003 contained in this annual report, as it was consummated in April
2002. Under US GAAP, the amalgamation was accounted for as a reverse
acquisition. This means that ICICI was recognized as the accounting acquirer in
the amalgamation, although ICICI Bank was the legal acquirer. Accordingly, the
financial statements and other financial information contained in this annual
report for fiscal 2002 and prior years, except where specifically stated
otherwise, present the assets, liabilities and results of operations of ICICI.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation, with ICICI Bank
recognized as the accounting acquirer.
As we are the surviving legal entity in the amalgamation, the other
subsidiaries and affiliates of ICICI have become our subsidiaries and
affiliates. Consequently, the products and services offered by ICICI and its
subsidiaries and affiliates are now offered by us. These include project and
corporate finance and a wide range of retail credit products such as home
loans, automobile loans and other consumer finance products and services, as
well as a number of advisory, investment and other financial activities,
venture capital, life insurance and non-life insurance.
During fiscal 2003, we offered products and services in the areas of
commercial banking to corporate and retail customers, both domestic and
international, investment banking and other products like insurance.
Our commercial banking operations for corporate customers include a range
of products and services for India's leading corporations and growth-oriented
middle market companies. Our products and services for corporate customers
include loan products and fee and commission-based products and services. Our
loan products consist of project finance, corporate finance and working capital
loans, including cash credit facilities and bill discounting, and agricultural
financing. Fee and commission-based products and services include documentary
credits, standby letters of credit, project finance guarantees, cash management
services, trust and retention accounts, cross-border trade
25
services, payment services, custodial services and loan syndication. Most of
these fee and commission-based products and services provide recurring fees
from customers. We also take rupee or foreign currency deposits with fixed or
floating interest bases from our corporate customers. Our deposit taking
products include certificates of deposit, checking accounts and time deposits.
Our commercial banking products and services for retail customers include
both retail loans and retail liability products and services. We offer a wide
rage of retail credit products including home loans, automobile loans,
commercial vehicle loans, two wheeler loans, consumer durable loans, dealer
financing, personal loans, credit cards, loans against time deposits and loans
against shares. We also offer loans and fee-based services to small
enterprises, which include suppliers and dealers of large corporations, and
clusters of small enterprises that have a homogeneous profile. We take rupee
and foreign currency deposits from customers in India as well as non-resident
Indians. Our deposit products include checking accounts and time deposits, with
specific products for customers in various segments, like student accounts,
payroll accounts, accounts for small businesses and non-resident Indian
accounts. We also offer retail bond products. Our other retail products and
services include private banking, debit cards, fund transfer facilities and
utility bill payment services. We also distribute third party investment
products, including government of India Relief Bonds, mutual funds and life
insurance policies issued by our joint venture, ICICI Prudential Life Insurance
Company.
Our investment banking business includes ICICI Bank's treasury
operations. ICICI Bank's treasury operations include maintenance and management
of regulatory reserves, proprietary trading in equity and fixed income, a range
of products and services for corporate customers, such as forward contracts and
interest rate and currency swaps, and foreign exchange products and services.
Through its treasury operations, ICICI Bank manages its balance sheet including
the maintenance of required regulatory reserves and seeks to optimize profits
from its trading portfolio by taking advantage of market opportunities. There
is no restriction on active management of ICICI Bank's regulatory portfolio
through sales and purchases of securities. Our investment banking business also
includes corporate advisory services, including advice on financing and
strategic transactions, underwriting and placement of equity offerings and
broking, and fixed income operations, including primary dealership in
government securities and proprietary operations in various money market
instruments, all of which are undertaken by ICICI Securities, our investment
banking subsidiary. We also provide venture capital funding to start-up
companies, as well as private equity to a range of companies, through funds
managed by our subsidiary ICICI Venture Funds Management Company Limited.
Our other businesses include life insurance and non-life insurance. ICICI
Prudential Life Insurance Company, our joint venture with Prudential plc,
offers a range of life insurance products to individuals in India. ICICI
Lombard General Insurance Company, our joint venture with Lombard Canada
Limited, offers property and other non-life insurance products to companies and
individuals in India.
We believe that the international markets present a major growth
opportunity and have, therefore, expanded the range of our commercial banking
products to international customers. Our strategy for growth in international
markets is based on leveraging home country links for international expansion
by capturing market share in select international markets. We have identified
North America, the United Kingdom, the Middle-East and South-East Asia as the
key regions for establishing our international presence. We established a
wholly-owned subsidiary, ICICI Bank UK Limited, in the United Kingdom and
received approval for undertaking banking business in the United Kingdom from
the Financial Services Authority in August 2003. We also established a branch
in Singapore in August 2003. We have a representative office in New York and
have received regulatory approvals for setting up a subsidiary in Canada and
representative offices in the United Arab Emirates and China.
We offer our customers a choice of delivery channels including physical
branches, ATMs, telephone banking call centers and the Internet. In recent
years, we have expanded our physical delivery channels, including bank branches
and ATMs, to cover a total of approximately 1,695 locations in 269 centers
throughout India at year-end fiscal 2003.
26
We have consistently used technology to differentiate our products and
services from those of our competitors. For example, we were among the first
banks in India to offer Internet banking. Our technology-driven products also
include cash management services, mobile phone banking services and electronic
commerce-based business-to-business and business-to-consumer banking solutions.
To support our technology initiatives, we have set up online real time
transaction processing systems. We remain focused on changes in customer needs
and technological advances and seek to remain at the forefront of electronic
banking in India.
Our legal name is ICICI Bank Limited but we are known commercially as
ICICI Bank. We were incorporated on January 5, 1994 under the laws of India as
a limited liability corporation. The duration of ICICI Bank is unlimited. Our
principal corporate office is located at ICICI Bank Towers, Bandra-Kurla
Complex, Mumbai 400 051, India, our telephone number is +91 22 2653 1414 and
our web site address is www.icicibank.com. Our agent for service of process in
the United States is CT Corporation System and their address is 111 Eighth
Avenue, New York, New York, 10011.
History
ICICI Bank was formed in 1994 as a part of the ICICI group of companies.
ICICI Bank's initial equity capital was contributed 75.0% by ICICI and 25.0% by
SCICI Limited, a diversified finance and shipping finance lender of which ICICI
owned 19.9% at December 1996. In December 1996, SCICI was merged into ICICI,
and as a result, ICICI Bank became a wholly-owned subsidiary of ICICI. In May
1994, when ICICI obtained its commercial banking license to establish ICICI
Bank, the Reserve Bank of India imposed a condition regarding dilution of
holdings in commercial banks by promoters. This condition required ICICI to
reduce its shareholding in ICICI Bank in stages, first to not more than 75.0%
of its equity share capital and ultimately to not more than 40.0% of its equity
share capital. In fiscal 1998, ICICI reduced its shareholding in ICICI Bank to
just below 75.0% of its equity share capital as required, through a public
offering of shares in India. In March 2000, ICICI Bank completed an equity
offering in the form of ADRs listed on the NYSE for an amount of US$ 175
million. After this offering, ICICI's shareholding in ICICI Bank was
approximately 62.2% of ICICI Bank's equity share capital.
Effective March 10, 2001, ICICI Bank acquired Bank of Madura, an old
private sector bank, in an all stock merger which was approved by ICICI Bank's
shareholders at an extraordinary general meeting held on January 19, 2001.
ICICI Bank issued two of its equity shares, par value Rs. 10 per share, for
every equity share, par value Rs. 10 per share, of Bank of Madura. The market
value of the shares issued by ICICI Bank was Rs 3.7 billion (US$ 78 million).
The fair value of the net assets acquired by ICICI Bank was Rs. 1.3 billion
(US$ 27 million) and the fair value of the liabilities assumed by ICICI Bank
was Rs. 39.1 billion (US$ 822 million). This acquisition gave ICICI Bank a
larger balance sheet and extensive geographic reach. This acquisition was
accounted for under the purchase method of accounting. The assets acquired and
liabilities assumed were recorded at estimated fair values as determined by
ICICI Bank's management based on information then available and on assumptions
made at that time as to future operations. ICICI's shareholding in ICICI Bank
was reduced to approximately 55.6% after this merger.
In further compliance with the bank licensing condition stipulated by the
Reserve Bank of India regarding dilution of holdings in commercial banks by
promoters, ICICI divested, through sales in the Indian secondary markets to
institutional investors, 8.8% of ICICI Bank's equity shares during March 2001.
At year-end fiscal 2001, ICICI held 46.4% of ICICI Bank's equity shares. During
the first five months (April to August) of fiscal 2002, ICICI sold additional
equity shares of ICICI Bank in the Indian secondary markets to institutional
investors. Consequently, ICICI's holding in ICICI Bank was reduced to 46.0% of
ICICI Bank's equity share capital. In accordance with Section 4 of the Indian
Companies Act, ICICI Bank ceased to be a subsidiary of ICICI as of March 22,
2001 and was accounted for under the equity method of accounting from April 1,
2000.
ICICI was formed in 1955 at the initiative of the World Bank, the
government of India and representatives of Indian industry. The principal
objective was to create a development financial
27
institution for providing medium-term and long-term project financing to Indian
businesses. Until the late 1980s, ICICI primarily focused its activities on
project finance, providing long-term funds to a variety of industrial projects.
With the liberalization of the financial sector in India in the 1990s, ICICI
transformed its business from a development financial institution offering only
project finance to a diversified financial services provider that, along with
its subsidiaries and affiliates, offered a wide variety of products and
services. As India's economy became more market-oriented and integrated with
the world economy, ICICI capitalized on the new opportunities to provide a
wider range of financial products and services to a broader spectrum of
clients. ICICI set up independent operations through the incorporation of
subsidiaries and affiliates in the areas of venture capital funding (1988),
asset management (1993), investment banking (1993), commercial banking (1994),
brokering and marketing (1994), personal finance (1997), Internet stock trading
(1999), home finance (1999) and insurance (2000).
ICICI Bank offered products and services which largely complemented the
products and services offered by ICICI and its other subsidiaries and
affiliates. ICICI Bank sought to take advantage of the customer relationships
of ICICI and its other subsidiaries and affiliates. These relationships were
particularly effective in helping ICICI Bank gain access to the larger
corporations, as ICICI Bank's balance sheet on a stand-alone basis would not
have permitted it to take the large exposures that might be undertaken by ICICI
given its large balance sheet capabilities. ICICI Bank also sought to benefit
from ICICI's corporate relationships in growing its retail business. ICICI Bank
sold retail products to the employees of the ICICI group's corporate customers,
including offering corporate customers its payroll deposit scheme for their
employees. ICICI's retail bondholders also presented ICICI Bank with an
opportunity for cross selling a variety of products, including bank accounts,
credit cards, depositary share accounts and, to a limited extent, retail loans.
The issue of universal banking, which in the Indian context means
conversion of long-term lending institutions into commercial banks, has been
discussed at length over the past few years. The Reserve Bank of India in its
Mid-Term Review of Monetary and Credit Policy for fiscal 2000 and its circular
on Approach to Universal Banking issued on April 28, 2001, announced that it
would consider proposals from long-term lending institutions (like ICICI)
wishing to transform themselves into banks on a case-by-case basis. In its
Mid-Term Review of Monetary and Credit Policy for fiscal 2002, the Reserve Bank
of India encouraged financial institutions to submit proposals for their
transformation into banks. See "Overview of the Indian Financial Sector -
Recent Structural Reforms - Universal Banking Guidelines" for a discussion of
the key regulatory provisions governing the transformation of financial
institutions into banks.
Conversion into a bank offered ICICI the ability to accept low-cost
demand deposits and offer a wider range of products and services, and greater
opportunities for earning non-fund based income in the form of banking fees and
commissions. In view of the benefits of transformation into a bank and the
Reserve Bank of India's pronouncements on universal banking, ICICI explored
various corporate structuring alternatives for its transformation into a
universal bank. ICICI also held discussions with the Reserve Bank of India on
an appropriate transition path and compliance with regulatory requirements.
ICICI Bank also considered various strategic alternatives, in the context of
the emerging competitive scenario in the Indian banking industry, and the move
towards universal banking. ICICI Bank identified a large capital base and size
and scale of operations as key success factors in the Indian banking industry.
The strategic alternatives examined by ICICI and ICICI Bank included an
amalgamation of the two entities, in view of ICICI's significant shareholding
in ICICI Bank, and the existing strong business synergies between the two
entities. ICICI also considered the reorganization of its subsidiary companies.
Following this strategizing on the various alternatives including an
amalgamation of ICICI and ICICI Bank, the senior managements of ICICI and ICICI
Bank commenced a program of in-depth confidential discussions on the various
strategic alternatives in July 2001. These discussions were held on various
dates during July-August 2001. Based on these discussions, the managements of
ICICI and ICICI Bank formed the view that the amalgamation of ICICI with ICICI
Bank would be the
28
optimal strategic alternative for both entities, and would create the optimal
legal structure for the ICICI group's universal banking strategy. The
managements of ICICI and ICICI Bank accordingly decided to prepare, for
submission to their respective boards of directors, a proposal for the
amalgamation of ICICI, ICICI Capital Services and ICICI Personal Financial
Services, with ICICI Bank. ICICI Capital Services was a wholly-owned subsidiary
of ICICI, and was one of the largest distributors of financial and investment
products in India. It also provided front-office services to the retail and
semi-retail investors of ICICI, and undertook the management of the various
ICICI centers, which were low-cost stand-alone offices acting as marketing and
service centers, set up by ICICI. ICICI Personal Financial Services was also a
wholly-owned subsidiary of ICICI, and was engaged in the distribution and
servicing of various retail credit products and other services offered by ICICI
and ICICI Bank.
The amalgamation was approved by each of the boards of directors of
ICICI, ICICI Personal Financial Services, ICICI Capital Services and ICICI Bank
at their respective meetings held on October 25, 2001. The amalgamation was
approved by the shareholders of ICICI Bank and ICICI at their extraordinary
general meetings held on January 25, 2002 and January 30, 2002, respectively.
The amalgamation was sanctioned by the High Court of Gujarat at Ahmedabad on
March 7, 2002 and by the High Court of Judicature at Bombay on April 11, 2002.
The amalgamation was approved by the Reserve Bank of India on April 26, 2002.
Shareholding of ICICI in ICICI Bank
At year-end fiscal 2002, ICICI held 101,395,949 shares of ICICI Bank,
representing 46.0% of the equity share capital of ICICI Bank. Pursuant to the
provisions of the Scheme of Amalgamation, ICICI transferred all of the ICICI
Bank shares held by it to the ICICI Bank Shares Trust with Western India
Trustee & Executor Company Limited as the Trustee, to hold such ICICI Bank
shares in trust exclusively for the benefit of ICICI and its successors. These
shares constituted 16.5% of ICICI Bank's equity share capital. The Scheme of
Amalgamation provided that the Trustees were to divest or otherwise dispose of
the shares within 24 months of the amalgamation becoming effective and remit
the proceeds of divestment to ICICI Bank. On September 26, 2002, these shares
were sold by the Trust through the stock exchange, primarily to foreign
strategic and institutional investors, at an average sale price of
approximately Rs. 130 per equity share.
Shareholding Structure and Relationship with the Government of India
We operate as an autonomous and commercial enterprise, making decisions
and pursuing strategies that are designed to maximize shareholder value, and
the Indian government has never directly held any of our shares. Reflecting the
dominant role of the Indian government in the Indian economy and ICICI's status
as a public financial institution named in the Indian Companies Act, ICICI's
principal shareholders were government-controlled. They included the Life
Insurance Corporation of India, the General Insurance Corporation of India,
government-owned general insurance companies and the Unit Trust of India.
Consequent to the amalgamation of ICICI with ICICI Bank, these
government-controlled shareholders have received shares of ICICI Bank in
exchange for their shareholding in ICICI. There is no shareholders' agreement
or voting trust relating to the ownership of the shares held by the
government-controlled shareholders. ICICI Bank is the surviving legal entity in
the amalgamation. Accordingly, ICICI Bank is not a public financial
institution. See "Supervision and Regulation - Public Financial Institution
Status" for a discussion of ICICI's public financial institution status and the
implications of the absence of such status for us.
29
The following table sets forth, at August 29, 2003, certain information
regarding the ownership of ICICI Bank's equity shares.
------------------------------------
Percentage of
total equity
shares Number of equity
outstanding shares held
------------------------------------
Government-controlled shareholders:
Life Insurance Corporation of India.................................................. 7.99 48,977,875
General Insurance Corporation of India and government-owned general insurance
companies........................................................................... 7.02 43,022,254
Unit Trust of India.................................................................. 2.31 14,152,517
Other government-controlled institutions, corporations and banks..................... 0.48 2,970,348
----------------------------------
Total government-controlled shareholders 17.80 109,122,994
----------------------------------
Other Indian investors:
Individual domestic investors (1) (2)................................................ 8.69 53,256,192
Bajaj Auto Limited .................................................................. 3.49 21,418,655
Indian corporates and others (excluding Bajaj Auto Limited).......................... 1.56 9,543,612
Mutual funds and banks (other than government-controlled banks)...................... 1.81 11,144,173
----------------------------------
Total other Indian investors............................................................ 15.55 95,362,632
----------------------------------
Total Indian investors.................................................................. 33.35 204,485,626
----------------------------------
Foreign investors:
Deutsche Bank Trust Company Americas, as depositary.................................. 26.08 159,882,118
Orcasia Limited...................................................................... 7.54 46,231,626
Government of Singapore.............................................................. 5.72 35,062,343
Foreign institutional investors, foreign banks, overseas corporate bodies and
non-resident Indians (excluding Orcasia Limited and Government of Singapore)...... 27.31 167,481,101
----------------------------------
Total foreign investors................................................................. 66.65 408,657,188
----------------------------------
Total ................................................................................. 100.00 613,142,814
==================================
-------------
(1) Executive officers and directors as a group held less than 0.1% of the
equity shares as of this date.
(2) No single shareholder in this group owned 5.0% or more of ICICI Bank's
equity shares as of this date.
The government of India has guaranteed certain of our domestic and
multilateral borrowings. Under the terms of these loan and guarantee facilities
provided by the government of India to us, the government of India is entitled
to appoint and has appointed one representative to the board of ICICI Bank.
ICICI had traditionally invited a representative each of the
government-controlled insurance companies that are among our principal domestic
institutional shareholders, General Insurance Corporation of India and Life
Insurance Corporation of India, generally their respective Chairman, on its
board. ICICI Bank had, effective May 3, 2002, appointed the then Chairman of
General Insurance Corporation of India, Mr. D. Sengupta, to its board. He
resigned from the board effective June 30, 2002, upon completion of his tenure
as Chairman of General Insurance Corporation of India. Mr. P.C. Ghosh, the
current Chairman of the General Insurance Corporation of India has been
appointed as a Director effective January 31, 2003. We expect to appoint the
Chairman of Life Insurance Corporation of India, to the board of ICICI Bank.
See "Management--Directors and Executive Officers" for a discussion of the
composition of ICICI Bank's board of directors.
ICICI raised US$ 315 million through an offering of 32.14 million ADSs in
September 1999. ICICI Bank raised US$ 175 million through an offering of 15.91
million ADSs in March 2000. Pursuant to the amalgamation of ICICI with ICICI
Bank, holders of ADSs in ICICI were issued ADSs in ICICI Bank. Deutsche Bank
Trust Company Americas holds the equity shares represented by 79.94 million
ADSs outstanding as depositary on behalf of the holders of the ADSs. The ADSs
are listed on the New York Stock Exchange. The depositary has the right to vote
on the equity shares represented by the ADSs as directed by ICICI Bank's board
of directors. Under the Indian Banking Regulation Act, no person holding shares
in a banking company can exercise more than 10.0% of the total voting
30
power. This means that Deutsche Bank Trust Company Americas (as depositary),
which owned approximately 26.1% of ICICI Bank's equity shares as of August 29,
2003, could only vote 10.0% of ICICI Bank's equity shares in accordance with
the directions of the board of directors. See "Overview of the Indian Financial
Sector - Recent Structural Reforms - Proposed Amendments to the Banking
Regulation Act". ICICI Bank does not have any agreement with its
government-controlled shareholders regarding management control, voting rights,
anti-dilution or any other matter. Except as stated above, no shareholder has
differential voting rights.
The holding of foreign investors increased to 66.7% as at August 29, 2003
from 48.8% for ICICI at year-end fiscal 2002, primarily due to the sale of
101,395,949 shares constituting 16.5% of ICICI Bank's equity share capital
subsequent to the amalgamation, held by Western India Trustee & Executor
Company Limited (ICICI Bank Shares Trust) to primarily foreign strategic and
institutional investors in September 2002, at an average price of approximately
Rs. 130 per share.
The holding of government-controlled shareholders is 17.8% as at August
29, 2003 against 32.3% for ICICI at year-end fiscal 2002, primarily due to the
issuance of one share in ICICI Bank for every two shares in ICICI pursuant to
the amalgamation and the low shareholding (3.7%) of government-controlled
shareholders in ICICI Bank prior to the amalgamation. The holding of Life
Insurance Corporation of India is 8.0% as at August 29, 2003 against 12.3% for
ICICI at year-end fiscal 2002 primarily due to the issuance of one share in
ICICI Bank for every two shares in ICICI pursuant to the amalgamation. The
holding of other Indian investors is 15.6% as at August 29, 2003, as against
18.9% for ICICI at year-end fiscal 2002.
Strategy
Our objective is to enhance our position as a premier provider of banking
and other financial services in India.
The key elements of our business strategy are to:
o leverage on the synergies of the amalgamation of ICICI with ICICI
Bank;
o focus on profitable, quality growth opportunities by:
- maintaining and enhancing our strong retail franchise;
- maintaining and enhancing our strong corporate franchise;
- building an international presence; and
- enhancing our strengths in the insurance business.
o emphasize conservative risk management practices and enhance asset
quality;
o use technology for competitive advantages; and
o attract and retain talented professionals.
Leverage on the Synergies of the Amalgamation of ICICI with ICICI Bank
As a result of the acquisition of Bank of Madura, we became and continue
to be the largest private sector bank in India and as a result of the
amalgamation, we became and continue to be the second largest among all banks
in India, in terms of total assets. The amalgamation has increased our capital
base and expanded the scope of our business operations. We aim to continue to
leverage on our increased capital base, comprehensive suite of products and
services, extensive corporate and retail customer relationships,
technology-enabled distribution architecture, strong brand franchise and vast
talent pool. We aim to continue to take advantage of the combination of ICICI's
large capital base with ICICI Bank's strong deposit raising capabilities to
develop and increase our market share in profitable business lines.
31
Focus on Profitable, Quality Growth Opportunities by:
Maintaining and Enhancing our Strong Retail Franchise
We believe that the Indian retail financial services market is likely to
continue to experience sustained growth. With upward migration of household
income levels, increasing affordability of retail finance and acceptance of use
of credit to finance purchases, retail credit has emerged as a rapidly growing
opportunity for banks that have the necessary skills and infrastructure to
succeed in this business. We have capitalized on the growing retail opportunity
in India and believe that we have emerged, on an incremental basis, as a market
leader in retail credit. The key dimensions of our retail strategy are
innovative products, parity pricing, customer convenience, wide distribution,
strong processes, prudent risk management and customer focus. Cross selling of
the entire range of credit and investment products and banking services to our
customers is a critical aspect of our retail strategy.
Our retail credit products include home loans, automobile loans,
commercial vehicle loans, two wheeler loans, consumer durable loans, dealer
financing, personal loans, credit cards, loans against time deposits and loans
against shares. Our retail loans increased significantly during fiscal 2003, as
a result of our focus on retail products and services. Retail credit forms an
integral part of our portfolio diversification strategy. We believe that we
have emerged, on an incremental basis, to be among the market leaders in retail
credit, based on publicly available data and our own market estimates. We will
continue to build on our leadership position in retail credit.
We have integrated our strategy with regard to small enterprises with our
strategy for retail products and services. We are focusing on offering working
capital loans and other banking products and services to suppliers or dealers
of large corporations, and clusters of small enterprises that have a
homogeneous profile.
We have over the years achieved significant growth in our retail
liability base. We offer a wide range of products and services to our retail
liability customers, including deposits, debit cards, fund transfer facilities
and utility bill payment services. We aim to continue to attract customers
through innovative products such as "Salary Account", our direct deposit
product that allows our corporate customers' employee salaries to be directly
credited to special savings accounts.
We earn fee income from our commercial banking services to retail
customers, including retail loan processing fees, credit card and debit card
fees, and retail transaction fees. Our ATM acquiring business also generates
fee income when customers of other banks execute transactions at our ATMs. We
have also entered the credit card acquiring business, in which we earn income
on transactions executed at merchant point of sale terminals owned by us. We
also offer our customers depositary share accounts and direct sales of third
party mutual funds and government of India Relief Bonds, for which we earn fee
income. Our Internet banking services include Money2India, an online remittance
facility for non-resident Indians, which generates fee income. ICICI Web Trade
Limited, an entity consolidated in our US GAAP financial statements, offers
online share trading services to our retail customers.
All of our retail products are marketed under the "ICICI Bank" brand. To
enhance our brand equity, we undertake comprehensive brand building and
advertising campaigns with advertisements in print and television. Studies
undertaken periodically by independent market research agencies commissioned by
us have shown that our brand is among the top two financial services brands in
India.
Maintaining and Enhancing our Strong Corporate Franchise
Our commercial banking operations for corporate customers include a range
of products and services for India's leading corporations and growth-oriented
middle market companies. Our key
32
commercial banking products and services to corporate customers include loan
products and fee and commission-based products and services.
Our corporate loan products consist principally of project and corporate
finance and working capital finance. Our fee and commission-based products and
services include documentary credits and standby letters of credit/ guarantees,
forward contracts, interest and currency swaps, cash management services,
escrow and trust and retention accounts, cross-border trade services, payment
services, custodial services, investment banking advisory services, loan
syndication and corporate risk management services. We have developed
countrywide collection and payment mechanisms for rural and cooperative banks
with limited geographic presence.
In fiscal 2003, we have increased focus on technology-driven enhancement
of delivery capabilities to offer improved service levels to clients. We have
set up centralized processing facilities for back office operations where
technology is leveraged to benefit from economies of scale arising out of large
transaction volumes.
In project finance, we focus on structuring and syndication of financing
for large projects, by leveraging our expertise in project financing. In the
manufacturing sector, our focus is on projects sponsored by entities that have
proven ability to commit the required financial resources and implement
projects successfully within planned time-frames.
Our commercial banking services to corporate customers will continue to
focus on leveraging our strong corporate relationships and increased capital
base to increase our market share in non-fund based working capital products
and fee-based services. Our corporate lending activities will continue to focus
on structured finance, corporate finance and working capital lending to highly
rated corporations. We will also focus on achieving directed lending
obligations to the agricultural sector through carefully structured credit
products. In project finance, we will continue to focus on structuring and
syndication of financing for large projects by leveraging our expertise in
project financing, and on actively managing our project finance portfolio to
reduce portfolio concentration and to manage portfolio risk. We view ourselves
not only as a provider of project finance but also as an arranger and
facilitator, creating appropriate financing structures that may serve as
financing and investment vehicles for a wider range of market participants. Our
goal is to provide a comprehensive and integrated service to corporate
treasurers through our solution managers. We aim to increase the cross selling
of our products and services and maximize the value of our corporate
relationships through the effective use of technology, speedy response times,
quality service and the provision of products and services designed to meet
specific customer needs. We will continue to actively manage our asset
portfolio through securitization of assets as well as through acquisition of
credit portfolios from other institutions and banks, to diversify the
portfolio, reduce long-term balance sheet exposures and maximize risk- adjusted
returns.
Building an International Presence
We believe that the international markets present a major growth
opportunity and have therefore expanded the range of our commercial banking
products in international markets. Our initial strategy for growth in
international markets is based on leveraging home country links for
international expansion by capturing market share in select international
markets. The initial focus areas are supporting Indian companies in raising
corporate and project finance for their investments abroad, trade finance,
personal financial services for non-resident Indians and international
alliances to support domestic businesses. ICICI Bank had over the last few
years built a large network of correspondent relationships across all major
countries. Most of these countries have significant trade and other
relationships with India.
We have identified North America, the United Kingdom, the Middle-East and
South-East Asia as the key regions for establishing our international presence.
We established a wholly-owned subsidiary, ICICI Bank UK Limited, in the United
Kingdom and received approval for commencement of banking business from the
Financial Services Authority in August 2003. We also
33
established a branch in Singapore in August 2003. We have a representative
office in New York and have received regulatory approvals for setting up a
subsidiary in Canada and representative offices in the United Arab Emirates and
China.
Enhancing Our Strengths in the Insurance Business
Following the deregulation of the insurance sector in India, private
sector companies have been allowed to enter the insurance business. We have a
joint venture partnership with Prudential plc of UK for the life insurance
business. We have a 74.0% interest in this joint venture. This joint venture
company, ICICI Prudential Life Insurance Company Limited, obtained the license
to conduct life insurance business in November 2000 and commenced business
operations in December 2000. ICICI Prudential Life Insurance sold about 244,000
policies in fiscal 2003. There is a Memorandum of Understanding between ICICI
Bank and ICICI Prudential Life Insurance Company for distribution of life
insurance policies issued by ICICI Prudential Life Insurance Company through
ICICI Bank's branch network.
In the non-life insurance sector, ICICI had entered into a joint venture
partnership with Lombard Canada Limited in fiscal 2001. We have a 74.0%
interest in this joint venture. The joint venture company, ICICI Lombard
General Insurance Company Limited, obtained the license to conduct general
insurance business in August 2001 and subsequently has commenced operations. In
fiscal 2003, ICICI Lombard General Insurance Company had written 98,293
policies and achieved financial breakeven. ICICI Lombard General Insurance
Company offers general insurance products to our corporate customers and seeks
to capitalize on our corporate relationships.
The key dimensions of our strategy for growth in the insurance business
are innovative products, wide distribution network, prudent portfolio mix and
sound risk management practices. In addition, we are focussed on leveraging on
our corporate and retail customer base for cross selling insurance products.
Emphasize Conservative Risk Management Practices and Enhance Asset Quality
We believe that conservative risk management policies, processes and
controls are critical for long-term sustainable competitive advantages in our
business. ICICI Bank's Risk, Compliance and Audit Group is an independent,
centralized group responsible for establishing and implementing company-wide
risk management policies, with an increasing focus on enhancing asset quality.
We continue to build on our credit risk management procedures, credit
evaluation and rating methodology, credit risk pricing models, proprietary
analytics and monitoring and control mechanisms. We expect to enter new product
markets only after conducting detailed risk analysis and pilot testing
programs.
To reduce risk, we are in the process of diversifying our loan portfolio
towards retail lending and shorter-term working capital, while continuing to
focus on corporate lending to highly-rated corporate customers and structured
finance. In addition, we seek to lower the credit risk profile of the project
and corporate loan portfolio through the increased use of financing structures
based on a security interest in the cash flows generated from the business of
the borrower and increased collateral, including additional security in the
form of liquid assets, such as investment securities and readily marketable
real property. We are also trying to mitigate project risk through the
allocation of risk to various project counterparties, such as construction
contractors, operations and maintenance contractors and raw material and fuel
suppliers, by entering into rigorous project contracts with those
counterparties. We seek to control credit risk in the retail loan portfolio,
the small enterprises loan portfolio and the agricultural financing portfolio
through carefully designed approval criteria and credit controls and efficient
collection and recovery systems. We have placed emphasis on recruiting
experienced retail credit professionals to staff our retail credit approval
function. We have also established standards and investigative verification
procedures for selection of our marketing and processing agents. While our
lending to the agricultural sector and small scale industries to comply with
the priority sector lending norms of the Reserve Bank of India may result in
higher credit risk,
34
we are seeking to develop appropriate credit approval criteria and credit
delivery structures to mitigate this risk.
Management has placed great emphasis on asset quality and this focus has
been institutionalized across the organization. We believe we are the market
driver in India in achieving early settlements with troubled borrowers, thus
maximizing our cash flows from these loans. Our Special Asset Management Group
has the responsibility for managing large impaired loans and accounts under
watch.
Use Technology for Competitive Advantages
We seek to be at the forefront of technology usage in the financial
services sector. Information technology is a strategic tool for our business
operations to gain competitive advantage and to improve overall productivity
and efficiency of the organization. All of our technology initiatives are aimed
at enhancing value, offering customer convenience and improved service while
optimizing costs.
We expect to continue with our policy of making investments in technology
to achieve a significant competitive advantage. The key objectives behind our
information technology strategy continue to be:
o building a cost-efficient distribution network to accelerate the
development of our retail franchise;
o enhancing cross selling and client segmenting capability by using
analytical tools and efficient data storage and retrieval systems;
o improving credit risk and market risk management; and
o improving product and client profitability analysis.
Attract and Retain Talented Professionals
We believe a key to our success will be our ability to continue to
maintain and grow a pool of strong and experienced professionals. We have been
successful in building a team of talented professionals with relevant
experience, including experts in credit evaluation, risk management, retail
consumer products, treasury, technology and marketing. Recruitment is a key
management activity and we continue to attract graduates from the premier
Indian business schools.
Our management team is committed to enhancing shareholder value and all
of our performance targets seek to meet this primary objective. We believe we
have created the right balance of performance bonus, stock option and other
economic incentives for our employees so that they will be challenged to
develop business, achieve profitability targets and control risk. We intend to
continuously re-engineer our management and organizational structure to allow
us to respond effectively to changes in the business environment and enhance
our overall profitability.
35
Overview of ICICI Bank's Products and Services
We offer products and services in the areas of commercial banking to
corporate and retail customers, both domestic and international, investment
banking and other products like insurance.
Commercial Banking
Commercial Banking Products and Services for Corporate Customers
General
We provide a range of commercial banking products and services to India's
leading corporations and growth-oriented middle market companies. Our key
commercial banking products and services to corporate customers include loan
products and fee and commission-based products and services. Our loan products
include project and corporate finance, working capital finance including cash
credit facilities (a revolving floating rate asset-backed overdraft facility)
and bill discounting (a type of receivables financing), and agricultural
financing. Our fee and commission-based products and services include
documentary credits, standby letters of credit, financial and performance
guarantees, cash management services, trust and retention accounts, cross
border trade services, payment services, securities processing services and
loan syndication. Most of these fee and commission-based products and services
provide recurring fees from customers. We also take rupee or foreign currency
deposits with fixed or floating interest bases from our corporate customers.
Our deposit taking products include certificates of deposit, checking accounts
and time deposits. We deliver our commercial banking products and services to
our corporate customers through a combination of physical branches,
correspondent banking networks, telephone banking and the Internet.
Corporate Loan Portfolio
Our corporate loan portfolio primarily consists of term loans for project
and corporate finance, and working capital credit facilities. For details on
our loan portfolio, see "- Loan Portfolio".
Project and Corporate Finance
Our Manufacturing Projects Group and Infrastructure Projects Group offer
project finance to the manufacturing sector and structured finance to the
infrastructure sector respectively. Our project finance business consists
principally of extending medium-term and long-term rupee loans to our clients
although we do provide financing in foreign currencies. We also provide
guarantees to foreign lenders and export credit agencies, on behalf of our
clients, typically for large projects in the infrastructure sector.
Our manufacturing sector financing includes project-based lending to
companies in traditional manufacturing sectors, including iron, steel and metal
products, textiles, machinery and capital goods, cement and paper. As a result
of structural changes to the Indian economy, trade liberalization and the
downturn in prices of several major market commodities, many of these industry
segments have gone through a period of stress over the last few years. In view
of the prevailing environment, there have been restricted opportunities for
lending to new projects in the manufacturing sector.
Project and corporate finance is provided generally through term loans
that amortize over a period of typically between one and ten years. Our term
credits include rupee loans, foreign currency loans, lease financing and
subscription to preferred stock. These products also include marketable
instruments such as fixed rate and floating rate debentures. In the case of
rupee and foreign currency loans, and debentures, we generally have a security
interest and first lien on the fixed assets of the borrower. The security
interest typically includes property, plant and equipment and other tangible
assets of the borrower. At year-end fiscal 2003, our gross project and
corporate loans outstanding were Rs. 387.9 billion (US$ 8.2 billion),
constituting 56.7% of our gross loan portfolio.
36
We offer a variety of products that are designed to allow clients to
effectively manage their balance sheets and cash flows, mitigate risks and
enhance the credit rating of certain of their debt issuances. Term loans are
also provided for financing acquisitions. Our structured products group focuses
specifically on the application of securitization techniques to credit enhance
our traditional lending products. We have played a leading role in the growth
and development of the securitization market in India. The structured products
group is also focusing on selling down of our loans to better manage portfolio
concentrations and mismatches in the maturities of our assets and liabilities
and to provide additional liquidity.
We extend fund based loans as well as standby letters of credit
facilities to corporates outside India which are joint ventures and/or
wholly-owned subsidiaries of Indian corporates. At year-end fiscal 2003, our
balance outstanding in respect of loans to corporates outside India was Rs. 536
million (US$ 11 million), representing approximately 0.1% of our total gross
loan portfolio.
Working Capital Finance
Under working capital finance, we offer our customers cash credit
facilities and bill discounting. At year-end fiscal 2003, our gross working
capital loans, including working capital term loans, outstanding were Rs. 74.4
billion (US$ 1.6 billion), constituting 10.9% of our gross loan portfolio.
Cash Credit Facilities: Cash credit facilities are the most common form
of working capital financing in India. Cash credit facilities are given to
borrowers to finance the cash flow gap arising out of the time difference
between the purchase of raw materials and the realization of sale proceeds of
the borrower's products. A cash credit facility is a revolving overdraft line
of credit for meeting the working capital needs of companies and is generally
backed by current assets like inventories and receivables. Under the cash
credit facility, a line of credit is provided up to a pre-established amount
based on the borrower's projected level of inventories, receivables and cash
deficits. Up to this pre-established amount, disbursements are made based on
the actual level of inventories and receivables. A portion of the cash credit
facility can also be made in the form of a demand loan. A cash credit facility
is typically given to companies in the manufacturing, trading and service
sectors on a floating interest rate basis. Interest is earned on this facility
on a monthly basis, based on the daily outstanding amounts. The facility is
generally given for a period of up to 12 months, with a review after that
period. Our cash credit facility is generally fully secured with full recourse
to the borrower. In most cases, we have a first lien on the borrower's current
assets, which normally are inventory and receivables. Additionally, in some
cases, we may take further security of a first or second lien on fixed assets
including real estate, a pledge of financial assets like marketable securities,
corporate guarantees and personal guarantees.
Cash credit facilities are extended to borrowers by a single bank,
multiple banks or a consortium of banks with a lead bank. The nature of the
arrangement is usually agreed between the bank(s) and the borrower and depends
upon the amount of working capital financing required by the borrower, the risk
profile of the borrower and the amount of loan exposure a single bank can take
on the borrower. We are focused on highly rated large corporations and have
participated in multiple bank and consortium arrangements. Regardless of the
arrangement, we undertake our own due diligence and follow our credit risk
policy to determine whether we should lend money to the borrower and, if so,
the amount to be lent to the borrower and the rate of interest to be charged.
For more details on our credit risk procedures, see "-- Risk Management --
Credit Risk".
Bill Discounting: Bill discounting involves the financing of short-term
trade receivables through negotiable instruments. These negotiable instruments
can then be discounted with other banks if required, providing us with
liquidity. In addition to traditional bill discounting, we also provide
customized solutions to our corporate customers having large dealer networks.
Loans are approved to dealers in the form of working capital lines of credit,
based on analysis of dealer credit risk profiles.
37
Corporate Loan Pricing
We price our loans to corporate borrowers based on the following factors:
o our internal credit rating of the company;
o the maturity of the loan;
o the nature of the banking or financing arrangement (either a single
bank, multiple bank or consortium arrangement);
o the collateral available; and
o market conditions.
For a description of our credit rating system, see "- Risk Management -
Credit Risk".
The Asset-Liability Management Committee of our board of directors fixes
prime lending rates based on yield curve factors, such as interest rate and
inflation rate expectations, as well as the market demand for loans of a
certain term and our cost of funds. For corporate loans, we have three prime
lending rates linked to the term of the loan and one prime lending rate for
cash credit. Our prime lending rates effective since January 1, 2003 are as
follows:
Term Prime lending rate
------------------------------------------------------ ------------------
Up to one year.................................. 10.5
One to three years.............................. 11.5
Over three years................................ 12.5
Cash credit..................................... 12.5
Under the earlier Reserve Bank of India regulations, loan exposures
through corporate debt instruments and bill discounting were not subject to the
prime lending rate regulations. Banks could lend at an interest rate below
their prime lending rates when delivery was through these products. From fiscal
2002, the Reserve Bank of India further liberalized the interest rate regime by
allowing banks the freedom to lend below their respective prime lending rates
pursuant to their internally approved guidelines. See also "Supervision and
Regulation - Regulations relating to Making Loans".
Fee and Commission-Based Activities
Our fee and commission-based products and services include documentary
credits, standby letters of credit, cash management services, trust and
retention accounts, payment services, securities processing services and loan
syndication.
Documentary Credits
We provide documentary credit facilities to our working capital loan
customers both for meeting their working capital needs as well as for capital
equipment purchases. For working capital purposes, we issue documentary credits
on behalf of our borrowers for the sourcing of their raw materials and stock
inputs. Lines of credit for documentary credits and standby letters of credit
are approved as part of a working capital loan package provided to a borrower.
These facilities, like cash credit facilities, are generally given for a period
up to 12 months, with review after that period. Typically, the line is drawn
down on a revolving basis over the term of the facility, resulting in a fee
payable to us at the time of each drawdown, based on the amount and term of the
drawdown.
We issue documentary credits on behalf of borrowers both for domestic and
foreign purchases. Borrowers pay a fee to us based on the amount drawn down
from the facility and the term of the facility. This facility is generally
secured by the same collateral available for cash credit facilities. We may
also take collateral in the form of cash deposits, in the range of 5.0% to
20.0% of the drawdown amount, from our borrowers before each drawdown of the
facility.
38
At year-end fiscal 2003, we had a portfolio of documentary credits of Rs.
43.2 billion (US$ 909 million).
Guarantees
We provide standby letter of credit facilities, called guarantees in
India, which can be drawn down any number of times up to the committed amount
of the facility. We issue guarantees on behalf of our borrowers in favor of
corporations and government authorities. Guarantees are generally issued for
the purpose of bid bonds, guaranteeing the performance of our borrowers under a
contract as security for advance payments made to our borrowers by project
authorities and for deferral of and exemption from the payment of import duties
granted to our borrowers by the government against fulfillment of certain
export obligations by our borrowers. The term of these guarantees is generally
up to 36 months though in specific cases, the term could be higher. This
facility is generally secured by collateral similar to that of documentary
credits. In addition, as a part of our project financing activity, we issue
guarantees to foreign lenders, export credit agencies and domestic lenders on
behalf of our clients.
At year-end fiscal 2003, our total guarantees outstanding were Rs. 106.5
billion (US$ 2.2 billion).
Cash Management Services
Under cash management services, we offer our corporate clients
custom-made collection, payment and remittance services allowing them to reduce
the time period between collections and remittances, thereby streamlining their
cash flows. Our cash management products include physical check-based clearing
in locations where settlement systems are not uniform, electronic clearing
services, central pooling of country-wide collections, dividend and interest
remittance services and Internet-based payment products. Our customers pay a
fee to us for these services based on the volume of the transaction, the
location of the check collection center and speed of delivery. This also
results in low-cost funds being maintained for short durations in checking
accounts of customers which we invest profitably.
The total amount handled by us under cash management services was Rs.
2,079.7 billion (US$ 43.7 billion) for fiscal 2003. At year-end fiscal 2003, we
had 598 cash management service customers.
Escrow and Trust and Retention Accounts
We offer escrow account and trust and retention account facilities to
lenders in limited and non-recourse project finance transactions who typically
require the setting up of escrow accounts and trust and retention accounts as
part of the project financing structure, and our customers include power and
telecommunications companies. This service enables us to capture the
receivables of the project on behalf of the lenders and channel the cash flows
in a pre-determined manner. We also offer escrow account facilities for
securitization and merger and acquisition transactions. Our customers pay a
negotiated fee to us for this product based on the complexity of the structure
and the level of monitoring involved in the transaction.
The cash flows managed by us under this product during fiscal 2003 were
about Rs. 74.8 billion (US$ 1.6 billion).
Payment Services
We offer online electronic payment facilities through our commercial
Internet banking platform to our corporate customers and their suppliers and
dealers as a closed user group, where the entire group is required to maintain
bank accounts with us. We use the Internet as the delivery platform for this
business-to-business electronic commerce product, which we call "i-payments".
Under this service, payments from our corporate customers to their suppliers
and payments from the dealers to our corporate customers are made
electronically. This service offers a high level of convenience since no
physical instruments are required, all transactions are done online and the
information may be viewed
39
on the Internet. This product can be customized to meet the specific
requirements of individual customers. We presently do not charge a fee for this
service, as it results in large low-cost funds being maintained for short
durations in checking accounts of customers, that we invest profitably.
At year-end fiscal 2003, there were approximately 8,500 corporations and
small enterprises (which also use our commercial Internet banking platform) on
our commercial Internet banking platform for corporate customers. Some of these
users are also using the platform for making payments/receiving collections
from their channel partners.
Securities Processing Services
We have a significant market share as a custodian of overseas depositary
banks for depositary receipt issues of Indian companies in the international
markets. The total assets held in custody on behalf of our clients, mainly
foreign institutional investors, offshore funds, overseas corporate bodies and
depositary banks for GDR investors, increased to Rs. 300.1 billion (US$ 6.3
billion) at year-end fiscal 2003 from Rs. 247.7 billion (US$ 5.2 billion) at
year-end fiscal 2002. In addition, we are registered as a depositary
participant of National Securities Depository Limited and Central Depository
Services (India) Limited, the only two securities depositaries operating in
India, and provide electronic depositary facilities to investors including
retail investors. To facilitate settlement services, we are a clearing member
of clearing agencies of the leading stock exchanges.
Loan Syndication
We have developed significant syndication capabilities while structuring
and arranging large project finance transactions. We seek to leverage these
syndication capabilities to arrange project and corporate finance for our
corporate clients and earn fee income, as well as to securitize loans
originated by us. We have been granted a merchant banking license by the
Securities and Exchange Board of India.
Products for Other Banks
Various cooperative banks and rural banks in India are limited to
specific regions or states of India. These banks need relationships with banks
present in most of the large cities in India to be able to service the needs of
their customers for country-wide collection and payment. We offer customized
products and solutions for cooperative banks. Although we do not charge a fee
for these products, they result in amounts being maintained with us in
non-interest-bearing current accounts that we can invest profitably.
Corporate Deposits
We take deposits from our corporate clients with terms ranging from 15
days (seven days in respect of deposits over Rs. 1.5 million (US$ 31,546) with
effect from April 19, 2001) to seven years but predominantly from 15 days to
one year. We routinely provide interest quotes for deposits in excess of Rs. 10
million (US$ 210,305) on a daily basis (uncommon in India), based on rates in
the inter-bank term money market and other money market instruments such as
treasury bills and commercial papers. The Reserve Bank of India regulates the
term of deposits in India but not the interest rates with some minor
exceptions. Banks are not permitted to pay interest for periods less than seven
days. Also, pursuant to the current regulations, we are permitted to vary the
interest rates on our corporate deposits based upon the size range of the
deposit so long as the rates offered are the same for every customer of a
deposit of a certain size range on a given day. Corporate deposits include
funds taken by us from large public sector corporations, government
organizations, other banks and private sector companies.
We offer a variety of deposit products to our corporate customers. We
take rupee or foreign currency denominated deposits with fixed or floating
interest rates. Our deposit products for corporations include:
40
o current accounts-- non-interest-bearing demand deposits;
o time deposits -- fixed term deposits that accrue interest at a fixed
rate and may be withdrawn before maturity by paying penalties; and
o certificates of deposit -- a type of time deposit.
Our corporate deposits totaled Rs. 242.8 billion (US$ 5.1 billion) at
year-end fiscal 2003, constituting 49.4% of our total deposits and 20.6% of our
total liabilities and stockholders' equity at year-end fiscal 2003. Of our
total corporate deposits, current account deposits totaled Rs. 22.1 billion
(US$ 465 million) constituting 9.1% of corporate deposits and term deposits
totaled Rs. 220.7 billion (US$ 4.6 billion) constituting 90.9% of corporate
deposits.
The following table sets forth, at the date indicated, the maturity
profile of our rupee term deposits (including deposits of banks) of Rs. 10
million (US$ 210,305) or more:
At March 31,
------------------------------------------
% of total
2003 deposits
------------------------------------------
(in millions, except percentages)
Less than three months............................ Rs. 65,986 US$ 1,388 13.4%
Above three months and less than six months....... 15,634 329 3.2
Above six months and less than twelve months...... 70,222 1,477 14.3
More than twelve months........................... 13,578 286 2.8
----------- --------- ------
Total deposits of Rs. 10 million and more......... Rs. 165,420 US$ 3,479 33.7%
=========== ========= ======
We market corporate deposits from branches and directly from our
corporate office.
We continue to be banker to the market offerings of select companies on
account of raising of equity or debt, buy back of equity and equity takeovers.
These companies are required to maintain the subscription funds with the
bankers to the offering until the allotment of shares/buy back of shares and
the refund of excess subscription is completed. This process generally takes
about 15 to 30 days, resulting in short-term deposits with us. We act as banker
to corporates for their dividend payout to their shareholders and interest
payout to bondholders, which results in mobilizing interest-free, float
balances to us. We believe that our relationships with corporate deposit
customers significantly reduce the volatility in our corporate deposit base. We
also offer inter-bank call rate-linked floating rate deposits.
The growth in corporate deposits has been supplemented by the "anywhere
banking service" offered by us, which allows multi-locational corporations in
India to receive cash inflows and make payments in various cities by
maintaining one central pooling account.
We also provide liquidity management services to our corporate customers
to enable them to invest their short-term cash surpluses in a variety of
short-term treasury and deposit-based instruments, including treasury bills,
commercial paper and certificates of deposit. These products allow our
customers to earn income on their short-term cash surpluses since deposits for
periods of less than 15 days (seven days in respect of deposits over Rs. 1.5
million (US$ 31, 548) with effect from April 19, 2001) are non-interest-bearing
pursuant to the Reserve Bank of India regulations. We also facilitate the
holding of foreign currency accounts. In addition to large public and private
sector companies, our other target customers for these products are provident
funds and high net worth individuals.
Client Coverage
In fiscal 2003, our principal corporate relationship groups were the
Corporate Solutions Group, the Government and Institutional Solutions Group,
the Emerging Corporates Group and the Agri-Business Group. The Corporate
Solutions Group was responsible for relationships with large, highly rated
corporates. The Government and Institutional Group was a dedicated group for
public sector
41
units, government departments and authorities and quasi governmental agencies
like municipal corporations. The Emerging Corporates Group and the
Agri-Business Group worked closely with the Corporate Solutions Group and the
Government and Institutional Solutions Group to offer products and services to
suppliers and dealers of our large corporate customers. The principal corporate
product groups were the Product and Technology Group which was responsible for
delivery of products and services, the Structured Products and Portfolio
Management Group which was responsible for supporting the product groups by
designing financing structures that satisfied customer requirements while
adequately mitigating risk and Treasury which was responsible for designing and
providing corporate treasury and risk management products and services. We had
specialized groups for infrastructure project finance and manufacturing project
finance (including oil, gas and petrochemicals and shipping). These groups
focused on project appraisal and monitoring and worked closely with the other
relationship and product groups to provide a wider range of products and
services, in addition to project financing, to our project finance customers.
In fiscal 2004, our principal corporate relationship groups have been
reorganized as the Corporate Banking Group, the Government Banking Group and
the Rural, Micro-banking and Agri-business Group. The Corporate Banking Group
is responsible for managing relationships with large, highly rated corporates
and public sector corporates. The Government Banking Group is a dedicated group
created to leverage the business opportunities in central and state governments
and local government bodies. The Rural, Micro-banking and Agri-business Group
is responsible for all our rural and micro-banking and agri-business
initiatives. The group is also responsible for relationships with regional
rural banks, co-operative banks, co-operatives and all other entities with a
primarily agricultural or rural focus. The Structured Products and Portfolio
Management Group has been reorganized to include the corporate treasury and
risk management products and services and to form the Structured Finance,
Credit and Markets Group which is responsible for structuring customized
financing solutions for our customers, who are increasingly seeking integrated
financial solutions encompassing credit, investment advice, foreign exchange
management and derivatives and risk management. The Small Enterprises Group has
been integrated with our commercial banking operations for retail customers.
Specialized groups for infrastructure project finance and manufacturing project
finance (including oil, gas and petrochemicals and shipping) continue to exist.
The relationship managers are supported by product specialists from the
product groups who focus on product improvements and customization. The main
focus of the relationship managers is to market our products. In addition to
the above, they cross sell the products offered by our subsidiaries and
affiliates.
Commercial Banking Products and Services for Retail Customers
General
We believe that the Indian retail financial services market is likely to
continue to experience sustained growth in the future. With upward migration of
household income levels, increasing affordability of retail finance and
acceptance of use of credit to finance purchases, retail credit has emerged as
a rapidly growing opportunity for banks that have the necessary skills and
infrastructure to succeed in this business. We have capitalized on the growing
retail opportunity in India and believe that we have emerged as a market leader
in retail credit on an incremental basis. The key dimensions of our retail
strategy are innovative products, parity pricing, customer convenience, wide
distribution, strong processes, prudent risk management and customer focus.
Cross selling of the entire range of credit and investment products and banking
services to our customers is a critical aspect of our retail strategy.
We offer a wide variety of consumer credit products such as home loans,
automobile loans, commercial vehicle loans, two wheeler loans, consumer durable
loans, dealer financing, personal loans, credit cards, loans against time
deposits and loans against shares. Our total retail loans were Rs. 188.3
billion (US$ 4.0 billion) or 27.5% of our total gross loans at year-end fiscal
2003. At year-end fiscal 2002, ICICI's total retail loans were Rs. 73.0 billion
(US$ 1.5 billion) or 13.0% of ICICI's
42
total gross loans, and ICICI Bank's total retail loans were Rs. 7.2 billion
(US$ 150 million) or 9.4% of ICICI Bank's total gross loans.
Our commercial banking operations for retail customers also consist of
raising deposits from retail customers. In addition, we offer retail liability
products in the form of a variety of unsecured redeemable bonds. Issuance of
these bonds to the public was undertaken by ICICI and continued by us following
the amalgamation. At year-end fiscal 2003, we had a customer base of 6.2
million bondholder accounts.
ICICI Bank's affiliate Prudential ICICI Asset Management Company, a joint
venture between Prudential Corporation plc of the United Kingdom and ICICI
Bank, offers a variety of mutual fund products. ICICI Bank's subsidiary ICICI
Home Finance Company Limited also provides housing loans.
All of our retail products are marketed under the "ICICI Bank" brand. To
enhance our brand equity, we undertake comprehensive brand building and
advertising campaigns with advertisements in print and television. Studies
undertaken periodically by independent market research agencies commissioned by
us have shown that our brand is among the top two financial services brands in
India.
Retail Lending Activities
We offer a range of retail asset products, including home loans,
automobile loans, commercial vehicle loans, two wheeler loans, consumer durable
loans, dealer financing, personal loans, credit cards, loans against time
deposits and loans against shares.. We also fund dealers who sell automobiles,
two wheelers, consumer durables and commercial vehicles. We also provide loans
against time deposits and loans against shares, including for subscriptions to
initial public offerings of Indian companies.
Home Finance
Our home finance business involves giving long-term secured housing loans
to individuals and corporations and construction finance to builders. ICICI
Bank provides housing loans directly and also through its wholly-owned
subsidiary called ICICI Home Finance Company, which serves as the focal point
for marketing, distribution and servicing of ICICI Bank's home loan products.
Currently, these loans are being given to resident and non-resident Indians for
the purchase, construction and extension of residential premises and to
self-employed professionals for office premises. At year-end fiscal 2003, the
total home finance loans of ICICI Bank and ICICI Home Finance Company including
loans to corporations and construction finance to builders were approximately
Rs. 103.3 billion (US$ 2.2 billion).
Automobile Finance
Automobile finance generally involves the provision of retail consumer
credit for an average maturity of three to five years to acquire specified new
and used automobiles. Automobile loans are secured by a lien on the purchased
automobile. We believe we are the market leaders in the automobile finance
segment. We have "preferred financier" status with 11 car manufacturers in
India. We have a strong external distribution network and a strong in-house
team to manage the distribution network which has been instrumental in
achieving this leadership position. At year-end fiscal 2003, our total
automobile finance loans were approximately Rs. 44.7 billion (US$ 939 million).
We also give loans for the purchase of two wheelers. At year-end fiscal 2003,
our total two wheeler finance loans were approximately Rs. 5.7 billion (US$ 120
million).
Commercial Business
We fund commercial vehicles, utility vehicles and construction and farm
equipment sold through manufacturer-authorized dealers. The finance is
generally for a maximum term of five to seven years
43
through loans, hire purchase agreements or a lease. At year-end fiscal 2003,
our total commercial business loans were approximately Rs. 24.6 billion (US$
518 million).
Personal Loans
Personal loans are unsecured loans provided to customers for various
purposes such as higher education, medical expenses, social events and
holidays. At year-end fiscal 2003, our total personal loans were approximately
Rs. 8.0 billion (US$ 169 million).
Consumer Durable Finance
Our consumer durable finance business involves the financing of home
products, such as refrigerators, televisions, washing machines, air
conditioners and audio equipment. At year-end fiscal 2003, our total consumer
durable finance loans were approximately Rs. 3.5 billion (US$ 73 million).
Credit Cards
In January 2000, ICICI Bank launched its credit card operations. As the
Indian economy develops, we expect that the retail market will seek short-term
credit for personal uses, and our offering of credit cards will facilitate
further extension of our retail credit business. We also expect that as credit
usage increases, we will be able to leverage our customer relationships to
cross sell additional retail and consumer-oriented products and services. At
year-end fiscal 2003, we had approximately 1.1 million credit cards in force
and our credit card receivables were approximately Rs. 5.5 billion (US$ 115
million).
Dealer Funding
We fund dealers who sell automobiles, two wheelers, consumer durables and
commercial vehicles. These loans are generally given for a short term. At
year-end fiscal 2003, our total dealer funding loans were approximately Rs. 3.7
billion (US$ 78 million). In May 2003, we acquired the entire paid-up capital
of Transamerica Apple Distribution Finance Private Limited, which has now been
renamed ICICI Distribution Finance Private Limited. ICICI Distribution Finance
is primarily engaged in providing distribution financing in the two-wheeler
segment. The acquisition is expected to supplement our retail franchise,
especially in the two-wheeler segment.
Lending to Small Enterprises
We are seeking to extend our reach to the growing small enterprises
sector without the accompanying high credit risks which are normally associated
with advances to small enterprises, through our Small Enterprises Group. This
group focuses on supply chain financing, including the financing of selected
suppliers of our existing corporate clients. Typically, the financing is in the
form of short-term revolving facilities with overdraft or bill discounting
limits and is extended only to carefully pre-selected suppliers and dealers to
be used only for genuine transactions with our corporate clients. The group is
also involved in financing based on a cluster or community based approach, that
is, financing of small enterprises that have a homogeneous profile such as
apparel manufacturers and manufacturers of pharmaceuticals.
Retail Deposits
Our retail deposit products include the following:
o time deposits including:
- recurring deposits, which are periodic deposits of a fixed
amount over a fixed term that accrue interest at a fixed rate
and may be withdrawn before maturity by paying penalties; and
44
- certificates of deposit;
o savings accounts, which are demand deposits that accrue interest at a
fixed rate set by the Reserve Bank of India (currently 3.5% per
annum) and upon which checks can be drawn; and
o current accounts, which are non-interest-bearing demand deposits.
In addition to deposits from Indian residents, we accept time and savings
deposits from non-resident Indians, foreign nationals of Indian origin and
foreign nationals working in India. These deposits are accepted on a
repatriable and a non-repatriable basis and are maintained in rupees and select
foreign currencies. See also "-Products and Services for International
Customers".
Our total retail deposits were Rs. 248.4 billion (US$ 5.2 billion) or
50.6% of our total deposits at year-end fiscal 2003. Prior to its amalgamation
with ICICI Bank, ICICI was not permitted to raise banking deposits as it was
not a banking entity. We intend to continue to grow our retail deposits for
funding purposes since retail deposits provide a stable and low cost funding
base. At year-end fiscal 2003, we had a retail deposit customer base of
approximately 4.7 million.
The following table sets forth the balance outstanding by type of retail
deposit, as at March 31, 2003.
At March 31, 2003
-----------------------------------------
Balance
outstanding % of total
-------------------------- ----------
(in millions, except percentages)
Current accounts............... Rs. 13,180 US$ 277 5.3%
Savings accounts............... 37,930 798 15.3%
Time deposits.................. 197,330 4,150 79.4%
----------- ---------- -----
Total retail deposits.......... Rs. 248,440 US$ 5,225 100.0%
=========== ========== =====
The corresponding figures for fiscal 2002 have not been provided because
prior to its amalgamation with ICICI Bank, ICICI was not permitted to raise
banking deposits, as it was not a banking entity.
For a description of the Reserve Bank of India's regulations applicable
to deposits in India and required deposit insurance, see "Supervision and
Regulation -- Regulations Relating to Deposits" and "Supervision and Regulation
-- Deposit Insurance".
In addition to our conventional deposit products, we offer a variety of
special value-added products and services which seek to maximize returns as
well as convenience for our customers. Following a strategy focused on customer
profiles and product segmentation, we offer differentiated liability products
to various categories of customers depending on their age group, such as Young
Star Accounts for children below the age of 18 years, Student Banking Services
for students, Salary Accounts for salaried employees and Senior Citizens
Account for individuals above the age of 60 years. We have also micro-segmented
various categories of customers to offer targeted products, like Private
Banking for high net worth individuals, Defence Banking Services for defence
personnel, Special Savings Accounts for trusts and Roaming Current Account for
businessmen. This segmentation strategy has contributed significantly to the
rapid growth in our deposit base in fiscal 2003.
Salary Accounts
In September 1996, ICICI Bank introduced "Power Pay", a direct deposit
product for its corporate customers, to help them streamline their salary
payment systems for their employees. This product allows the employees'
salaries to be directly credited to a special individual savings account
established for this purpose. Renamed as "Salary Account" in 2002, this product
provides us with a
45
competitive advantage as these new payroll account holders often open other
accounts with us, including time deposits. We also seek to market our retail
credit products to our salary account holders. We aim to deliver value to
corporates and their employees by offering end-to-end financial solutions from
salary processing through strategic alliances, offering payment services
through checks, debit and credit cards as well as online bill payment and
in-house as well as third party investment vehicles. By year-end fiscal 2003,
over 15,000 corporate clients were using Salary Accounts.
Value Added Savings Account
Our value added savings account is a savings account product that offers
the customer liquidity as well as higher returns than an ordinary savings
account. This product provides automatic transfer of idle balances, above a
certain minimum amount, from savings accounts to time deposits, resulting in
higher yields. Whenever there is a shortfall in the customer's savings account,
deposits are automatically transferred back from the time deposit account, in
units of Rs. 1,000 (US$ 21) to meet the shortfall.
Private Banking
Our private banking services seek to meet the entire banking and
financial advisory needs of customers with a high net worth. At present, we
offer this preferred banking product to clients with a banking relationship
size in excess of Rs. 500,000 (US$ 10,515). We offer private banking services
at 338 branches in over 200 centers. Private banking services offer competitive
pricing on certain asset products, preferential rates for select liability
products and services, special complimentary offers and value-linked benefits,
along with personalized service. In addition, our private banking services
offer financial planning and investment advisory services to assist our
customers in their investment and savings plans. The services offered include
assistance in risk profiling and regular monitoring and performance review of
the client's investment and savings portfolio.
Web Brokering
ICICI Web Trade Limited, a company promoted by ICICI, provides web
brokering services. This service involves the online integration of a
customer's depositary share accounts and bank accounts with us and securities
brokerage accounts with ICICI Web Trade. This service has assisted us in our
efforts to acquire new customers and low-cost savings deposits, as each
e-brokering customer is required to open a bank account.
Portfolio Investment Scheme
We are one of the banks designated by the Reserve Bank of India for
issuing approvals to non-resident Indians and overseas corporate bodies to
trade in shares and convertible debentures on the Indian stock exchanges.
Pursuant to this scheme of the Reserve Bank of India, these investors can trade
on the Indian stock exchanges within a prescribed limit by obtaining an
approval from a designated bank and by routing all the transactions through
that bank. As a designated bank, we report all such transactions to the Reserve
Bank of India. We also help these investors with regulatory compliance, such as
ensuring delivery based trading and limit monitoring and providing tax
calculations.
Debit Cards
We offer an international debit card, branded as ICICINCash, in
association with VISA International on its popular VISA Electron
signature-based platform. This provides a greater choice of payment solutions
to customers. It provides customers a safer and more convenient alternative to
carrying cash both locally and internationally. The ICICINCash debit card
enables direct deductions of the purchase amount from the customer's account
from any VISA-enabled merchant establishment and ATM around the world. Our
debit card base has increased to over 3.4 million cards at year-end fiscal
2003.
46
Bond Issues
We offer a variety of unsecured redeemable bonds to the Indian public.
These bonds, which are not insured by any Indian authority, are designed to
address various investor needs, such as the need for regular income, liquidity
and tax saving. During fiscal 2003, we raised Rs. 23.42 billion (US$ 493
million) through these bond issuances. We had about 6.2 million bondholder
accounts at year-end fiscal 2003. We seek to continue to offer similar bonds to
the public, though deposits are and will be our primary source of funding.
Internet banking services
We offer Internet banking services to our retail customers through our
website www.icicibank.com. We believe that the increasing number of Internet
users, the demographic characteristics of those users and the relative
flexibility and convenience of Internet banking provide an opportunity for us
to capitalize on our experience in this area and gain market share in retail
finance. The services we currently offer to our Internet banking customers
include access to online account information, placement of time deposits,
secure e-mail facility for communications with an accounts manager, bill
payments using credit cards issued by us or by debit to savings account, and
transfer of funds to any other account with us or to accounts in any branch of
any bank, in eight cities through eCheques, the inter-bank fund transfer
facility. The number of our Internet banking accounts was approximately 3.3
million at year-end fiscal 2003.
Online Bill Payment
We have tie-ups with leading telecommunication companies, utility
providers, insurance companies and Internet shopping portals for online payment
of bills by our Internet banking customers. Currently, we have tied up with
over 45 service providers (for utility bill payments) and 85 online shopping
portals. We currently offer this service free to our customers with the
intention of building a base of users. This service is based on cost sharing
arrangements with most of these companies, where we either charge the company a
fixed fee per bill or the company maintains a balance with us before the funds
are used by the company, resulting in short-term low cost deposits with us.
Other Fee-Based Products and Services
Mutual Fund Sales
We have entered into arrangements with select mutual funds to distribute
their products through our distribution network, for which we earn up-front and
trailing commissions. We believe that by the end of fiscal 2003, we were one of
the largest market players in this segment.
Depository Share Accounts
The Securities and Exchange Board of India has made it mandatory for the
10 largest stock exchanges of the country to settle securities transactions in
a dematerialized mode. We are a depository participant of the National
Securities Depository Limited and Central Depository Services (India) Limited
and offer depository share accounts.
Government of India Relief Bond Sales
We have been permitted by the Reserve Bank of India to sell government of
India Relief Bonds. This includes the receipt of applications for Relief Bonds,
the issue of Relief Bonds in the form of bond ledger accounts and the servicing
of bondholders. Relief Bonds are sold across all of our branches. We seek to
capitalize on this opportunity by effectively distributing Relief Bonds through
our distribution network and earning fee income in the process. We believe that
by the end of fiscal 2003, we were one of the largest market players in this
segment.
47
Commercial Banking Products and Services for International Customers
Our strategy in international commercial banking is based on leveraging
home country links for international expansion by capturing market share in
select international markets. The initial focus areas are supporting Indian
companies in raising corporate and project finance for their investments
abroad, trade finance, personal financial services for non-resident Indians and
international alliances to support domestic businesses. We had over the last
few years built a large network of correspondent relationships with
international banks across all major countries. Most of these countries have
significant trade and other relationships with India.
Many international commercial banking products such as trade finance and
letters of credit are variants of their respective commercial banking
counterparts. Some of the key products and services that are unique to our
international customers are described below.
TradeWay
"TradeWay" is an Internet-based documentary collection product which
provides correspondent banks access to real-time on-line information on the
status of their export bills collections routed through us. The main features
of the product are the availability of online status enquiry for documentary
collections, availability of tracking and tracing functions for bills routed
through us and the presence of a single point contact for India bound
documentary collections.
Guarantee re-issuance
We re-issue guarantees favoring corporations and government departments
in India against counter guarantees issued by correspondent banks. This service
is provided subject to pre-arrangement. We offer competitive pricing for our
guarantee re-issuance facility. We can issue bid bond guarantees, performance
guarantees and financial guarantees including payment guarantees. Our
guarantees have wide acceptance across Indian corporates and government
departments.
Offshore Banking Deposits
We offer deposit products through our Offshore Banking Unit in the
Special Economic Zone at Mumbai. These deposits were launched in August 2003.
These deposits are offered only in US dollars for a tenure of between 3 months
to 6 years. The minimum deposit size is US$ 5,000.
Foreign Currency Non-Resident Deposits
Foreign Currency Non-Resident deposits are simple foreign currency
deposits offered in four main currencies - US Dollar, Pound Sterling, Euro and
Japanese Yen. The interest earned on these deposits is not taxed in India and
both the principal amount and interest earned can be fully repatriated out of
India. These foreign currency deposits are subject to minimum deposit values of
US$ 1,000, GBP 1,000, Euro 1,000 and Yen 200,000 respectively.
Non-Resident External Fixed Deposits
These deposits are maintained in Indian rupees and the minimum investment
amount is Rs. 25,000 (US$ 526). Interest earned in India on these deposits is
not taxable in India. Both the interest earned and principal amounts are fully
repatriable out of India. Loans against these deposits are generally available
for up to 90.0% of the deposit amount.
Non-Resident External Savings Account
Non-Resident External Savings Accounts are maintained in Indian Rupees
and the minimum average balance required to be maintained is Rs. 10,000 (US$
210) for the quarter. An International ATM and debit card is offered together
with the account and funds can be accessed from ATMs
48
across the world. Funds can be transferred to this account free of cost,
through the online remittance channel Money2India.
Non-Resident Ordinary Savings Accounts and Non-Resident
Ordinary Fixed Deposits
These products are primarily intended for non-residents who earn income
in India. The interest rates offered and other product features are similar to
the rates offered on domestic deposits. Principal is not repatriable except in
certain cases while the interest is repatriable net of taxes payable in India.
Money2India Remittance Facility
For easy transfer of funds to India, we offer Money2India, a wire
transfer remittance facility with a web interface. Non-resident Indians can
send money to over 670 locations in India.
Delivery Channels
We deliver our products and services through a variety of distribution
outlets, ranging from traditional bank branches to ATMs, call centers and the
Internet. We believe that India's vast geography necessitates a variety of
distribution channels to best serve our customers' needs. As part of our
strategy to migrate customers to lower cost electronic delivery channels, we
have made significant investments in channels such as ATMs, call centers and
the Internet. Our channel migration effort is aimed at reducing cost while
enhancing customer satisfaction levels by providing them round-the-clock
transaction and servicing facilities. We believe that currently, more than
70.0% of our retail customer induced banking transactions take place through
non-branch channels. The key components of our distribution network are
described below.
Branches
At year-end fiscal 2003, we had a network of 394 branches and 52
extension counters in 269 centers across several Indian states, an increase of
35 branches and 8 extension counters over the previous year. Extension counters
are small offices primarily within office buildings or on factory premises that
provide commercial banking services. Prior to opening a branch, we conduct a
detailed study in which we assess the deposit potential of the area. Our branch
locations are largely leased rather than owned. Our back office operations are
centralized at regional processing centers, enabling us to create a more
efficient branch network.
As a part of its branch licensing conditions, the Reserve Bank of India
has stipulated that at least 25.0% of our branches must be located in
semi-urban and rural areas. A semi-urban area is defined as a center with a
population of greater than 10,000 but less than 100,000. A rural area is
defined as a center with a population of less than 10,000. The population
figures relate to the 1991 census. We have adhered to this requirement as shown
in the table below. Several of these branches are located in suburbs of large
cities, and some of these branches are located in areas where large
corporations have their manufacturing facilities.
The following table sets forth, at the date indicated, the number of
branches broken down by area.
At March 31, 2003
--------------------------------
Number of branches % of total
------------------ ------------
Metropolitan/urban............. 219 56%
Semi-urban/rural .............. 175 44%
------------------ ------------
Total ......................... 394 100.0%
------------------ ------------
Prior to the amalgamation, ICICI had set up a number of "ICICI Centers",
which were low-cost, technology driven, stand-alone offices with three or more
employees, acting as marketing and service centers. At year-end fiscal 2002,
ICICI had 95 ICICI Centers. Pursuant to the amalgamation, we submitted a
proposal to the Reserve Bank of India in respect of these centers, proposing
conversion of 25 of these centers into bank branches, conversion of 26 centers
into distribution and servicing centers
49
attached to existing bank branches, and closure of the remaining 44 centers.
During fiscal 2003, the Reserve Bank of India approved our proposal. By
year-end fiscal 2003, 25 centers had been converted into bank branches in
accordance with this plan. The programme for conversion of the 26 centers into
distribution and servicing centers attached to adjacent bank branches is being
implemented in phases. The remaining 44 centers are being closed in phases.
Our corporate relationship groups are principally based at Mumbai, New
Delhi, Chennai, Kolkata, Bangalore, Hyderabad, Ahmedabad, Pune, Vadodara,
Coimbatore, Ludhiana, Chandigarh, Jaipur and Kochi. Our commercial banking
services to corporate customers are delivered through our network of branches.
Franchisee Network
We have a vast franchisee network spread over all major cities in India.
The franchisees deliver our retail credit products. These agencies help us
achieve deeper penetration by offering door-step service to the customer. These
agencies market our products on an exclusive basis. All credit and risk
management decisions pertaining to any customer are made by us and no agency
can extend credit to any customer without our approval. These agencies receive
a fee based on the volume of business generated by them.
Automated Teller Machines (ATMs)
At year-end fiscal 2003, we had 1,675 ATMs, of which 424 were located at
our branches and extension counters. The remaining 1,251 were located at the
offices of select corporate clients, large residential developments, airports,
gas stations and on major roads in metropolitan cities. Apart from cards issued
to our own customers, our ATMs also process Visa, Visa Electron, Master, Cirrus
and Maestro card transactions.
In view of the diversity of regional languages used in various parts of
India, our ATMs offer multilingual screens. Other facilities offered through
ATMs include bill payment services and a facility for recharging prepaid cards
for mobile phones. We have also pioneered the concept of mobile ATMs in India,
to reach remotely located customers. This service deploys ATMs mounted on
mobile vans to visit specific areas at a pre-designated time.
Internet
We believe that Internet access and information is key to satisfying the
needs of certain customer segments. As a result, we maintain a website at
www.icicibank.com, offering generalized information on our products and
services. Our Internet banking service allows customers to access all
account-related information and give account instructions 24 hours a day, seven
days a week through our website. Customers can also electronically transfer
funds from our account to any other account with us or to accounts in any
branch of any bank, in eight cities through eCheques, the inter-bank fund
transfer facility. The Internet banking service also allows transactions and
bill payment facilities. We seek to continue to be at the forefront of
providing web-based products to our retail customers.
We provide Internet banking services to our corporate clients through
ICICI e-business, a finance portal which is the single point web-based
interface for all our corporate clients. This platform allows clients to
conduct banking business online in a secure environment. Clients can view
accounts online, transfer funds between their own accounts or to other
accounts, among other services. We are the only Indian private sector bank
offering foreign exchange trading through the Internet through FXOnline, a
secure and user-friendly platform that makes it easy for clients to get live
prices for their deals and transact from virtually anywhere in the world.
FxOnline provides automated quotes for spots and forwards, with transparent
prices in all transactions. The Debt Online channel allows companies to
transact in government of India securities in a seamless manner. This is
achieved through straight through processing using a constituent subsidiary
ledger account. The client can view real time quotes offered by us and ICICI
Securities. The client can use the chat facility to negotiate the deal over the
50
Internet. We ensure credit of interest and redemption payments from the Reserve
Bank of India to the client's bank account. The client can monitor transactions
and the portfolio at any given time.
Call Centers
We provide telephone banking services through our call center. The call
center functions 24 hours a day, seven days a week, and offers a self-service
option to customers for automated phone banking. In addition, well-trained
customer service officers offer personalized services for banking,
dematerialized securities, online share trading customers, credit card holders,
bondholders and loan product customers. The call center is also used in product
specific marketing campaigns to generate leads, which are assigned to the
franchisees for fulfillment. At year-end fiscal 2003, our call center had 1,750
workstations across two locations. During fiscal 2003, the number of contacts
handled by our call centers was approximately 21.1 million.
Mobile Phone Banking
Our mobile phone banking services are available to our customers using
any cellular telephone service operator in India. Savings account and credit
card customers can view their account details on their mobile phones. Savings
account customers can also request a checkbook or account statement, and obtain
a list of all the major transactions in their account through Short Messaging
Service (SMS).
Correspondent Banking Networks
We have correspondent banking relationships with other banks in India
with large physical branch networks to offer a broader coverage for our funds
transfers and remittance related products. As a result of our correspondent
banking associations, we provide remittance and cash management services at
over 3,600 locations in India.
Investment Banking
Our investment banking operations principally consist of our treasury
operations and the operations of ICICI Securities, our subsidiary.
Treasury
Through our treasury operations, we seek to manage our balance sheet
including the maintenance of required regulatory reserves and to optimize
profits from our trading portfolio by taking advantage of market opportunities.
Our trading and securities portfolio includes our regulatory portfolio, as
there is no restriction on active management of our regulatory portfolio. Our
treasury operations include a range of products and services for corporate
customers, such as forward contracts and interest rate and currency swaps, and
foreign exchange products and services.
General
Under the Reserve Bank of India's statutory liquidity ratio requirement,
we are required to maintain 25.0% of our total demand and time liabilities by
way of approved securities, such as government of India securities and state
government securities. We maintain the statutory liquidity ratio through a
portfolio of government of India securities that we actively manage to optimize
the yield and benefit from price movements. Under the Reserve Bank of India's
cash reserve ratio requirements, we are required to maintain 4.5% of our demand
and time liabilities in a current account with the Reserve Bank of India. The
Reserve Bank of India pays no interest on these cash reserves up to 3.0% of the
net demand and time liabilities and pays interest at the bank rate (the rate at
which the Reserve Bank of India provides refinance to the banking system,
currently 6.0%) on the remaining eligible balance.
For further discussion of these regulatory reserves, see "Supervision and
Regulation -- Legal Reserve Requirements".
51
Our treasury undertakes liquidity management by seeking to maintain an
optimum level of liquidity and complying with the cash reserve ratio. The
objective is to ensure the smooth functioning of all our branches and at the
same time avoid the holding of excessive cash. Our treasury maintains a balance
between interest-earning liquid assets and cash to optimize earnings. The
treasury undertakes reserve management by maintaining statutory reserves,
including the cash reserve ratio and the statutory liquidity ratio.
Due to these regulatory reserve requirements, a substantial portion of
our trading and securities portfolio consists of government of India
securities. At year-end fiscal 2003, government of India securities constituted
67.3% of our trading portfolio and 84.6% of our total trading and securities
portfolio, while the remainder included corporate debt securities, equity
securities and derivative and foreign exchange contracts.
Our treasury engages in domestic and foreign exchange operations from a
centralized trading floor in Mumbai. As part of our treasury activities, we
also maintain proprietary trading portfolios in domestic debt and equity
securities and in foreign currency assets. We have a limited equity portfolio
because the Reserve Bank of India restricts investments by a bank in equity
securities to 5.0% of its total outstanding domestic loan portfolio as at March
31 of the previous year. A significant portion of ICICI's investments in equity
securities were related to projects financed by it. The Reserve Bank of India
has permitted us to exclude these investments for determining compliance with
the restriction on investments by banks in equity securities, for a period of
five years from the amalgamation.
Our treasury manages our foreign currency exposures, offers foreign
exchange and risk hedging derivative products to our customers and engages in
proprietary trading of currencies. Our investment and market risk policies are
approved by the Risk Committee and Asset-Liability Management Committee of our
board of directors.
Our securities are classified into held to maturity securities, available
for sale securities, trading securities, venture capital investments and
non-readily marketable securities. The following table sets forth, at the dates
indicated, certain information related to our trading portfolio.
At March 31,
--------------------------------------------------------
2001 2002 2003 2003
--------------------------- ------------------------
(in millions)
Government of India securities........ Rs. 8,889 Rs. 15,602 Rs. 26,658 US$ 561
Securities purchased under
agreements to resell................ - 21,399 5,399 114
Corporate debt securities............. 7,289 4,627 6,704 141
Equity securities..................... 2,677 742 187 4
Fair value of derivative and foreign
exchange contracts................. 23 6 686 14
---------- ---------- ---------- --------
Total................................. Rs. 18,878 Rs. 42,376 Rs. 39,634 US$ 834
========== ========== ========== ========
The following table sets forth, for the periods indicated, certain
information related to interest and dividends on our trading securities, net
gain from the sale of these securities and unrealized gain/(loss) on these
securities.
Year ended March 31,
--------------------------------------------------------
2001 2002 2003 2003
--------------------------- ------------------------
(in millions)
Interest and dividends................. Rs. 2,837 Rs. 1,715 Rs. 2,754 US$ 58
Gain on sale of trading securities..... 469 2,948 2,356 50
Unrealized gain/(loss) on trading
securities........................ 378 (506) 719 15
---------- ---------- ---------- --------
Total.................................. Rs. 3,684 Rs. 4,157 Rs. 5,829 US$ 123
========== ========== ========== ========
52
In addition to trading securities, we also hold available for sale
securities. The following tables set forth, at the dates indicated, certain
information related to our available for sale securities portfolio.
At March 31,
--------------------------------------------------------
2001
--------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gain loss Fair value
---------- ---------- ---------- ----------
(in millions)
Available for sale:
Government of India securities........ Rs. - Rs. - Rs. - Rs. -
Corporate debt securities.............. 245 - - 245
Equity securities...................... 11,821 482 (6,110) 6,193
---------- ---------- ---------- ----------
Total available for sale............... 12,066 482 (6,110) 6,438
---------- ---------- ---------- ----------
Held to maturity:
Government of India securities........ 1,088 58 - 1,146
Corporate debt securities.............. 418 - (1) 417
Other debt securities.................. - - - -
---------- ---------- ---------- ----------
Total.................................. Rs. 1,506 Rs. 58 Rs. (1) Rs. 1,563
========== ========== ========== ==========
Non readily marketable securities(1)... 7,148
Venture capital investments(2)......... 3,769
-------------------------------------------------------------------------------------------------
At March 31,
--------------------------------------------------------
2002
--------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gain loss Fair value
---------- ---------- ----------- ----------
(in millions)
Corporate debt securities.............. Rs. 4,446 Rs. . 502 Rs. (513) Rs. 4,435
Government of India securities....... 26,662 438 - 27,100
---------- ---------- ---------- ----------
Total debt securities.................. 31,108 940 (513) 31,535
Equity securities...................... 19,181 365 (3,223) 16,322
---------- ---------- ---------- ----------
Total.................................. Rs. 50,289 Rs. 1,305 Rs. (3,736) Rs. 47,857
========== ========== ========== ==========
Non readily marketable securities(1)... 8,268
----------
Venture capital investments(2)......... 3,921
----------
-------------------------------------------------------------------------------------------------
At March 31,
--------------------------------------------------------
2003
--------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gain loss Fair value
---------- ---------- ----------- ----------
(in millions)
Corporate debt securities............... Rs. 10,636 Rs. 389 Rs. (79) Rs. 10,946
Government of India securities........ 240,187 4,403 (459) 244,131
---------- ---------- ---------- ----------
Total debt securities................... 250,823 4,792 (538) 255,077
Equity securities....................... 13,609 745 (1,932) 12,422
---------- ---------- ---------- ----------
Total................................... Rs.264,432 Rs. 5,537 Rs. (2,470) Rs.267,499
========== ========== ========== ==========
Non readily marketable securities(1).... 9,418
----------
Venture capital investments(2).......... 3,704
----------
-------------------------------------------------------------------------------------------------
(1) Primarily represents securities acquired as a part of project financing activities or
conversion of loans in debt restructurings.
(2) Represents venture capital investments held by ICICI Venture Funds Management Company.
The following table sets forth, for the period indicated, income from
available for sale securities.
53
Year ended March 31,
--------------------------------------------------------
2001 2002 2003 2003
---------- ---------- ---------- --------
(in millions)
Interest................................ Rs. 123 Rs. 1,027 Rs. 16,633 US$ 350
Dividend................................ 345 267 389 8
---------- ---------- ---------- --------
Total................................... Rs. 468 1,294 Rs. 17,022 US$ 358
========== ========== ========== ========
Gross realized gain..................... Rs. 474 1,238 Rs. 6,845 US$ 144
Gross realized loss..................... (348) (7) (5,022) (106)
---------- ---------- ---------- --------
Total................................... Rs. 126 Rs. 1,231 Rs. 1,823 US$ 38
========== ========== ========== ========
The following table sets forth, at the date indicated, an analysis of the
maturity profile of our investments in debt securities classified as available
for sale securities and the yields thereon.
At March 31, 2003
--------------------------------------------------------------------------------------------
Up to one year One to five years Five to ten years More than ten years
------------------ -------------------- ----------------- --------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- ----- ---------- ----- ------- ----- ---------- -----
(in millions)
Corporate debt securities.... Rs. 267 9.74% Rs. 8,719 7.56% Rs. 1,900 7.53% Rs. 60 8.77%
Government of India
securities.................. 76,216 5.81 55,922 5.80 54,614 5.90 57,379 6.02
---------- ----- ---------- ----- ------- ----- ---------- -----
Total interest-earning
securities.................. Rs. 76,483 5.83% Rs. 64,641 6.04% Rs.56,514 5.95% Rs. 57,439 6.02%
========== ===== ========== ===== ========= ===== ========== -----
Total amortized cost......... Rs. 76,523 Rs. 63,412 Rs.56,032 Rs. 54,856
From time to time, ICICI acquired and held equity securities. These
securities, which typically consisted of ordinary shares, were acquired in
multiple ways: direct subscriptions, rights issues and by conversion of ICICI's
performing and impaired loans into equity. ICICI also acquired equity
securities in connection with underwritings conducted by ICICI and ICICI
Securities. A significant portion of these equity positions were acquired at
the time of the initial project finance assistance. The decision to invest in
equity securities along with project financing activities was an independent
business decision to participate in the equity of the company with the
intention of realizing capital gains arising out of expected increases in
market prices. This decision was taken strictly on a case-by-case basis and
there was no correlation between the basis for the lending decision and the
reasons for making the equity investment. All of ICICI's equity investments,
other than in its subsidiaries and affiliates, were made with the intent of
holding them for medium-term to long-term periods strictly as portfolio
investments. To ensure compliance with the Securities and Exchange Board of
India's revised insider trading regulations, all dealings in our equity
investments in listed companies are undertaken by the equity and corporate
bonds dealing desks of our treasury, which are segregated from our other
business groups as well as the other groups and desks in the treasury, and
which do not have access to unpublished price sensitive information about these
companies that may be available to us as lenders.
Equity securities, forming part of our investment securities portfolio,
are considered as publicly traded if they have been traded on a securities
exchange within six months of the balance sheet. The last quoted price of such
securities is taken and recorded as their fair value. Non-readily marketable
equity securities for which there is no readily determinable fair value are
recorded at cost and a provision is made for other than temporary diminution.
Securities acquired through conversion of loans in a troubled debt
restructuring are recorded at the fair value on the date of conversion and
subsequently accounted for as if acquired for cash. Venture capital investments
are carried at fair value. However, they are generally carried at cost during
the first year, unless a significant event occurs that effects the long-term
value of the investment.
Equity securities, including venture capital investments and mutual fund
units were 2.2% of our total assets at year-end fiscal 2003. Equity securities
were 8.0% of our total investment securities portfolio at year-end fiscal 2003.
As these investments are primarily in the nature of long-term investments in
start-up projects, returns on such investments generally accrue well after
54
commencement of operations by the projects. In general, we pursue a strategy of
active management of our long-term equity portfolio to maximize return on
investment.
We deal in several major foreign currencies and take deposits from
non-resident Indians in four major foreign currencies. We also manage onshore
accounts in foreign currencies. The foreign exchange treasury manages its
portfolio through money market and foreign exchange instruments to optimize
yield and liquidity.
We control market risk and credit risk on our foreign exchange trading
portfolio through an internal model which sets counterparty limits, stop-loss
limits and limits on the loss of the entire foreign exchange trading operations
and exception reporting. We also use a value at risk model to monitor our spot
positions.
Customer Foreign Exchange
We provide customer specific products and services and risk hedging
solutions in several currencies to meet the trade and service-related
requirements of our corporate clients. The products and services offered
include:
o spot foreign exchange for the conversion of foreign currencies
without any value restrictions;
o forward foreign exchange for hedging future receivables and payables,
without any value restriction, up to a maximum period of three years;
and
o foreign exchange and interest rate derivatives for hedging long-term
exposures.
We earn commissions on these products and services from our corporate
customers.
Forward Contracts and Interest and Currency Swaps
We provide forward contracts to our customers for hedging their
short-term exchange rate risk on foreign currency denominated receivables and
payables. We generally provide this facility for a term of up to six months and
occasionally up to 12 months. We also offer interest rate and currency swaps to
our customers for hedging their medium and long-term risks due to interest rate
and currency exchange rate movements. We offer these swaps for a period ranging
from three to 10 years. Our customers pay a commission for this product that is
included in the price of the product and is dependent upon market conditions.
We also hedge our own exchange rate risk related to our foreign currency
trading portfolio with products from banking counterparties. Our risk
management products are currently limited to foreign currency forward
transactions and currency and interest rate swaps for selected approved
clients. We believe, however, that the demand for risk management products will
grow, and we are building the capabilities to grow these products. We are
focusing particularly on setting up the sophisticated infrastructure and
internal control procedures that are critical to these products.
At year-end fiscal 2003, we had a portfolio of outstanding forward
contracts of Rs. 277.3 billion (US$ 5.8 billion) and a portfolio of interest
and currency swaps of Rs. 339.5 billion (US$ 7.1 billion).
ICICI Securities
In addition to our treasury operations, we also provide investment
banking services through our subsidiary, ICICI Securities. ICICI Securities
provides investment banking services through three main business lines -
corporate advisory, fixed income and equities. The clients of ICICI Securities
include a range of Indian and foreign corporations and institutional investors.
ICICI Securities is a non-bank finance company. For a description of non-bank
finance companies, see "Overview of the Indian Financial Sector - Non-Bank
Finance Companies".
55
Corporate Advisory
ICICI Securities provides a variety of advisory services, including
advice on financing and strategic transactions. ICICI Securities was one of the
first Indian investment banks to form a dedicated mergers and acquisitions
group to provide a range of services to large and mid-market Indian corporate
clients, including business valuations, pricing and structuring of
transactions, and financial and corporate restructuring. In addition, ICICI
Securities provides specialized services, such as private equity syndication
and privatization advisory services for public sector companies.
Fixed Income
We believe ICICI Securities is one of the market leaders in the Indian
debt market, having been named the "Best Domestic Bond House in India - 2002"
by Asiamoney. In fiscal 2003, ICICI Securities assisted public sector entities,
financial institutions and corporates to raise over Rs. 125.7 billion (US$ 2.6
billion) of debt. ICICI Securities is a primary dealer appointed and authorized
by the Reserve Bank of India to trade in government securities. As a primary
dealer, ICICI Securities is permitted to underwrite the issuance of government
securities and treasury bills and to act as a market maker in these
instruments. ICICI Securities was the first primary dealer to commence activity
in interest rate derivative products such as interest rate swaps and forward
rate agreements following their introduction by the Reserve Bank of India in
July 1999. ICICI Securities is also a leading player in the non-government debt
market in India. This activity primarily involves running a proprietary book in
various money market instruments.
Equities
In equities, ICICI Securities offers a range of products including
underwriting of equity offerings, public and private placement of corporate
equity, assistance in buyback programs and equity broking and research,
primarily for institutional investor clients. Indian law prohibits ICICI
Securities from holding or trading ICICI Bank's equity shares. In fiscal 2003,
ICICI Securities raised Rs. 6.7 billion (US$ 141 million) for Initial Public
Offerings by corporations as compared to Rs. 1.6 billion (US$ 34 million) in
fiscal 2002.
Other Investment Banking Products and Services
Venture Capital Funding
We provide venture capital funding to start-up companies and private
equity to a range of companies through funds managed by our subsidiary ICICI
Venture Funds Management Company Limited. At year-end fiscal 2003, ICICI
Venture managed or advised funds of Rs. 24.4 billion (US$ 514 million). The
company focuses on the information technology, media and entertainment and
healthcare sectors. We believe that ICICI Venture is the leading private equity
investor in India, having invested in a large number of the private equity
deals completed in the country to date and having established a track record of
successfully exiting from several investments.
Others
Insurance
ICICI Bank provides a wide range of insurance products and services
through ICICI Prudential Life Insurance Company Limited and ICICI Lombard
General Insurance Company Limited. The key dimensions of our strategy for
growth in the insurance business are innovative products, wide distribution
network, prudent portfolio mix and sound risk management practices. In
addition, we are focused on leveraging on our corporate and retail customer
base for cross selling insurance products.
56
Life Insurance
ICICI Bank has a joint venture partnership with Prudential plc of UK for
the life insurance business. ICICI Bank has a 74.0% interest in this joint
venture. This joint venture company, ICICI Prudential Life Insurance Company,
obtained the license to conduct life insurance business in November 2000 and
commenced business operations in December 2000. ICICI Prudential Life Insurance
sold about 244,000 policies in fiscal 2003. There is a Memorandum of
Understanding between ICICI Bank and ICICI Prudential Life Insurance Company
for distribution of life insurance policies issued by ICICI Prudential Life
Insurance Company through ICICI Bank's branch network.
Non-Life Insurance
In the non-life insurance sector, ICICI had entered into a joint venture
partnership with Lombard Canada Limited in fiscal 2001. We have a 74.0%
interest in this joint venture. The joint venture company, ICICI Lombard
General Insurance Company, obtained the license to conduct general insurance
business in August 2001 and since then has commenced operations. ICICI Lombard
General Insurance Company offers a wide range of general insurance products for
corporate and retail customers. In fiscal 2003, ICICI Lombard General Insurance
Company had written 98,293 policies and achieved financial breakeven. ICICI
Lombard General Insurance Company offers general insurance products to our
corporate customers and seeks to capitalize on our corporate relationships.
Funding
Our funding operations are designed to ensure stability of funding,
minimize funding costs and effectively manage liquidity. Subsequent to the
amalgamation, our primary source of funding is deposits raised from both retail
and corporate customers. We also raise funds through short-term rupee
borrowings and public issuance of bonds. As a financial institution, ICICI was
not allowed to raise banking deposits and so its primary sources of funding,
prior to the amalgamation, were rupee borrowings from a wide range of
institutional investors, and retail bonds. ICICI also obtained funds through
foreign currency borrowings from multilateral institutions like the Asian
Development Bank and the World Bank, which were guaranteed by the government of
India, as well as through commercial foreign currency borrowings.
The composition of our liabilities has changed significantly pursuant to
the amalgamation. Our deposits constituted 45.2% of our total liabilities at
year-end fiscal 2003 compared to 1.1% of ICICI's total liabilities and 84.1% of
ICICI Bank's total liabilities at year-end fiscal 2002. Our borrowings
constituted 43.1% of our total liabilities at year-end fiscal 2003 compared to
88.9% of ICICI's total liabilities at year-end fiscal 2002. Our borrowings
declined to Rs. 469.9 billion (US$ 9.9 billion) at year-end fiscal 2003
compared to ICICI's borrowings of Rs. 599.5 billion (US$ 12.6 billion) at
year-end fiscal 2002, due to repayment of ICICI's long-term debt and short-term
borrowings during fiscal 2003 in line with scheduled maturities, and new
funding primarily through deposits. As a result, our long-term debt decreased
21.6% to Rs. 400.8 billion (US$ 8.4 billion) at year-end fiscal 2003 compared
to ICICI's long-term debt of Rs. 511.4 billion (US$ 10.8 billion) at year-end
fiscal 2002, reflecting a 20.1% decrease in long-term rupee debt and a 31.2%
decrease in long-term foreign currency debt, and our short-term borrowings
decreased 40.5% to Rs. 42.1 billion (US$ 885 million) at year-end fiscal 2003
compared to ICICI's short-term borrowings of Rs.70.8 billion (US$ 1.5 billion)
at year-end fiscal 2002. Going forward, we will continue to repay our
borrowings in accordance with their scheduled maturities and raise new funds
primarily in the form of lower-cost deposits.
Our deposits were Rs. 491.3 billion (US$ 10.3 billion) at year-end fiscal
2003 compared to ICICI's deposits of Rs. 7.4 billion (US$ 155 million) and
ICICI Bank's deposits of Rs. 325.2 billion (US$ 6.8 billion) at year-end fiscal
2002. This significant growth in deposits was achieved primarily through
increased focus on retail and corporate customers by offering a wide range of
products designed to meet varied individual and corporate needs and leveraging
on our network of branches, extension counters and ATMs.
57
The following table sets forth, for the periods indicated, the average
volume and average cost of deposits by type of deposit.
Year ended March 31,(1)(2)
------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------------------------------------------------------------------------------------------------------
Amount Cost(3) Amount Cost(3) Amount Cost(3) Amount Cost(3) Amount Amount Cost(3)
------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Interest-bearing
deposits:
Savings deposits.. Rs. 1,633 3.25% Rs. 3,530 3.34% Rs. - -% Rs. - -% Rs. 30,874 US$ 649 2.96%
Time deposits..... 40,636 10.60 64,309 9.31 3,682 13.31% 6,618 11.24% 327,144 6,880 7.68%
Non-interest-bearing
deposits:
Demand deposits... 4,430 - 7,443 - - - - - 31,172 656 -
--------- --------- --------- --------- ---------------------
Total deposits...... Rs.46,699 9.34% Rs.75,282 8.11% Rs. 3,682 13.31% Rs. 6,618 11.24% Rs.389,190 US$ 8,185 6.69%
========= ========= ========= ========= =====================
----------------
(1) Data for fiscal 2003 is not comparable to fiscal 2001 and 2002, as data for fiscal 2001 and 2002 is only for ICICI and does not
include ICICI Bank, as ICICI Bank was accounted for by the equity method in those fiscal years. Also, the average volume of
deposits for fiscal 2001 and 2002 is not comparable with fiscal 1999 and 2000 due to deconsolidation of ICICI Bank effective
April 1, 2000.
(2) Average of quarterly balances at the end of March of the previous fiscal year and June, September, December and March of that
fiscal year for each of fiscal 1999, 2000, 2001, 2002 and 2003.
(3) Represents interest expense divided by the average of quarterly balances.
Our average deposits in fiscal 2003 were Rs. 389.2 (US$ 819 million) at
an average cost of 6.7% compared to ICICI Bank's average deposits of Rs. 194.4
billion (US$ 4.1 billion) at an average cost of 7.0% and ICICI's average
deposits of Rs. 6.6 billion (US$ 139 million) at an average cost of 11.2% in
fiscal 2002. Our average time deposits in fiscal 2003 were Rs. 327.1 billion
(US$ 6.9 billion) at an average cost of 7.7% compared to ICICI Bank's average
time deposits of Rs. 153.6 billion (US$ 3.2 billion) in fiscal 2002 at an
average cost of 8.4% and ICICI's average time deposits of Rs. 6.6 billion (US$
14 million) in fiscal 2002 at an average cost of 11.2%. The average cost of
deposits decreased primarily due to the reduction in the deposit rates offered
to customers in fiscal 2003 in line with the overall decline in interest rates
in the economy.
The following table sets forth, at the date indicated, the maturity
profile of deposits by type of deposit.
At March 31, 2003
----------------------------------------------------------------
After one year
and within After three
Up to one year three years years Total
----------------------------------------------------------------
(in millions)
Interest-bearing deposits:
Savings deposits ............. Rs. 37,932 Rs. - Rs. - Rs. 37,932
Time deposits................. 334,351 62,465 21,303 418,119
Non-interest-bearing deposits:
Demand deposits............... 35,239 - - 35,239
----------------------------------------------------------------
Total deposits................... Rs. 407,522 Rs. 62,465 Rs. 21,303 Rs. 491,290
================================================================
58
The following table sets forth, for the periods indicated, average
outstanding rupee borrowings based on quarterly balance sheets and by category
of borrowing and the percentage composition by category of borrowing. The
average cost (interest expense divided by average of quarterly balances) for
each category of borrowings is provided in the footnotes.
Year ended March 31,(1) (2)
---------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
---------------------------------------------------------------------------------------------------------
% to % to % to % to % to
Amount total Amount total Amount total Amount total Amount Amount total
---------------------------------------------------------------------------------------------------------
(in millions, except percentages)
SLR bonds(3)............ Rs. 27,936 8.4% Rs. 26,507 6.5% Rs. 23,405 4.9% Rs. 20,518 4.0% Rs. 15,690 US$ 330 3.4%
Borrowings from Indian.. 9,995 3.0 9,194 2.2 8,049 1.7 7,333 1.4 6,434 135 1.4
Government(4).........
Convertible
debentures(5)......... 518 0.2 130 0.1 - - - - - - -
Other borrowings(6)(7).. 293,312 88.4 373,256 91.2 442,716 93.4 481,951 94.6 444,461 9347 95.2
---------------------------------------------------------------------------------------------------------
Total(7)................ Rs.331,761 100.0% Rs.409,087 100.0% Rs.474,170 100.0% Rs.509,802 100.0% Rs.466,585 US$ 9,812 100.0%
=========================================================================================================
--------------------
(1) Data for fiscal 2003 is not comparable to fiscal 2001 and 2002, as data for fiscal 2001 and 2002 is only for ICICI and does not
include ICICI Bank, as ICICI Bank was accounted for by the equity method in those fiscal years. Also, the average volume of
borrowings for fiscal 2001 and 2002 is not comparable with fiscal 1999 and 2000 due to deconsolidation of ICICI Bank effective
April 1, 2000.
(2) Average of quarterly balances at the end of March of the previous fiscal year and June, September, December and March of that
fiscal year for each of fiscal 1999, 2000, 2002 and 2003 and average of quarterly balances at the end of June, September,
December and March for fiscal 2001.
(3) With an average cost of 10.39% in fiscal 1999, 10.33% in fiscal 2000, 10.62% in fiscal 2001, 11.10% in fiscal 2002 and 11.44%
in fiscal 2003.
(4) With an average cost of 11.11% in fiscal 1999, 10.85% in fiscal 2000, 10.70% in fiscal 2001, 10.40% in fiscal 2002 and 10.40%
in fiscal 2003.
(5) With an average cost of 12.50% in 1999 and 14.38% in fiscal 2000. The convertible debentures were redeemed on July 17, 1999.
(6) With an average cost of 14.53% in fiscal 1999, 13.67% in fiscal 2000, 13.06% in fiscal 2001, 12.36% in fiscal 2002 and 11.65%
in fiscal 2003.
(7) Includes publicly and privately placed bonds, borrowings from institutions and wholesale deposits such as inter-corporate
deposits certificate of deposits and call borrowings.
During fiscal 2003, we repaid a significant amount of ICICI's high cost
long-term and short-term debt. As a result, average long-term debt was reduced
to Rs.455.3 billion (US$ 9.6 billion) during fiscal 2003 compared to ICICI's
average long-term debt of Rs. 504.1 billion (US$ 10.6 billion) during fiscal
2002.
The following table sets forth, at the dates indicated, certain
information related to short-term rupee borrowings, which consist of
certificates of deposits, inter-corporate deposits and borrowings from
government-owned companies, known commonly as public sector units.
At March 31, (1)
-------------------------------------------------------------------------------
1999 2000 2001 2002 2003
-------------------------------------------------------------------------------
(in millions, except percentages)
Year-end balance.............................. Rs. 50,585 Rs. 87,758 Rs. 99,997 Rs. 74,932 Rs. 50,232
Average balance during the year (2) .......... 51,098 68,626 100,569 85,057 75,983
Maximum quarter-end balance................... 68,858 90,442 104,412 91,950 82,100
Average interest rate during the year (3) .... 10.42% 12.38% 10.17% 9.65% 11.31%
Average interest rate at year-end (4)......... 12.10% 10.82% 11.01% 9.34% 6.80%
---------------
(1) Short-term borrowings include trading liabilities, such as borrowings in the call market and repurchase agreements.
(2) Average of quarterly balances at the end of March of the previous fiscal year, June, September, December and March of that
fiscal year for each of fiscal 1999, 2000, 2002 and 2003 and average of quarterly balances at the end of June, September,
December and March for fiscal 2001.
(3) Represents the ratio of interest expense on short-term borrowings to the average of quarterly balances of short-term
borrowings.
(4) Represents the weighted average rate of the short-term borrowings outstanding at fiscal year-end.
59
For short-term rupee borrowings, the average interest rate at year-end
fiscal 2003 at 6.80% was significantly lower compared to the average interest
rate during fiscal 2003 at 11.31% because ICICI's higher cost rupee short-term
borrowings were largely repaid during the year, and only a small portion of the
same remained outstanding at year-end fiscal 2003.
The following table sets forth, at the dates indicated, average
outstanding volume of foreign currency borrowings based on quarterly balance
sheets by source and the percentage composition by source. The average cost
(interest expense divided by average of quarterly balances) for each source of
borrowings is provided in the footnotes.
At March 31, (1) (2)
--------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------------------
% to % to % to % to % to
Amount total Amount total Amount total Amount total Amount Amount total
--------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Commercial
borrowings (3).. Rs...81,140 79.1% Rs.74,509 77.4% Rs. 74,745 77.6% Rs. 73,955 77.6% Rs.53,791 US$1,131 67.4%
Multilateral
borrowings (4).. 21,483 20.9 21,748 22.6 21,554 22.4 22,290 22.4 26,020 547 32.6
--------------------------------------------------------------------------------------------------------
Total..............Rs.102,623 100.0% Rs.96,257 100.0% Rs. 96,299 100.0% Rs. 96,246 100.0% Rs.79,811 US$1,678 100.0%
========================================================================================================
------------------------
(1) Data for fiscal 2003 is not comparable to fiscal 2001 and 2002, as data for fiscal 2001 and 2002 is only for ICICI and does not
include ICICI Bank, as ICICI Bank was accounted for by the equity method in those fiscal years. Also, the average volume of
borrowings at year-end fiscal 2001 and 2002 is not comparable with fiscal 1999 and 2000 due to deconsolidation of ICICI Bank
effective April 1, 2000.
(2) Average of quarterly balances at the end of March of the previous fiscal year, June, September, December and March of that
fiscal year for each of fiscal 1999, 2000, 2001, 2002 and 2003.
(3) With an average cost of 6.15% in fiscal 1999, 5.72% in fiscal 2000, 7.6% in fiscal 2001, 6.8% in fiscal 2002 and 3.16% in
fiscal 2003.
(4) With an average cost of 5.79% in fiscal 1999, 5.53% in fiscal 2000, 4.39% in fiscal 2001, 4.93% in fiscal 2002 and 4.40% in
fiscal 2003.
At year-end fiscal 2003, our outstanding subordinated debt was Rs.
97.5 billion (US$ 2.1 billion). This debt is classified as Tier 2 capital in
calculating the capital adequacy ratio. Under the Reserve Bank of India's
capital adequacy requirements, we are required to maintain a minimum ratio of
capital to risk adjusted assets and off-balance sheet items of 9.0% effective
March 31, 2000, at least half of which must be Tier 1 capital. Total
subordinated debt classified as Tier 2 capital cannot exceed 50.0% of Tier 1
capital.
60
Risk Management
As a financial intermediary, ICICI Bank is exposed to risks that are
particular to its lending and trading businesses and the environment within
which it operates. ICICI Bank's goal in risk management is to ensure that it
understands, measures and monitors the various risks that arise and that the
organization adheres strictly to the policies and procedures which are
established to address these risks.
As a financial intermediary, ICICI Bank is primarily exposed to credit
risk, market risk, liquidity risk, operational risk and legal risk. ICICI Bank
has a central Risk, Compliance and Audit Group with a mandate to identify,
assess, monitor and manage all of ICICI Bank's principal risks in accordance
with well-defined policies and procedures. The Head of the Risk, Compliance and
Audit Group reports to the Executive Director responsible for the Corporate
Center, which does not include any business groups, and is thus independent
from ICICI Bank's business units. The Risk, Compliance and Audit Group
coordinates with representatives of the business units to implement ICICI
Bank's risk methodologies.
Committees of the board of directors have been constituted to oversee the
various risk management activities. The Audit Committee of ICICI Bank's board
of directors provides direction to and also monitors the quality of the
internal audit function. The Risk Committee of ICICI Bank's board of directors
reviews risk management policies in relation to various risks including
portfolio, liquidity, interest rate, off-balance sheet and operational risks,
investment policies and strategy, and regulatory and compliance issues in
relation thereto. The Credit Committee of ICICI Bank's board of directors
reviews developments in key industrial sectors and ICICI Bank's exposure to
these sectors. The Asset Liability Management Committee of ICICI Bank's board
of directors is responsible for managing the balance sheet and reviewing the
asset-liability position to manage ICICI Bank's market risk exposure. The
Agriculture & Small Enterprises Business Committee of ICICI Bank's board of
directors, which was constituted in June 2003 but has not held any meetings to
date, will, in addition to reviewing ICICI Bank's strategy for small
enterprises and agri-business, also review the quality of the agricultural
lending and small enterprises finance credit portfolio. For a discussion of
these and other committees, see "Management".
As shown in the following chart, the Risk, Compliance and Audit Group is
organized into six sub-groups: Credit Risk Management, Market Risk Management,
Analytics, Internal Audit, Retail Risk Management and Credit Policies and
Reserve Bank of India Inspection. The Analytics Unit develops proprietary
quantitative techniques and models for risk measurement.
[GRAPHIC OMITTED}
REPRESENTATION OF CHART
Managing Director & CEO Audit/ Risk/ Credit/Agriculture
& Small Enterprises Business
Committee of the Board
-------------------------------------------------------------------
|
Executive Director,
Corporate Center
|
Head, Risk, Compliance and
Audit Group
----------------------------------------------------------------------------------------
| | | | | |
Credit Risk Market Risk Analytics Internal Audit Retail Risk Credit Policies,
Management Management (including Management Reserve Bank of
subsidiaries) India Inspection
61
Borrower credit ratings Developing and Development of Comprehensive coverage of
implementing market proprietary models operational risk inherent
Sectoral analysis and risk measurement for risk measurement in all areas of business
review methodologies
Initiation of systems audit
Credit portfolio analysis Approval of all new in information
products technology-intensive areas
Monitoring market
risk exposures
table continue
Borrower credit ratings Approval of retail Formulation of
policies and credit policies and
Sectoral analysis and procedures ensuring compliance
review
Impact of macro Co-ordinating
Credit portfolio analysis economic changes on Reserve Bank of
the retail portfolio India inspections
Portfolio review
and monitoring
The Risk, Compliance and Audit Group is also responsible for assessing
the risks pertaining to international business, including review of credit
policies and setting sovereign and counterparty limits.
Credit Risk
In our lending operations, we are principally exposed to credit risk.
Credit risk is the risk of loss that may occur from the failure of any party to
abide by the terms and conditions of any financial contract with us,
principally the failure to make required payments on loans due to us. We
currently measure, monitor and manage credit risk for each borrower and also at
the portfolio level. We have a structured and standardized credit approval
process, which includes a well-established procedure of comprehensive credit
appraisal.
Credit Risk Assessment Procedures for Corporate Loans
In order to assess the credit risk associated with any financing
proposal, ICICI Bank assesses a variety of risks relating to the borrower and
the relevant industry. Borrower risk is evaluated by considering:
o the financial position of the borrower by analyzing the quality of
its financial statements, its past financial performance, its
financial flexibility in terms of ability to raise capital and its
cash flow adequacy;
o the borrower's relative market position and operating efficiency; and
o the quality of management by analyzing their track record, payment
record and financial conservatism.
Industry risk is evaluated by considering:
o certain industry characteristics, such as the importance of the
industry to the economy, its growth outlook, cyclicality and
government policies relating to the industry;
o the competitiveness of the industry; and
o certain industry financials, including return on capital employed,
operating margins and earnings stability.
After conducting an analysis of a specific borrower's risk, the Credit
Risk Management Group assigns a credit rating to the borrower. ICICI Bank has a
scale of 10 ratings ranging from AAA to B and an additional default rating of
D. Credit rating is a critical input for the credit approval process. ICICI
Bank determines the desired credit risk spread over its cost of funds by
considering the borrower's credit rating and the default pattern corresponding
to the credit rating. Every proposal for a financing facility is prepared by
the relevant business unit and reviewed by the appropriate industry specialists
in the Credit Risk Management Group before being submitted for approval to the
appropriate approval authority. The approval process for non-fund facilities is
similar to that for fund-based facilities. The credit rating for every borrower
is reviewed at least annually and is typically reviewed on a more frequent basis
for higher risk credits and large exposures. ICICI Bank also reviews the
62
ratings of all borrowers in a particular industry upon the occurrence of any
significant event impacting that industry.
Working capital loans are generally approved for a period of 12 months.
At the end of 12 months, ICICI Bank reviews the loan arrangement and the credit
rating of the borrower and takes a decision on continuation of the arrangement
and changes in the loan covenants as may be necessary.
Credit Approval Procedures for Corporate Loans
Project Finance Procedures
ICICI Bank has a strong framework for the appraisal and execution of
project finance transactions. ICICI Bank believes that this framework creates
optimal risk identification, allocation and mitigation, and helps minimize
residual risk.
The project finance approval process begins with a detailed evaluation of
technical, commercial, financial, marketing and management factors and the
sponsor's financial strength and experience. Once this review is completed, an
appraisal memorandum is prepared for credit approval purposes. As part of the
appraisal process, a risk matrix is generated, which identifies each of the
project risks, mitigating factors and residual risks associated with the
project. The appraisal memorandum analyzes the risk matrix and establishes the
viability of the project. Typical key risk mitigating factors include the
commitment of stand-by funds from the sponsors to meet any cost overruns and a
conservative collateral position. After credit approval, a letter of intent is
issued to the borrower, which outlines the principal financial terms of the
proposed facility, sponsor obligations, conditions precedent to disbursement,
undertakings from and covenants on the borrower. After completion of all
formalities by the borrower, a loan agreement is entered into with the
borrower.
In addition to the above, in the case of structured project finance in
areas such as infrastructure and oil, gas and petrochemicals, as a part of the
due diligence process, ICICI Bank appoints consultants, wherever considered
necessary, to advise the lenders, including technical advisors, business
analysts, legal counsel and insurance consultants. These consultants are
typically internationally recognized and experienced in their respective
fields. Risk mitigating factors in these financings generally also include
creation of debt service reserves and channeling project revenues through a
trust and retention account.
ICICI Bank's project finance credits are generally fully secured and have
full recourse to the borrower. In most cases, ICICI Bank has a security
interest and first lien on all the fixed assets and a second lien on all the
current assets of the borrower. Security interests typically include property,
plant and equipment as well as other tangible assets of the borrower, both
present and future. Typically, it is ICICI Bank's practice to lend between
60.0% and 80.0% of the appraised value of these types of collateral securities.
ICICI Bank's borrowers are required to maintain comprehensive insurance on
their assets where ICICI Bank is recognized as payee in the event of loss. In
some cases, ICICI Bank also takes additional collateral in the form of
corporate or personal guarantees from one or more sponsors of the project and a
pledge of the sponsors' equity holding in the project company. In certain
industry segments, ICICI Bank also takes security interest in relevant project
contracts such as concession agreements, off-take agreements and construction
contracts as part of the security package. In limited cases, loans are also
guaranteed by commercial banks and, in the past, have also been guaranteed by
Indian state governments or the government of India.
It is ICICI Bank's current practice to normally disburse funds after the
entire project funding is committed and all necessary contractual arrangements
have been entered into. Funds are disbursed in tranches to pay for approved
project costs as the project progresses. When ICICI Bank appoints technical and
market consultants, they are required to monitor the project's progress and
certify all disbursements. ICICI Bank also requires the borrower to submit
periodic reports on project implementation, including orders for machinery and
equipment as well as expenses incurred. Project completion is contingent upon
satisfactory operation of the project for a certain minimum period and,
63
in certain cases, the establishment of debt service reserves. ICICI Bank
continues to monitor the credit exposure until its loans are fully repaid.
Corporate Finance Procedures
As part of the corporate loan approval procedures, ICICI Bank carries out
a detailed analysis of funding requirements, including normal capital expenses,
long-term working capital requirements and temporary imbalances in liquidity.
ICICI Bank's funding of long-term core working capital requirements is assessed
on the basis, among other things, of the borrower's present and proposed level
of inventory and receivables. In case of corporate loans for other funding
requirements, ICICI Bank undertakes a detailed review of those requirements and
an analysis of cash flows. A substantial portion of ICICI Bank's corporate
finance loans are secured by a lien over appropriate assets of the borrower.
The focus of ICICI Bank's structured corporate finance products is on
cash flow based financings. ICICI Bank has a set of distinct approval
procedures to evaluate and mitigate the risks associated with such products.
These procedures include:
o carrying out a detailed analysis of cash flows to accurately forecast
the amounts that will be paid and the timing of the payments based on
an exhaustive analysis of historical data;
o conducting due diligence on the underlying business systems,
including a detailed evaluation of the servicing and collection
procedures and the underlying contractual arrangements; and
o paying particular attention to the legal, accounting and tax issues
that may impact any structure.
ICICI Bank's analysis enables it to identify risks in these transactions.
To mitigate risks, ICICI Bank uses various credit enhancement techniques, such
as over-collateralization, cash collateralization, creation of escrow accounts
and debt service reserves and performance guarantees. The residual risk is
typically managed by complete or partial recourse to the borrowing company
whose credit risk is evaluated as described above. ICICI Bank also has a
monitoring framework to enable continuous review of the performance of such
transactions.
Working Capital Finance Procedures
ICICI Bank carries out a detailed analysis of its borrowers' working
capital requirements. Credit limits are approved in accordance with the
approval authorization approved by ICICI Bank's board of directors. Once credit
limits are approved, ICICI Bank calculates the amounts that can be lent on the
basis of monthly statements provided by the borrower and the margins
stipulated. Quarterly information statements are also obtained from borrowers
to monitor the performance on a regular basis. Monthly cash flow statements are
obtained where considered necessary. Any irregularity in the conduct of the
account is reported to the appropriate authority on a monthly basis. Credit
limits are reviewed on an annual basis.
Working capital facilities are primarily secured by inventories and
receivables. Additionally, in certain cases, these credit facilities are
secured by personal guarantees of directors, or subordinated security interests
in the tangible assets of the borrower including plant and machinery.
Credit Approval Authority for Corporate Loans
ICICI Bank has established four levels of credit approval authorities for
its corporate banking activities, the Credit Committee of the board of
directors, the Committee of Directors, the Committee of Executives (Credit) and
the Regional Committee (Credit). The Credit Committee has the power to approve
all financial assistance. ICICI Bank's board of directors has delegated the
authority to the Committee of Directors, consisting of ICICI Bank's wholetime
directors, to the Committee of Executives (Credit) and the Regional Committee
(Credit), both consisting of designated executives of
64
ICICI Bank, to approve
financial assistance to any company within certain individual and group
exposure limits set by the board of directors.
The following table sets forth the composition and the approval authority
of these committees.
Approval Authority
Committee Members
-----------------------------------------------------------------------------------------------------------------------------------
Credit Committee of the Chaired by an independent director and o All approvals to companies with
board of directors consisting of a majority of independent rating below BB and all new (non
directors. agriculture) companies rated BB,
pursuant to ICICI Bank's internal
credit rating policy.
o All approvals (in practice,
generally above the prescribed
authority of the Committee of
Directors).
o Approvals to companies identified
by the Credit Committee where the
company or the borrower group
requires close monitoring.
-----------------------------------------------------------------------------------------------------------------------------------
Committee of Directors Chaired by the Managing All approvals above the prescribed authority
Director and Chief Executive Officer and of the Committee of Executives (Credit) subject
consisting of all to the following total exposure limits:
wholetime directors. o Up to 10.0% of ICICI Bank's
capital funds(1) to a single
entity; and
o Up to 30.0% of ICICI Bank's
capital funds(1) to a single group
of companies.
-----------------------------------------------------------------------------------------------------------------------------------
Committee of Executives Consisting of heads of client Approvals linked to the rating, tenure and
(Credit) relationship groups, retail assets, security of the exposure, which are above
treasury, international banking, the authority of the Regional Committee
structured products and portfolio (Credit) subject to the following indicative
management, project finance with the exposure limits:
Chief Financial Officer and the o From up to Rs. 5.0 billion (US$
Head-Risk, Compliance and Audit Group as 105 million) for a one year
permanent invitees. secured exposure to up to Rs. 0.38
billion (US$ 8 million) for a
secured exposure greater than ten
years for each company with an
internal credit rating of AA- and
above;
o From up to Rs. 5.0 billion (US$
105 million) for a one year
unsecured exposure to up to Rs.
0.27 billion (US$ 6 million) for
an unsecured exposure greater than
ten years for each company with an
internal credit rating of AA- and
above;
o From up to Rs. 1.6 billion (US$ 34
million) for a one year secured
exposure to up to Rs. 0.13 billion
(US$ 3 million) for a ten year
secured exposure for each company
with an internal credit rating of
A+ and below;
o From up to Rs. 1.1 billion (US$ 23
million) for a one year unsecured
exposure to up to Rs. 0.09 billion
(US$ 2 million) for a ten year
unsecured exposure for each
company with an internal credit
rating of A+ and below;
-----------------------------------------------------------------------------------------------------------------------------------
Regional Committee Consisting of regional representatives o From up to Rs. 5.0 billion (US$
(Credit) of various client relationship groups 105 million) for a one year
and a representative of Structured secured exposure to up to Rs. 0.15
Finance and Portfolio Management Group, billion (US$ 3 million) for a ten
with a representative of Risk, year secured exposure for each
Compliance and Audit Group as a company with an internal credit
permanent invitee. rating of AA- and above;
o From up to Rs. 5.0 billion (US$
105 million) for a one year
unsecured exposure to up to Rs.
0.11 billion (US$ 2 million) for a
ten year unsecured exposure for
each company with an internal
credit rating of AA- and above;
o From up to Rs. 0.9 billion (US$ 19
million) for a one year secured
exposure to up to Rs. 0.06 billion
(US$ 1 million) for a ten year
secured exposure for each company
with an internal credit rating of
A+ and below;
o From up to Rs. 0.64 billion (US$
13 million) for a one year
unsecured exposure to up to Rs.
0.04 billion (US$ 1 million) for a
ten year unsecured exposure for
each company with an internal
credit rating of A+ and below;
-----------------------------------------------------------------------------------------------------------------------------------
In all cases, subject to adherence to limits on ICICI Bank's
capital funds(1) imposed on the Committee of Directors as
mentioned above.
-----------------
(1) Capital funds consist of Tier 1 and Tier 2 capital, as defined in the Reserve Bank of India regulations, under Indian GAAP. See
"Supervision and Regulation - Capital Adequacy Requirements".
65
All new loans must be approved by the above committees in accordance with
their respective powers. Certain designated executives are authorized to
approve:
o ad-hoc/ additional working capital facilities not exceeding the lower of
10.0% of existing approved facilities and Rs. 20 million (US$ 420,610);
o temporary accommodation not exceeding the lower of 20.0% of existing
approved facilities and Rs. 20 million (US$ 420,610); and
o facilities fully secured by deposits, cash margin, letters of credit of
approved banks or approved sovereign debt instruments.
In addition to the above loan products, ICICI Bank's Rural Micro Banking
Group provides loans to self-help groups, rural agencies, as well as certain
categories of agricultural loans and loans under government-sponsored schemes.
These loans are typically of small amounts. The credit approval authorization
approved by the board of directors of ICICI Bank requires that all such loans
above Rs.1.5 million (US$ 31,546) be approved by the Committee of Directors
comprising all the wholetime directors, while the authority to approve loans up
to Rs.1.5 million (US$ 31,546) has been delegated to designated executives.
Credit Monitoring Procedures for Corporate Loans
The Credit Middle Office Group monitors compliance with the terms and
conditions for credit facilities prior to disbursement. It also reviews the
completeness of documentation, creation of security and insurance policies for
assets financed. All borrower accounts are reviewed at least once a year.
Larger exposures and lower rated-borrowers are reviewed more frequently.
Retail Loan Procedures
Our customers for retail loans are typically middle and high-income,
salaried or self-employed individuals, and, in some cases, partnerships and
corporations. Except for personal loans and credit cards, we require a
contribution from the borrower and our loans are secured by the asset financed.
Our retail credit product operations are sub-divided into various product
lines. Each product line is further sub-divided into separate sales and
marketing and credit groups. The Risk, Compliance and Audit Group, which is
independent of the business groups, approves all new retail products and
product policies and credit approval authorizations. All products and policies
require the approval of the Committee of Directors comprising all the wholetime
directors. All credit approval authorizations require the approval of ICICI
Bank's board of directors.
We have an established process for evaluating and selecting our dealers
and franchisees and there is a clear segregation between the group responsible
for originating loans and the group that approves the loans. A centralized set
of risk assessment criteria has been created for retail lending operations
after approval by the Risk, Compliance and Audit Group. These criteria vary
across product segments but typically include factors such as the borrower's
income, the loan-to-value ratio and certain stability factors. The loan
approval authority is delegated to credit officers, subject to loan amount
limits, which vary across different loan products. We use Direct Marketing
Agents (DMAs) for the marketing and sale of retail credit products. Credit
approval authority lies only with our credit officers.
Credit officers approve loans in compliance with the risk assessment
criteria. External agencies are used to facilitate a comprehensive due
diligence process including visits to office or home in the case of loans to
individual borrowers. Before disbursements are made, the credit officer
conducts a centralized check and review of the borrower's profile.
In order to limit the scope of individual discretion in the loan
assessment and approval process, ICICI Bank has implemented a credit-scoring
program for credit cards. ICICI Bank has also implemented a credit-scoring
program for certain variants within the consumer durables loan product.
66
The credit-scoring program is an automated credit approval system for
evaluating loan applications by assigning a credit score to each applicant
based on certain demographic attributes like earnings stability, educational
background and age. The credit score then forms the basis of loan evaluation.
Though a formal credit bureau does not as yet operate in India, we avail the
services of certain private agencies operating in India to check applications
before disbursement.
ICICI Bank has a separate retail credit team, which undertakes review and
audit of credit quality across each credit approval team. ICICI Bank has
established centralized operations to manage operating risk in the various back
office processes of its retail loan business except for a few operations which
are decentralized to improve turnaround time for our customers. The Risk,
Compliance and Audit Group conducts an independent audit of processes and
documents at periodic intervals. As with our other retail credit products,
ICICI Bank emphasizes conservative credit standards, including credit scoring
and strict monitoring of repayment patterns, to optimize risks associated with
credit cards.
ICICI Bank has a collections unit structured along various product lines
and geographical locations, to manage delinquency levels. The collections unit
operates under the guidelines of a standardized recovery process. ICICI Bank
also makes use of external collection agents to aid ICICI Bank in its
collection efforts, including collateral repossession in accounts that are
overdue for more than 90 days. A fraud control department has been set up to
manage levels of fraud, primarily through fraud prevention in the form of
forensic audits and also through recovery of fraud losses. The fraud control
department is aided by specialized agencies. External agencies for collections
are strictly governed by standardized process guidelines. External agencies are
also used to facilitate a comprehensive due diligence process including
property valuation prior to the approval of home loans and visits to home or
office in the case of loans to individual borrowers.
Small Enterprises Loan Procedures
The Small Enterprises Group finances dealers and vendors of companies by
implementing structures to enhance the base credit quality of the vendor /
dealer, that involve an analysis of the base credit quality of the vendor /
dealer pool and an analysis of the linkages that exist between the vendor /
dealer and the company.
The group is also involved in financing based on a cluster community based
approach, that is, financing of small enterprises that have a homogeneous
profile such as apparel manufacturers and manufacturers of pharmaceuticals. The
risk assessment of such communities involves identification of appropriate
credit norms for target market, use of scoring models for enterprises that
satisfy these norms and applying pre-determined exposure limits to enterprises
that are awarded a minimum required score in the scoring model. The assessment
also involves setting up of portfolio control norms, individual borrower
approval norms and stringent exit triggers to be followed while financing such
clusters or communities.
Investment Banking Procedures
ICICI Securities provides investment banking services, including
corporate advisory, fixed income and equity services, to corporate customers.
All investment banking mandates, including underwriting commitments, are
approved by the Managing Director and the relevant business group heads of
ICICI Securities.
ICICI Securities is registered with the Securities and Exchange Board of
India as a merchant bank. In that capacity, ICICI Securities has decided not to
engage in any lending and leasing activities and conducts only activities
related to the securities markets and corporate advisory services.
67
Quantitative and Qualitative Disclosures About Market Risk
Market risk is exposure to loss arising from changes in the value of a
financial instrument as a result of changes in market variables such as
interest rates, exchange rates and other asset prices. The prime source of
market risk for us is the interest rate risk we are exposed to as a financial
intermediary, which arises on account of our asset liability management
activities. In addition to interest rate risk, we are exposed to other elements
of market risk such as, liquidity or funding risk, price risk on trading
portfolios, and exchange rate risk on foreign currency positions.
Market Risk Management Procedures
The board of directors of ICICI Bank reviews and approves the policies
for the management of market risk. The board has delegated the responsibility
for market risk management on the banking book to the Asset Liability
Management Committee and the trading book to the Committee of Directors, under
the Risk Committee of the Board. The Asset Liability Management Committee is
responsible for approving policies and managing interest rate risk on the
banking book and liquidity risks reflected in the balance sheet. The Committee
of Directors is responsible for setting policies and approving risk controls
for the trading portfolio.
The Asset Liability Management Committee is chaired by the Joint Managing
Director and all four Executive Directors are members of the Committee. The
Committee generally meets on a monthly basis and reviews the interest rate and
liquidity gap positions on the banking book, formulates a view on interest
rates, sets deposit and benchmark lending rates, reviews the business profile
and its impact on asset liability management and determines the asset liability
management strategy, as deemed fit, in light of the current and expected
business environment. The Committee reports to the Risk Committee. A majority
of the members of the Risk Committee are independent directors and the
committee is chaired by an independent director. The Balance Sheet Management
Group, reporting to the Chief Financial Officer, is responsible for managing
interest rate risk on the banking book, and liquidity, under the supervision of
the Asset Liability Management Committee.
An independent Market Risk Management Group, which is part of the Risk,
Compliance and Audit Group, recommends changes in risk policies and controls,
including for new trading products, and the processes and methodologies for
quantifying and assessing market risks. Risk limits including position limits
and stop loss limits for the trading book are monitored on a daily basis and
reviewed periodically. In addition to risk limits, risk monitoring tools such
as Value-at-Risk models are also used for measuring market risk in the trading
portfolio. ICICI Securities, our investment banking subsidiary which is a
primary dealer in government of India securities and has government of India
securities as a significant proportion of its portfolio, has a corporate risk
management group for managing its interest rate and liquidity risk.
Interest Rate Risk
Since our balance sheet consists predominantly of rupee assets and
liabilities, movements in domestic interest rates constitute the main source of
interest rate risk. Our portfolio of traded and other debt securities and our
loan portfolio are negatively impacted by an increase in interest rates.
Exposure to fluctuations in interest rates is measured primarily by way of gap
analysis, providing a static view of the maturity and re-pricing
characteristics of balance sheet positions. An interest rate gap report is
prepared by classifying all assets and liabilities into various time period
categories according to contracted maturities or anticipated re-pricing date.
The difference in the amount of assets and liabilities maturing or being
re-priced in any time period category, would then give an indication of the
extent of exposure to the risk of potential changes in the margins on new or
re-priced assets and liabilities. ICICI Bank prepared interest rate risk
reports on a fortnightly basis in fiscal 2003. The same were reported to the
Reserve Bank of India on a monthly basis. Interest rate risk is further
monitored through interest rate risk limits approved by the Asset Liability
Management Committee.
68
Our core business is deposit taking and lending in both rupees and
foreign currencies, as permitted by the Reserve Bank of India. These activities
expose us to interest rate risk. As the rupee market is significantly different
from the international currency markets, gap positions in these markets differ
significantly.
In the rupee market, most of our deposit taking is at fixed rates of
interest for fixed periods, except that savings deposits and current deposits
which do not have any specified maturity and can be withdrawn on demand. We
usually borrow for a fixed period with a one-time repayment on maturity, with
some borrowings having European call/put options, exercisable only on specified
dates, attached to them. However, we have a mix of floating and fixed interest
rate assets. Our loans generally are repaid more gradually, with principal
repayments being made over the life of the loan. Our housing loans are
primarily floating rate loans where the rates are reset every quarter. We
follow a four-tier prime rate structure, namely, a short-term prime rate for
one-year loans or loans that re-price at the end of one year, a medium-term
prime rate for one to three year loans, a long-term prime rate for loans with
maturities greater than three years and a prime rate for cash credit products.
We seek to eliminate interest rate risk on undisbursed commitments by fixing
interest rates on rupee loans at the time of loan disbursement.
In contrast to our rupee loans, a large proportion of our foreign
currency loans are floating rate loans. These loans are generally funded with
floating rate foreign currency funds. Our fixed rate foreign currency loans are
generally funded with fixed rate foreign currency funds. We generally convert
all our foreign currency borrowings and deposits into floating rate dollar
liabilities through the use of interest rate and currency swaps with leading
international banks. The foreign currency gaps are generally significantly
lower than rupee gaps, representing a considerably lower exposure to
fluctuations in foreign currency interest rates.
We use the duration of our government securities portfolio as a key
variable for interest rate risk management. We increase or decrease the
duration of government securities portfolio to increase or decrease our
interest rate risk exposure. In addition, we also use interest rate derivatives
to manage the asset and liability positions. We are an active participant in
the interest rate swap market and are one of the largest counterparties in
India.
The following table sets forth, at the date indicated, ICICI Bank's
asset-liability gap position.
At March 31, 2003 (1) - (4)
--------------------------------------------------------------------------------
Greater than one year
Less than or equal to and up to Greater than Total
one year five years five years
--------------------------------------------------------------------------------
(in millions)
Loans, net................................... Rs. 290,554 Rs. 218,691 Rs. 121,175 Rs. 630,421
Securities................................... 146,887 47,065 89,284 283,236
Fixed assets................................. - - 21,215 21,215
Other assets(5).............................. 92,431 4,895 148,065 245,391
--------------------------------------------------------------------------------
Total assets................................. 529,872 270,652 379,739 1,180,263
Stockholders' equity......................... - - 92,213 92,213
Debt(5)...................................... 481,825 271,310 139,820 892,955
Other liabilities............................ 111,433 83,662 195,095
--------------------------------------------------------------------------------
Total liabilities............................ 593,258 271,310 315,695 1,180,263
Total gap before risk management positions... (63,386) (658) 64,044 _
Risk management positions.................... (30,672) 21,989 8,682 _
--------------------------------------------------------------------------------
Total gap after risk management positions.... Rs. (94,058) Rs. 21,331 Rs. 72,727 Rs. _
================================================================================
------------------
(1) Assets and liabilities are classified into the applicable categories,
based on residual maturity or re-pricing whichever is earlier.
Classification methodologies are based on Asset Liability Management
Guidelines issued by the Reserve Bank of India, effective from April 1,
2000.
(2) Items that neither mature nor re-price are included in the "greater than
five years" category. This includes equity share capital and fixed assets.
69
(3) Impaired loans of residual maturity less than three years are classified
in the "greater than one year and up to five years" category and impaired
loans of residual maturity between three to five years are classified in
the "greater than five years" category.
(4) The risk management positions comprise foreign currency and rupee swaps.
The risk management position has been adjusted for a sum of Rs. 586
million (US$ 12 million) on account of revaluation of swaps.
(5) The categorization for these items is different from that reported in the
financial statements.
The following table sets forth, at the date indicated, the amount of
ICICI Bank's loans with residual maturities greater than one year that had
fixed and variable interest rates.
At March 31, 2003
----------------------------------------------------
Fixed rate
loans Variable rate loans Total
----------------------------------------------------
(in millions)
Loans.................... Rs. 339,461 Rs. 182,369 Rs. 521,830
Price Risk (Banking book)
The following table sets forth, using the balance sheet at year-end
fiscal 2003 as the base, one possible prediction of the impact of adverse
changes in interest rates on net interest income for fiscal 2004, assuming a
parallel shift in yield curve at year-end fiscal 2003.
At March 31, 2003
Change in interest rates
(in basis points)
-------------------------------------------------
(100) (50) 50 100
--------- -------- --------- ----------
(in millions, except percentages)
Rupee portfolio.............. Rs. 194 Rs. 97 Rs. (97) Rs. (194)
Foreign currency portfolio... (20) (10) 10 20
Total Rs. 174 Rs. 87 Rs. (87) Rs. (174)
========= ======== ======== =========
Based on our asset and liability position at year-end fiscal 2003, the
sensitivity model shows that net interest income from the banking book for
fiscal 2004 would fall by Rs. 174 million (US$ 4 million) if interest rates
increased by 100 basis points during fiscal 2004. Conversely, the sensitivity
model shows that if interest rates decreased by 100 basis points during fiscal
2004, net interest income for fiscal 2004 would rise by an equivalent amount of
Rs. 174 million (US$ 4 million). Based on ICICI's asset and liability position
at year-end fiscal 2002, the sensitivity model showed that net interest income
for fiscal 2003 would fall by Rs. 365 million (US$ 8 million) if interest rates
increased by 100 basis points during fiscal 2003. Interest rate risk numbers at
year-end fiscal 2003 are low primarily due to the low duration of government
securities portfolio maintained by us, large amount of floating rate housing
loan originated during the year and a positive gap in the foreign currency
portfolio.
Sensitivity analysis, which is based upon a static interest rate risk
profile of assets and liabilities, is used for risk management purposes only
and the model above assumes that during the course of the year no other changes
are made in the respective portfolios. Actual changes in net interest income
will vary from the model.
Price Risk (Trading book)
We undertake trading activities to enhance earnings through profitable
trading for our own account. ICICI Securities, our investment banking
subsidiary, is a primary dealer in government of India securities, and a
significant proportion of its portfolio consists of government of India
securities.
The following tables sets forth, using the fixed income portfolio at
year-end fiscal 2003 as the base, one possible prediction of the impact of
changes in interest rates on the value of our rupee fixed income trading
portfolio for fiscal 2004, assuming a parallel shift in yield curve.
70
At March 31, 2003
-----------------------------------------------------------------------
Change in interest rates
(in basis points)
-----------------------------------------------------------------------
Portfolio
Size (100) (50) 50 100
-----------------------------------------------------------------------
(in millions)
Government of India securities...... Rs. 26,658 Rs. 1,600 Rs. 791 Rs. (726) Rs. (1,438)
Corporate debt securities........... 6,704 224 108 (119) (190)
-----------------------------------------------------------------------
Total............................... Rs. 33,362 Rs. 1,824 Rs. 898 Rs. (845) Rs. (1,628)
-----------------------------------------------------------------------
At year-end fiscal 2003, the total value of our rupee fixed income
portfolio was Rs. 33.4 billion (US$ 702 million). The sensitivity model shows
that if interest rates increase by 100 basis points during fiscal 2004, the
value of the trading portfolio, would fall by Rs. 1.6 billion (US$ 34 million).
Conversely, if interest rates fell by 100 basis points during fiscal 2003,
under the model, the value of this portfolio would rise by Rs. 1.8 billion (US$
38 million). At year-end fiscal 2002, the sensitivity model showed that if
interest rates increased by 100 basis points during fiscal 2003, the value of
the trading portfolio would fall by Rs. 933 million (US$ 20 million). The
increase at year-end fiscal 2003 was primarily due to the increase in the
portfolio to Rs. 33.4 billion (US$ 702 million) from Rs. 20.2 billion (US$ 425
million) at year-end fiscal 2002.
As noted above, sensitivity analysis is used for risk management purposes
only and the model used above assumes that during the course of the year no
other changes are made in the respective portfolios. Actual changes in the
value of the fixed income portfolio will vary from the model above.
We revalue our trading portfolio on a daily basis and recognize aggregate
re-valuation losses in our profit and loss account. The asset liability
management policy stipulates an interest rate risk limit which seeks to cap the
risk on account of the mark-to-market impact on the mark-to-market book (under
the Indian GAAP classification which is different from the US GAAP
classification - see "Supervision and Regulation - Banks' Investment
Classification and Valuation Norms") and the earnings at risk on the banking
book, based on a sensitivity analysis of a 100 basis points parallel and
immediate shift in interest rates.
In addition, the Market Risk Management Group stipulates risk limits
including position limits and stop loss limits for the trading book. These
limits are monitored on a daily basis and reviewed periodically. In addition to
risk limits, we also have risk monitoring tools such as Value-at-Risk models
for measuring market risk in our trading portfolio.
ICICI Bank is required to invest a specified percentage, currently 25.0%,
of its liabilities in government of India securities to meet the statutory
ratio requirement prescribed by the Reserve Bank of India. As a result, we have
a very large portfolio of government of India securities and these are
primarily classified as available for sale securities. Our available for sale
securities included Rs. 244.1 billion (US$ 5.1 billion) of government of India
securities. These are not included in the trading book analysis presented
above.
Equity Risk
We assume equity risk both as part of our investment book and our trading
book. On the investment book, investments in equity shares and preference
shares are essentially long-term in nature. Nearly all the equity investment
securities have been driven by our project financing activities. The decision
to invest in equity shares during project financing activities has been a
conscious decision to participate in the equity of the company with the
intention of realizing capital gains arising from the expected increases in
market prices, and is separate from the lending decision.
Trading account securities are recorded at market value. For the purpose
of valuation of our available for sale equity investment securities, an
assessment is made whether a decline in the fair value, below the amortized
cost of the investments, is other than temporary. If the decline in fair value
below the amortized cost is other than temporary, the decline is provided for
in the income statement.
71
A temporary decline in value is excluded from the income statement and charged
directly to the shareholders' equity. To assess whether a decline in fair value
is temporary, the duration for which the decline had existed, industry and
company specific conditions and dividend record are considered. Non-readily
marketable securities for which there is no readily determinable fair value are
recorded at cost. Venture capital investments are carried at fair value.
However, they are generally carried at cost during the first year, unless a
significant event occurs that affected the long-term value of the investment.
At year-end fiscal 2003, the fair value of trading account equity
securities was Rs. 187 million (US$ 4 million). The fair value of our available
for sale equity securities investment portfolio, including non-readily
marketable securities of Rs. 9.4 billion (US$ 198 million), was Rs. 25.5
billion (US$ 537 million). This included investments of approximately Rs. 5.4
billion (US$ 115 million) in liquid mutual fund units at year-end fiscal 2003.
At year-end fiscal 2002, the fair value of trading equity securities was Rs.
742 million (US$ 16 million). The fair value of the available for sale equity
securities investment portfolio, including non-readily marketable securities of
Rs. 8.3 billion (US$ 174 million), was Rs. 28.5 billion (US$ 600 million).
Exchange Rate Risk
We offer foreign currency hedge instruments like swaps, forwards, and
currency options to clients, which are primarily banks and highly rated
corporate customers. We actively use cross currency swaps, forwards, and
options to hedge against exchange risks arising out of these transactions.
Trading activities in the foreign currency markets expose us to exchange rate
risks. This risk is mitigated by setting counterparty limits, stipulating daily
and cumulative stop-loss limits, and engaging in exception reporting.
Recently, the Reserve Bank of India has authorized the dealing of foreign
currency-rupee options by banks for hedging foreign currency exposures
including hedging of balance sheet exposures. We have begun offering such
products to corporate clients and other inter-bank counterparties and are one
of the largest participants in the currency options market accounting for a
significant share of daily trading volume.
In addition, foreign currency loans are made on terms that are similar to
foreign currency borrowings, thereby transferring the foreign exchange risk to
the borrower. Foreign currency cash balances are generally maintained abroad in
currencies matching with the underlying borrowings.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the
risk of unexpected increases in the cost of funding an asset portfolio at
appropriate maturities and the risk of being unable to liquidate a position in
a timely manner at a reasonable price. The goal of liquidity management is to
be able, even under adverse conditions, to meet all liability repayments on
time, to meet contingent liabilities, and fund all investment opportunities.
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. We fund our operations principally by accepting
deposits from retail and corporate depositors and through public issuance of
bonds. We also borrow in the short-term inter-bank market. Loan maturities,
securitization of assets and loans, and sale of investments also provide
liquidity. See "Operating and Financial Review and Prospects - Financial
Condition - Liquidity Risk" for a detailed description of liquidity risk.
Operational Risk
ICICI Bank is exposed to many types of operational risk. Operational risk
can result from a variety of factors, including failure to obtain proper
internal authorizations, improperly documented transactions, failure of
operational and information security procedures, computer systems, software
72
or equipment, fraud, inadequate training and employee errors. ICICI Bank
attempts to mitigate operational risk by maintaining a comprehensive system of
internal controls, establishing systems and procedures to monitor transactions,
maintaining key back-up procedures and undertaking regular contingency
planning.
Operational Controls and Procedures in Branches
ICICI Bank has operating manuals detailing the procedures for the
processing of various banking transactions and the operation of the application
software. Amendments to these manuals are implemented through circulars sent to
all offices.
When taking a deposit from a new customer, ICICI Bank requires the new
customer to complete a relationship form, which details the terms and
conditions for providing various banking services. Photographs of customers are
also obtained for ICICI Bank's records, and specimen signatures are scanned and
stored in the system for online verification. ICICI Bank enters into a
relationship with a customer only after the customer is properly introduced to
ICICI Bank. When time deposits become due for repayment, the deposit is paid to
the depositor. System generated reminders are sent to depositors before the due
date for repayment. Where the depositor does not apply for repayment on the due
date, the amount is transferred to an overdue deposits account for follow up.
ICICI Bank has a scheme of delegation of financial powers that sets out
the monetary limit for each employee with respect to the processing of
transactions in a customer's account. Withdrawals from customer accounts are
controlled by dual authorization. Senior officers have delegated power to
authorize larger withdrawals. ICICI Bank's operating system validates the check
number and balance before permitting withdrawals. Cash transactions over Rs. 1
million (US$ 21,030) are subject to special scrutiny to avoid money laundering.
ICICI Bank's banking software has multiple security features to protect the
integrity of applications and data.
ICICI Bank gives importance to computer security and has s a
comprehensive information technology security policy. Most of the information
technology assets including critical servers are hosted in centralised data
centers which are subject to appropriate physical and logical access controls.
Operational Controls and Procedures for Internet Banking
In order to open an Internet banking account, the customer must provide
ICICI Bank with documentation to prove the customer's identity, including a
copy of the customer's passport, a photograph and specimen signature of the
customer. After verification of the same, ICICI Bank opens the Internet banking
account and issues the customer a user ID and password to access his account
online.
Operational Controls and Procedures in Regional Processing Centers
& Central Processing Centers
To improve customer service at ICICI Bank's physical locations, ICICI
Bank handles transaction processing centrally by taking away such operations
from branches. ICICI Bank has centralized operations at regional processing
centers located at 15 cities in the country. These regional processing centers
process clearing checks and inter-branch transactions, make inter-city check
collections, and engage in back office activities for account opening, standing
instructions and auto-renewal of deposits.
In Mumbai, ICICI Bank has centralized transaction processing on a
nationwide basis for transactions like the issue of ATM cards and PIN mailers,
reconciliation of ATM transactions, monitoring of ATM functioning, issue of
passwords to Internet banking customers, depositing post-dated cheques received
from retail loan customers and credit card transaction processing. Centralized
processing has been extended to the issuance of personalized check books, back
office activities of
73
non-resident Indian accounts, opening of new bank accounts for customers who
seek web broking services and recovery of service charges for accounts for
holding shares in book-entry form.
Operational Controls and Procedures in Treasury
ICICI Bank has a high level of automation in trading operations. ICICI
Bank uses technology to monitor risk limits and exposures. ICICI Bank's front
office, back office and accounting and reconciliation functions are fully
segregated in both the domestic treasury and foreign exchange treasury. The
respective middle offices use various risk monitoring tools such as
counterparty limits, position limits, exposure limits and individual dealer
limits. Procedures for reporting breaches in limits are also in place.
ICICI Bank's front office treasury operations for rupee transactions
consists of operations in fixed income securities, equity securities and
inter-bank money markets. ICICI Bank's dealers analyze the market conditions
and take views on price movements. Thereafter, they strike deals in conformity
with various limits relating to counterparties, securities and brokers. The
deals are then forwarded to the back office for settlement.
The inter-bank foreign exchange treasury operations are conducted through
Reuters dealing systems. Brokered deals are concluded through voice systems.
Deals done through Reuters systems are captured on a real time basis for
processing. Deals carried out through voice systems are input in the system by
the dealers for processing. The entire process from deal origination to
settlement and accounting takes place via straight through processing. The
processing ensures adequate checks at critical stages. Trade strategies are
discussed frequently and decisions are taken based on market forecasts,
information and liquidity considerations. Trading operations are conducted in
conformity with the code of conduct prescribed by internal and regulatory
guidelines.
The Treasury Middle Office Group, which reports to the Executive
Director, Corporate Centre, monitors counterparty limits, evaluates the
mark-to-market impact on various positions taken by dealers and monitors market
risk exposure of the investment portfolio and adherence to various market risk
limits set up by the Risk, Compliance and Audit Group.
ICICI Bank's back office undertakes the settlement of funds and
securities. The back office has procedures and controls for minimizing
operational risks, including procedures with respect to deal confirmations with
counterparties, verifying the authenticity of counterparty checks and
securities, ensuring receipt of contract notes from brokers, monitoring receipt
of interest and principal amounts on due dates, ensuring transfer of title in
the case of purchases of securities, reconciling actual security holdings with
the holdings pursuant to the records and reports any irregularity or
shortcoming observed.
Audit
The Internal Audit Group undertakes a comprehensive audit of all business
groups and other functions, in accordance with a risk-based audit plan. This
plan allocates audit resources based on an assessment of the operational risks
in the various businesses. The Internal Audit group conceptualizes and
implements improved systems of internal controls, to minimize operational risk.
The audit plan for every fiscal year is approved by the Audit Committee of
ICICI Bank's board of directors.
The Internal Audit group also has a dedicated team responsible for
information technology security audits. Various components of information
technology from applications to databases, networks and operating systems are
covered under the annual audit plan.
The Reserve Bank of India requires banks to have a process of concurrent
audits at branches handling large volumes, to cover a minimum of 50.0% of
business volumes. ICICI Bank has instituted systems to conduct concurrent
audits, using reputed chartered accountancy firms. Concurrent audits have also
been arranged at the Regional Processing Centers and other centralised
processing operations to ensure existence of and adherence to internal
controls.
74
Legal Risk
The uncertainty of the enforceability of the obligations of ICICI Bank's
customers and counter-parties, including the foreclosure on collateral, creates
legal risk. Changes in law and regulation could adversely affect ICICI Bank.
Legal risk is higher in new areas of business where the law is often untested
by the courts. ICICI Bank seeks to minimize legal risk by using stringent legal
documentation, employing procedures designed to ensure that transactions are
properly authorized and consulting internal and external legal advisors.
Derivative Instruments Risk
ICICI Bank engages in limited trading of derivative instruments on its
own account and generally enters into interest rate and currency derivative
transactions primarily for the purpose of hedging interest rate and foreign
exchange mismatches. ICICI Bank provides limited derivative services to
selected major corporate customers and other domestic and international
financial institutions, including foreign currency forward transactions and
foreign currency and interest rate swaps. ICICI Bank's derivative transactions
are subject to counter-party risk to the extent particular obligors are unable
to make payment on contracts when due.
Controls and Procedures
ICICI Bank's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of ICICI Bank's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended) as of a date within 90 days prior to the filing date of this
annual report and concluded that, as of the date of their evaluation, ICICI
Bank's disclosure controls and procedures were effective to ensure that
information required to be disclosed by ICICI Bank in the reports that it files
or submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There has been no change in ICICI Bank's internal control over financial
reporting that has occurred subsequent to the date of their most recent
evaluation that has materially affected, or is reasonably likely to materially
affect, ICICI Bank's internal control over financial reporting.
Loan Portfolio
Our gross loan portfolio, which includes loans structured as debentures
and preferred stock, was Rs. 684.6 billion (US$ 14.4 billion) at year-end
fiscal 2003, an increase of 22.2% over ICICI's gross loan portfolio of Rs.
560.2 billion (US$ 11.8 billion), at year-end fiscal 2002. At year-end fiscal
2002, ICICI's gross loan portfolio decreased 11.8% to Rs. 560.2 billion (US$
11.8 billion) from Rs. 635.1 billion (US$ 13.3 billion) at year-end fiscal
2001, primarily due to securitization and sell-down of ICICI's loan portfolio.
Approximately 86.5% of our gross loans were rupee loans at year-end fiscal
2003. At year-end fiscal 2003, our balance outstanding in respect of loans to
corporates outside India was Rs. 536 million (US$ 11 million), representing
approximately 0.1% of our total gross loan portfolio.
75
Loan Portfolio by Categories
The following table sets forth, at the dates indicated our gross rupee
and foreign currency loans by business category.
At March 31, (1)
-----------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
-----------------------------------------------------------------------------------------------
(in millions)
Wholesale banking(2) Rs. 423,604 Rs. 459,837 Rs. 511,312 Rs. 410,556 Rs. 385,143 US$ 8,100
Rupee........................... 335,306 371,257 428,782 342,068 297,030 6,247
Foreign currency................ 88,298 88,581 82,530 68,488 88,113 1,853
Working capital finance 22,697 75,606 44,442 42,225 74,422 1,565
Rupee........................... 22,203 72,317 42,592 39,943 70,092 1,474
Foreign currency................ 494 3,289 1,850 2,282 4,330 91
Leasing and related activities (3) 51,472 35,254 39,741 24,332 17,862 376
Rupee........................... 49,942 33,787 38,258 22,879 17,862 376
Foreign currency ............... 1,530 1,467 1,483 1,453 - -
Other(4) 5,862 24,835 39,563 83,135 207,213 4,357
Rupee .......................... 5,862 24,835 39,563 83,135 207,213 4,357
Foreign currency ............... - - - - - -
Gross loans
Rupee ......................... 413,308 502,196 549,195 488,025 592,197 12,454
Foreign currency ............... 90,322 93,337 85,863 72,223 92,443 1,944
-----------------------------------------------------------------------------------------------
Total gross loans ................ 503,630 595,533 635,058 560,248 684,640 14,398
Allowance for loan losses......... (28,524) (34,085) (33,035) (36,647) (54,219) (1,140)
-----------------------------------------------------------------------------------------------
Net loans ........................ Rs. 475,106 Rs. 561,448 Rs. 602,023 Rs. 523,601 Rs. 630,421 US$ 13,258
===============================================================================================
--------------
(1) Data for fiscal 2003 is not comparable to fiscal 2001 and 2002, as data
for fiscal 2001 and 2002 is only for ICICI and does not include ICICI
Bank, as ICICI Bank was accounted for by the equity method in those fiscal
years. Also, the average of loans at year-end fiscal 2001 and 2002 is not
comparable with fiscal 1999 and 2000 due to deconsolidation of ICICI Bank
effective April 1, 2000.
(2) Wholesale banking includes project finance, corporate finance and
receivable financing but excludes leasing and related activities.
(3) Leasing and related activities includes leasing and hire purchase.
(4) Other includes retail finance asset, bills discounted and inter-corporate
deposits
The proportion of foreign currency loans to total gross loans has
decreased from 18.0% of ICICI's total gross loans at year-end fiscal 1999 to
13.5% of our gross loans at year-end fiscal 2003 due to a decrease in demand
for these loans.
Collateral -- Completion, Perfection and Enforcement
Our loan portfolio consists largely of project and corporate finance and
working capital loans to corporate borrowers, and loans to retail customers for
financing purchase of residential property, vehicles, consumer durable
products, medical equipment and farm and construction equipment, and personal
loans and credit card receivables. Corporate finance and project finance loans
are typically secured by a first lien on fixed assets, which normally consists
of property, plant and equipment. These security interests are perfected by the
registration of these interests within 30 days with the Registrar of Companies
pursuant to the provisions of the Indian Companies Act. We may also take
security of a pledge of financial assets like marketable securities, corporate
guarantees and personal guarantees. This registration amounts to a constructive
public notice to other business entities. Working capital loans are typically
secured by a first lien on current assets, which normally consist of inventory
and receivables. Additionally, in some cases, we may take further security of a
first or second lien on fixed assets, a pledge of financial assets like
marketable securities, corporate guarantees and personal guarantees. A
substantial portion of our loans to retail customers is also secured by a first
lien on the assets financed (predominantly property and vehicles). In general,
our loans are over-collateralized. In India, there are no regulations
stipulating any loan-to-collateral limits.
76
In India, foreclosure on collateral generally requires a written petition
to an Indian court. An application, when made, may be subject to delays and
administrative requirements that may result, or be accompanied by, a decrease
in the value of the collateral. These delays can last for several years leading
to deterioration in the physical condition and market value of the collateral.
In the event a corporate borrower makes an application for relief to a
specialized quasi-judicial authority called the Board for Industrial and
Financial Reconstruction, foreclosure and enforceability of collateral is
stayed. In fiscal 2003, the Indian Parliament passed the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002, which is expected to strengthen the ability of lenders to resolve
non-performing assets by granting them greater rights as to enforcement of
security and recovery of dues. Petitions challenging the constitutional
validity of this legislation are currently pending before the Indian Supreme
Court. There can be no assurance that the legislation in its current form will
be upheld by the Indian Supreme Court or that it will have a favorable impact
on our efforts to resolve non-performing assets. See "Overview of the Indian
Financial Sector - Recent Structural Reforms - Legislative Framework for
Recovery of Debts due to Banks".
We recognize that our ability to realize the full value of the collateral
in respect of current assets is difficult, due to, among other things, delays
on our part in taking immediate action, delays in bankruptcy foreclosure
proceedings, defects in the perfection of collateral and fraudulent transfers
by borrowers. However, cash credit facilities are so structured that we are
able to capture the cash flows of our customers for recovery of past due
amounts. In addition, we have a right of set-off for amounts due to us on these
facilities. Also, we monitor the cash flows of our working capital loan
customers on a daily basis so that we can take any actions required before the
loan becomes impaired. On a case-by-case basis, we may also stop or limit the
borrower from drawing further credit from its facility.
Loan Concentration
We follow a policy of portfolio diversification and evaluate our total
financing exposure in a particular industry in light of our forecasts of growth
and profitability for that industry. ICICI Bank's Risk, Compliance and Audit
Group monitors all major sectors of the economy and specifically follows
industries in which ICICI Bank has credit exposures. We seek to respond to any
economic weakness in an industrial segment by restricting new credits to that
industry segment and any growth in an industrial segment by increasing new
credits to that industry segment, resulting in active portfolio management.
ICICI Bank's current policy is to limit its loan portfolio to any particular
industry (other than retail loans) to 15.0%.
Pursuant to the guidelines of the Reserve Bank of India, ICICI Bank's
credit exposure to individual borrowers must not exceed 15.0% of its capital
funds comprising Tier 1 and Tier 2 capital, calculated pursuant to the
guidelines of the Reserve Bank of India, under Indian GAAP. Credit exposure to
individual borrowers may exceed the exposure norm of 15.0% of a bank's capital
funds by an additional 5.0% (i.e. up to 20.0%) provided the additional credit
exposure is on account of infrastructure financing. ICICI Bank's exposure to a
group of companies under the same management control must not exceed 40.0% of
its capital funds unless the exposure is in respect of an infrastructure
project. In that case, the exposure to a group of companies under the same
management control may be up to 50.0% of ICICI Bank's capital funds. Pursuant
to the Reserve Bank of India guidelines, exposure for funded facilities is
calculated as the total approved limit or the outstanding funded amount,
whichever is higher (for term loans, as undisbursed commitments plus the
outstanding amount). Exposure for non-funded facilities is calculated as 50.0%
of the approved amount or the outstanding non-funded amount, whichever is
higher (100.0% of the approved amount or the outstanding non-funded amount,
whichever is higher, with effect from fiscal 2004). ICICI Bank is in compliance
with these limits, except in the case of two borrowers to whom its exposure is
in excess of the single exposure limit. The excess over the single borrower
exposure limits in respect of these two borrowers is mainly due to the
reduction in the level of reserves under Indian GAAP, as a result of
adjustments arising out of the amalgamation. ICICI's exposure to these
borrowers was not in excess of the limit at the time of providing the
assistance. The Reserve Bank of India has granted its approval
77
for exceeding the single exposure limit in the case of these two borrowers
until the date of completion or stabilization of the projects.
The following table sets forth, at the dates indicated, our gross loans
outstanding, including loans structured as debentures and preferred stock, by
the borrower's industry or economic activity.
At March 31,(1)
---------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Retail finance.......Rs. 602 0.1% Rs. 6,679 1.1% Rs. 27,106 4.3% Rs. 72,789 13.0% Rs. 188,286 US$ 3,960 27.5%
Iron and steel....... 48,908 9.7 59,246 9.9 70,547 11.1 71,272 12.7 72,473 1,524 10.6
Power................ 40,154 8.0 56,162 9.4 66,368 10.5 61,159 10.9 56,091 1,180 8.2
Services............. 40,500 8.0 62,997 10.6 74,425 11.7 47,676 8.5 45,443 956 6.6
Textiles............. 35,979 7.1 42,019 7.1 47,052 7.4 40,867 7.3 40,279 847 5.9
Telecom.............. 9,867 2.0 15,903 2.7 20,244 3.2 25,547 4.6 27,458 577 4.0
Crude petroleum and
petroleum refining... 44,492 8.8 51,338 8.6 54,822 8.6 32,099 5.7 24,556 516 3.6
Electronics.......... 11,275 2.2 12,597 2.1 15,032 2.4 17,817 3.2 20,722 436 3.0
Cement............... 17,069 3.4 19,559 3.3 25,709 4.0 19,088 3.4 18,774 395 2.7
Transport equipment.. 18,226 3.6 23,020 3.9 19,613 3.1 13,086 2.3 12,872 271 1.9
Food products........ 6,293 1.2 7,736 1.3 8,755 1.4 9,264 1.7 12,174 256 1.8
Basic chemicals...... 18,864 3.7 22,058 3.7 15,825 2.5 14,115 2.5 12,147 255 1.8
Machinery............ 19,562 3.9 19,089 3.2 16,973 2.7 13,196 2.4 11,346 239 1.7
Fertilizers and
pesticides........ 18,493 3.7 21,001 3.5 17,801 2.8 9,202 1.6 11,025 232 1.6
Transportation....... 17,795 3.5 18,982 3.2 15,568 2.5 8,715 1.6 10,744 226 1.6
Paper and paper
products.......... 12,655 2.5 16,934 2.8 16,205 2.6 12,865 2.3 10,651 224 1.6
Petrochemicals....... 8,128 1.6 7,396 1.2 11,471 1.8 7,621 1.4 10,436 219 1.5
Man-made fibers...... 11,832 2.3 11,505 1.9 11,061 1.7 8,670 1.5 9,891 208 1.4
Metal products....... 7,847 1.6 9,783 1.7 7,924 1.2 6,912 1.2 9,094 191 1.3
Electrical
equipment......... 12,738 2.5 18,526 3.1 14,068 2.2 8,357 1.5 8,490 178 1.2
Sugar................ 7,872 1.6 9,464 1.6 9,718 1.5 7,645 1.4 8,378 176 1.2
Plastics............. 9,022 1.8 10,988 1.8 11,213 1.8 10,086 1.8 7,825 165 1.1
Non-ferrous metals... 5,453 1.1 5,376 0.9 4,473 0.7 6,536 1.2 6,868 144 1.0
Drugs................ 6,616 1.3 6,936 1.2 9,950 1.6 7,766 1.4 5,464 115 0.8
Rubber and rubber
products.......... 3,321 0.7 4,086 0.7 3,431 0.5 3,500 0.6 3,006 63 0.4
Mining............... 7,918 1.6 8,330 1.4 6,503 1.0 4,970 0.9 2,413 51 0.4
Other chemicals...... 774 0.2 332 0.1 335 0.1 189 0.0 428 9 0.1
Other (2)............ 61,375 12.3 47,491 8.0 32,866 5.1 19,239 3.4 37,306 785 5.5
----------------------------------------------------------------------------------------------------------------
Gross loans.........Rs. 503,630 100.0% Rs.595,533 100.0% Rs. 635,058 100.0% Rs.560,248 100.0% Rs. 684,640 US$ 14,398 100.0%
===== ====== ===== ===== =====
Allowance for
loan losses....... (28,524) (34,085) (33,035) (36,647) (54,219) (1,140)
----------- ---------- -----------
Net loans...........Rs. 475,106 Rs. 561,448 Rs. 602,023 Rs.523,601 Rs.630,421 US$ 13,258
=========== =========== =========== ========== ===========---------------
-----------------
(1) Data for fiscal 2003 is not comparable to fiscal 2001 and 2002, as data
for fiscal 2001 and 2002 is only for ICICI and does not include ICICI
Bank, as ICICI Bank was accounted for by the equity method in those fiscal
years. Also, loans outstanding at year-end fiscal 2001 and 2002 are not
comparable with fiscal 1999 and 2000 due to deconsolidation of ICICI Bank
effective April 1, 2000.
(2) Other principally includes shipping, printing, mineral products, glass and
glass products, watches, healthcare, gems and jewelry, leather and wood
products industries.
Our gross loan portfolio at year-end fiscal 2003 increased by 22.2%
compared to ICICI's gross loan portfolio at year-end fiscal 2002. The largest
increase was in retail finance, which constituted 27.5% of gross loans at
year-end fiscal 2003 compared to 13.0% of ICICI's gross loan portfolio at
year-end fiscal 2002 and 4.3% of ICICI's gross loan portfolio at year-end
fiscal 2001. Our gross loans to the iron and steel sector as a percentage of
gross loans decreased to 10.6% at year-end fiscal 2003 compared to 12.7% of
ICICI's gross loan portfolio at year-end fiscal 2002. Our gross loans to the
power sector as a percentage of gross loans decreased to 8.2% at year-end
fiscal 2003 compared to 10.9% of ICICI's gross loan portfolio at year-end
fiscal 2002. Retail finance accounted for 2.1% of our gross other impaired
loans at year-end fiscal 2003. The iron and steel sector accounted for 35.5% of
our gross restructured loans and 10.2% of our gross other impaired loans at
year-end fiscal 2003. The power sector accounted for 0.9% of our gross
restructured loans and 21.3% of our gross other impaired loans at year-end
fiscal 2003. See also "-Impaired Loans".
78
At year-end fiscal 2003, our 20 largest borrowers accounted for
approximately 21.2% of our gross loan portfolio, with the largest borrower
accounting for approximately 2.2% of our gross loan portfolio. The largest
group of companies under the same management control accounted for
approximately 4.9% of our gross loan portfolio.
Geographic Diversity
Except as described below, our portfolios were geographically diversified
throughout India, primarily reflecting the location of our corporate borrowers.
The states of Maharashtra and Gujarat, two of the most industrialized states in
India, accounted for the largest proportion of our gross loans outstanding at
year-end fiscal 2003.
Directed Lending
The Reserve Bank of India requires banks to lend to certain sectors of
the economy. Such directed lending is comprised of priority sector lending,
export credit and housing finance.
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend 40.0% of their net bank credit (total domestic loans less marketable debt
instruments and certain exemptions permitted by the Reserve Bank of India from
time to time) to certain specified sectors called priority sectors. Priority
sectors include small-scale industries, the agricultural sector, food and
agri-based industries, small businesses and housing finance up to certain
limits. Out of the 40.0%, banks are required to lend a minimum of 18.0% of
their net bank credit to the agriculture sector and the balance to certain
specified sectors, including small scale industries (defined as manufacturing,
processing and services businesses with a limit on investment in plant and
machinery of Rs. 10 million), small businesses, including retail merchants,
professional and other self employed persons and road and water transport
operators, housing loans up to certain limits and to specified state financial
corporations and state industrial development corporations.
While granting its approval for the amalgamation, the Reserve Bank of
India stipulated that since ICICI's loans transferred to us were not subject to
the priority sector lending requirement, we are required to maintain priority
sector lending of 50.0% of our net bank credit on the residual portion of our
advances (i.e. the portion of our total advances excluding advances of ICICI at
year-end fiscal, 2002, henceforth referred to as residual net bank credit).
This additional 10.0% priority sector lending requirement will apply until such
time as our aggregate priority sector advances reach a level of 40.0% of our
total net bank credit. The Reserve Bank of India's existing instructions on
sub-targets under priority sector lending and eligibility of certain types of
investments/ funds for qualification as priority sector advances apply to us.
We are required to comply with the priority sector lending requirements
at the end of each fiscal year. Any shortfall in the amount required to be lent
to the priority sectors may be required to be deposited with government
sponsored Indian development banks like the National Bank for Agriculture and
Rural Development and the Small Industries Development Bank of India. These
deposits have a maturity of up to five years and carry interest rates lower
than market rates.
79
At year-end fiscal 2003, our priority sector loans were Rs. 83.7 billion
(US$ 1.8 billion), constituting 75.6% of our residual net bank credit against
the requirement of 50.0%. The following table sets forth our priority sector
loans, at year-end fiscal 2003, broken down by the type of borrower.
% of residual
net bank credit
At March 31, at March 31,
------------------------------------------
2003 2003 2003
------------------------- ----------------
(in millions, except percentages)
Small scale industries...............Rs. 2,686 US$ 57 2.4%
Others including small businesses.... 59,436 1,250 53.7
Agricultural sector.................. 21,601 454 19.5
---------- ----------- ----
Total................................Rs. 83,723 US$ 1,761 75.6%
========== =========== ====
Export Credit
As part of directed lending, the Reserve Bank of India also requires
banks to make loans to exporters at concessional rates of interest. Export
credit is provided for pre-shipment and post-shipment requirements of exporter
borrowers in rupees and foreign currencies. At the end of the fiscal year,
12.0% of a bank's net bank credit is required to be in the form of export
credit. This requirement is in addition to the priority sector lending
requirement but credits extended to exporters that are small scale industries
or small businesses may also meet part of the priority sector lending
requirement. The Reserve Bank of India provides export refinancing for an
eligible portion of total outstanding export loans at the bank rate prevailing
in India from time to time. The interest income earned on export credits is
supplemented through fees and commissions earned from these exporter customers
from other fee-based products and services taken by them from us, such as
foreign exchange products and bill handling. At year-end fiscal 2003, our
export credit was Rs. 4.1 billion (US$ 87 million), constituting 3.7 % of our
residual net bank credit.
Housing Finance
The Reserve Bank of India requires banks to lend up to 3.0% of their
incremental deposits in the previous fiscal year for housing finance. This can
be in the form of home loans to individuals or investments in the debentures
and bonds of the National Housing Bank and housing development institutions
recognized by the government of India. Housing finance also qualifies as
priority sector lending. At year-end fiscal 2003, our housing finance
qualifying as priority sector advances was Rs. 49.7 billion (US$ 1.0 billion).
Impaired Loans
The following discussion on impaired loans is based on US GAAP. For
classification of impaired loans under Indian regulatory requirements, see
"Supervision and Regulation - Loan Loss Provisions and Impaired Assets".
Impact of Economic Environment on the Industrial Sector
In the past few years the Indian economy has been impacted by negative
trends in the global marketplace, particularly in the commodities markets, and
recessionary conditions in various economies, which have impaired the operating
environment for the industrial sector. The manufacturing sector has also been
impacted by several other factors, including increased competition arising from
economic liberalization in India and volatility in industrial growth and
commodity prices. This has led to stress on the operating performance of Indian
corporations and the impairment of a significant amount of loan assets in the
financial system, including loan assets of ICICI and ICICI Bank. Certain Indian
corporations are coming to terms with this new competitive reality through a
process of restructuring and repositioning, including rationalization of
capital structures and production capacities. The process of restructuring
continued during fiscal 2003. This continuing process of restructuring as well
as the impairment of loans to borrowers adversely impacted by the changing
operating environment but for whom financial restructuring was not approved,
resulted in an increase in our restructured and other impaired loans during
fiscal 2003.
80
Recognition of Impaired Loans
We identify a loan as impaired when it is probable that we will be unable
to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Until year-end fiscal 2003, a loan was
also considered to be impaired if interest or principal was overdue for more
than 180 days. The Reserve Bank of India's revised asset classification rules
effective from fiscal 2004 now require Indian banks to classify an asset as
impaired when principal or interest has remained overdue for more than 90 days.
Delays or shortfalls in loan payments are evaluated along with other factors to
determine if a loan should be placed on non-accrual status. Generally, loans
with delinquencies under 180 days (90 days from fiscal 2004) are placed on
non-accrual status only if specific conditions indicate that impairment is
probable. The decision to place a loan on non-accrual status is also based on
an evaluation of the borrower's financial condition, collateral, liquidation
value, and other factors that affect the borrower's ability to repay the loan
in accordance with the contractual terms. Generally, at the time a loan is
placed on non-accrual status, interest accrued and uncollected on the loan in
the current fiscal year is reversed from income, and interest accrued and
uncollected from the prior year is charged off against the allowance for loan
losses. Thereafter, interest on non-accrual loans is recognized as interest
income only to the extent that cash is received and future collection of
principal is not in doubt. When borrowers demonstrate over an extended period
the ability to repay a loan in accordance with the contractual terms of a loan,
which we classified as non-accrual, the loan is returned to accrual status.
We classify a loan as a troubled debt restructuring where we have made
concessionary modifications, that we would not otherwise consider, to the
contractual terms of the loan to a borrower experiencing financial
difficulties. Such loans are placed on a non-accrual status. For these loans,
cash receipts are typically applied to principal and interest in accordance
with the terms of the restructured loan agreement. With respect to restructured
loans, performance prior to the restructuring or significant events that
coincide with the restructuring are evaluated in assessing whether the borrower
can meet the rescheduled terms and may result in the loan being returned to
accrual status after a performance period.
Consumer loans are generally identified as impaired not later than a
predetermined number of days overdue on a contractual basis. The number of days
is set at an appropriate level by loan product. The policy for suspending
accruals of interest and impairment on consumer loans varies depending on the
terms, security and loan loss experience characteristics of each product.
The value of impaired loans is measured at the present value of expected
future cash flows discounted at the loan's effective interest rate, at the
loan's observable market price, or the fair value of the collateral if the
recovery of the loan is solely collateral dependent. If the value of the
impaired loan is less than the recorded investment in the loan, we recognize
this impairment by creating a valuation allowance with a corresponding charge
to the provision for loan losses.
Our gross restructured loans increased 55.0% during fiscal 2003 to Rs.
147.4 billion (US$ 3.1 billion) at year-end fiscal 2003, from ICICI's gross
restructured loans of Rs. 95.1 billion (US$ 2.0 billion) at year-end fiscal
2002 primarily due to restructuring of loans to companies in the iron and
steel, cement and electronics industries and reclassification of other impaired
loans of Rs. 5.5 billion (US$ 116 million) as restructured loans at year-end
fiscal 2003 after restructuring of these impaired loans in fiscal 2003. Gross
other impaired loans increased 63.8% during fiscal 2003 to Rs. 83.2 billion
(US$ 1.7 billion) at year-end fiscal 2003, from ICICI's gross other impaired
loans of Rs. 50.8 billion (US$ 1.1 billion) at year-end fiscal 2002 primarily
due to increase in respect of borrowers in the power, metal product and
fertilizer and pesticides industries. See also "-Impact of Economic Environment
on the Industrial Sector". As a percentage of net loans, net restructured loans
were 19.5% at year-end fiscal 2003 compared to 14.8% of ICICI's net loans at
year-end fiscal 2002 and net other impaired loans were 8.8% at year-end fiscal
2003 compared to 6.3% of ICICI's net loans at year-end fiscal 2002.
81
The following table sets forth, at the dates indicated, our gross
restructured rupee and foreign currency loan portfolio by business category.
At March 31,
----------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------
(in millions, except percentages)
Wholesale banking(1).............. Rs. 13,171 Rs. 18,513 Rs. 37,726 Rs. 84,048 Rs.135,421 US$2,848
Rupee........................... 8,549 11,896 25,190 60,017 83,074 1,747
Foreign currency................ 4,622 6,617 12,536 24,031 52,347 1,101
Working capital finance........... - 33 818 5,283 11,084 233
Rupee........................... - 33 818 5,283 11,084 233
Foreign currency................ - - - - - -
Leasing and related activities(2). - - 5,137 5,652 886 19
Rupee........................... - - 5,137 5,652 886 19
Foreign currency................ - - - - - -
Other(3).......................... - - - 105 - -
Rupee........................... - - - 105 - -
Foreign currency................ - - - - - -
Total restructured loans
Rupee........................... 8,549 11,929 31,145 71,057 95,044 1,999
Foreign currency................ 4,622 6,617 12,536 24,031 52,347 1,101
----------------------------------------------------------------------------------------------
Gross restructured loans.......... 13,171 18,546 43,681 95,088 147,391 3,100
Allowance for loan losses......... (6,422) (7,751) (11,372) (17,722) (24,732) (520)
----------------------------------------------------------------------------------------------
Net restructured loans............ Rs. 6,749 Rs. 10,795 Rs. 32,309 Rs. 77,366 Rs. 122,659 US$ 2,580
==============================================================================================
Gross loan assets................. Rs. 503,630 Rs. 595,533 Rs. 635,058 Rs. 560,248 Rs. 684,640 US$ 14,398
Net loan assets................... 475,106 561,448 602,023 523,601 630,421 13,258
Gross restructured loans as a
percentage of gross loan assets. 2.62% 3.11% 6.88% 16.97% 21.53%
Net restructured loans as a
percentage of net loan assets... 1.42% 1.92% 5.37% 14.78% 19.45%
---------------------------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities.
(2) Includes leasing and hire purchase.
(3) Other includes retail finance asset, bills discounted and inter-corporate
deposits.
The following table sets forth, at the dates indicated, our gross other
impaired rupee and foreign currency loan portfolio by business category.
At March 31,
--------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------
(in millions, except percentages)
Wholesale banking(1)..............Rs. 41,611 Rs. 45,616 Rs. 39,430 Rs. 48,093 Rs.67,906 US$1,428
Rupee.............................Rs. 27,634 29,714 23,514 32,847 50,864 1,070
Foreign currency................ 13,977 15,902 15,916 15,246 17,042 358
Working capital finance........... 1,158 1,420 1,234 1,699 11,907 250
Rupee........................... 1,158 1,420 1,234 1,699 11,907 250
Foreign currency................ - - - - - -
Leasing and related activities(2). 2,360 2,965 899 731 1,550 33
Rupee........................... 2,360 2,965 899 731 1,550 33
Foreign currency................ - - - - - -
Other(3).......................... 187 573 181 231 1,793 38
Rupee........................... 187 573 181 231 1,793 38
Foreign currency................ - - - - - -
Total other impaired loans
Rupee........................... 31,339 34,672 25,828 35,508 66,114 1,391
Foreign currency................ 13,977 15,902 15,916 15,246 17,042 358
----------------------------------------------------------------------------------------------
Gross other impaired loans........ 45,316 50,574 41,744 50,754 83,156 1,749
Allowance for loan losses......... (22,102) (26,334) (21,663) (17,567) (27,837) (585)
---------------------------------------------------------------------------------------------
Net other impaired loans..........Rs. 23,214 Rs. 24,240 Rs. 20,081 Rs. 33,187 Rs. 55,319 US$ 1,164
=============================================================================================
82
At March 31,
--------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------
(in millions, except percentages)
Gross loan assets.................Rs. 503,630 Rs. 595,533 Rs. 635,058 Rs.560,248 Rs.684,640 US$ 14,398
Net loan
assets............................ 475,106 561,448 602,023 523,601 630,421 13,258
Gross other impaired loans as a
percentage of gross loan
assets.......................... 9.00% 8.49% 6.57% 9.06% 12.15%
Net other impaired loans as a
percentage of net loan assets... 4.89% 4.32% 3.34% 6.34% 8.77%
-----------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities.
(2) Includes leasing and hire purchase.
(3) Other includes retail finance asset, bills discounted and inter-corporate
deposits.
The following table sets forth, at the dates indicated, gross
restructured loans by borrowers' industry or economic activity and as a
percentage of total gross restructured loans.
At March 31,
--------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Iron and steel ............Rs. 909 6.9% Rs. 1,461 7.9% Rs. 7,270 16.6% Rs. 18,013 18.9% Rs. 52,295 US$1,100 35.5%
Textiles .................. 1,611 12.2 2,276 12.3 12,437 28.5 21,468 22.6 15,660 329 10.6
Cement .................... 286 2.2 300 1.6 888 2.0 3,454 3.6 10,102 212 6.9
Transport equipment ....... 13 0.1 13 0.1 418 1.0 5,857 6.2 7,219 152 4.9
Paper and paper products... 137 1.0 338 1.8 2,211 5.1 6,076 6.4 5,669 119 3.8
Electronics ............... 868 6.6 933 5.0 854 2.0 899 0.9 5,555 117 3.8
Plastics .................. 2,447 18.6 2,525 13.6 2,586 5.9 2,738 2.9 4,829 102 3.3
Man-made fibers ........... 2,616 19.9 3,456 18.6 4,561 10.4 5,759 6.1 4,641 98 3.1
Services .................. 688 5.2 1,098 5.9 1,605 3.7 2,710 2.8 4,589 97 3.1
Sugar ..................... 209 1.6 570 3.1 446 1.0 2,859 3.0 4,250 89 2.9
Petrochemicals ............ 546 4.1 710 3.8 937 2.1 853 0.9 3,793 80 2.6
Machinery ................. 209 1.6 283 1.5 902 2.1 1,336 1.4 3,773 79 2.6
Fertilizers and
pesticides............... 99 0.8 76 0.4 141 0.3 3,695 3.9 3,168 67 2.1
Basic chemicals ........... 703 5.2 1,527 8.2 1,306 3.0 1,991 2.1 1,983 42 1.3
Power...................... - - 28 0.2 2,278 5.2 915 0.9 1,229 26 0.9
Non-ferrous metals ........ 160 1.2 214 1.2 180 0.4 1,337 1.4 1,164 24 0.8
Electrical equipment ...... 121 0.9 235 1.3 1,035 2.4 1,713 1.8 1,086 23 0.7
Metal products ............ 86 0.7 171 0.9 761 1.7 636 0.7 1,030 22 0.7
Food products ............. 588 4.5 655 3.5 707 1.6 434 0.5 550 12 0.4
Rubber and rubber
products................. 150 1.1 143 0.8 169 0.4 460 0.5 449 9 0.3
Drugs ..................... - - - - 27 0.1 189 0.2 356 7 0.2
Other chemicals ........... - - - - - - - - 21 - -
Other(1) .................. 725 5.6 1,534 8.3 1,962 4.5 11,696 12.3 13,980 294 9.5
---------------------------------------------------------------------------------------------------------
Gross restructured loans..Rs.13,171 100.0% Rs. 18,546 100.0% Rs. 43,681 100.0% Rs. 95,088 100.0% Rs.147,391 US$3,100 100%
===== ===== ===== ===== ===
Aggregate allowance for
loan osses............... (6,422) (7,751) (11,372) (17,722) (24,732) (520)
-------- ---------- ---------- ----------- --------------------
Net restructured loans.....Rs.6,749 Rs. 10,795 Rs. 32,309 Rs. 77,366 Rs.122,659 US$2,580
======== ========== ========== =========== ====================
--------------
(1) Other principally includes telecom, shipping, real estate, construction,
wood, non-bank finance companies, glass, computer software, tea,
agriculture, vegetable oil, fishing, printing, floriculture, leather,
crude petroleum and retail finance assets.
83
The following table sets forth, at the dates indicated, gross other
impaired loans by borrowers' industry or economic activity and as a percentage
of total gross other impaired loans.
At March 31,
-------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Power ....................Rs. 35 0.2% Rs. 71 0.0% Rs. - -% Rs. 6,009 11.9% Rs.17,733 US$ 373 21.3%
Iron and steel ........... 5,058 11.2 4,942 9.8 5,894 14.1 5,899 11.6 8,481 178 10.2
Metal products ........... 2,872 6.3 3,284 6.5 2,970 7.1 2,628 5.2 7,003 147 8.4
Textiles ................. 3,764 8.3 5,978 11.8 6,041 14.5 4,250 8.4 4,964 104 6.0
Basic chemicals .......... 3,101 6.9 2,879 5.7 2,075 5.0 4,412 8.7 4,624 97 5.6
Petrochemicals ........... 157 0.3 169 0.3 86 0.2 3,440 6.8 4,029 85 4.8
Fertilizers and
pesticides ............. 450 1.0 442 0.9 193 0.5 163 0.3 3,282 69 3.9
Electrical equipment ..... 1,333 2.9 1,653 3.3 1,652 4.0 2,008 4.0 3,178 67 3.8
Drugs .................... 2,448 5.4 2,481 4.9 2,401 5.7 2,544 5.0 2,588 54 3.2
Services ................. 1,768 3.9 2,015 4.0 1,324 3.2 416 0.8 2,255 47 2.7
Electronics .............. 2,829 6.2 2,537 5.0 1,456 3.5 1,281 2.5 2,166 45 2.6
Cement ................... 1,728 3.8 1,371 2.7 1,972 4.7 1,287 2.5 1,779 37 2.1
Machinery ................ 1,696 3.7 1,802 3.6 919 2.2 2,596 5.1 1,759 37 2.1
Man-made fibers .......... 3,993 8.8 4,092 8.1 2,129 5.1 1,802 3.6 1,661 35 2.0
Paper and paper products . 1,125 2.5 3,147 6.2 2,456 5.9 2,199 4.3 1,582 33 1.9
Food products ............ 2,523 5.6 2,663 5.3 2,415 5.8 1,389 2.8 1,323 28 1.6
Sugar .................... 291 0.7 951 1.9 1,461 3.5 722 1.4 1,262 27 1.5
Plastics ................. 1,268 2.8 1,312 2.6 1,280 3.1 1,137 2.2 1,142 24 1.4
Transport equipment ...... 856 1.9 852 1.7 761 1.8 715 1.4 790 17 1.0
Non-ferrous metals ....... 597 1.3 639 1.3 503 1.2 447 0.9 447 10 0.5
Other chemicals .......... 6 - 48 0.1 45 0.1 92 0.2 357 8 0.4
Rubber and rubber
products................ 462 1.0 485 1.0 335 0.8 328 0.6 328 7 0.4
Other(1) ................. 6,956 15.3 6,761 13.3 3,376 8.0 4,990 9.8 10,423 220 12.6
----------------------------------------------------------------------------------------------------------
Gross other impaired
loans...................Rs.45,316 100.0% Rs. 50,574 100.0% Rs.41,744 100.0% Rs.50,754 100.0% Rs.83,156 US$ 1,749 100%
===== ===== ===== ===== ===
Aggregate allowance for
loan losses............ (22,102) (26,334) (21,663) (17,567) (27,837) (585)
--------- ---------- ---------- ---------- --------------------
Net other impaired loans .Rs.23,214 Rs. 24,240 Rs. 20,081 Rs. 33,187 Rs. 55,319 US$1,164
========= ========== ========= ========== ==========----------
-----------------
(1) Other principally includes telecom, construction, non-bank finance
companies, shipping, vegetable oil, health care, printing, computer
software, road, wood, mineral product, tea, glass, agriculture, fishing,
trade, leather, gems and jewelry, crude petroleum, mining and retail
finance assets.
The largest proportion of our restructured and other impaired loans was
to the iron and steel, textiles and power industries. There is a risk that
restructured and other impaired loans in each of these sectors and in other
sectors including petrochemicals and electronics industries could increase if
Indian economic conditions deteriorate or there is a negative trend in global
commodity prices.
Iron and Steel. Over the last few years, a persistent downward trend in
international steel prices to historic lows has had a significant impact on
companies in this sector. In addition, a significant reduction in import
tariffs led to price competition from certain countries, significantly reducing
domestic prices. Our outlook for this sector is positive owing to the recent
increase in prices and an increase in exports. In fiscal 2000 and fiscal 2001,
the increase in ICICI's assets in this sector was primarily due to phased
disbursements to projects that were approved earlier. While most of these
projects have now been completed, a part of these loans is to projects still
under implementation. At year-end fiscal 2003, we had classified 72.2% of our
gross loans in this sector as restructured loans and 11.7% as other impaired
loans.
Textiles. Over the last few years, the textiles sector was adversely
affected by the impact of erratic monsoons on cotton production, the South-east
Asian economic crisis and competitive pressures from other low cost textile
producing countries. A substantial portion of our loans to this sector have
been
84
classified as impaired. At year-end fiscal 2003, we had classified 38.9%
of our gross loans in this sector as restructured loans and 12.3% as other
impaired loans.
Power. At year-end fiscal 2003, we had classified 2.2% of our total loans
to the power sector as restructured loans and 31.6% as other impaired loans.
Other impaired loans primarily include loans to two large borrowers. These
include a large private sector power generation project in the state of
Maharashtra, the implementation of which is currently suspended on account of a
dispute between the power project and the purchaser, the state electricity
board. The matter is currently pending before the Indian courts, while parallel
efforts are continuing for an out of court settlement, including re-negotiation
of the power tariff. The principal sponsor of the project has filed for
bankruptcy in the United States. The assets of the project are in the
possession of a receiver appointed by the High Court of Judicature at Bombay on
a plea by the lenders to the project, including us. Efforts are continuing for
sale of the project to new sponsors. Loans to a private sector player in power
generation and distribution, were also classified as other impaired loans,
pending the expected restructuring of the loans. This restructuring was
approved in the first quarter of fiscal 2004.
Interest Foregone
The following table sets forth, for the periods indicated, the amount of
interest foregone by us in respect of loans on which accrual of interest was
suspended at the respective fiscal year-end.
Interest foregone
(in billions)
-----------------
Fiscal 1999............................... Rs. 10.4 US$ 0.2
Fiscal 2000............................... 12.4 0.3
Fiscal 2001............................... 14.3 0.3
Fiscal 2002............................... 16.1 0.3
Fiscal 2003............................... 17.9 0.4
During fiscal 2003, interest income of Rs. 2.4 billion (US$ 50 million)
was recognized on impaired loans on a cash basis.
Impaired Loans Strategy
Our Special Asset Management Group is responsible for finding early
solutions for large and complex impaired loans. This group works closely with
other banks and financial institutions and uses outside experts and specialized
agencies for due diligence, valuation and legal advice to expedite early
resolution. The group also seeks to leverage our corporate relationships to
facilitate quicker resolution of impaired loans. It consists of professionals
with significant experience in credit management supported by a team of
dedicated legal professionals.
We place great emphasis on recovery and settlement of our stressed asset
portfolio and impaired loans, and this focus has been institutionalized across
ICICI Bank. Methods for resolving impaired loans include:
o early enforcement of collateral through judicial means;
o encouraging the consolidation of troubled borrowers in fragmented
industries with stronger industry participants;
o encouraging the financial restructuring of troubled borrowers; and
o encouraging modernization of existing plants through technology
upgrades.
Further, we have taken concrete measures to enhance the security
structures in accounts that may be under stress, including through:
o the pledge of sponsor's shareholding;
85
o the right to convert debt into equity at par;
o ensuring effective representation in the board of directors of these
companies;
o continuous monitoring of the physical performance of the borrower's
operations through independent technical consultants; and
o escrow mechanisms to capture cash flows.
We are seeking to leverage recent positive developments in the
Indian financial system that facilitate financial restructuring of troubled
borrowers and recovery through enforcement of collateral. These include the
constitution of a Corporate Debt Restructuring Forum, consisting of financial
institutions and banks, by the Reserve Bank of India, the enactment of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 and the setting up of an asset reconstruction
company to acquire impaired loans from banks and financial institutions. See
"Overview of the Indian Financial Sector - Recent Structural Reforms-
Legislative Framework for Recovery of Debts due to Banks". However, there can
be no assurance of the extent to which, if at all, these developments will have
a positive impact on our recovery and settlement efforts.
Allowance for Loan Losses
The following table sets forth, at the dates indicated, movements in our
allowances for loan losses.
At March 31,
---------------------------------------------------------------------------------
1999 2000 2001 2002 2003
---------------------------------------------------------------------------------
(in millions)
Aggregate allowance for loan losses
at the beginning of the year.................... Rs. 22,457 Rs. 28,524 Rs. 34,085 Rs. 33,035 Rs. 36,647 US$ 770
Less: Effect of deconsolidation of subsidiary on -
allowance for loan losses....................... - (747) - - -
Add: Effect of reverse acquisition on allowance -
for loan losses................................. - - - 1,297 27
Add: Provisions for loan losses
Wholesale banking(1)............................. 5,129 5,571 9,097 9,069 16,601 349
Working capital finance.......................... 419 518 479 513 2,237 47
Leasing and related activities (2)............... 434 279 249 6 231 5
Others (3)....................................... 85 (5) 67 155 580 12
Total provisions for loan losses................... Rs. 6,067 Rs. 6,363 Rs. 9,892 Rs. 9,743 Rs. 19,649 US$ 413
Write offs(4)...................................... - (802) (10,195) (6,131) (3,374) (71)
Aggregate allowance for loan losses
-------------------------------------------------------------------------------
at the end of the year........................... Rs. 28,524 Rs. 34,085 Rs. 33,035 Rs. 36,647 Rs. 54,219 US$1,139
-------------------------------------------------------------------------------
Ratio of net provisions for loan losses during
the period to average loans outstanding.......... 1.4% 1.2% 1.7% 1.6% 3.2%
--------------------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities. Provisions include unallocated
provisions on lending assets not specifically identified as restructured
loans or other impaired loans.
(2) Includes leasing and hire purchase.
(3) Includes retail finance assets, bills discounted and inter-corporate
deposits.
(4) Until year-end fiscal 2000, ICICI followed a policy whereby loan balances
were not charged-off against the allowance for loan losses. This policy
was in response to the regulatory environment governing debt recovery
proceedings in India. During fiscal 2001, changes in the tax laws
necessitated that loan balances deemed unrecoverable be charged-off
against the allowance for credit losses. Accordingly, ICICI charged-off
significant loan balances deemed unrecoverable in fiscal 2001 and fiscal
2002.
86
We conduct a comprehensive analysis of our loan portfolio on a periodic
basis. The analysis considers both qualitative and quantitative criteria
including, among others, the account conduct, future prospects, repayment
history and financial performance. This comprehensive analysis includes an
account by account analysis of the entire loan portfolio, and an allowance is
made for any probable loss on each account. In estimating the allowance, we
consider the net realizable value on a present value basis by discounting the
future cash flows over the expected period of recovery. Further, we also
consider past history of loan losses and value of underlying collateral. For
further discussions on allowances for loan losses, see "Operating and Financial
Review and Prospects".
Under US GAAP, the analysis of the provisions for restructured and other
impaired loans requires that we take into account the time delay in our ability
to foreclose upon and sell collateral. The net present value of a restructured
and other impaired loan includes the net present value of the underlying
collateral, if any. As a result, even though our loans are generally
over-collateralized, additional allowances are required under US GAAP because
US GAAP takes into account the time value of money.
Each portfolio of smaller-balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, is
individually evaluated for impairment. The allowance for loan losses attributed
to these loans is established via a process that includes an estimate of
probable losses inherent in the portfolio, based upon various statistical
analysis. These include migration analysis, in which historical delinquency and
credit loss experience is applied to the current ageing of the portfolio,
together with an analysis that reflects current trends and conditions. The use
of different estimates or assumptions could produce different provisions for
smaller balance homogeneous loan losses.
When there is an equity investment for which the corresponding loan asset
is impaired, an adjustment is made to record an impairment of the related
equity security.
For restructured and other impaired loans in excess of Rs. 100 million
(US$ 2 million), which were 84.3% of our gross restructured and other impaired
loan portfolio at year-end fiscal 2003, we followed a detailed process for each
account to determine the allowance for loan losses to be provided. For the
balance of smaller loans in the restructured and other impaired loan portfolio,
we follow the classification detailed below for determining the allowance for
loan losses.
Settlement Cases
Settlement cases include cases in which we are in the process of entering
into a "one-time settlement" because we believe that the potential to recover
the entire amount due (the gross principal plus outstanding interest, including
penalty interest) in these cases is limited. In our experience, we recover
about 85.0% on a present value basis, as a result of negotiated settlements.
Enforcement Cases
Enforcement cases are those cases (excluding cases referred to the Board
for Industrial and Financial Reconstruction or BIFR) in which we have commenced
litigation. We expect that only the secured portion of these loans is
recoverable, after a specified number of years from the date the loan is
recalled. The realizable value of these loans on a present value basis is
determined by discounting the estimated cash flow at the end of the specified
number of years from the date of the recall by the average interest implicit in
these loans.
Non-Enforcement BIFR Cases
Non-enforcement BIFR cases include cases which have been referred to the
Board for Industrial and Financial Reconstruction, which are further
categorized into accounts where the plant is under operation and accounts where
the plant is closed. We expect that in accounts where the plant is operational,
the secured portion of the loan is recoverable over specified annual payments.
In respect
87
of those accounts where the plant is closed, we expect that the secured portion
of the loan will be recoverable at the end of a specified number of years based
upon historical experience.
Non-Enforcement Non-BIFR Cases
Non-enforcement non-BIFR cases include cases, which are neither under
litigation nor referred to the Board for Industrial and Financial
Reconstruction. This category is also divided into accounts where the plant is
under operation and accounts where the plant is closed. We expect that in those
accounts where the plant is operational, the secured portion of the loan is
recoverable over specified annual payments together with a recovery in interest
due at a specified rate. In respect of those loans where the plant is closed,
we expect that the secured portion of the loan will be recoverable over
specified annual payments.
The following table sets forth, for the period indicated, the results of
our restructured and other impaired loan classification scheme.
At March 31, 2003
-----------------------------------------------------------
Percentage
expected to be Impaired
realized on a net loans, net of
Gross impaired present value allowance for
loans basis loan losses
-----------------------------------------------------------
(in millions, except percentages)
Gross principal greater than Rs. 100 million....... Rs. 194,374 81.3% Rs. 158,080
Settlement cases................................... 1,849 85.0 1,572
Enforcement cases.................................. 4,327 66.3 2,869
Non-enforcement BIFR cases......................... 2,376 45.7 1,085
Non-enforcement non-BIFR cases..................... 1,385 81.7 1,132
Other loans........................................ 26,236 50.4 13,241
------------- ------------
Total.............................................. Rs. 230,547 77.2% Rs. 177,979
============ ============
Subsidiaries and Affiliates
Prior to the amalgamation, ICICI Bank had no subsidiaries. As ICICI Bank
is the surviving legal entity in the amalgamation, the subsidiaries and
affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
The following table sets forth, for the period indicated, certain
information relating to ICICI Bank's direct subsidiaries and affiliates at
year-end fiscal 2003.
-----------------------------------------------------------------------------------------------------------------------------------
Stockholders'
Total equity Assets at
Year of Shareholding income in at March March 31,
Name formation Activities by ICICI Bank fiscal 2003(1) 31, 2003(1) 2003(1)
-----------------------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
ICICI Securities February Investment banking 99.9% Rs. 3,224 Rs. 3,728 Rs. 24,874
Limited(2) 1993 activities
ICICI Venture Funds January Venture capital 100.0 357 306 410
Management 1988 Management
Company Limited
88
-----------------------------------------------------------------------------------------------------------------------------------
Stockholders'
Total equity Assets at
Year of Shareholding income in at March March 31,
Name formation Activities by ICICI Bank fiscal 2003(1) 31, 2003(1) 2003(1)
-----------------------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
ICICI Prudential Life July 2000 Life insurance business 74.0 2,735 1,944 8,455
Insurance Company
Limited(3)
ICICI Lombard October 2000 General insurance business 595 1,069 3,124
General Insurance 74.0
Company Limited(3)
ICICI Home May Home and property financing 100.0 2,035 1,668 13,390
Finance 1999
Company Limited
ICICI International January Offshore fund management 100.0 16 26 25
Limited 1996
ICICI Trusteeship April Trustees for various funds 100.0 - 1 1
Services Limited 1999
ICICI Investment March Investment manager 100.0 11 113 123
Management 2000 for mutual fund
Company Limited
Prudential ICICI June Trustee company for 45.0 4 9 13.4
Trust Limited 1993 mutual fund
Prudential ICICI June Investment manager 45.0 620 815 863
Asset Management 1993 for mutual fund
Company Limited
ICICI Bank UK February 2003 Had not commenced operations 100.0 -(4) -(4) -(4)
Limited
--------------------
(1) All financial information is in accordance with US GAAP. (2)
Consolidated; formerly ICICI Securities and Finance Company Limited.
(3) The results of ICICI Prudential Life Insurance Company and ICICI Lombard
General Insurance Company were not consolidated under US GAAP in fiscal
2003, due to substantive participative rights retained by the minority
shareholders, and have been accounted for by the equity method.
(4) ICICI Bank UK Limited has not yet commenced operations.
The following table sets forth, for the period indicated, information on
significant other entities required to be consolidated in ICICI Bank's
financial statements for fiscal 2003 under US GAAP.
-----------------------------------------------------------------------------------------------------------------------------------
Shareholding
by ICICI Bank, Stockholders'
venture capital equity/net
funds or trusts to Total assets Assets at
Date of which ICICI Bank income in at March March 31,
Name formation Activities was a contributory fiscal 2003(1) 31, 2003(1) 2003(1)
-----------------------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
ICICI Infotech October Software consulting and 92.5% Rs. 2,123 Rs. 1,725 Rs. 4,120
Limited(2) (3) 1993 development, IT enabled
services, IT infrastructure
and facilities management
ICICI Web Trade December 1999 Internet-based broking
Limited (3) services 100.0 336 185 763
ICICI OneSource December 2001 Business process outsourcing
Limited (3)(4) and call center services 100.0 777 1,158 2,068
89
-----------------------------------------------------------------------------------------------------------------------------------
Shareholding
by ICICI Bank, Stockholders'
venture capital equity/net
funds or trusts to Total assets Assets at
Date of which ICICI Bank income in at March March 31,
Name formation Activities was a contributory fiscal 2003(1) 31, 2003(1) 2003(1)
-----------------------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
ICICI Equity Fund March 2000 Investment predominantly in 100.0 (1) 4,297 4,250
equity and equity-linked
securities of mid sized Indian
companies.
ICICI Emerging Sector September 2002 Investment in medium sized and 100.0 (26) 3,355 3,396
Fund early stage companies across
sectors
ICICI Strategic
Investments Fund February 2003 Medium sized growth companies 100.0 (4) 5,645 5,650
for funding capacity expansion
and growth
ICICI Eco-Net Internet December 2000 Investment in equity or 92.1 (132) 879 886
& Technology Fund equity-linked securities of
early stage, unlisted internet
and technology companies.
------------------
(1) All financial information is in accordance with US GAAP. (2)
Consolidated; formerly ICICI Infotech Services Limited.
(3) Prior to the amalgamation, ICICI's entire interest in ICICI Web Trade
Limited and majority interest in ICICI Infotech Limited was transferred
to ICICI Information Technology Fund and ICICI Equity Fund respectively.
The majority interest in ICICI OneSource Limited is held by ICICI
Information Technology Fund and the minority interest by ICICI Bank.
(4) Consolidated
At year-end fiscal 2003, all of ICICI Bank's subsidiaries and affiliated
companies and entities consolidated or accounted for under the equity method
under US GAAP, were incorporated or organized in India, except the following 11
companies:
o ICICI Securities Holdings Inc., incorporated in the US;
o ICICI Securities Inc., incorporated in the US;
o ICICI Bank UK Limited, incorporated in the United Kingdom;
o ICICI Infotech Inc., incorporated in the US;
o ICICI Infotech Pte. Limited, incorporated in Singapore;
o ICICI Infotech Pty. Limited, incorporated in Australia;
o ICICI Infotech SDN BDH, incorporated in Malaysia;
o Semantik Solutions GmbH, incorporated in Germany;
o ICICI International Limited, incorporated in Mauritius;
o ICICI OneSource Limited, USA, incorporated in the US; and
o ICICI OneSource Limited, UK, incorporated in the United Kingdom
ICICI Securities Holdings Inc. is a wholly-owned subsidiary of ICICI
Securities and ICICI Securities Inc. is a wholly-owned subsidiary of ICICI
Securities Holdings Inc. ICICI Securities Holdings Inc. and ICICI Securities
Inc. are consolidated in ICICI Securities' financial statements. ICICI Infotech
Inc., ICICI Infotech Pte. Limited and ICICI Infotech Pty. Limited are
wholly-owned subsidiaries of ICICI Infotech Limited and are consolidated in its
financial statements. ICICI Infotech SDN BDH is a subsidiary of ICICI Infotech
Pte. Limited and is consolidated in the financial
90
statements of ICICI Infotech Limited. Semantik Solutions GmbH is a joint
venture between ICICI Infotech Limited, Fraunhofer ISST and Innova Business
Development and Holding GmbH. The shareholding of ICICI Infotech Limited in
Semantik Solutions GmbH is 50.0%. The financials of Semantik Solutions GmbH are
consolidated in the financial statements of ICICI Infotech Limited. ICICI
OneSource Limited, USA and ICICI OneSource Limited, UK are both wholly-owned
subsidiaries of Customer Asset India Private Limited, which is a wholly-owned
subsidiary of ICICI OneSource Limited.
In July 2003, ICICI OneSource Limited acquired First Ring, a business
process outsourcing company based in India. In May 2003, ICICI Bank acquired
the entire paid-up equity share capital of Transamerica Apple Distribution
Finance Private Limited. The company is now a wholly-owned subsidiary of ICICI
Bank and has been renamed ICICI Distribution Finance Private Limited.
Technology
The rapidly evolving banking needs of Indian customers have led to
various technology dependent products and solutions. We seek to be at the
forefront of developing innovative technology initiatives to meet customer
expectations. We believe that technology is a key source of competitive
advantage in the Indian banking sector. Our focus on technology emphasizes:
o Electronic and online channels to:
- Offer easy access to our products and services;
- Reduce distribution and transaction costs;
- Reach new target customers; and
- Enhance existing customer relationships.
o Application of information systems to:
- Effectively market to our target customers;
- Monitor and control risks; and
- Identify, assess and capitalize on market opportunities.
Technology Organization
ICICI Bank's technology initiatives are centralized in its Technology
Management Group. In addition, there are dedicated technology groups for retail
and corporate products and services.
Electronic and Online Channels
At year-end fiscal 2003, 394 branches and 52 extension counters of ICICI
Bank were completely automated to ensure prompt and efficient delivery of
products and services. ICICI Bank's branch banking software is flexible and
scaleable and integrates well with its electronic delivery channels.
ICICI Bank's ATMs are sourced from some of the world's leading vendors.
These ATMs work with the branch banking software. At year-end fiscal 2003,
ICICI Bank had 1,675 ATMs across India.
ICICI Bank was one of the first banks to offer Internet banking
facilities to its customers. ICICI Bank now offers a number of online banking
services to its customers.
ICICI Bank's telephone banking call centers have a total seating capacity
of 1,750 seats, across two locations. These telephone banking call centers use
an Interactive Voice Response System (IVRS). In fiscal 2003, ICICI Bank
upgraded the existing hardware and deployed a new integrated Interactive Voice
Response System to enhance capacity. The call centers are based on the latest
technology and provide an integrated customer database that allows the call
agents to get a complete
91
overview of the customer's relationship with ICICI Bank. The database enables
customer segmentation and assists the call agent in identifying cross-selling
opportunities.
ICICI Bank launched mobile banking services in India in March 2000, in
line with its strategy to offer multi-channel access to its customers. This
service has now been extended across to all mobile telephone service providers
across India and non-resident Indian customers in the United States of America,
the United Kingdom, the Middle East and Singapore.
Application of Information Systems
Treasury and Trade Finance Operations
ICICI Bank uses technology to monitor risk limits and exposures. ICICI
Bank has invested significantly to acquire advanced systems from some of the
world's leading vendors and connectivity to the SWIFT network. In fiscal 2003,
ICICI Bank successfully rolled out a business process management solution to
automate its activities in the areas of trade services and general banking
operations. Through integration of the workflow system with the imaging and
document management system, ICICI Bank has achieved substantial savings and
practically eliminated the use of paper for these processes.
Banking Application Software
ICICI Bank has installed an advanced banking system that is robust,
flexible and scaleable and allows ICICI Bank to effectively and efficiently
serve its growing customer base.
In fiscal 2003, the core banking software was upgraded and enabled with
multi-currency features. A central stand-in server provides services all days
of the week, throughout the year, to delivery channels. The server stores the
latest customer account balances, which are continuously streamed from the core
banking database.
High-Speed Electronic Communications Infrastructure
ICICI Bank has installed a nationwide data communications network linking
all its offices. The network design is based on a mix of dedicated leased lines
and satellite links to provide for reach and redundancy, which is imperative in
a vast country like India. The communications network is monitored 24 hours a
day using advanced network management software. ICICI Bank also uses a data
center in Mumbai for centralized data base management, data storage and
retrieval.
Customer Relationship Management
In fiscal 2002, ICICI Bank implemented a customer relationship management
solution for automation of customer handling in all key retail products. ICICI
Bank increased the deployment of its customer relationship management software.
ICICI Bank's customer relationship management solution enables various channels
to service the customer needs at all touch points, and across all products and
services. The solution has been deployed at the telephone banking call centers
as well as a large number of branches. ICICI Bank has also undertaken a retail
data warehouse initiative to achieve customer data integration at the
back-office level.
ICICI Bank has implemented an Enterprise Application Integration (EAI)
initiative across its retail and corporate products and services, to link
various products, delivery and channel systems. This initiative underpins ICICI
Bank's multi-channel customer service strategy and seeks to deliver customer
related information consistently across access points.
Competition
As a result of the acquisition of Bank of Madura, we became and continue
to be the largest private sector bank in India and as a result of the
amalgamation, we became and continue to be the second largest bank in India, in
terms of total assets. We face strong competition in all
92
our principal areas of business from Indian and foreign commercial banks,
housing finance companies, mutual funds and investment banks. We believe that
our principal competitive advantage over our competitors arises from our
innovative products and services, our use of technology, our long-standing
customer relationships and our highly motivated and skilled employees. Because
of these factors, we believe that we have a strong competitive position in the
Indian financial services market. We evaluate our competitive position
separately in respect of our products and services for retail and corporate
customers.
Corporate products and services
In products and services for corporate customers, we face strong
competition primarily from public sector banks, foreign banks and other new
private sector banks. Our principal competition in these products and services
comes from public sector banks, which have built extensive branch networks that
have enabled them to raise low-cost deposits and, as a result, price their
loans and fee-based services very competitively. Their wide geographical reach
facilitates the delivery of banking products to their corporate customers
located in most parts of the country. We have been able, however, to compete
effectively because of our efficient service and prompt turnaround times that
are significantly faster than public sector banks. We seek to compete with the
large branch networks of the public sector banks through our multi-channel
distribution approach and technology-driven delivery capabilities.
Traditionally, foreign banks have been active in providing trade finance,
fee-based services and other short-term financing products to top tier Indian
corporations. We effectively compete with foreign banks in cross-border trade
finance as a result of our wider geographical reach relative to foreign banks
and our customized trade financing solutions. We have established strong
fee-based cash management services and compete with foreign banks due to our
technological edge and competitive pricing strategies.
Other new private sector banks also compete in the corporate banking
market on the basis of efficiency, service delivery and technology. However,
our strong corporate relationships, wider geographical reach and ability to use
technology to provide innovative, value-added products and services provide us
with a competitive edge.
In project finance, ICICI's primary competitors were established
long-term lending institutions. In recent years, Indian and foreign commercial
banks have sought to expand their presence in this market. We believe that we
have a competitive advantage due to our strong market reputation and expertise
in risk evaluation and mitigation. We believe that our in-depth sector specific
knowledge has allowed us to gain credibility with project sponsors, overseas
lenders and policy makers.
Retail products and services
The retail credit business in India is in a relatively early stage of
development. The retail business has witnessed substantial growth over the last
two years and as per-capita income levels continue to grow, we expect continued
strong growth in retail lending in future. In the retail markets, competition
is primarily from foreign and Indian commercial banks and housing finance
companies. Foreign banks have the product and delivery capabilities but are
likely to focus on limited customer segments. We have capitalized on the first
mover advantage to emerge as market leader in several segments within the
retail credit business. With a full product portfolio, effective distribution
channels, which include direct selling agents, robust credit processes and
collection mechanisms, experienced professionals and superior technology, we
expect to maintain our market position in retail credit.
Indian commercial banks attract the majority of retail bank deposits,
historically the preferred retail savings product in India. We have capitalized
on our corporate relationships to gain individual customer accounts through
payroll management products and will continue to pursue a multi-channel
distribution strategy utilizing physical branches, ATMs, telephone banking call
centers and the Internet to reach customers. Further, following a strategy
focused on customer profiles and product
93
segmentation, we offer differentiated liability products to customers of
various ages and income profiles. This strategy has contributed significantly
to the rapid growth in our retail liability base.
Mutual funds are another source of competition to us. Mutual fund
offerings have the capacity to earn competitive returns and hence, have
increasingly become a viable alternative to bank deposits.
Employees
At year-end fiscal 2003, we had 15,179 employees, an increase from 5,063
employees for ICICI at year-end fiscal 2002 and 3,460 employees for ICICI at
year-end fiscal 2001. ICICI Bank had 4,820 employees at year-end fiscal 2002
and 4,491 employees at year-end fiscal 2001. Of the 15,179 employees at
year-end fiscal 2003, 5,558 were professionally qualified, holding degrees in
management, accountancy, engineering, law, computer science, economics or
banking.
Management believes that it has good relationships with its employees.
ICICI Bank has a staff center, which serves as a forum for grievances, pay and
benefit negotiations and other industrial relations matters. ICICI Bank had
inducted 2,725 employees of Bank of Madura consequent to its acquisition in
March 2001. The employees inducted from Bank of Madura in the grade of clerks
and sub-staffs are unionized. We have a cordial relationship with this union.
We have realigned the service conditions and compensation structure of the
officers who came to us from Bank of Madura, which is now comparable with the
one existing for ICICI Bank's officers.
The financial services industry in India is undergoing unprecedented
change as deregulation gains momentum. Moreover, changing customer needs and
rapid advances in technology are continually re-defining the lines of
innovation and competition, thereby providing us with new challenges and
opportunities. To meet these challenges, we have relied extensively on our
human capital, which comprises some of the best talent in the industry.
We continue to attract the best graduates from the premier business
schools of the country. We dedicate significant amount of senior management
time to ensure that employees remain highly motivated and perceive the
organization as a place where opportunities abound, innovation is fuelled,
teamwork is valued and success is rewarded. Employee compensation is clearly
tied to performance and we encourage the involvement of all our employees in
our overall performance and profitability through profit sharing incentive
schemes based on the financial results. A revised performance appraisal system
has been implemented to assist management in career development and succession
planning.
ICICI Bank has an employee stock option scheme to encourage and retain
high performing employees. Pursuant to the employee stock option scheme as
amended by the Scheme of Amalgamation, up to 5.0% of the aggregate of ICICI
Bank's issued equity shares after the amalgamation, can be allocated under the
employee stock option scheme. The stock option will entitle eligible employees
to apply for equity shares. The grant of stock options is approved by ICICI
Bank's board of directors on the recommendations of the Board Governance and
Remuneration Committee. The eligibility of each employee is determined based on
an evaluation of the employee including employee's work performance, technical
knowledge and leadership qualities. Moreover, ICICI Bank places considerable
emphasis and value on its policy of encouraging internal communication and
consultation between employees and management. See also "Management -
Compensation and Benefits to Directors and Officers - Employee Stock Option
Scheme."
ICICI Bank has training centers at Khandala in the state of Maharashtra,
which conduct various training programs designed to meet the changing skill
requirements of its employees. These training programs include orientation
sessions for new employees and management development programs for mid-level
and senior executives. The training center regularly offers courses conducted
by faculty, both national and international, drawn from industry, academia and
ICICI Bank's own organization. Training programs are also conducted for
developing functional as well as managerial skills. Products and operations
training is also conducted through web-based training modules.
94
In addition to basic compensation, employees of ICICI Bank are eligible
to receive loans from ICICI Bank at subsidized rates and to participate in its
provident fund and other employee benefit plans. The provident fund, to which
both ICICI Bank and its employees contribute a defined amount, is a savings
scheme, required by government regulation, under which ICICI Bank at present is
required to pay to employees a minimum 9.0% (9.5% until fiscal 2003) annual
return. If such return is not generated internally by the fund, ICICI Bank is
liable for the difference. ICICI Bank's provident fund has generated sufficient
funds internally to meet the minimum annual return requirement since inception
of the funds. ICICI Bank has also set up a superannuation fund to which it
contributes defined amounts. In addition, ICICI Bank contributes specified
amounts to a gratuity fund set up pursuant to Indian statutory requirements.
The following table sets forth, at the dates indicated, the approximate
number of employees in ICICI Bank and its consolidated subsidiaries and other
consolidated entities:
At March 31,
-----------------------------------------------------------------------
2002 2003
-----------------------------------------------------------------------
Number % to total Number % to total
-----------------------------------------------------------------------
ICICI Bank........................... -(1) -% 10,617 69.9%
ICICI................................ 1,165 23.0 -(2) -
ICICI Personal Financial Services.... 1,236 24.5 -(2) -
ICICI Capital Services............... 505 10.0 -(2) -
ICICI Securities..................... 143 2.8 147 1.0
ICICI Home Finance................... 442 8.7 927 6.1
ICICI Infotech....................... 1,443 28.5 1,302 8.6
ICICI OneSource...................... - - 2,056 13.5
Others............................... 129 2.5 130 0.9
-----------------------------------------------------------------------
Total number of employees............ 5,063 100.0% 15,179 100.0%
=======================================================================
------------------
(1) At year-end fiscal 2002, ICICI Bank was accounted for in ICICI's financial
statements by the equity method.
(2) Amalgamated with and into ICICI Bank with effect from April 1, 2002 for
accounting purposes under US GAAP.
At year-end fiscal 2003, we had approximately 15,179 employees, an
increase from 5,063 employees of ICICI at year-end fiscal 2002 and from 3,460
employees of ICICI at year-end fiscal 2001. Of these, 10,617 at year-end fiscal
2003 were employed by ICICI Bank, an increase from 4,820 at year-end fiscal
2002 and 4,491 at year-end fiscal 2001. The increase in number of employees in
fiscal 2003 was primarily in ICICI Bank, ICICI OneSource and ICICI Home
Finance, which have grown their business and distribution capabilities.
The following table sets forth, the approximate number of employees in
ICICI Bank and its consolidated subsidiaries and other consolidated entities at
August 31, 2003.
---------------------------------
Number % to total
---------------------------------
ICICI Bank............................... 11,752 68.8%
ICICI Securities......................... 146 0.8
ICICI Infotech........................... 1,334 7.8
ICICI OneSource.......................... 3,723 21.8
Others................................... 132 0.8
---------------------------------
Total number of employees................ 17,087 100.0%
=================================
The results of ICICI Prudential Life Insurance Company and ICICI Lombard
General Insurance Company were not consolidated under US GAAP in fiscal 2003
and have been accounted for under the equity method due to substantive
participative rights retained by the minority shareholders. ICICI Prudential
Life insurance had 1,932 employees at year-end fiscal 2003 and 2,642 employees
at
95
August 31, 2003. ICICI Lombard General Insurance had 284 employees at year-end
fiscal 2003 and 399 employees at August 31, 2003.
In July 2003, ICICI Bank offered an Early Retirement Option to its
employees. All employees who had completed 40 years of age and seven years of
service with ICICI Bank (including periods of service with Bank of Madura,
ICICI, ICICI Personal Financial Services and ICICI Capital Services which were
amalgamated with and into ICICI Bank) as of July 31, 2003 were eligible for the
Early Retirement Option. Out of approximately 2,350 eligible employees,
approximately 1,495 employees exercised the Option. The amount payable to these
employees was the lesser of the amount equal to:
o 3 months' salary for every completed year of service, and
o 1 month's salary for the number of months of service left.
The above payment was subject to an overall limit of Rs. 2.0 million for
employees at the level of Joint General Manager and below, and Rs. 2.5 million
for employees at the level of General Manager and Senior General Manager. For
the purpose of this computation, salary included basic pay and dearness
allowance but excluded all other allowances. The total cost of the Early
Retirement Option is estimated to be approximately Rs. 1.7 billion (US$ 36
million). In addition, while we have made provisions for leave encashment and
retirement benefits based on actuarial valuation in accordance with relevant
accounting guidelines, the early retirement of employees will result in
additional payouts over and above the provisions made to date in respect of
those employees. The total retirement benefits in excess of provisions made are
estimated to be approximately Rs. 300 million (US$ 6 million). These costs will
be accounted for in our financial statements for fiscal 2004.
Properties
ICICI Bank's registered office is located at Landmark, Race Course
Circle, Vadodara 390 007, Gujarat, India. ICICI Bank's corporate headquarters
are located at ICICI Bank Towers, Bandra-Kurla Complex, Mumbai 400 051,
Maharashtra, India.
ICICI Bank had a principal network consisting of 394 branches, 52
extension counters and 1,675 ATMs at year-end fiscal 2003. These facilities are
located throughout India. Forty-two of these facilities are located on
properties owned by ICICI Bank, while the remaining facilities are located on
leased properties. In addition to the branches, extension counters and ATMs,
ICICI Bank has 18 controlling/administrative offices including the registered
office at Vadodara and the corporate headquarters at Mumbai, 14 regional
processing centers in various cities and one central processing center at
Mumbai. ICICI Bank has 910 apartments and two residential facilities for its
employees. ICICI Bank also provides residential and holiday home facilities to
employees at subsidized rates. Our subsidiaries and other consolidated entities
own seven properties and also have 131 properties on lease. The net book value
of all properties and equipment at year-end fiscal 2003 was Rs. 21.2 billion
(US$ 446 million).
Legal and Regulatory Proceedings
We are involved in a number of legal proceedings in the ordinary course
of our business. However, excluding the legal proceedings discussed below, we
are not a party to any proceedings and no proceedings are known by us to be
contemplated by governmental authorities or third parties, which, if adversely
determined, may have a material adverse effect on our financial condition or
results of operations.
At year-end fiscal 2003, we had been assessed an aggregate of Rs. 20.4
billion (US$ 429 million) in excess of the provision made in our accounts, in
income tax, interest tax, wealth tax and sales tax demands by the government of
India's tax authorities for past years. We have appealed each of these tax
demands. Management believes that the tax authorities are not likely to be able
to substantiate their income tax, interest tax, wealth tax and sales tax
assessments and accordingly we have not provided for these tax demands but have
disclosed the same as a contingent liability. Management
96
believes that the tax
authorities are not likely to be able to substantiate their demands for the
following reasons:
o We have received favorable decisions from the appellate authorities
with respect to Rs. 1.3 billion (US$ 27 million) of the assessment.
The income tax authorities have appealed these decisions to higher
appellate authorities and the same are pending adjudication.
o We have received a favorable decision of the Supreme Court of India
in respect of writ petitions filed by us relating to the sales tax
issues that are currently being appealed by us with respect to Rs.
185 million (US$ 4 million) of the assessment.
o We have received favorable appellate decisions in earlier years
related to the income tax, interest tax and wealth tax issues
currently being appealed by us with respect to Rs. 862 million (US$
18 million) of the assessment, and in respect of Rs. 18.0 billion
(US$ 378 million), favorable appellate decisions in the cases of
other Indian companies or expert opinions are available to
substantiate the issues that are currently being appealed.
Of the Rs. 20.4 billion (US$ 429 million) aggregate tax assessments in
excess of the provision made in our accounts, a major portion relates to the
treatment of depreciation claim on leased assets. In respect of depreciation
claimed by us for fiscal 1993 on two sale and lease back transactions, the
Income Tax Appellate Tribunal, Mumbai has held in August 2003 that no
depreciation is allowable to us. The additional tax impact of this decision is
Rs. 189 million (US$ 4 million). We intend to appeal against this decision
before the High Court and believe that we will receive a favorable decision in
the matter. As the Income Tax Appellate Tribunal's decision is based on the
facts of two specific transactions, we believe that the Income Tax Appellate
Tribunal's decision will not have an adverse tax impact on other sale and lease
back transactions entered into by us. Moreover, the lease agreements provide
for variation in the lease rental to offset any loss of depreciation benefit to
us.
In March 1999, ICICI filed a suit in the Debt Recovery Tribunal, Delhi
against Esslon Synthetics Limited and its Managing Director (in his capacity as
guarantor) for recovery of amounts totaling Rs. 169 million (US$ 3 million) due
from Esslon Synthetics. In May 2001, the guarantor filed a counter-claim for an
amount of Rs. 1.0 billion (US$ 21 million) against ICICI and other lenders who
had extended financial assistance to Esslon Synthetics on the grounds that he
had been coerced by officers of the lenders into signing an agreement between
LML Limited, Esslon Synthetics and the lenders on account of which he suffered,
among other things, loss of business. The matter is currently pending before
the Debt Recovery Tribunal, Delhi.
In April 1999, ICICI filed a suit before the High Court of Judicature at
Bombay against Mardia Chemicals Limited for recovery of amounts totaling Rs.
1.4 billion (US$ 29 million) due from Mardia Chemicals. The suit was
subsequently transferred to the Debt Recovery Tribunal, Mumbai. In July 2002,
ICICI Bank issued a notice to Mardia Chemicals under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Ordinance, 2002 (subsequently passed as an Act by the Indian Parliament)
demanding payment of its outstanding dues. In August 2002, Mardia Chemicals
filed a suit in the city civil court at Ahmedabad against ICICI Bank, Mr. K. V.
Kamath, Managing Director and Chief Executive Officer and Ms. Lalita D. Gupte,
Joint Managing Director, for an amount of Rs. 56.3 billion (US$ 1.2 billion) on
the grounds that Mardia Chemicals has allegedly suffered financial losses on
account of ICICI's failure to provide adequate financial facilities, ICICI's
recall of the advanced amount and ICICI's filing of a recovery action against
it. The city civil court held that the suit should have been filed in the
pending proceedings before the Debt Recovery Tribunal, Mumbai. Mardia Chemicals
filed an appeal before the High Court of Gujarat, which dismissed the appeal
and ordered that the claim against ICICI Bank be filed before the Debt Recovery
Tribunal, Mumbai and the claim against Mr. K.V. Kamath and Ms. Lalita D. Gupte
be continued before the city civil court at Ahmedabad. In June 2003, the
promoters of Mardia Chemicals in their capacity as guarantors of loans given by
ICICI to Mardia Chemicals filed a civil suit in the city civil court at
Ahmedabad against ICICI Bank for an amount of Rs. 20.8 billion (US$ 437
97
million) on the grounds of loss of investment and loss of profit on
investments. The pleadings in the matter are yet to be completed. Mardia
Chemicals had also filed a petition in the High Court, Delhi, challenging the
constitutional validity of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Ordinance, 2002. The matter has
since been transferred to the Supreme Court of India, where it is currently
pending.
Management believes, based on consultation with counsel, that the legal
proceedings instituted by each of Esslon Synthetics and Mardia Chemicals
against us are frivolous and untenable and their ultimate resolution will not
have a material adverse effect on our results of operations, financial
condition or liquidity.
98
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Our selected financial and other data for and at year-end fiscal 2003 have
been derived from our consolidated financial statements, prepared in accordance
with US GAAP. The selected financial and other data for ICICI for and at
year-end fiscal 1999, 2000, 2001 and 2002 have been derived from ICICI's
consolidated financial statements, prepared in accordance with US GAAP. These
financial statements have been audited by KPMG, India, independent auditors.
Following the approval of shareholders, the High Court of Gujarat at
Ahmedabad and the High Court of Judicature at Bombay, the Reserve Bank of India
approved the amalgamation of ICICI, ICICI Personal Financial Services and ICICI
Capital Services with and into ICICI Bank on April 26, 2002.
The Statement on Financial Accounting Standard No. 141 on "Business
Combinations", issued by the Financial Accounting Standards Board, requires that
business combinations be accounted for in the period in which the combination is
consummated. Accordingly, under US GAAP, the amalgamation has been reflected in
the financial statements contained in this annual report for fiscal 2003, as it
was consummated in April 2002. The effective date of the amalgamation for
accounting purposes under US GAAP was April 1, 2002. Under US GAAP, the
amalgamation was accounted for as a reverse acquisition. This means that ICICI
was recognized as the accounting acquirer in the amalgamation, although ICICI
Bank was the legal acquirer and the surviving entity. Accordingly, the financial
data contained in this annual report for fiscal 2002 and prior years, except
where specifically stated otherwise, present the assets, liabilities and results
of operations of ICICI. The financial information for ICICI for fiscal 2002 and
2001 reflect results of ICICI Bank as an equity investment in accordance with
ICICI's ownership interest in ICICI Bank prior to the amalgamation. The
financial information for ICICI for fiscal 2000 and 1999 reflect results of
ICICI Bank as a consolidated entity. Following the amalgamation, the other
subsidiaries and affiliates of ICICI have become subsidiaries and affiliates of
ICICI Bank.
On the date of amalgamation, ICICI held a 46% ownership interest in ICICI
Bank. Accordingly, the acquisition of the balance 54% ownership interest has
been accounted for as a step acquisition. Following the acquisition, the 46%
ownership interest held by ICICI in ICICI Bank was recorded as treasury stock at
its historical carrying value. In September 2002, the treasury stock was sold to
institutional investors for Rs. 13,154 million (US$ 277 million). The difference
between the sale proceeds and the carrying value, net of related tax effects of
Rs. 599 million (US$ 13 million), was recognized in the statement of
stockholders' equity as a capital transaction.
ICICI's consolidated subsidiaries for and at year-end fiscal 2002 and
year-end fiscal 2001 did not include ICICI Bank. Effective March 10, 2001, ICICI
Bank acquired Bank of Madura, an old private sector bank in India, in an all
stock merger and, as a result, the ownership interest of ICICI was reduced from
62.2% to 55.6%. In addition, during March 2001, ICICI reduced its interest in
ICICI Bank to 46% through sales of equity shares in the Indian secondary markets
to institutional investors. As a result of the foregoing, ICICI Bank ceased to
be one of ICICI's subsidiaries as of March 22, 2001 and was accounted for under
the equity method of accounting from April 1, 2000, the beginning of the fiscal
year in which ICICI's majority ownership interest in ICICI Bank was deemed to be
temporary. ICICI Bank continues to be reported on a consolidated basis for the
years ended March 31, 1999 and 2000. As a result, the financial statements for
fiscal 2002 and 2001 are not strictly comparable with those for fiscal 2000 and
1999.
The consolidation of ICICI's majority ownership interest in two insurance
companies, ICICI Prudential Life Insurance Company Limited and ICICI Lombard
General Insurance Company Limited, in each of fiscal 2001 and 2002 has now been
deemed inappropriate because of substantive participative rights retained by the
minority shareholders. Accordingly, such investees are no longer consolidated
but are accounted for by the equity method. Prior period financial statements
have been restated and as a result, the financial statements for fiscal 2001 and
2002 contained in this annual
99
report are not the same as those contained in our annual report for fiscal 2002.
There is no resultant impact on net income or stockholders' equity for fiscal
2001 and 2002.
You should read the following data with the more detailed information
contained in "Operating and Financial Review and Prospects" and our consolidated
financial statements. Historical results do not necessarily predict the results
in the future.
Year ended March 31,
---------------------------------------------------------------------------
1999 2000 2001 2002 2003 2003 (1)
---------------------------------------------------------------------------
(in millions, except per common share data)
Selected income statement data:
Interest income ......................... Rs. 70,293 Rs. 79,296 Rs. 79,759 Rs. 78,600 Rs. 97,714 US$ 2,055
Interest expense ........................ (58,043) (67,492) (67,893) (69,520) (83,208) (1,750)
---------------------------------------------------------------------------
Net interest income ..................... 12,250 11,804 11,866 9,080 14,506 305
Dividends ............................... 676 1,502 345 267 389 8
---------------------------------------------------------------------------
Net interest income, including dividends 12,926 13,306 12,211 9,347 14,895 313
Provisions for loan losses .............. (6,067) (6,363) (9,892) (9,743) (19,649) (413)
---------------------------------------------------------------------------
Net interest income / (loss), including
dividends, after provisions for loan
losses.................................... 6,859 6,943 2,319 (396) (4,754) (100)
Non-interest income ..................... 5,560 9,815 9,243 8,148 13,253 278
---------------------------------------------------------------------------
Net revenue ............................. 12,419 16,758 11,562 7,752 8,499 178
Non-interest expense ................... (3,795) (5,302) (5,479) (7,596) (18,609) (390)
Equity in earnings / (loss) of affiliates (34) 20 735 294 (958) (20)
Minority interest ...................... (170) (361) 1 83 24 -
---------------------------------------------------------------------------
Income / (loss) before income taxes,
extraordinary items and cumulative
effect of accounting changes .......... 8,420 11,115 6,819 533 (11,044) (232)
Income tax (expense) / benefit .......... (1,194) (2,033) (189) (251) 3,061 64
---------------------------------------------------------------------------
Income / (loss) before extraordinary items 7,226 9,082 6,630 282 (7,983) (168)
and cumulative effect of accounting
changes, net of tax ...................
Extraordinary items, net of tax(2) ...... 292 - - - - -
Cumulative effect of accounting
changes, net of tax(3)................. - 249 - 1,265 - -
---------------------------------------------------------------------------
Net income/ (loss)....................... Rs. 7,518 Rs. 9,331 Rs. 6,630 Rs. 1,547 Rs. (7,983) US$ (168)
Per common share(4):
Net income / (loss) from continuing
operations
--Basic(5) ................................ Rs. 31.32 Rs. 28.90 Rs. 16.88 Rs. 3.94 Rs. (14.18) US$ (0.30)
Net income/ (loss) from continuing
operations
--Diluted(6) .............................. 27.04 27.54 16.81 3.94 (14.18) (0.30)
Dividends(7) ............................ 11.0 11.0 11.0 22.0 - -
Book value .............................. 152.04 180.58 193.35 181.70 150.42 3.16
Common shares outstanding at end of
period (in millions of common shares) 240 393 393 393 613
Weighted average common shares outstanding
--basic (in millions of common shares) .... 240 323 393 393 563
Weighted average common shares outstanding
--diluted (in millions of common shares) .. 289 344 393 393 563
---------------------------------
(1) Rupee amounts for fiscal 2003 have been translated into US dollars
using the noon buying rate in effect on March 28, 2003 of Rs. 47.55 =
US$ 1.00.
(2) Represents gains from extinguishment of debt, net of tax. In fiscal
1999, ICICI realized a post-tax gain of Rs. 292 million (US$ 6
million) through repurchase of certain of ICICI's outstanding foreign
currency bonds, which resulted in extinguishment of debt.
(3) Effective April 1, 1999, ICICI changed the method of providing
depreciation on property and equipment from the written down value
method to the straight line method. The cumulative effect of the
change aggregating Rs. 405 million (US$ 8 million), net of the related
income tax effect of Rs. 156 million (US$ 3 million) has been included
in the statement of income for fiscal 2000. In June 2001, the
100
FASB issued SFAS No. 141, which requires that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies the criteria that intangible
assets acquired in a purchase method business combination must be
recognized and reported apart from goodwill, noting that any purchase
price allocated to an assembled workforce may not be accounted
separately. As of April 1, 2001, ICICI had an unamortized deferred
credit of Rs. 1,265 million (US$ 26 million) related to an excess of
the fair value of assets acquired over the cost of acquisition of
SCICI. As required by SFAS No. 141, in conjunction with the early
adoption of SFAS No. 142, the unamortized deferred credit as of April
1, 2001, was written-off and recognized as the effect of a change in
accounting principle.
(4) For fiscal 1999, 2000, 2001 and 2002, based on the exchange ratio of
1:2 in which shareholders of ICICI were issued shares of ICICI Bank,
number of shares have been adjusted by dividing by two. Hence, these
numbers are different from the numbers reported in last year's annual
report on Form 20-F for fiscal 2002.
(5) Represents net income / (loss) before dilutive impact.
(6) Represents net income / (loss) adjusted for full dilution. All
convertible instruments are assumed to be converted to common shares
at the beginning of the year, at prices that are most advantageous to
the holders of these instruments. For the purpose of calculating
diluted earnings per share, the net income was adjusted for interest
(after tax) on convertible instruments only for the year ended March
31, 2000, as all convertible bonds were converted/redeemed in fiscal
2001. Shares assumed to be issued have been weighted for the period
the convertible instruments are outstanding. Options to purchase
2,546,675, 7,015,800 and 12,610,275 equity shares granted to employees
at a weighted average exercise price of Rs. 226.0, Rs. 81.3 and Rs.
154.7 were outstanding in fiscal 2001, 2002 and 2003, respectively,
but were not included in the computation of diluted earnings per share
because the exercise price of the options was greater than the average
market price of the equity shares during the period. In fiscal 2003 we
have reported a net loss and accordingly all outstanding options at
year-end fiscal 2003 are anti-dilutive. See Note 24 to our
consolidated financial statements.
(7) In India, dividends for a fiscal year are normally declared and paid
in the following year. The same was true for ICICI until fiscal 2001.
However, in fiscal 2002, dividend was paid by ICICI as an interim
dividend during fiscal 2002. We have declared a dividend of Rs. 7.50
per equity share for fiscal 2003, which was paid out in August 2003
i.e. fiscal 2004. The dividend per equity share shown above is based
on the total amount of dividends paid out on the equity shares during
the year, exclusive of dividend tax. This was different from the
dividend declared for the year. In US dollars, dividends were US$ 0.23
per equity share in each of fiscal 1999, 2000 and 2001 and US$ 0.46
per equity share in fiscal 2002.
(8) Certain reclassifications have been made in the financial statements
of prior years to conform to classifications used in the current year.
These changes have no impact on previously reported results of
operations or stockholders' equity.
101
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of average total assets for the
respective period.
Year ended March 31,
---------------------------------------------------------------------
1999 2000 2001 2002 2003
---------------------------------------------------------------------
Selected income statement data:
Interest income........................... 12.24% 11.23% 11.29% 10.53% 8.63%
Interest expense ......................... (10.11) (9.56) (9.61) (9.31) (7.35)
---------------------------------------------------------------------
Net interest income ...................... 2.13 1.67 1.68 1.22 1.28
Dividends ................................ 0.12 0.21 0.05 0.04 0.03
---------------------------------------------------------------------
Net interest income, including dividends.. 2.25 1.88 1.73 1.25 1.32
Provisions for loan losses ............... (1.06) (0.90) (1.40) (1.31) (1.73)
---------------------------------------------------------------------
Net interest income / (loss), including
dividends, after provisions for loan
losses.................................... 1.19 0.98 0.33 (0.05) (0.42)
Non-interest income, net ................. 0.97 1.39 1.31 1.09 1.17
---------------------------------------------------------------------
Net revenue............................... 2.16 2.37 1.64 1.04 0.75
Non-interest expense ..................... (0.66) (0.75) (0.78) (1.02) (1.64)
Equity in earnings/(loss) of affiliates .. (0.01) 0.00 0.10 0.04 (0.08)
Minority interest ........................ (0.03) (0.05) 0.00 0.01 0.00
---------------------------------------------------------------------
Income / (loss) before income taxes and 1.46 1.57 0.97 0.07 (0.98)
cumulative effect of accounting changes
Income tax (expense)/benefit.............. (0.21) (0.29) (0.03) (0.03) 0.27
---------------------------------------------------------------------
Income/(loss) before extraordinary items
and cumulative effect of accounting
changes, net of tax ................... 1.25 1.28 0.94 0.04 (0.70)
Extraordinary items and cumulative effect
of accounting changes, net of tax ........ 0.05 0.04 - 0.17 -
---------------------------------------------------------------------
Net income/(loss) ........................ 1.30% 1.32% 0.94% 0.21% (0.70)%
At March 31,
--------------------------------------------------------------------------
1999 2000 2001 2002 2003 2003(1)
--------------------------------------------------------------------------
(in millions, except percentages)
Selected balance sheet data:
Total assets ............................. Rs.646,945 Rs.774,279 Rs.739,892 Rs.743,362 Rs.1,180,263 US$ 24,822
Securities ............................... 15,041 18,871 18,861 60,046 280,621 5,902
Loans, net(2) ............................ 475,106 561,448 602,023 523,601 630,421 13,258
Troubled debt restructuring
(restructured loans), net ............. 6,749 10,795 32,309 77,366 122,659 2,580
Other impaired loans, net ................ 23,214 24,240 20,081 33,187 55,319 1,163
Total liabilities ........................ 609,661 699,073 663,829 671,754 1,087,926 22,880
Long-term debt ........................... 435,521 436,320 492,882 511,458 400,812 8,429
Deposits ................................. 60,605 96,682 6,072 7,380 491,290 10,332
Redeemable preferred stock(3) ............ 10,897 10,207 698 772 853 18
Stockholders' equity ..................... 36,494 70,908 75,927 71,348 92,213 1,939
Common stock ............................ 2,400 3,916 3,924 3,922 6,127 129
Period average(4):
Total assets ............................. 574,198 706,066 706,343 746,330 1,132,638 23,820
Interest-earning assets .................. 500,966 612,452 615,164 641,141 924,573 19,444
Loans, net(2) ............................ 430,830 513,421 570,989 591,398 606,496 12,755
Total liabilities(5) ..................... 538,213 650,794 631,324 670,750 1,038,377 21,838
Interest-bearing liabilities ............. 483,636 583,609 576,474 613,401 905,226 19,037
Long-term debt ........................... 383,286 436,718 462,916 504,103 455,347 9,576
Stockholders' equity ..................... Rs.35,985 Rs.55,272 Rs.75,019 Rs.75,580 Rs.94,261 US$ 1,982
Profitability:
Net income / (loss) as a percentage of:
Average total assets .................. 1.30% 1.32% 0.94% 0.21% (0.70)%
Average stockholders' equity .......... 20.89 16.88 8.84 2.05 (8.47)
Average stockholders' equity
(including redeemable preferred stock)
(6) ...................................... 19.26 15.95 8.89 2.12 (8.31)
102
Dividend payout ratio(7) ................. 34.8 28.3 52.9 635.2 -
Spread(8) ................................ 2.03 1.38 1.19 0.93 1.38
Net interest margin(9) ................... 2.45 1.93 1.93 1.42 1.57
Cost-to-income ratio(10) ................. 20.53 22.93 25.54 43.42 66.11
Cost-to-average assets ratio(11) ......... 0.66 0.75 0.78 1.02 1.64
Capital:
Average shareholders' equity as a
percentage of average total assets ....... 6.27 7.83 10.62 10.13 8.32
Average stockholders' equity (including
redeemable preferred stock) as a
percentage of average total assets (12). 7.48 9.30 10.95 10.23 8.39
At or for the year ended March 31,
------------------------------------------------------------
1999 2000 2001 2002 2003
------------------------------------------------------------
(in percentages)
Asset quality
Net restructured loans as a percentage of net loans ...... 1.42% 1.92% 5.37% 14.78% 19.45%
Net other impaired loans as a percentage of net loans .... 4.89 4.32 3.34 6.34 8.77
Allowance for loan losses on restructured loans as
a percentage of gross restructured loans ............... 48.76 41.79 26.03 18.64 16.78
Allowance for loan losses on other impaired loans
as a percentage of gross impaired loans ................ 48.77 52.07 51.89 34.61 33.48
Allowance for loan losses as a percentage of
gross loans ............................................ 5.66 5.72 5.20 6.54 7.92
--------------
(1) Rupee amounts for fiscal 2003 have been translated into US dollars using
the noon buying rate in effect on March 28, 2003 of Rs. 47.55 = US$ 1.00.
(2) Net of allowance for loan losses in respect of restructured and other
impaired loans and allowances for loans not specifically identified as
restructured or other impaired loan.
(3) ICICI had issued preferred stock redeemable at face value after 20 years.
Banks in India are not currently allowed to issue preferred stock. However,
we are currently exempt from the restriction.
(4) For fiscal 1999, 2000, 2002 and 2003 the average balances are the
average of quarterly balances outstanding at the end of March of the
previous fiscal year, June, September, December and March of that fiscal
year and for fiscal 2001, the average balances are the average of quarterly
balances outstanding at the end of June, September, December and March of
that fiscal year.
(5) Represents the average of the quarterly balance of total liabilities and
minority interest.
(6) Represents the ratio of net income plus dividend on redeemable preferred
stock to the sum of average stockholders' equity and average redeemable
preferred stock. Under Indian tax laws, dividend on preferred stock is not
tax deductible.
(7) Represents the ratio of total dividends paid on common stock, exclusive of
dividend distribution tax, as a percentage of net income.
(8) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets was the ratio of interest income to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(9) Represents the ratio of net interest income to average interest-earning
assets. The difference in net interest margin and spread arises due to the
difference in the amount of average interest-earning assets and average
interest-bearing liabilities. If average interest-earning assets exceed
average interest-bearing liabilities, net interest margin is greater than
spread, and if average interest-bearing liabilities exceed average
interest-earning assets, net interest margin is less than spread.
(10) Represents the ratio of non-interest expense, to the sum of net interest
income, dividends and non-interest income.
(11) Represents the ratio of non-interest expense to average total assets.
(12) ICICI Bank's capital adequacy is computed in accordance with the Reserve
Bank of India guidelines and is based on unconsolidated financial
statements prepared in accordance with Indian GAAP. At year-end fiscal
2003, on this basis ICICI Bank's total capital adequacy ratio was 11.10%
with Tier 1 capital adequacy ratio of 7.05% and Tier 2 capital adequacy
ratio of 4.05%. Capital adequacy reporting for ICICI as of year-end fiscal
2002 was not required as it ceased to exist for Indian GAAP reporting
purposes, as ICICI Bank was the accounting acquirer in Indian GAAP.
103
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial
condition and results of operations together with our consolidated audited
financial statements. The following discussion is based on our audited financial
statements and accompanying notes, which have been prepared in accordance with
US GAAP.
Introduction
Our loan portfolio, financial condition and results of operations have
been, and in the future, are expected to be influenced by economic conditions,
particularly industrial growth, in India and certain global developments,
particularly in commodity prices relating to the business activities of our
corporate customers. For ease of understanding the discussion of our results of
operations that follows, you should consider the introductory discussion of
these macroeconomic factors. In addition, for a meaningful comparison of our
results of operations for these years, you should also consider the amalgamation
and effect of other acquisitions.
Indian Economy
Overall GDP growth in the Indian economy has been in the range of 4.0-6.0%
in the last three years. In fiscal 2001, GDP grew at the rate of 4.4%, while the
preliminary estimate of 5.4% GDP growth in fiscal 2002 was later revised upwards
to 5.6%. The latest available revised estimates have pegged the growth rate for
fiscal 2003 at 4.3%. In fiscal 2003, the slowdown in growth was primarily caused
by a decline in the growth of agriculture because of insufficient rainfall and
resulting drought conditions prevailing in the country. Agricultural growth,
which had risen by 5.7% in fiscal 2002 declined by 3.2% in fiscal 2003. The
agricultural sector declined by 0.4% in fiscal 2001. The industrial sector grew
by 5.7% in fiscal 2003 after low growth of 3.2% in fiscal 2002. The industrial
sector grew by 6.5% in fiscal 2001. Industrial growth in fiscal 2003 was
supported primarily by growth in construction and manufacturing activities.
Growth between fiscal 1998 and 1999 was affected by a slowdown in the global
economy stemming from the economic crisis in Asia, Russia and elsewhere.
The average annual rate of inflation measured by the Wholesale Price Index
declined to 3.4% in fiscal 2003 from 3.6% in fiscal 2002. Fuel price inflation
declined to 5.5% in fiscal 2003 from 8.9% in fiscal 2002. The high level of
foreign exchange reserves and the volume of food stocks cushioned the
inflationary impact of insufficient rainfall and drought conditions. The US-led
coalition's war in Iraq also did not significantly impact the inflationary
process because of the relatively short duration of the war. Conditions,
however, still remain unsettled in the Middle East where most of the world's oil
production facilities are located and continuing tensions or hostilities could
lead to increases in oil prices or higher volatility in oil prices.
The Indian rupee remained relatively stable vis-a-vis the US dollar during
fiscal 2003, strengthening marginally from Rs. 48.83 per US$ 1.00 at year-end
fiscal 2002 to Rs. 47.53 per US$ 1.00 at year-end fiscal 2003. The rupee,
however, depreciated against the pound sterling, euro and yen primarily because
of the weakening of the US dollar against these currencies. Foreign exchange
reserves were US$ 87.4 billion at September 5, 2003.
The overall growth in industry, agriculture and services during fiscal 2004
will affect the performance of the banking sector as it will affect the level of
credit disbursed by banks, and the overall growth prospects of our business,
including our ability to grow, the quality of our assets and our ability to
implement our strategy.
104
Regional Hostilities and Terrorist Attacks
India has from time to time experienced social and civil unrest and
hostilities both internally and with neighboring countries. In recent years,
there have been military confrontations between India and Pakistan in the
Kashmir region and present relations between India and Pakistan continue to be
tense on the issues of terrorism, armament and Kashmir. India has also
experienced terrorist attacks in some parts of the country. These hostilities
and tensions could lead to political or economic instability in India and a
possible adverse effect on our business, its future financial performance and
the price of its equity shares and its ADSs. For example, the terrorist attacks
in the United States on September 11, 2001 and subsequent military action in
Afghanistan and Iraq affected the markets all over the world. The United States'
continuing battle against terrorism could lengthen these regional hostilities
and tensions. Further, India has also experienced social unrest in some parts of
the country. If such tensions occur in other parts of the country, leading to
overall political and economic instability it could have an adverse effect on
our business, our future financial performance and the price of our equity
shares and our ADSs.
Banking Sector
According to the Reserve Bank of India's data, total deposits of all
commercial banks increased by 18.4% in fiscal 2001, 15.5% in fiscal 2002 and
17.4% in fiscal 2003. In fiscal 2001, growth in bank deposits was high mainly as
a result of the India Millennium Deposits (approximately Rs. 256.6 billion)
raised by the State Bank of India to augment overall foreign exchange reserves
of the country. These bonds increased the level of deposits in fiscal 2001
because they were included in deposits. Excluding the India Millennium Deposits,
bank deposits would have risen by 15.2% in fiscal 2001. In fiscal 2002,
excluding the India Millennium Deposits outstanding at year-end fiscal 2001, the
growth in deposits was 15.0%. Growth in deposits in fiscal 2003 includes the
impact of the amalgamation, as some of ICICI's liabilities which were not
included in banking deposits at year-end fiscal 2002, were included at year-end
fiscal 2003. Bank credit grew by 17.3% in fiscal 2001, 15.8% in fiscal 2002 and
23.3% in fiscal 2003. Bank credit growth in fiscal 2003 was high mainly due to
the impact of the amalgamation, as ICICI's credit was included in total banking
system credit at year-end fiscal 2003 but not included at year-end fiscal 2002.
In the last five fiscal years, there has been a downward movement in
interest rates, barring intra-year periods when interest rates were higher
temporarily due to extraneous circumstances. This movement was principally due
to the Reserve Bank of India's policy of assuring adequate liquidity in the
banking system and generally lowering the rate at which it would lend to Indian
banks to ensure that corporate borrowers have access to funding at competitive
rates. The Reserve Bank of India's primary motive has been to realign interest
rates with the market to facilitate a smooth transition from a
government-controlled regime in the early 1990s, when interest rates were
heavily regulated, to a more market-oriented interest rate regime. Banks have
generally followed the direction of interest rates set by the Reserve Bank of
India and adjusted both their deposit rates and lending rates downwards. On July
21, 2000, the Reserve Bank of India reversed the downward movement of the last
four fiscal years and announced an increase in the bank rate of 100 basis
points. However, on February 16, 2001, the bank rate was reduced to 7.5% and
then reduced to 7.0% on March 7, 2001, thus reversing the upward movements
initiated earlier. In October 2002, it was further reduced to 6.5%. It was
further reduced to 6.0% in April 2003, the lowest since 1973. The Union Budget
also reduced the rate of interest on government small savings and provident fund
schemes by 100 basis points and the Reserve Bank of India subsequently reduced
the savings deposit rate and the repo rate. The following table sets forth the
decline in average deposit rates and average lending rates of five major public
sector banks for the last five years.
105
Average deposit rate Average prime
Fiscal year for over one year term (range) lending rate (range)
------------------------------------------- ------------------------------- ------------------------
(in percentages)
---------------------------------------------------------
1999 ...................................... 9.0-11.0 12.0-13.0
2000 ...................................... 8.0-10.5 12.0-12.5
2001 ...................................... 8.5-10.0 11.0-12.0
2002 ...................................... 8.0-8.5 11.0-12.0
2003 ...................................... 5.25-8.50 10.75-12.00
2004 (through August 15, 2003)............. 5.00-6.25 10.50-11.50
---------
Source: Reserve Bank of India: Handbook of Statistics on Indian Economy, 2002,
Annual Report 2002-2003 and Weekly Statistical Supplements.
Amalgamation
Following the approval of shareholders, the High Court of Gujarat at
Ahmedabad and the High Court of Judicature at Bombay, the Reserve Bank of India
approved the amalgamation of ICICI, ICICI Personal Financial Services and ICICI
Capital Services with and into ICICI Bank on April 26, 2002.
The Statement on Financial Accounting Standards No. 141 "Business
Combinations", issued by the Financial Accounting Standards Board, requires that
business combinations be accounted for in the period in which the combination is
consummated. Accordingly, under US GAAP, the amalgamation has been reflected in
the financial statements contained in this annual report for fiscal 2003, as it
was consummated in April 2002. The effective date of the amalgamation for
accounting purposes under US GAAP was April 1, 2002. Under US GAAP, the
amalgamation was accounted for as a reverse acquisition. This means that ICICI
was recognized as the accounting acquirer in the amalgamation, although ICICI
Bank was the legal acquirer and the surviving entity. Accordingly, the financial
data contained in this annual report for fiscal 2002 and prior years, except
where specifically stated otherwise, present the assets, liabilities and results
of operations of ICICI. The financial information for ICICI for fiscal 2002 and
2001 reflect results of ICICI Bank as an equity investment in accordance with
ICICI's ownership interest in ICICI Bank prior to the amalgamation. The
financial information for ICICI for fiscal 2000 and 1999 reflect results of
ICICI Bank as a consolidated entity. Following the amalgamation, the other
subsidiaries and affiliates of ICICI have become subsidiaries and affiliates of
ICICI Bank.
On the date of amalgamation, ICICI held 46% ownership interest in ICICI
Bank. Accordingly, the acquisition of the balance 54% ownership interest has
been accounted for as a step acquisition. Following the acquisition, the 46%
ownership interest held by ICICI in ICICI Bank was recorded as treasury stock at
its historical carrying value. In September 2002, the treasury stock was sold to
institutional investors for Rs. 13,154 million (US$ 277 million). The difference
between the sale proceeds and the carrying value, net of related tax effects of
Rs. 599 million (US$ 13 million), was recognized in the statement of
stockholders' equity as a capital transaction.
The total purchase price for the acquisition was Rs. 14.1 billion (US$ 296
million) including fair value of common stock issued on reverse acquisition of
Rs. 12.0 billion (US$ 252 million). Intangible assets of Rs. 5.5 billion (US$
116 million), relating to customer and deposit relationships, will be amortized
over a period of 10 years. Goodwill recognized in this transaction was Rs. 819
million (US$ 17 million).
Effect of Other Acquisitions
In fiscal 2003, ICICI Infotech, an entity consolidated in our US GAAP
financial statements, acquired the remaining 50.0% ownership interest in
Tricolor Infotech International Inc., Mauritius for a cash consideration of Rs.
110 million (US$ 2 million). The assets of Tricolor Infotech International Inc.
amounted to Rs. 35 million (US$ 726,603). The business combination was accounted
for by the
106
purchase method and accordingly the consolidated financial statements
since fiscal 2003 include the results of operations of Tricolor Infotech
International Inc. The business combination resulted in goodwill of Rs. 18
million (US$ 378,549) as the purchase price was more than the fair value of net
assets acquired.
In fiscal 2003, ICICI One Source, an entity consolidated in our US GAAP
financial statements, acquired a 100.0% ownership interest in Customer Asset
India Private Limited, a company engaged in the business of providing contact
center services through its offshore contact center at Bangalore, for cash
consideration aggregating Rs. 959 million (US$ 20 million). The business
combination was accounted for by the purchase method and accordingly our
consolidated financial statements for fiscal 2003 include the results of
operations of Customer Asset India Private Limited. The business combination
resulted in goodwill of Rs. 617 million (US$ 13 million) as the purchase price
was more than the fair value of net assets acquired.
During fiscal 2001, ICICI Infotech, acquired the following software
development and services companies based in the United States: Ivory
International Inc., Objects Xperts Inc. and Command Systems Inc. ICICI also
acquired Ajax Software Solutions, a software development company based in India.
The business combinations were accounted for under the purchase method and the
revenues and total assets of the acquired companies were immaterial to ICICI's
consolidated results of operations and financial position for fiscal 2001.
Effective April 1, 1998, ICICI acquired Anagram Finance Limited, a non-bank
finance company, principally to support its entry into the retail loan market.
The assets of Anagram Finance amounted to Rs. 9.6 billion (US$ 202 million),
approximately 2.0% of ICICI's total assets at year-end fiscal 1998. The business
combination was accounted for by the purchase method and accordingly the
consolidated financial statements since fiscal 1999 include the results of
operations of Anagram Finance. The business combination resulted in a goodwill
of Rs. 934 million (US$ 20 million), which was being amortized over a period of
five years. This resulted in an expense of Rs. 187 million (US$ 4 million) due
to amortization of goodwill in fiscal 1999, 2000 and 2001.
Effective April 1, 1997, ICICI acquired ITC Classic Finance Limited, a
non-bank finance company, principally to support its efforts in diversifying its
retail funding base. The assets of ITC Classic Finance amounted to Rs. 14.0
billion (US$ 287 million), approximately 3.7% of ICICI's total assets at
year-end fiscal 1997. The business combination was accounted for by the purchase
method and accordingly the consolidated financial statements since fiscal 1998
include the results of operations of ITC Classic Finance. The business
combination resulted in negative goodwill of Rs. 10 million (US$ 210,305) as the
purchase price was less than the fair value of the net assets acquired. The
negative goodwill was set-off against certain non-current, non-monetary assets.
Effective April 1, 1996, ICICI acquired SCICI Limited, a diversified
financial institution in which ICICI had an existing 19.9% equity interest.
ICICI acquired SCICI principally to benefit from the scale efficiencies of being
a larger entity. The assets of SCICI amounted to Rs. 50.4 billion (US$ 1.0
billion), approximately 16.8% of ICICI's total assets at year-end fiscal 1996.
The business combination was accounted for by the purchase method and
accordingly the consolidated financial statements since fiscal 1997 include the
results of operations of SCICI. The business combination resulted in negative
goodwill of Rs. 3.1 billion (US$ 65 million) as the purchase price was less than
the fair value of the net assets acquired. Of this amount, Rs. 600 million (US$
13 million) was set-off against certain property and equipment and an amount of
Rs. 253 million (US$ 5 million) was accrued to income in each of the years for
fiscal 1997 to fiscal 2001. In addition, in fiscal 1998, income of Rs. 242
million (US$ 5 million) was accrued from the sale of SCICI's headquarters
building in Mumbai.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which requires that business combinations involving
financial institutions within its scope, be accounted for under SFAS No. 141.
Previously, generally accepted accounting principles for acquisitions of
financial institutions provided for recognition of the excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an
107
unidentifiable intangible asset. Under SFAS No. 147, such excess is accounted
for as goodwill. Adoption of SFAS No. 147 resulted in a reclassification of a
previously recorded unidentifiable intangible asset of Rs. 373 million (US$ 8
million) to goodwill with effect from April 1, 2001. Further, as required by
SFAS No. 147, ICICI reversed the amortization expense of Rs. 290 million (US$ 6
million) and the related income tax benefit of Rs. 103 million (US$ 2 million),
by restating the results for fiscal 2002.
ICICI adopted SFAS No. 142 on April 1, 2001, which resulted in
reclassification of existing goodwill and intangible assets. In fiscal 2002,
ICICI recorded goodwill of Rs. 354 million (US$ 7 million) relating to
acquisitions of certain software services companies of which goodwill of Rs. 70
million (US$ 1 million) had been recorded pending final allocation as of March
31, 2002. The revenues and total assets of the acquired companies were
immaterial to the consolidated results of operations and financial position of
ICICI. Substantially all goodwill at year-end fiscal 2002, related to the
software development and services reporting unit of ICICI. No goodwill
impairment loss had been recorded during fiscal 2002 and 2003. In June 2001, the
FASB issued SFAS No. 141, which requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. SFAS No.
141 also specifies the criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocated to an assembled workforce may
not be accounted separately. As of April 1, 2001, ICICI had an unamortized
deferred credit of Rs. 1.3 billion (US$ 27 million) related to an excess of the
fair value of assets acquired over the cost of acquisition of SCICI. As required
by SFAS No. 141, in conjunction with the early adoption of SFAS No. 142, the
unamortized deferred credit as of April 1, 2001, has been written-off and
recognized as the effect of a change in accounting principle.
Deconsolidation of ICICI Bank for fiscal 2001 and 2002
ICICI's consolidated subsidiaries for and at year-end fiscal 2002 and
year-end fiscal 2001 did not include ICICI Bank . Effective March 10, 2001,
ICICI Bank acquired Bank of Madura, an old private sector bank in India, in an
all stock merger and, as a result, the ownership interest of ICICI was reduced
from 62.2% to 55.6%. In addition, during March 2001, ICICI reduced its interest
in ICICI Bank to 46% through sales of equity shares in the Indian secondary
markets to institutional investors. This was in line with the Reserve Bank of
India's directive that ICICI reduce its interest in ICICI Bank to not more than
40% over a period of time. As a result of the foregoing, ICICI Bank ceased to be
one of ICICI's subsidiaries as of March 22, 2001 and was accounted for under the
equity method of accounting from April 1, 2000, the beginning of the fiscal year
in which ICICI's majority ownership interest in ICICI Bank was deemed to be
temporary. ICICI Bank continued to be reported on a consolidated basis for the
years ended March 31, 1999 and 2000. As a result, ICICI's financial statements
for fiscal 2002 and 2001 are not strictly comparable with those for fiscal 2000
and 1999.
Change in accounting basis for insurance subsidiaries
The consolidation of ICICI's majority ownership interest in the two
insurance companies, ICICI Prudential Life Insurance Company and ICICI Lombard
General Insurance Company, incorporated in each of fiscal 2001 and 2002 has now
been deemed inappropriate because of substantive participative rights retained
by the minority shareholders. Accordingly, such investees are no longer
consolidated but are accounted for by the equity method. Prior period financial
statements have been restated and as a result, the financial statements for
fiscal 2001 and 2002 contained in this annual report are not the same as those
contained in our annual report for fiscal 2002. There is no resultant impact on
net income or stockholders' equity for fiscal 2001 and 2002.
Results of Operations
Consequent to the amalgamation, the businesses formerly conducted by ICICI
became subject for the first time to various regulations applicable to banks.
These include the prudential reserve and liquidity requirements, namely the
statutory liquidity ratio under Section 24 of the Indian Banking Regulation Act,
1949, and the cash reserve ratio under Section 42 of the Reserve Bank of India
Act,
108
1934. The statutory liquidity ratio is required to be maintained in the
form of government of India securities and other approved securities, while the
cash reserve ratio is required to be maintained in the form of cash balances
with the Reserve Bank of India. At present, the stipulated statutory liquidity
ratio is 25.0% of a bank's net demand and time liabilities in India and the
stipulated cash reserve ratio is 4.5% of a bank's net demand and time
liabilities in India. In addition to the above, the directed lending norms of
Reserve Bank of India require that every bank should extend 40.0% of net bank
credit to certain eligible sectors, which are categorized as "priority sectors".
Considering that the advances of ICICI were not subject to the requirement
applicable to banks in respect of priority sector lending, the Reserve Bank of
India directed us, following the amalgamation to maintain an additional 10.0%
over and above the requirement of 40.0%, i.e., a total of 50.0% of our net bank
credit on the residual portion of our advances (our total advances less
outstanding advances of ICICI at year-end fiscal 2002). Priority sectors are
specific sectors such as agriculture and small-scale industries. This additional
10.0% priority sector lending requirement will apply until such time as our
aggregate priority sector advances reach a level of 40.0% of our total net bank
credit. The Reserve Bank of India's existing instructions on sub-targets under
priority sector lending and eligibility of certain types of investments and
funds for reckoning as priority sector advances also apply to us. See
"Supervision and Regulation - Directed Lending - Priority Sector Lending" and
"Business - Loan Portfolio - Directed Lending - Priority Sector Lending".
Following the announcement of the amalgamation in October 2001, ICICI
directed all its resources towards meeting the reserve requirements on its
outstanding liabilities following the amalgamation. A large cash balance was
maintained by ICICI towards the end of fiscal 2002 in order to meet the cash
reserve requirement on its outstanding liabilities following the amalgamation.
ICICI restricted its loan disbursements and also securitized and sold down its
loans in the second half of fiscal 2002 to raise additional resources. As a
result, ICICI's net loans decreased 13.0% to Rs. 523.6 billion (US$ 11.0
billion) at year-end fiscal 2002 from Rs. 602.0 billion (US$ 12.7 billion) at
year-end fiscal 2001.
Consequent to the amalgamation, while we have benefited from our lower cost
of funding as a bank compared to ICICI as a non-bank financial institution, the
requirement to maintain statutory liquidity ratio and cash reserve ratio on
historic liabilities of ICICI has adversely impacted our spread. Maintenance of
the statutory liquidity ratio and cash reserve ratio has resulted in large
investment in government securities and cash balances with the Reserve Bank of
India, both of which earn low yields compared to loan assets.
Summary Fiscal 2003 to Fiscal 2002
Loss (before cumulative effect of accounting changes, net of tax) amounted
to Rs. 8.0 billion (US$ 168 million) in fiscal 2003 compared to income (before
cumulative effect of accounting changes, net of tax) of Rs. 282 million (US$ 6
million) in fiscal 2002 primarily due to the large increase in provisions for
loan losses, which increased by 102.1% or by Rs. 9.9 billion (US$ 208 million)
to Rs. 19.6 billion (US$ 413 million) in fiscal 2003 from Rs. 9.7 billion (US$
205 million) in fiscal 2002. Increases in net interest income and non-interest
income were offset by the increase in non-interest expenses. After considering
the cumulative effect of accounting changes, net loss amounted to Rs. 8.0
billion (US$ 168 million) in fiscal 2003 compared to net income of Rs. 1.5
billion (US$ 33 million) in fiscal 2002. We made a loss on average assets of
0.70% for fiscal 2003 compared to net income on average assets of 0.21% for
fiscal 2002 and loss on average stockholders' equity of 8.47% for fiscal 2003
compared to net income on average stockholders' equity of 2.05% for fiscal 2002.
o Net interest income (excluding dividends) before provisions for loan losses
increased 59.7% to Rs. 14.5 billion (US$ 305 million) in fiscal 2003 from
Rs. 9.1 billion (US$ 191 million) in fiscal 2002 reflecting mainly the
following factors:
- an increase of Rs. 282.7 billion (US$ 5.9 billion) or 50.4% in the
average volume of interest-earning rupee assets;
109
- an increase of Rs. 688 million (US$ 14 million) or 0.86% in the
average volume of interest-earning foreign currency assets;
- an increase in rupee spread to 1.24% in fiscal 2003 from 0.72% in
fiscal 2002; and
- an increase in foreign currency spread to 1.84% in fiscal 2003 from
0.84% in fiscal 2002.
o The average volume of interest-earning rupee assets increased by Rs. 282.7
billion (US$ 5.9 billion) during fiscal 2003 primarily due to the increase
in investment in government securities by Rs. 228.1 billion (US$ 4.8
billion) as we were required to maintain the statutory liquidity ratio on
ICICI's liabilities, which were not subject to this requirement prior to
the amalgamation.
o The spread increased by 45 basis points to 1.38% in fiscal 2003 from 0.93%
in fiscal 2002 and net interest margin also increased to 1.57% in fiscal
2003 from 1.42% in fiscal 2002.
o Non-interest income increased by 62.7% in fiscal 2003 to Rs. 13.3
billion (US$ 278 million), from Rs. 8.1 billion (US$ 171 million) in fiscal
2002, primarily due to a decrease in loss from security transactions by Rs
3.3 billion (US$ 68 million), increase in fee income, commission and
brokerage by Rs. 1.0 billion (US$ 21 million) and gains from sale of loans
and credit substitutes by Rs. 816 million (US$ 17 million).
o Non-interest expense increased 145.0% in fiscal 2003 to Rs. 18.6 billion
(US$ 390 million) from Rs. 7.6 billion (US$ 160 million) in fiscal 2002
primarily due to the amalgamation and an increase in employee expenses and
other administrative costs, mainly due to the growth in retail products and
services.
o Provisions for loan losses increased to Rs. 19.6 billion (US$ 413 million)
during fiscal 2003 from Rs. 9.7 billion (US$ 205 million) in fiscal 2002
reflecting an increase in gross restructured and other impaired loans by
Rs. 84.7 billion (US$ 1.8 billion) in fiscal 2003 compared to Rs. 60.4
billion (US$ 1.3 billion) in fiscal 2002. Provisions for loan losses as a
percentage of net loans increased to 3.12% in fiscal 2003 from 1.86% in
fiscal 2002.
o Gross restructured loans increased 55.0% to Rs. 147.4 billion (US$ 3.1
billion) at year-end fiscal 2003 from Rs. 95.1 billion (US$ 2.0 billion) at
year-end fiscal 2002, primarily due to an increase in restructuring of
loans to companies in the iron and steel, cement and electronics
industries. Gross other impaired loans increased 63.8% to Rs.83.2 billion
(US$ 1.7 billion) at year-end fiscal 2003 from Rs. 50.7 billion (US$ 1.1
billion) at year-end fiscal 2002, primarily due to an increase in respect
of borrowers in the power, metal products and fertilizer and pesticides
industries. As a percentage of net loans, net restructured loans were 19.5%
at year-end fiscal 2003 compared to 14.8% at year-end fiscal 2002 and net
other impaired loans were 8.8% at year-end fiscal 2003 compared to 6.3% in
year-end fiscal 2002.
o Total assets increased by 58.8% to Rs. 1,180.3 billion (US$ 24.8 billion)
at year-end fiscal 2003 from Rs. 743.4 billion (US$ 15.6 billion) at
year-end fiscal 2002. Net loans increased 20.4% to Rs. 630.4 billion (US$
13.3 billion) at year-end fiscal 2003 from Rs. 523.6 billion (US$ 11.0
billion) at year-end fiscal 2002.
Summary Fiscal 2002 to Fiscal 2001
Income (before cumulative effect of accounting changes, net of tax)
declined to Rs. 282 million (US$ 6 million) in fiscal 2002 compared to Rs. 6.6
billion (US$ 139 million) in fiscal 2001 primarily due to lower net interest
income, lower fees, commissions and brokerage and higher non-interest expense.
Net income after cumulative effect of accounting changes declined to Rs. 1.5
billion (US$ 33 million) in fiscal 2002 compared to Rs. 6.6 billion (US$ 139
million) in fiscal 2001. As a result, the return on average assets for fiscal
2002 declined to 0.21% compared to 0.94% in fiscal 2001 and
110
the return on average stockholders' equity declined to 2.05% in fiscal 2002
compared to 8.84% in fiscal 2001.
o Net interest income (excluding dividends) before provisions for loan losses
decreased 23.5% to Rs. 9.1 billion (US$ 191 million) in fiscal 2002 from
Rs. 11.9 billion (US$ 260 million) in fiscal 2001, with an increase of Rs.
38.7 billion (US$ 813 million) or 7.4% in the average volume of
interest-earning rupee assets being offset mainly by the following factors:
- a decrease of Rs. 12.7 billion (US$ 267 million) or 13.7% in the
average volume of interest-earning foreign currency assets;
- a decrease in rupee spread to 0.72% in fiscal 2002 from 0.89% in
fiscal 2001; and
- a decrease in foreign currency spread to 0.84% in fiscal 2002 from
2.19% in fiscal 2001.
o The spread declined by 26 basis points to 0.93% in fiscal 2002 from 1.19%
in fiscal 2001 and net interest margin also decreased to 1.42% in fiscal
2002 from 1.93% in fiscal 2001.
o Gross restructured loans increased by 117.7% to Rs. 95.1 billion (US$ 2.0
billion) at year-end fiscal 2002 from Rs. 43.7 billion (US$ 919 million) at
year-end fiscal 2001, primarily due to an increase in restructuring of
loans to companies in the textiles, transport equipment and iron and steel
industries. Also, loans previously categorized as other impaired loans
amounting to Rs. 12.5 billion (US$ 263 million) were restructured during
fiscal 2002 and were re-classified as restructured loans at year-end fiscal
2002. Gross other impaired loans increased 21.6% to Rs. 50.8 billion (US$
1.0 billion) at year-end fiscal 2002 from Rs. 42.0 billion (US$ 878
million) at year-end fiscal 2001. As a percentage of net loans, net
restructured loans were 14.8% at year-end fiscal 2002 compared to 5.4% at
year-end fiscal 2001 and net other impaired loans were 6.3% at year-end
fiscal 2002 compared to 3.3% in year-end fiscal 2001.
o Non-interest income declined by 11.9% in fiscal 2002 to Rs. 8.1
billion (US$ 171 million), from Rs. 9.2 billion (US$ 194 million) in fiscal
2001. Though there was a significant increase in trading account revenue,
gain on sale of loans and income from software development and services in
fiscal 2002, this was offset by a decline in gain on sale of stock of
subsidiaries and affiliates, an other than temporary diminution on
securities portfolio and a decline in fees, commission and brokerage. In
fiscal 2001, non-interest income included a gain on the sale of ICICI's
equity interest in ICICI Bank of Rs. 2.0 billion (US$ 42 million) and in
ICICI Infotech of Rs. 511 million (US$ 11 million).
o Non-interest expense increased 38.6% in fiscal 2002 to Rs. 7.6 billion (US$
160 million) from Rs. 5.5 billion (US$ 115 million) in fiscal 2001
primarily due to an increase in employee expenses and other administrative
costs for ICICI Infotech, and other administrative costs.
o Provisions for loan losses decreased 2.0% to Rs. 9.7 billion (US$ 205
million) during fiscal 2002 from Rs. 9.9 billion (US$ 208 million) in
fiscal 2001 and reflected a result of management's estimation of the
recoverability of restructured and other impaired loans. ICICI believed
that several loans, which became restructured loans in fiscal 2002, were
essentially to inherently viable projects, which resulted in lower
impairment losses during fiscal 2002. Provisions for loan losses in fiscal
2002 included Rs. 1.4 billion (US$ 29 million) of unallocated provisions on
loans not specifically identified as restructured or other impaired loans,
which were based on ICICI's estimate of the probable losses inherent in
that portfolio. Provisions for loan losses as a percentage of net loans
increased to 1.86% in fiscal 2002 from 1.64% in fiscal 2001.
o Total assets increased marginally by 0.5% to Rs. 743.4 billion (US$ 15.6
billion) at year-end fiscal 2002 from Rs. 739.9 billion (US$ 15.6 billion)
at year-end fiscal 2001. Net loans decreased 13.0% to Rs. 523.6 billion
(US$ 11.0 billion) at year-end fiscal 2002 from Rs. 602.0 billion (US$ 12.7
billion) at year-end fiscal 2001.
111
Average Balance Sheet
For fiscal 2002 and 2003, the average balances are the average of quarterly
balances outstanding at the end of March of the previous fiscal year, June,
September, December and March of that fiscal year. For fiscal 2001, the average
balances are the average of quarterly balances outstanding at the end of June,
September, December and March. The amortized portion of loan origination fees
(net of loan origination costs) was included in interest income on loans,
representing an adjustment to the yield. The average yield on average
interest-earning assets is the ratio of interest income to average
interest-earning assets. The average cost on average interest-bearing
liabilities is the ratio of interest expense to average interest-bearing
liabilities. The average balances of loans include impaired loans and are net of
allowance for loan losses that have been allocated on a pro-rata basis to rupee
loans and foreign currency loans, based on the proportion of impaired rupee
loans and impaired foreign currency loans. We did not recalculate tax-exempt
income on a tax-equivalent basis because we believed that the effect of doing so
would not be significant. Total interest income also includes other interest
income which is primarily interest on refund of income tax.
The following table sets forth, for the periods indicated, the
average balances of the assets and liabilities outstanding, which are major
components of interest income, interest expense and net interest income. The
average balances of loans include impaired loans and are net of allowance for
loan losses.
Year ended March 31,
------------------------------------------------------------------------------------------------
2001 2002 2003
------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense cost balance expense cost balance expense cost
------------------------------------------------------------------------------------------------
(in millions, except percentages)
Assets:
Cash, cash equivalents and
Trading assets:
Rupee.................. Rs.29,774 Rs.3,262 10.96% Rs.28,592 Rs.1,883 6.59% Rs.58,204 Rs.3,937 6.76%
Foreign currency ...... 13,136 567 4.32 9,422 200 2.12 15,712 195 1.24
---------------------- ---------------------- -----------------------
Total cash, cash equivalents
and Trading assets...... 42,910 3,829 8.92 38,015 2,083 5.48 73,916 4,132 5.59
Securities--debt:
Rupee ................. 1,265 154 12.17 11,728 1,180 10.06 244,161 16,633 6.81
Foreign currency ...... - - - - - - - - -
---------------------- ---------------------- -----------------------
Total securities--debt .... 1,265 154 12.17 11,728 1,180 10.06 244,161 16,633 6.81
Loans, net:
Rupee ................. 491,792 67,494 13.72 521,169 69,725 13.38 541,868 70,917 13.09
Foreign currency ...... 79,197 7,778 9.82 70,230 5,512 7.85 64,628 4,163 6.44
---------------------- ---------------------- -----------------------
Total loans, net .........
570,989 75,272 13.18 591,399 75,237 12.72 606,496 75,080 12.38
Other interest income .... - 504 - - 100 - - 1,869 -
Interest-earning assets:
Rupee ................. 522,831 71,414 13.66 561,489 72,889 12.98 844,233 93,356 11.06
Foreign currency ...... 92,333 8,345 9.04 79,652 5,711 7.17 80,340 4,358 5.42
---------------------- ---------------------- -----------------------
Total interest-earning
assets ................. 615,164 79,759 12.97 641,141 78,600 12.26 924,573 97,714 10.57
Securities--equity:
Rupee ................. 25,239 345 1.37 31,434 267 0.85 29,379 389 1.32
Foreign currency ...... - - - - - - - - -
---------------------- ---------------------- -----------------------
Total securities--equity.. 25,239 345 1.37 31,434 267 0.85 29,379 389 1.32
Earning assets:
Rupee ................. 548,069 71,759 13.09 592,922 73,156 12.34 873,613 93,745 10.73
Foreign currency ...... 92,333 8,345 9.04 79,652 5,711 7.17 80,340 4,358 5.42
---------------------- ---------------------- -----------------------
Total earning assets ..... 640,402 80,104 12.51 672,575 78,867 11.73 953,953 98,103 10.28
112
Cash and cash equivalents. 3,959 - 6,720 - 45,585 -
Acceptances .............. 4,048 - 3,552 - 26,496 -
Property and equipment ... 11,531 - 13,375 - 18,826 -
Other assets ............. 46,403 - 50,109 - 87,778 -
---------------------- ---------------------- -----------------------
Total non-earning
assets.. 65,941 - 73,755 - 178,685 -
---------------------- ---------------------- -----------------------
Total assets ............. Rs.706,344 Rs.80,104 Rs.746,330 Rs.78,867 Rs.1,132,638 Rs.98,103
====================== ====================== =======================
Year ended March 31,
------------------------------------------------------------------------------------------------
2001 2002 2003
------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense cost balance expense cost balance expense cost
------------------------------------------------------------------------------------------------
(in millions, except percentages)
Liabilities:
Savings account deposits:
Rupee .................... Rs. - Rs. - -% Rs. - Rs. - -% Rs. 30,828 914 2.96%
Foreign currency ......... - - - - - - 46 - 0.67
---------------------- ---------------------- ------------------------
Total savings account
deposits ............... - - - - - - 30,874 914 2.96
Time deposits:
Rupee .................. 3,682 490 13.30 6,618 744 11.24 315688 24688 7.82
Foreign currency ....... 0 0 - 0 0 - 11456 431 3.76
---------------------- ---------------------- ------------------------
Total time deposits ....... 3,682 490 13.30 6,618 744 11.24 327,144 25,119 7.68
Long-term debt:
Rupee .................. 373,604 50,337 13.47 424,745 54,387 12.80 390,602 45,661 11.69
Foreign currency ....... 89,313 6,249 7.00 79,358 5,337 6.72 64,745 2,420 3.74
---------------------- ---------------------- ------------------------
Total long-term debt ...... 462,916 56,586 12.22 504,103 59,724 11.85 455,347 48,081 10.56
Redeemable preferred stock. 2,321 244 10.52 735 74 10.07 813 82 10.09
Trading account and other
liabilities:
Rupee................... 100,569 10,230 10.17 85,057 8,217 9.66 75,983 8,590 11.31
Foreign currency........ 6986 343 4.91 16,888 761 4.50 15,065 423 2.81
---------------------- ---------------------- ------------------------
Total trading account and
other liabilities ....... 107,555 10,573 9.83 101,945 8,978 8.81 91,048 9,013 9.90
Interest-bearing
liabilities:
Rupee .................. 480,176 61,301 12.77 517,155 63,423 12.26 813,913 79,935 9.82
Foreign currency ....... 96,299 6,592 6.84 96,246 6,097 6.34 91,313 3,274 3.59
----------------------------------------------------- ------------------------
Total interest-bearing
liabilities.............. 576,475 67,893 11.78 613,401 69,520 11.33 905,226 83,209 9.19
Non-interest-bearing
deposits:
Rupee .................. - - - - 31,172 -
Foreign currency ....... - - - - - -
---------------------- ---------------------- ------------------------
Total non-interest-bearing
deposits ................ - - - - 31,172 -
Other liabilities ......... 54,850 - 57,349 - 133,151 -
---------------------- ---------------------- ------------------------
Total non-interest-bearing
liabilities ............. 54,850 - 57,349 - 164,323 -
---------------------- ---------------------- ------------------------
Total liabilities ......... Rs. 631,324 Rs.67,893 Rs.670,750 Rs. 69,520 Rs. 1,038,377 Rs.83,209
====================== ---------------------- ------------------------
Stockholders' equity....... Rs. 75,019 - Rs. 75,580 - Rs. 94,261 -
---------------------- ---------------------- ------------------------
Total liabilities and
stockholders' equity .... Rs. 706,343 Rs.67,893 Rs.746,330 Rs. 69,520 Rs.1,132,638 Rs.83,209
====================== ====================== ========================
Analysis of Changes in Interest Income and Interest Expense Volume and Rate
Analysis
The following table sets forth, for the periods indicated, the changes in
the components of net interest income. The changes in net interest income
between periods have been reflected as attributed either to volume or rate
changes. For the purpose of this table, changes, which are due to both volume
and rate, have been allocated solely to volume.
113
Fiscal 2002 vs. Fiscal 2001 Fiscal 2003 vs. Fiscal 2002
------------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------------------------------------------------------
Net change Change in Change in Net change Change in Change in
average average average average
volume rate volume rate
------------------------------------------------------------------------------
Interest income: (in millions)
Cash, cash equivalents and trading assets:
Rupee .................................. Rs. (1,379) Rs. (78) Rs. (1,301) Rs. 2,054 Rs. 2,003 Rs. 51
Foreign currency ....................... (368) (79) (289) (5) 78 (83)
------------------------------------------------------------------------------
Total cash, cash equivalents and trading
assets..................................... (1,747) (157) (1,590) 2,049 2,081 (32)
Securities:
Rupee .................................. 1,026 1,053 (27) 15,453 15,834 (381)
Foreign currency ....................... - - - - - -
------------------------------------------------------------------------------
Total securities .......................... 1,026 1,053 (27) 15,453 15,834 (381)
Loans:
Rupee .................................. 2,231 3,930 (1,699) 1,192 2,709 (1,517)
Foreign currency ....................... (2,266) (704) (1,562) (1,349) (361) (988)
------------------------------------------------------------------------------
Total loans ............................... (35) 3,226 (3,261) (157) 2,348 (2,505)
Other interest income ..................... (404) (404) - 1,769 1,769 -
------------------------------------------------------------------------------
Total interest income:
Rupee .................................. 1,474 4,501 (3,027) 20,468 22,315 (1,848)
Foreign currency ....................... (2,634) (783) (1,851) (1,354) (283) (1,071)
------------------------------------------------------------------------------
Total interest income ..................... Rs. (1,160) Rs. 3,718 Rs. (4,878) Rs. 19,114 Rs. 22,032 Rs. (2,919)
Interest expense:
Savings account deposits:
Rupee .................................. - - - Rs. 914 Rs. 914 -
Foreign currency ....................... - - - 0.31 0.31 -
------------------------------------------------------------------------------
Total savings account deposits ........... Rs. - Rs. - Rs. - Rs. 914 Rs. 914 Rs. -
Time deposits:
Rupee .................................. 254 330 (76) 23,944 24,171 (226)
Foreign currency ....................... - - - 431 431 -
------------------------------------------------------------------------------
Total time deposits ....................... 254 330 (76) 24,375 24,601 (226)
Long-term debt:
Rupee .................................. 4,050 6,549 (2,499) (8,726) (3,991) (4,735)
Foreign currency ....................... (912) (669) (242) (2,917) (546) (2,371)
------------------------------------------------------------------------------
Total long-term debt ...................... 3,138 5,879 (2,741) (11,643) (4,537) (7,106)
Redeemable preferred stock(1) ............. (170) (160) (10) 8 8 -
Trading account and other liabilities:
Rupee .................................. (2,013) (1,499) (514) 373 (1,026) 1,399
Foreign currency ....................... 418 446 (28) (338) (51) (287)
------------------------------------------------------------------------------
Total trading account and other liabilities (1,595) (1,053) (542) 35 (1,077) 1,112
Total interest expense:
Rupee .................................. 2,121 5,221 (3,099) 16,513 20,075 (3,562)
Foreign currency ....................... (494) (223) (270) (2,824) (166) (2,658)
Total interest expense .................... Rs. 1,627 Rs. 4,997 Rs. (3,369) Rs. 13,689 Rs. 19,909 Rs. (6,220)
==============================================================================
Net interest income:
Rupee .................................. (647) (719) 72 3,955 2,240 1,715
Foreign currency ....................... (2,140) (560) (1,581) 1,470 (117) 1,587
==============================================================================
Total net interest income ................. Rs. (2,787) Rs.(1,279) Rs. (1,509) Rs. 5,425 Rs. 2,123 Rs. 3,301
==============================================================================
----------------------
(1) Banks in India are not allowed to issue preferred stock. However, we have
been currently exempted from the restriction.
114
Yields, Spreads and Margins
The following table sets forth, for the periods indicated, the yields,
spreads and net interest margins on interest-earning assets.
Year ended March 31,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
-----------------------------------------------------------------
( in millions, except percentages)
Interest income......................... Rs. 70,293 Rs. 79,296 Rs. 79,759 Rs. 78,600 Rs.97,714
Average interest-earning assets......... 500,966 612,452 615,164 641,141 924,573
Interest expense........................ 58,043 67,492 67,893 69,520 83,209
Average interest-bearing liabilities.... 483,636 583,609 576,474 613,401 905,226
Average total assets.................... 574,198 706,066 706,343 746,330 1,132,638
Average interest-earning assets as a
percentage of average total assets.... 87.25% 86.74% 87.09% 85.91% 81.63%
Average interest-bearing liabilities as a
percentage of average total assets.... 84.23 82.66 81.61 82.19 79.92
Average interest-earning assets as a
percentage of average interest-bearing
liabilities........................... 103.58 104.94 106.71 104.52 102.14
Yield................................... 14.03 12.95 12.97 12.26 10.57
Rupee................................ 15.67 14.20 13.66 12.98 11.06
Foreign currency..................... 8.63 7.57 9.04 7.17 5.42
Cost of funds........................... 12.00 11.56 11.78 11.33 9.19
Rupee................................ 13.64 12.77 12.77 12.26 9.82
Foreign currency..................... 6.07 5.66 6.84 6.34 3.59
Spread (1).............................. 2.03 1.38 1.19 0.93 1.38
Rupee................................ 2.03 1.42 0.89 0.72 1.24
Foreign currency..................... 2.55 1.91 2.19 0.84 1.84
Net Interest margin(2).................. 2.44 1.93 1.93 1.42 1.57
Rupee................................ 2.23 1.75 1.93 1.69 1.59
Foreign currency..................... 3.16 2.70 1.90 -0.48 1.35
___________________
(1) Spread is the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest income to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(2) Net interest margin is the ratio of net interest income to average
interest-earning assets. The difference in net interest margin and spread
arises due to the difference in amount of average interest-earning assets
and average interest-bearing liabilities. If average interest-earning
assets exceed average interest-bearing liabilities, net interest margin is
greater than the spread and if average interest-bearing liabilities exceed
average interest-earning assets, net interest margin is less than the
spread.
Net Interest Income
The following table sets forth, for the periods indicated, the principal
components of net interest income, excluding income from dividends.
115
Year ended March 31,
------------------------------------------------------------------------
2001 2002 2002/2001 2003 2003 2003/2002
% Change % Change
------------------------------------------------------------------------
(in millions, except percentages)
Interest income ............... Rs. 79,759 Rs. 78,600 (1.5)% Rs. 97,714 US$ 2,055 24.3%
Interest expense .............. (67,893) (69,520) 2.4% (83,208) (1,750) 19.7%
----------------------- -----------------------
Net interest income, excluding
income from dividends ...... Rs. 11,866 Rs. 9,080 (23.5)% Rs. 14,506 US$ 305 59.7%
======================= =======================
Fiscal 2003 compared to Fiscal 2002
Net interest income increased 59.7% in fiscal 2003 compared to fiscal 2002
reflecting mainly the following:
o an increase of Rs. 282.7 billion (US$ 5.9 billion) or 50.3% in the average
volume of interest-earning rupee assets;
o an increase of Rs. 688 million (US$ 14 million) or 0.9% in the average
volume of interest-earning foreign currency assets;
o an increase in rupee spread to 1.24% in fiscal 2003 from 0.72% in fiscal
2002; and
o an increase in foreign currency spread to 1.84% in fiscal 2003 from 0.84%
in fiscal 2002.
The average volume of interest-earning rupee assets increased by Rs. 282.7
billion (US$ 5.9 billion) during fiscal 2003 primarily due to the increase in
investment in government securities by Rs. 228.1 billion (US$ 4.8 billion) as we
were required to maintain statutory liquidity ratio on ICICI's liabilities,
which were not subject to this requirement prior to the amalgamation.
ICICI Bank's average volume of loans was Rs. 85.4 billion (US$ 1.8 billion)
in fiscal 2002. Subsequent to the amalgamation, our average volume of loans
increased in fiscal 2003 to Rs. 606.5 billion (US$ 12.8 billion). The average
volume of rupee loans increased by Rs. 20.7 billion (US$ 435 million) or 4.0% to
Rs. 541.9 billion (US$ 11.4 billion) in fiscal 2003 from Rs. 521.2 billion (US$
11.0 billion) in fiscal 2002. This increase in average loans was principally due
to the addition of ICICI Bank's loans, subsequent to amalgamation, and increased
disbursements of retail finance loans, offset by securitization of loans and
repayments of existing loans. The average volume of foreign currency loans
decreased 8.0% to Rs. 64.6 billion (US$ 1.4 billion) in fiscal 2003 from Rs.
70.2 billion (US$ 1.5 billion) in fiscal 2002.
ICICI Bank's gross loans outstanding were Rs. 75.7 billion (US$ 1.6
billion) at year-end fiscal 2002. Subsequent to the amalgamation, our gross
loans increased 22.2% in fiscal 2003 to Rs. 684.6 billion (US$ 14.4 billion)
from ICICI's gross loans of Rs. 560.2 billion (US$ 11.8 billion) at year-end
fiscal 2002. Gross rupee loans at year-end fiscal 2003 increased 22.0% to Rs.
595.0 billion (US$ 12.5 billion) compared to Rs. 487.6 billion (US$ 10.3
billion) at year-end fiscal 2002 and gross foreign currency loans declined 23.4%
to Rs. 89.7 billion (US$ 1.9 billion) compared to Rs. 72.7 billion (US$ 1.5
billion) at year-end fiscal 2002. Gross retail finance loans at year-end fiscal
2003 increased 158.0% to Rs. 188.3 billion (US$ 4.0 billion) from Rs. 73.0
billion (US$ 1.5 billion) at year-end fiscal 2002. Our project finance and
working capital finance loans decreased 0.8% to Rs. 462.3 billion (US$ 9.7
billion) at year-end fiscal 2003 compared to Rs. 458.6 billion (US$ 9.6 billion)
at year-end fiscal 2002.
ICICI Bank's average volume of cash, cash equivalents and trading assets
was Rs. 48.9 billion (US$ 1.0 billion) in fiscal 2002. The average volume of
cash, cash equivalents and trading assets increased by 94.4% in fiscal 2003 to
Rs. 73.9 billion (US$ 1.6 billion) compared to fiscal 2002 primarily due to the
impact of amalgamation, and requirement of cash reserve ratio on ICICI's
liabilities effective April 2002. At year-end fiscal 2002, cash, cash
equivalents and trading assets of ICICI were Rs. 83.9 billion (US$ 1.8 billion)
and of ICICI Bank were Rs. 115.4 billion (US$ 2.4
116
billion). ICICI and ICICI Bank were maintaining a large amount of cash and
liquid balances at year-end fiscal 2002 to meet the reserve requirements on
ICICI's liabilities. Cash, cash equivalents and trading assets increased by
33.7% to Rs. 112.1 billion (US$ 2.4 billion) at year-end fiscal 2003 from Rs.
83.9 billion (US$ 1.8 billion) at year-end fiscal 2002, reflecting the addition
of ICICI Bank's cash, cash equivalents and trading assets offset, in part, by
utilization of the cash and liquid balances existing at the beginning of fiscal
2003 for investment in government securities to meet statutory liquidity ratio
requirement.
The spread increased by 45 basis points to 1.38% in fiscal 2003 from 0.93%
in fiscal 2003 as rupee spread increased by 52 basis points and foreign currency
spread increased by 100 basis points. Net interest margin increased by 15 basis
points to 1.57% in fiscal 2003 from 1.42% in fiscal 2002. This was primarily due
to the increase in spread as offset by a decrease in average interest-earning
assets as a percentage of average interest-bearing liabilities to 102.1% in
fiscal 2003 from 104.5% in fiscal 2002.
The yield on interest-earning rupee assets decreased 192 basis points to
11.06% in fiscal 2003 from 12.98% in fiscal 2002 principally due to the
significant increase in proportion of securities acquired primarily to meet the
statutory liquidity ratio requirement on ICICI's liabilities. Securities, which
earned a yield of 6.81% in fiscal 2003 increased to 26.4% as a proportion of
average interest-earning assets from 1.8% in fiscal 2002. The yield on loans
declined due to non-accrual of income on loans recognized as impaired during the
year and reduction in rates of interest on restructured loans, as well as a
general decline in interest rates in the economy. The non-accrual of income on
impaired loans was partly offset by interest income of Rs. 2.4 billion (US$ 50
million) which was recognized on impaired loans on a cash basis in fiscal 2003
compared to Rs. 3.3 billion (US$ 69 million) in fiscal 2002. ICICI Bank's
average volume of deposits was Rs. 194.8 billion (US$ 4.1 billion) in fiscal
2002 with an average cost of 7.0%, and ICICI Bank's deposits at year-end fiscal
2002 were Rs. 325.2 billion (US$ 6.8 billion). These existing deposits along
with new deposits raised during the year, being at a cost lower than ICICI's
borrowings, reduced our cost of liabilities. The average cost of rupee
liabilities decreased 244 basis points to 9.82% in fiscal 2003 from 12.26% in
fiscal 2002 primarily due to acquisition of low interest-bearing deposits of
ICICI Bank subsequent to amalgamation, increase in deposits and repayment of
higher cost rupee liabilities of ICICI in fiscal 2003 and a general decline in
interest rates in fiscal 2003. Average deposits, with a cost of 6.7% in fiscal
2003, constituted 43.0% of total interest-bearing liabilities compared to a
cost of 11.2% in fiscal 2002. While the average cost of long-term rupee debt
decreased to 11.7% from 12.8%, the average cost of short-term rupee borrowings
increased to 9.9% in fiscal 2003 from 8.8% in fiscal 2002. As the decline in
average cost was higher that the decline in yield, it resulted in an increase
in rupee spread by 52 basis points to 1.24% in fiscal 2003 from 0.72% in fiscal
2002.
Our foreign currency loans are primarily floating rate US dollar
LIBOR-linked loans. The yield on the company's interest-earning foreign currency
assets decreased 175 basis points to 5.42% in fiscal 2003 from 7.17% in fiscal
2002, principally due to a decrease in LIBOR during fiscal 2003. The average
cost of foreign currency liabilities decreased 275 basis points to 3.59% in
fiscal 2003 from 6.34% in fiscal 2002. The foreign currency spread increased 100
basis points to 1.84% in fiscal 2003 from 0.84% in fiscal 2002.
Fiscal 2002 compared to Fiscal 2001
Net interest income decreased 23.5% in fiscal 2002 compared to fiscal 2001
reflecting mainly the following:
o an increase of Rs. 38.7 billion (US$ 813 million) or 7.4% in the average
volume of interest-earning rupee assets, more than offset by
o a decrease of Rs. 12.7 billion (US$ 267 million) or 13.7% in the average
volume of interest-earning foreign currency assets;
o a decrease in rupee spread to 0.72% in fiscal 2002 from 0.89% in fiscal
2001; and
117
o a decrease in foreign currency spread to 0.84% in fiscal 2002 from 2.19% in
fiscal 2001.
The average volume of rupee loans increased by Rs. 29.4 billion (US$ 618
million) or 6.0% to Rs. 521.2 billion (US$ 11.0 billion) at year-end fiscal 2002
from Rs. 491.8 billion (US$ 10.3 billion) at year-end fiscal 2001. This increase
in average loans was principally due to increased disbursements of retail
finance loans in fiscal 2002. Gross retail finance loans at year-end fiscal 2002
increased 168.5% to Rs. 73.0 billion (US$ 1.5 billion) from Rs. 27.1 billion
(US$ 570 million) at year-end fiscal 2001. This increase in retail loans was
offset by securitization and sale of corporate loans in the second half of
fiscal 2002 to raise resources to meet reserve requirements on ICICI's
outstanding liabilities. As a result, project finance and working capital
finance loans decreased 18.2% to Rs. 458.6 billion (US$ 9.6 billion) at year-end
fiscal 2002 compared to Rs. 555.8 billion (US$ 11.7 billion) at year-end fiscal
2001. Gross rupee loans at year-end fiscal 2002 declined 11.2% to Rs. 487.6
billion (US$ 10 billion) compared to Rs. 548.8 billion (US$ 11.5 billion) at
year-end fiscal 2001 and gross foreign currency loans declined 15.7% to Rs. 72.7
billion (US$ 1.5 billion) compared to Rs. 86.2 billion (US$ 1.8 billion) at
year-end fiscal 2001. The average volume of foreign currency loans decreased to
Rs. 70.2 billion (US$ 1.5 billion) in fiscal 2002 from Rs. 79.2 billion (US$ 1.7
billion) in fiscal 2001.
Cash, cash equivalents and trading assets increased by 68.3% to Rs. 83.9
billion (US$ 1.8 billion) at year-end fiscal 2002 from Rs. 49.8 billion (US$ 1.0
billion) at year-end fiscal 2001 as ICICI maintained larger cash balances at
year-end fiscal 2002 to have resources to comply with the reserve requirements
on ICICI's liabilities following the amalgamation. The average volume of cash,
cash equivalents and trading assets declined 11.4% in fiscal 2002 to Rs. 38.0
billion (US$ 800 million) compared to fiscal 2001 as the average balance
considered was only the average of quarterly balances outstanding at the end of
March of the previous fiscal year and June, September, December and March of
fiscal 2002 and not an average of daily balances.
The spread declined by 26 basis points to 0.93% in fiscal 2002 from 1.19%
in fiscal 2001 as rupee spread decreased by 17 basis points and foreign currency
spread decreased by 135 basis points. Net interest margin decreased by 51 basis
points to 1.42% in fiscal 2002 from 1.93% in fiscal 2001. This was primarily due
to the decrease in spread and the average interest-earning assets as a
percentage of average interest-bearing liabilities to 104.5% in fiscal 2002 from
106.7% in fiscal 2001.
ICICI's foreign currency loans were primarily floating rate US dollar
LIBOR-linked loans. The yield on interest-earning foreign currency assets
decreased 187 basis points to 7.17% in fiscal 2002 from 9.04% in fiscal 2001,
principally due to a decrease in LIBOR during fiscal 2002. The average cost of
the ICICI's foreign currency liabilities decreased 50 basis points to 6.34% in
fiscal 2002 from 6.84% in fiscal 2001. The decrease in average cost of foreign
currency liabilities was significantly lower than the decrease in LIBOR during
fiscal 2002, since ICICI had swapped some of its foreign currency liabilities to
generate rupee funds for lending in rupees during fiscal 2001 and fiscal 2002.
The foreign currency interest expense included forward premium expenses paid on
forward contracts booked on ICICI's foreign currency borrowings. The amount of
foreign currency liabilities swapped into rupee funds was significantly higher
in fiscal 2002 compared to fiscal 2001, resulting in a higher expense of Rs. 1.7
billion (US$ 36 million) compared to Rs. 549 million (US$ 12 million) in fiscal
2001. This additional cost impacted the foreign currency spread by 120 basis
points. As a result of the foregoing, the foreign currency spread decreased 135
basis points to 0.84% in fiscal 2002 from 2.19% in fiscal 2001. The adverse
impact on the foreign currency net interest margin, which was negative for
fiscal 2002, was offset by the rupee yield (which was higher than the foreign
currency yield) earned on the rupee assets created out of the swapped foreign
currency liabilities.
In fiscal 2002, ICICI earned other interest income of Rs. 100 million (US$
2.1 million) compared to Rs. 504 million (US$ 11 million) in fiscal 2001. Other
interest income in fiscal 2001 included an amount of Rs. 470 million (US$ 10
million) of interest on income-tax refund, which was not there in fiscal 2002.
118
Provisions for Loan Losses
The following table set forth, at the dates indicated, certain information
regarding restructured and other impaired loans.
At March 31,
----------------------------------------------------------------------
2001 2002 2002/2001 2003 2003 2003/2002
% change % change
----------------------------------------------------------------------
(in millions, except percentages)
Gross restructured loans....................... Rs. 43,681 Rs. 95,088 117.7% Rs.147,391 US$ 3,100 55.0%
Allowance for loan losses on restructured loans (11,372) (17,722) 55.8 (24,732) (520) 39.6
------------------------ -----------------------
Net restructured loans......................... 32,309 77,366 139.5 122,659 2,580 58.5
------------------------ -----------------------
Gross other impaired loans..................... 41,744 50,754 21.6 83,156 1,749 63.8
Allowance for loan losses on other
impaired loans............................... (21,663) (17,567) (18.9) (27,837) (585) 58.5
------------------------ -----------------------
Net other impaired loans....................... 20,081 33,187 65.3 55,319 1,163 66.7
------------------------ -----------------------
Gross restructured and other impaired loans... 85,425 145,842 70.7 230,547 4,849 58.1
Allowance for loan losses(1)................... (33,035) (35,289) 6.8 (52,569) (1,106) 49.0
------------------------ -----------------------
Net restructured and other impaired loans...... 52,390 110,553 111.0 177,978 3,743 61.0
------------------------ -----------------------
Gross total loans.............................. 635,058 560,248 (11.8) 684,640 14,398 22.2
Net total loans................................ 602,023 523,601 (13.0) 630,421 13,258 20.4
Gross restructured loans as a percentage
of gross loans............................... 6.88% 16.97% 21.53%
Gross other impaired loans as a percentage
of gross loans............................... 6.57 9.06 12.15
Net restructured loans as a percentage
of net loans................................. 5.37 14.78 19.46
Net other impaired loans as a percentage
of net loans................................. 3.34 6.34 8.77
Allowance for loans losses on restructured
loans as a percentage of gross restructured
loans........................................ 26.03 18.64 16.78
Allowance for loan losses on other impaired
loans as a percentage of gross other impaired
loans........................................ 51.89 34.61 33.48
Allowance on loan losses as a percentage
of gross loans............................... 5.20 6.54 7.92
-------------------
(1) Does not include provisions on loans not specifically identified as
restructured or other impaired loans.
The following table sets forth, for the periods indicated, certain
information regarding provisions for loan losses.
Year ended March 31,
-----------------------------------------------------------------------------
2001 2002 2002/2001 2003 2003 2003/2002
% change % change
-----------------------------------------------------------------------------
(in millions, except percentages)
-------------------------- ------------------------
Total provisions for the year............... Rs. 9,892.0 Rs. 9,743.0 (1.5)% Rs. 19,649.0 US$ 413 101.7%
Provision for loans losses as a percentage of
net loans................................. 1.64% 1.86% 3.12%
Changes in provisions and allowance for loan losses as a whole reflected
economic trends in the key manufacturing and infrastructure segments in which
many of our customers operate. The manufacturing sector has been adversely
impacted between fiscal 1998 and fiscal 2003 primarily due to a slowdown in the
Indian economy, a downturn in global commodity prices, particularly in the steel
and textiles sectors, and a rapid reduction in import duties, which adversely
impacted the performance of borrowers in these sectors. The changing economic
and regulatory environment led to reduced profitability for certain borrowers.
As a result of these adverse economic factors some of the loans to these
borrowers became impaired. A process of restructuring, including rationalization
of capital
119
structures and production capacities, is taking place in several industries as
companies reposition their businesses in the new environment.
Gross restructured loans increased 55.0% during fiscal 2003 to Rs. 147.4
billion (US$ 3.1 billion) at year-end fiscal 2003, primarily due to an increase
in restructuring of loans to companies in the iron and steel, cement and
electronics industries. Gross other impaired loans increased 63.9% to Rs. 83.1
billion (US$ 1.7 billion) at year-end fiscal 2003 from Rs. 50.7 billion (US$ 1.1
billion) at year-end fiscal 2002 primarily due to companies in the power, metal
products and fertilizers and pesticides industries. As a percentage of net
loans, net restructured loans were 19.5% at year-end fiscal 2003 compared to
14.8% at year-end fiscal 2002 and net other impaired loans were 8.8% at year-end
fiscal 2003 compared to 6.3% in year-end fiscal 2002.
Provisions for loan losses increased 101.7% to Rs. 19.6 billion (US$ 413
million) during fiscal 2003 from Rs. 9.7 billion (US$ 205 million) in fiscal
2002 and reflected a result of management's estimation of the recoverability of
restructured and other impaired loans. Gross restructured and other impaired
loans increased by Rs. 84.7 billion (US$ 1.3 billion) in fiscal 2003 compared to
Rs. 60.4 billion (US$ 1.3 billion) in fiscal 2002. We believe that several
loans, which became restructured loans in fiscal 2002 and 2003, were essentially
to inherently viable projects and consequently resulted in lower impairment
losses. As a result, the coverage ratio on gross restructured loans decreased to
16.8% at year-end fiscal 2003 from 18.6% at year-end fiscal 2002 and 26.0% at
year-end fiscal 2001. The coverage ratio on other impaired loans decreased to
33.5% at year-end fiscal 2003 from 34.6% at year-end fiscal 2002 and 51.9% at
year-end fiscal 2001.
During fiscal 2001, changes in the tax laws necessitated that loan balances
deemed unrecoverable be charged-off against the allowance for loan losses.
Accordingly, ICICI charged-off significant loan balances deemed unrecoverable in
fiscal 2001. The loans charged-off in fiscal 2003 were Rs. 3.4 billion (US$ 71
million) compared to Rs. 6.1 billion (US$ 129 million) in fiscal 2002.
We identify a commercial loan as impaired and place it on non-accrual status
when it is probable that we would be unable to collect the scheduled payments of
principal and interest due under the contractual terms of the loan agreement. A
commercial loan is also considered to be impaired and placed on a non-accrual
basis if interest or principal is greater than 180 days overdue. The Reserve
Bank of India's revised asset classification rules effective from fiscal 2004
require Indian banks to classify an asset as impaired when principal or interest
has remained overdue for more than 90 days. This may impact the classification
of, and reserving against, impaired loans. Delays or shortfalls in loan payments
are evaluated along with other factors to determine if a loan should be
classified as impaired. The decision to classify a loan as impaired is also
based on an evaluation of the borrower's financial condition, collateral,
liquidation value and other factors that affect the borrower's ability to pay.
We classify a loan as a troubled debt restructuring where we have made
concessionary modifications, that we would not otherwise consider, to the
contractual terms of the loan to a borrower experiencing financial difficulties.
Such loans are typically placed on a non-accrual status. When borrowers
demonstrate over an extended period the ability to repay a loan in accordance
with the contractual terms of a loan, which we classified as non-accrual, the
loan is returned to accrual status. With respect to restructured loans,
performance prior to the restructuring or significant events that coincide with
the restructuring are evaluated in assessing whether the borrower can meet the
rescheduled terms and may result in the loan being returned to accrual status
after a performance period.
Generally, at the time a loan is placed on non-accrual status, interest
accrued and uncollected on the loan in the current fiscal year is reversed from
income, and interest accrued and uncollected from the prior year is charged off
against the allowance for loan losses. Thereafter, interest on non-accrual loans
is recognized as interest income only to the extent that cash is received. When
borrowers demonstrate over an extended period the ability to repay a loan in
accordance with the contractual terms of a loan, which we classified as
non-accrual, the loan is returned to accrual status. With respect to
restructured loans, performance prior to the restructuring or significant events
that coincide with the restructuring are evaluated in assessing whether the
borrower could have met the rescheduled terms
120
and may result in the loan being returned to accrual status after a performance
period. Consumer loans are generally identified as impaired not later than a
predetermined number of days overdue on a contractual basis. The number of days
is set at an appropriate level by loan product. The policy for suspending
accruals of interest and impairment on consumer loans vary depending on the
terms, security and loan loss experience characteristics of each product.
Allowance for loan losses on impaired loans is calculated by comparing the
net present value of the expected cash flows, including cashflows from
enforcement of collaterals, discounted at the effective interest rate of the
loan and the carrying value of the loan. See "Business--Impaired Loans" for a
description of our allowance for loan losses.
We conduct an analysis of our loan portfolio on a periodic basis. The
analysis considers both qualitative and quantitative criteria including the
account conduct, future prospects, repayment history, and financial performance
amongst others. For impaired loans in excess of Rs. 100 million (US$ 2 million),
which were 84.3% of the gross impaired loan portfolio at year-end fiscal 2003,
we follow a detailed process for each loan to determine the allowance for loan
losses to be provided. For the balance of smaller loans in the impaired loan
portfolio, we follow the classification detailed under "Business--Impaired
Loans--Allowance for Loan Losses" for determining the allowance for loan losses.
Our impaired loan portfolio is composed largely of project finance and other
term loans where we have a security interest and first lien on all the fixed
assets and a second lien on all the current assets of the borrower. ICICI
typically lent between 60.0% and 80.0% of the appraised value of collateral.
Hence, all of ICICI's loans have historically been sufficiently
over-collateralized so that once collateral was realized, ICICI typically
recovered the full principal along with a small portion of interest claims.
However, recoveries are subject to delays, that can be several years, due to the
long legal collection process in India. As a result, we make an allowance for
loans based on the time value of money or the present value of expected
realizations of collateral, which takes into account the delay we would
experience before recovering its principal. The time to recovery, expected
future cash flows and realizable value for collateral are periodically reviewed
in estimating the allowance.
We believe that the process for ascertaining allowance for loan losses
described above adequately captures the expected losses on our entire loan
portfolio.
Non-Interest Income
The following table sets forth, for the periods indicated, the principal
components of non-interest income.
Year ended March 31,
---------------------------------------------------------------------
2001 2002 2002/2001 2003 2003 2003/2002
% change % change
---------------------------------------------------------------------
(in millions, except percentages)
Fees, commission and brokerage........... Rs. 5,317 Rs. 4,703 (11.5)% Rs. 5,722 US$ 120 21.7%
Trading account revenue (1).............. 847 2,442 188.3 3,075 65 25.9
Securities transactions (2).............. (1,714) (3,572) 108.4 (322) (7) (91.0)
Foreign exchange transactions (3)........ (108) 78 (172.2) 92 2 17.9
Gain on sale of loans.................... 705 1,979 180.7 2,795 59 41.2
Software development and services........ 701 1,493 113.0 1,062 22 (28.9)
Gain on sale of stock in other
subsidiaries and affiliates............ 2,507 165 (93.4) - - (100.0)
Profit on sale of certain premises
and equipment.......................... (31) 29 (193.5) 16 - (44.8)
Effect of business combinations.......... 253 - (100.0) - - 0
Other income............................. 766 831 8.5 813 18 (2.2)
------------------------ ----------------------
Total non-interest income................ Rs. 9,243 Rs. 8,148 (11.8)% Rs. 13,253 US$ 278 62.7%
======================== ======================
---------
(1) Primarily reflects income from trading in government of India securities
and corporate debt securities.
121
(2) Primarily reflects capital gains / (losses) realized on the sale of
securities, including fixed income and equity, venture capital investments
and revenues from investment banking subsidiary less other than temporary
diminution.
(3) Arises primarily from purchases and sales of foreign exchange on behalf of
corporate clients and revaluation of foreign currency assets and
liabilities and outstanding forward contracts.
Fiscal 2003 compared to Fiscal 2002
Non-interest income increased by 62.7% in fiscal 2003 to Rs. 13.3 billion
(US$ 278 million), from Rs. 8.1 billion (US$ 171 million) in fiscal 2002
primarily due to a decrease in loss from securities transactions, increase in
fees income, commission and brokerage and gains from sale of loans and credit
substitutes.
Fees, commission and brokerage increased 21.7% to Rs. 5.7 billion (US$ 120
million) in fiscal 2003 from Rs. 4.7 billion (US$ 99 million) in fiscal 2002
primarily due to the amalgamation and increase in retail and corporate
transaction banking fees which offset the decrease in fees from project
appraisal and related activities. ICICI Bank's fees, commission and brokerage
was Rs. 1.7 billion (US$ 36 million) in fiscal 2002.
Trading account revenue primarily consisted of income from trading in
government of India securities and corporate debt securities. Trading account
revenue increased 25.9% to Rs. 3.1 billion (US$ 65 million) during fiscal 2003
compared to fiscal 2002 as we capitalized on the market opportunities in a
declining interest rate environment. Gains on trading account have resulted from
short-term market opportunities created by a fall in interest rates during
fiscal 2002 and 2003. We cannot assure you that interest rates will not fall any
further as they change depending on the overall economic environment.
The loss from securities transactions reduced to Rs. 322 million (US$ 7
million) during fiscal 2003 as compared to Rs. 3.6 billion (US$ 75 million)
primarily due to increase in net gains realized to Rs. 1.8 billion (US$ 38
million) in fiscal 2003 from Rs. 1.2 billion (US$ 26 million) in fiscal 2002, as
we capitalized on a declining interest rate environment and a decrease in the
amount of other than temporary diminution in securities. In fiscal 2003, as part
of our ongoing evaluation of the securities portfolio, we recorded an impairment
charge of Rs. 2.1 billion (US$ 44 million) compared to Rs. 3.5 billion (US$ 73
million) in fiscal 2002, for an other than temporary decline in the value of the
available for sale and non-readily marketable equity securities.
Income from foreign exchange transactions arose primarily from purchases
and sales of foreign exchange on behalf of corporate clients and revaluation of
foreign currency assets and liabilities and outstanding forward contracts.
Income from foreign exchange transactions was Rs. 92 million (US$ 2 million) in
fiscal 2003 compared to Rs. 78 million (US$ 2 million) in fiscal 2002.
During fiscal 2002, ICICI securitized and sold down a part of is corporate
loan portfolio, primarily with the objective of complying with regulatory
reserve requirements on its liabilities following amalgamation with ICICI Bank.
This helped in the development of a market for securitized debt in India. We now
view securitization and sell-down of corporate and retail loans as a key element
of our business strategy, seeking to leverage our strong origination
capabilities to meet the investment requirements of other financial
intermediaries that have access to funding but relatively limited origination
capabilities. We earned a profit of Rs. 2.8 billion (US$ 59 million) on
securitization/sale of loans and credit substitutes in fiscal 2003 compared to
Rs. 2.0 billion (US$ 42 million) in fiscal 2002.
Income from software development and services decreased 28.9% to Rs. 1.1
billion (US$ 22 million) in fiscal 2003 from Rs. 1.5 billion (US$ 31 million) in
fiscal 2002 primarily due to decline in software revenues from ICICI Infotech
and ICICI Infotech Inc., US, on account of a decline in billing rates in both
the offshore and onsite businesses combined with a decline in business volumes
from the US market.
122
Non-interest income also included a gain of Rs. 16 million (US$ 336,488) on
the sale of certain premises and equipment in fiscal 2003 compared to Rs. 29
million (US$ 609,884) in fiscal 2002. Other income primarily included rental
income for fiscal 2003.
Fiscal 2002 compared to Fiscal 2001
Non-interest income decreased by 11.8% in fiscal 2002 to Rs. 8.1 billion
(US$ 171million), from Rs. 9.2 billion (US$ 194 million) in fiscal 2001
primarily due to a decline in gain on sale of stock of subsidiaries and
affiliates, a loss on account of securities transactions, a decline in fees,
commission and brokerage and an increase in trading account revenue, offset in
part by a gain on sale of loans. In fiscal 2001, non-interest income included a
gain on sale of equity interest in ICICI Bank of Rs. 2.0 billion (US$ 42
million).
The decrease of 11.5% in fees, commission and brokerage in fiscal 2002 was
primarily due to the decrease in fees from project appraisal and related
activities. As ICICI had limited its credit growth in the second half of fiscal
2002, the fee income linked to new business generation also decreased.
Trading account revenue increased 188.3% to Rs. 2.4 billion (US$ 51
million) during fiscal 2002 compared to fiscal 2001 as ICICI's investment
banking subsidiary capitalized on the market opportunities in a declining
interest rate environment. Gains on trading account resulted from short-term
market opportunities created by a fall in interest rates during fiscal 2002.
Income from securities transactions primarily reflected capital gains
realized on the sale of ICICI's long-term equity securities less other than
temporary diminution. The income from securities transaction declined during
fiscal 2002 primarily due to an increase in the amount of other than temporary
diminution in securities in fiscal 2002. In fiscal 2002, as part of its ongoing
evaluation of its securities portfolio, ICICI recorded an impairment charge of
Rs. 3.5 billion (US$ 75 million) compared to Rs. 1.8 billion (US$ 37 million) in
fiscal 2001, for an other than temporary decline in the value of ICICI's
available for sale and non-readily marketable equity securities.
Income from foreign exchange transactions arose primarily from purchases
and sales of foreign exchange on behalf of ICICI's corporate clients and
revaluation of the ICICI's foreign currency assets and liabilities and
outstanding forward contracts. Income from foreign exchange transactions in
fiscal 2002 was Rs. 78 million (US$ 2 million) compared to a loss of Rs. 108
million (US$ 2 million) in fiscal 2001.
During fiscal 2002, ICICI securitized and sold down some of its corporate
loans, primarily to provide resources towards meeting the reserve requirements
on ICICI's liabilities. This resulted in a gain on sale of loans of Rs. 2.0
billion (US$ 42 million) in fiscal 2002 compared to Rs. 705 million (US$ 15
million) in fiscal 2001.
Income from software development and services increased 113.0% to Rs. 1.5
billion (US$ 31 million) in fiscal 2002 from Rs. 701 million (US$ 15 million) in
fiscal 2001 as ICICI Infotech and ICICI Infotech Inc., US diversified into a
range of software solutions covering banking, insurance, enterprise resource
planning, customer relationship management and information technology security
and continued their sustained marketing efforts in fiscal 2002.
In fiscal 2002, ICICI realized a gain of Rs. 57 million (US$ 1 million) on
the sale of 0.40% of its equity interest in ICICI Bank and a gain on sale of
stock in other subsidiaries and affiliates of Rs 108 million (US$ 2 million).
During fiscal 2001, ICICI reduced its equity interest in ICICI Bank to 46%
through sales of equity shares in the Indian secondary markets to institutional
investors. The sale of shares was made for a consideration of Rs. 3.5 billion
(US$ 74 million) and the gain on sale was Rs. 2.0 billion (US$ 42 million) which
is included in income for fiscal 2001. Non-interest income also included a gain
on sale of ICICI's stake in ICICI Infotech of Rs. 511 million (US$ 11 million).
123
Non-interest income also included a gain of Rs. 29 million (US$ 609,884) on
the sale of certain premises and equipment in fiscal 2002 compared to a loss of
Rs. 31 million (US$ 651,945) in fiscal 2001. Other income primarily included
rental income for fiscal 2002.
Non-Interest Expense
The following table sets forth, for the periods indicated, the principal
components of non-interest expense.
Year ended March 31,
---------------------------------------------------------------------
2001 2002 2002/2001 2003 2003 2003/2002
% change % change
---------------------------------------------------------------------
(in millions, except percentages)
Employee expense:
Salaries ............................ Rs. 1,564 Rs. 2,526 61.5% Rs. 4,686 US$ 98 85.5%
Employee benefits ................... 313 454 45.0 697 15 53.5
--------------------- ----------------------
Total employee expense ................ 1,877 2,980 58.8 5,383 113 80.6
Premises and equipment expense ......... 1,507 2,102 39.5 4,784 101 127.6
Administration and other expense ....... 1,835 2,514 37.0 7,797 164 210.1
Amortization of goodwill and intangible
assets .............................. 260 - (100.0) 645 13 -
--------------------- ----------------------
Total non-interest expense ............ Rs. 5,479 Rs. 7,596 38.6% Rs. 18,609 US$ 391 145.0%
===================== ======================
Fiscal 2003 compared to Fiscal 2002
Non-interest expense increased 145.0% in fiscal 2003 to Rs. 18.6 billion
(US$ 391 million) from Rs. 7.6 billion (US$ 160 million) in fiscal 2002
primarily due to an increase in employee expenses and administration expense as
a result of the amalgamation, and growth in retail products and services.
Employee expenses increased 80.6% to Rs. 5.4 billion (US$ 113 million) in
fiscal 2003 from Rs. 3.0 billion (US$ 63 million) in fiscal 2002 primarily due
to expenses of 4,820 employees of ICICI Bank who joined subsequent to
amalgamation, new employees hired during the year and an increase in salary
levels. ICICI Bank's employee expenses were Rs. 1.5 billion (US$ 32 million) in
fiscal 2002. At year-end fiscal 2003, our employees had increased by 199.8% to
15,179 employees compared to ICICI's 5,063 employees at year-end fiscal 2002,
primarily due to the addition of employees of ICICI Bank and an increase in
employees of ICICI OneSource and ICICI Home Finance, which have grown their
business and distribution capabilities.
Premises and equipment expense increased 127.6% to Rs. 4.8 billion (US$ 101
million) in fiscal 2003 from Rs. 2.1 billion (US$ 44 million) in fiscal 2002,
primarily due to the impact of amalgamation, increased technology expenses,
maintenance and depreciation expenses for ICICI centers, computers and computer
software. ICICI Bank's premises and equipment expense was Rs. 2.2 billion (US$
46 million) in fiscal 2002. The number of ATM's increased from 1,000 at year-end
fiscal 2002 to 1,675 at year-end fiscal 2003 and the number of branches and
extension counters increased from 403 at year-end fiscal 2002 to 446 at year-end
fiscal 2003. Administrative and other expenses increased 210.1% to Rs. 7.8
billion (US$ 164 million) in fiscal 2003 from Rs. 2.5 billion (US$ 53 million)
in fiscal 2002 primarily due to the impact of amalgamation, an increase in the
retail business expenses and increase in general business volumes. ICICI Bank's
administrative and other expenses were Rs. 2.2 billion (US$ 46 million) in
fiscal 2002.
Fiscal 2002 compared to Fiscal 2001
Non-interest expense increased 38.6% in fiscal 2002 to Rs. 7.6 billion (US$
160 million) from Rs. 5.5 billion (US$ 115 million) in fiscal 2001 primarily due
to an increase in employee expenses and other administrative costs of ICICI
Infotech, and other administrative costs.
124
Employee expenses increased 58.8% to Rs. 2.9 billion (US$ 63 million) in
fiscal 2002 from Rs. 1.9 billion (US$ 40 million) in fiscal 2001. The number of
employees increased to 5,063 employees at year-end fiscal 2002 from 3,460
employees, excluding ICICI Bank, at year-end fiscal 2001 primarily due to an
increase in the number of employees in ICICI's subsidiaries, ICICI Infotech, and
ICICI Home Finance, which had been rapidly growing their business and
distribution infrastructure in fiscal 2002.
Premises and equipment expense increased 39.5% in fiscal 2002 compared to
fiscal 2001, primarily due to increased technology expenses, maintenance and
depreciation expenses for ICICI's centers, computers and computer software.
Administrative and other expenses increased 37.0% in fiscal 2002 compared to
fiscal 2001 primarily due to an increase in the administration expense of ICICI
Infotech and its subsidiaries. In fiscal 2002, ICICI Infotech diversified its
range of products and increased its presence to all major cities of India
through sustained business development and marketing efforts.
Income Tax Expense
Income tax benefit amounted to Rs. 3.1 billion (US$ 64 million) in fiscal
2003 compared to income tax expense of Rs. 251 million (US$ 5 million) in fiscal
2002. The effective rate of tax benefit was 27.7% in fiscal 2003 compared to
effective rate of tax expense of 47.1% in fiscal 2002. The effective tax rate of
27.7% in fiscal 2003 was lower compared to statutory tax rate of 36.75%
primarily due to exempt interest and dividend income and the charging of certain
income at rates other than statutory tax rate, partly offset by the disallowance
of certain expenses for tax purposes. Income tax expense increased by 32.8% to
Rs. 251 million (US$ 5 million) in fiscal 2002 compared to Rs. 189 million (US$
4 million) in fiscal 2001. The effective tax rate in fiscal 2002 was 47.1%
compared to 2.8% in fiscal 2001. The effective rate of tax expense at 47.1% in
fiscal 2002 was higher compared to the statutory tax rate of 35.70% primarily
due to the impact on deferred tax asset of change in the statutory tax rate from
39.55% in fiscal 2001 to 35.70% in fiscal 2002. The effective rate of tax
expense at 2.8% in fiscal 2001 was significantly lower compared to statutory tax
rate of 39.55% primarily due to an increase in recognition of deferred tax
assets on other than temporary diminution in securities available for sale of
earlier years.
A retrospective change was effected in the local tax laws in India's budget
for fiscal 2002, whereby provisions for loan losses are not allowed as a
deduction from taxable income unless the corresponding loan is written off in
the accounts. As a result, a higher current tax liability was recognized against
provisions for loan losses claimed in earlier years, which was offset by
recognition of a deferred tax asset in respect of the same. See Note 28 of our
consolidated financial statements for a further discussion on income tax.
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal
components of assets.
At March 31,
-------------------------------------------------------------------------
2001 2002 2002/2001 2003 2003 2003/2002
% change % change
-------------------------------------------------------------------------
(in millions, except percentages)
Cash and cash equivalents..... Rs. 30,957 Rs. 41,476 34.0% Rs. 72,453 US$ 1,524 74.7%
Trading account assets(1) .... 18,878 42,376 124.5 39,634 834 (6.5)
Securities, excluding venture 15,092 56,125 271.9 276,917 5,824 393.4
capital investments(2) .....
Venture capital investments .. 3,769 3,921 4.0 3,704 78 (5.5)
Investments in affiliates .... 8,908 10,086 13.2 2,615 55 (74.1)
Loans, net:
Rupee ..................... 548,827 487,598 (11.2) 594,955 12,512 22.0
125
Foreign currency .......... 86,230 72,650 (15.7) 89,685 1,886 23.4
Less: Allowances .......... (33,035) (36,647) 10.9 (54,219) (1,140) 47.9
------------------------- -------------------------
Total loans, net ............. 602,022 523,601 (13.0) 630,421 13,258 20.4
Acceptances .................. 2,715 4,783 76.2 43,252 910 804.3
Property and equipment ....... 11,897 12,577 5.7 21,215 446 68.7
Other assets ................. 45,652 48,417 6.1 90,052 1,894 86.0
------------------------- -------------------------
Total assets ................. Rs.739,890 Rs.743,362 0.5% Rs.1,180,263 US$ 24,823 58.8%
========================= =========================
---------------------------
(1) Primarily includes government of India securities and corporate debt
securities.
(2) Primarily includes government of India securities and to a much smaller
extent, corporate debt securities and equity securities.
Fiscal 2003 compared to Fiscal 2002
Our total assets increased 58.8% to Rs. 1,180.3 billion (US$ 24.8 billion)
at year-end fiscal 2003 compared to Rs.743.4 billion (US$ 15.6 billion) at
year-end fiscal 2002, primarily due to an increase in securities and loans on
account of the amalgamation. ICICI Bank's total assets at year-end fiscal 2002
were Rs. 404.8 billion (US$ 8.5 billion).
Our net loans increased 20.4% to Rs. 630.4 billion (US$ 13.3 billion) at
year-end fiscal 2003 compared to Rs. 523.6 billion (US$ 11.0 billion) at
year-end fiscal 2002, reflecting a 22.0% increase in gross rupee loans, a 23.4%
increase in gross foreign currency loans and a 47.9% increase in allowance for
loan losses. Gross retail finance loans increased 157.9% to Rs. 188.3 billion
(US$ 4.0 billion) at year-end fiscal 2003 from Rs. 73.0 billion (US$ 1.5
billion) at year-end fiscal 2002.
Securities, excluding venture capital investment increased 393.4% to Rs.
276.9 billion (US$ 5.8 billion) at year-end fiscal 2003 from Rs. 56.1 billion
(US$ 1.2 billion) at year-end fiscal 2002 primarily due to investment in
government securities required to comply with the statutory liquidity ratio on
ICICI's liabilities. At year-end fiscal 2002, cash, cash equivalents and trading
assets of ICICI and ICICI Bank were Rs. 83.9 billion (US$ 1.8 billion) and Rs.
115.4 billion (US$ 2.4 billion), respectively. ICICI and ICICI Bank were
maintaining a large amount of cash and liquid balances at year-end fiscal 2002
to meet the reserve requirements on ICICI's liabilities following the
amalgamation. Cash, cash equivalents and trading assets increased by 33.7% to
Rs. 112.1 billion (US$ 2.4 billion) at year-end fiscal 2003 from Rs. 83.9
billion (US$ 1.8 billion) at year-end fiscal 2002, reflecting the addition of
ICICI Bank's cash, cash equivalents and trading assets offset, in part, by
utilization of the cash and liquid balances existing at the beginning of fiscal
2003 for investment in government securities to meet statutory liquidity ratio
requirement.
Trading assets at year-end fiscal 2003 included Rs. 5.4 billion (US$ 114
million) of reverse repurchase transactions as compared to Rs. 21.4 billion (US$
450 million) at year-end fiscal 2002. Under these transactions securities were
purchased under agreements to resell after a specified time. Such securities
qualified as approved securities for statutory liquidity ratio requirements, and
were of short maturity, carrying lower risk while yielding higher returns as
compared to other short-term money market instruments. These transactions were
typically used for better liquidity management.
Investment in affiliates declined to Rs. 2.6 billion (US$ 55 million) at
year-end fiscal 2003 from Rs. 10.1 billion (US$ 212 million) at year-end fiscal
2002 due to the step acquisition of and amalgamation with ICICI Bank.
Acceptances primarily include letters of credit issued on behalf of customers.
ICICI, being a financial institution, was restricted in its ability to issue
acceptances, unlike ICICI Bank. Following the amalgamation, we have been able to
significantly increase the issuance of acceptances by leveraging on ICICI's
strong corporate relationships. Acceptances increased to Rs. 43.3 billion (US$
910 million) at year-end fiscal 2003 from Rs. 4.8 billion (US$ 101 million) at
year-end fiscal 2002. ICICI Bank's acceptances at year-end fiscal 2002 were Rs.
12.6 billion (US$ 265 million).
Other assets at year-end fiscal 2003, included advance taxes of Rs. 28.3
billion (US$ 595 million), deferred tax assets of Rs. 6.4 billion (US$ 135
million), intangible assets of Rs. 5.1 billion (US$ 108
126
million) and Rs. 2.3 billion (US$ 49 million) of assets held for sale, which
were primarily acquired through foreclosure of loans.
Fiscal 2002 compared to Fiscal 2001
ICICI's total assets increased 0.5% to Rs. 743.4 billion (US$ 15.6 billion)
at year-end fiscal 2002 from Rs. 739.9 billion (US$ 15.6 billion) at year-end
fiscal 2001, primarily due to an increase in cash and cash equivalents, trading
account assets and securities, excluding venture capital investments, offset in
part by a decrease in net loans.
Subsequent to the announcement of the amalgamation in October 2001, ICICI
directed all its resources towards meeting the reserve requirements on its
outstanding liabilities following the amalgamation. ICICI limited its loan
disbursements and also securitized and sold down its loans in the second half of
fiscal 2002 to raise additional resources. As a result, ICICI's net loans
decreased by 13.0% to Rs. 523.60 billion (US$ 11.0 billion) at year-end fiscal
2002 from Rs. 602.0 billion (US$ 12.7 billion) at year-end fiscal 2001,
reflecting a 11.2% decrease in gross rupee loans and a 15.7% decrease in gross
foreign currency loans, offset by an increase in allowances for loan losses. The
decrease in ICICI's corporate loan portfolio was offset by an increase in retail
finance disbursements in fiscal 2002. Gross retail finance loans at year-end
fiscal 2002 increased 168.5% to Rs. 72.8 billion (US$ 1.5 billion) from Rs. 27.1
billion (US$ 570 million) at year-end fiscal 2001.
Cash and cash equivalents which included interest-bearing deposits with
banks, increased to Rs. 41.5 billion (US$ 872 million) at year-end fiscal 2002
from Rs. 31.0 billion (US$ 651 million) at year-end fiscal 2001, as a large cash
balance was maintained by ICICI towards the end of fiscal 2002 in order to meet
the cash reserve requirement on its outstanding liabilities following the
amalgamation. Trading assets increased significantly to Rs. 42.4 billion (US$
891 million) at year-end fiscal 2002 compared to Rs. 18.9 billion (US$ 397
million) at year-end fiscal 2001. Trading assets at year-end fiscal 2002
included Rs. 21.4 billion (US$ 450 million) of reverse repurchase transactions.
Under these transactions securities were purchased under agreements to resell
after a specified time. Such securities qualified as approved securities for
statutory liquidity ratio requirements, and were of short maturity, carrying
lower risk while yielding higher returns as compared to other short-term money
market instruments. These transactions were typically used for better liquidity
management.
Securities, excluding venture capital investments at year-end fiscal 2002
increased to Rs. 56.1 billion (US$ 1.2 billion) compared to Rs. 15.1 billion
(US$ 317 million) at year-end fiscal 2001 primarily due to the increase in
government of India securities. Venture capital investments at year-end fiscal
2002 remained almost the same at Rs. 3.9 billion (US$ 82 million) compared to
Rs. 3.8 (US$ 79 million) at year-end fiscal 2001. ICICI's investment in
affiliates increased to Rs. 10.1 billion (US$ 212 million) from Rs. 8.9 billion
(US$ 187 million) primarily due to the addition of ICICI Bank's retained
earnings. Acceptances increased to Rs. 4.8 billion (US$ 101 million) at year-end
fiscal 2002 from Rs. 2.7 billion (US$ 57 million) at year-end fiscal 2001.
Acceptances, primarily included letters of credit issued on behalf of customers.
Other assets at year-end fiscal 2002, included advance taxes of Rs. 16.6
billion (US$ 349 million, deferred tax assets of Rs. 7.3 billion (US$ 153
million) and Rs. 2.0 billion (US$ 42 million) of assets held for sale, which
were primarily acquired through foreclosure of loans.
Liabilities and Stockholders' Equity
The following table sets forth, at the dates indicated, the principal
components of liabilities and stockholders' equity.
127
At March 31,
-------------------------------------------------------------------------
2001 2002 2002/2001 2003 2003 2003/2002
% change % change
-------------------------------------------------------------------------
(in millions, except percentages)
Deposits ................................ Rs. 6,072 Rs. 7,380 21.5% Rs. 491,290 US$ 10,332 6557%
Trading account liabilities.............. 12,483 17,105 37.03 26,086 549 52.5
Short-term borrowings ................... 99,655 70,804 (28.95) 42,095 885 (40.5)
Acceptances ............................. 2,715 4,783 76.17 43,252 910 804.3
Long-term debt:
Rupee ................................... 404,017 438,704 8.59 350,633 7,374 (20.1)
Foreign currency ........................ 88,865 72,894 (17.97) 50,179 1,055 (31.2)
------------------------ -------------------------
Total long-term debt .................... 492,882 511,598 3.80 400,812 8,429 (21.7)
Other liabilities ....................... 38,832 48,402 24.64 66,658 1,402 37.7
Taxes and dividends payable ............. 10,494 11,050 5.30 16,880 355 52.8
Redeemable preferred stock(1)............ 698 772 10.60 853 18 10.5
------------------------ -------------------------
Total liabilities ....................... 663,831 671,894 1.21 1,087,926 22,880 61.9
Minority interest ....................... 135 260 92.59 124 3 (52.3)
Stockholders' equity .................... 75,927 71,348 (6.03) 92,213 1,939 29.2
------------------------ -------------------------
Total liabilities and stockholders' equity Rs.739,893 Rs.743,502 0.5% Rs.1,180,263 US$ 24,822 (96.7)%
======================== =========================
------------------
(1) In line with the existing regulatory requirements in India, preferred stock
issued by ICICI needed to be compulsorily redeemed within a specified time
period. Accordingly, all series of preferred stock issued by ICICI were
redeemable in accordance with the terms of the issue.
Fiscal 2003 compared to Fiscal 2002
Deposits increased to Rs. 491.3 billion (US$ 10.4 billion) at year-end
fiscal 2003 from Rs. 7.4 billion (US$ 155 million) at year-end fiscal 2002.
ICICI Bank's deposits at year-end fiscal 2002 were Rs. 325.2 billion (US$ 6.8
billion). ICICI Bank's deposits along with new deposits raised during the year
increased our volume of deposits. Unlike ICICI, we fund ourselves primarily
through deposits and not borrowings and debt. As ICICI's long-term debt and
short-term borrowings were repaid during the year in line with scheduled
maturities both long-term debt and short-term borrowings declined significantly.
Our long-term debt decreased 21.7% to Rs. 400.8 billion (US$ 8.4 billion) at
year-end fiscal 2003 from Rs. 511.6 billion (US$ 10.8 billion) at year-end
fiscal 2002, reflecting a 20.1% decrease in long-term rupee debt and a decrease
of 31.2% in long-term foreign currency debt. Our short-term borrowings decreased
40.5% at year-end fiscal 2003 compared to year-end fiscal 2002. Going forward,
we will continue to repay ICICI's liabilities as and when they mature and raise
new resources primarily through deposits. Trading account liabilities increased
52.5% at year-end fiscal 2003 compared to year-end fiscal 2002 due to the impact
of amalgamation. Taxes and dividends payable increased 52.8% to Rs. 16.9 billion
(US$ 355 million) at year-end fiscal 2003 from Rs. 11.1 billion (US$ 232
million) at year-end fiscal 2002 primarily due to increase in dividends payable.
Dividend for fiscal 2002 was paid by ICICI before year-end fiscal 2002 unlike
dividend for fiscal 2003 which we paid subsequent to the year-end. The carrying
amount of the redeemable preferred stock increased to Rs. 853 million (US$ 18
million) at year-end fiscal 2003 from Rs 772 million (US$ 16 million) at
year-end fiscal 2002. Minority interest decreased 52.3% at year-end fiscal 2003.
Stockholders' equity increased 29.2% at year-end fiscal 2003 to Rs. 92.2 billion
(US$ 1.9 billion).
Fiscal 2002 compared to Fiscal 2001
ICICI's long-term debt increased 3.8% to Rs. 511.5 billion (US$ 10.8
billion) at year-end fiscal 2002 from Rs. 492.9 billion (US$ 10.4 billion) at
year-end fiscal 2001, reflecting a 8.6% increase in long-term rupee debt offset
by a decrease of 18.0% in long-term foreign currency debt. Deposits increased to
Rs. 7.4 billion (US$ 155 million) at year-end fiscal 2002 from Rs. 6.1 billion
(US$ 128 million) at year-end fiscal 2001, primarily due to the deposits raised
by ICICI Home Finance in fiscal 2002. In fiscal 2002, ICICI Home Finance
launched a fixed deposit program to mobilize resources to
128
meet the growing business needs and diversify its resource base. Trading account
liabilities increased 37.0% at year-end fiscal 2002 compared to year-end fiscal
2001 due to increased market opportunities in a declining interest rate
environment and an increase in trading account assets. ICICI short-term
borrowings decreased 29.0% at year-end fiscal 2002 compared to year-end fiscal
2001. Short-term borrowings included foreign currency non-reparable borrowings,
which increased at year-end fiscal 2002. This was offset by a decrease in rupee
short-term borrowings. The carrying amount of the redeemable preferred stock
increased to Rs. 772 million (US$ 16 million) at year-end fiscal 2002 from
Rs.698 million (US$ 15 million) at year-end fiscal 2001. Minority interest
increased 92.6% at year-end fiscal 2002 on account of new subsidiaries and
acquisitions by ICICI Infotech. Stockholders' equity declined 6.0% at year-end
fiscal 2002 to Rs. 71.3 billion (US$ 1.5 billion). At year-end fiscal 2002,
stockholders' equity was net of the dividend paid by ICICI as an interim
dividend during fiscal 2002.
Off Balance Sheet Items, Commitments and Contingencies
Foreign Exchange and Derivative Contracts
We enter into foreign exchange forwards, options, swaps and other
derivative products, which enables customers to transfer, modify or reduce their
foreign exchange and interest rate risks. These instruments are used to manage
foreign exchange and interest rate risk relating to specific groups of
on-balance sheet assets and liabilities. Since adoption on April 1, 2001, of
SFAS No. 133 and SFAS No. 138, all derivatives have been recorded as assets or
liabilities on the balance sheet at their respective fair values with unrealized
gains and losses recorded either in accumulated other comprehensive income or in
the statement of income, depending on the purpose for which the derivative is
held. Derivatives that do not meet the criteria for designation as a hedge under
SFAS No. 133 at inception, or fail to meet the criteria thereafter, are
accounted for in other assets with changes in fair value recorded in the
statement of income. See Note 1 - "Significant accounting policies - Derivative
instruments and hedging activities" to our consolidated financial statements.
The following table sets forth, at the dates indicated, the notional amount
of the derivative contracts.
At March 31,
----------------------------------------------------------------------------------
Notional principal amounts Balance sheet credit exposure(1)
----------------------------------------------------------------------------------
2001 2002 2003 2003 2001 2002 2003 2003
----------------------------------------------------------------------------------
(in millions)
Interest rate products:
Swap agreements....................Rs. 50,430 Rs. 87,824 Rs. 324,893 US$ 6,833 Rs. (5) Rs. 620 Rs. 137 US$ 3
Others............................. - - - - - - - -
----------------------------------------------------------------------------------
Total interest rate products ......Rs. 50,430 Rs. 87,824 Rs. 324,893 US$ 6,833 Rs. (5) Rs. 620 Rs. 137 US$ 3
==================================================================================
Foreign exchange products:
Forward contracts .................Rs. 21,091 Rs. 41,873 Rs. 277,280 US$ 5,831 Rs.(159) Rs. (41) Rs.(116) US$ (2)
Swap agreements.................... 23,429 20,395 14,611 307 - 328 539 11
----------------------------------------------------------------------------------
Total foreign exchange products ...Rs. 44,520 Rs. 62,268 Rs. 291,891 US$ 6,138 Rs.(159) Rs. 287 Rs. 423 US$ 9
==================================================================================
---------------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products on the reporting date.
The notional principal amount of interest rate products increased to Rs.
324.9 billion (US$ 6.8 billion) at year-end fiscal 2003 compared to Rs. 87.8
billion (US$ 1.8 billion) at year-end fiscal 2002. The notional principal amount
of foreign exchange products increased Rs. 291.9 billion (US$ 6.1 billion) at
year-end fiscal 2003 compared to Rs. 62.3 billion (US$ 1.3 billion) at year-end
fiscal 2002. This significant increase in the volumes of interest rates swaps
and foreign exchange forward contracts in fiscal 2003 was primarily due to the
impact of the amalgamation, increased transactions carried out by us on behalf
of our customers and increase in the market for such products. Prior to
129
amalgamation, ICICI, being a financial institution, was restricted in interest
rate derivative products and foreign exchange products that it could offer to
customers.
Securitization
We primarily securitize commercial loans through "pass-through"
securitizations. In fiscal 2003, we securitized loans with a carrying value of
Rs. 51.8 billion (US$ 1.1 billion) compared to Rs. 40.9 billion (US$ 859
million) in fiscal 2002, which resulted in gains of Rs. 2.1 billion (US$ 44
million) in fiscal 2003 compared to Rs. 1.1 billion (US$ 23 million) in fiscal
2002. The gains are reported as a component of gain on sale of loans. After the
securitization, we generally continue to maintain customer account relationships
and serviced loans transferred to the securitization trust. Generally, the
securitizations are without recourse and we do not provide any credit
enhancement. In a few cases, we may enter into derivative transactions such as
written put options and interest rate swaps with the transferees. Generally, we
do not retain any beneficial interests in the assets sold.
In fiscal 2003, we wrote put options, which require us to purchase, upon
request of the holders, securities issued in certain securitization
transactions. The put options seek to provide liquidity to holders of such
instruments. If exercised, we are obligated to purchase the securities at the
predetermined exercise price. All put options were out-of-the-money for the
holders.
In fiscal 2003, we sold loans and credit substitutes with an aggregate put
option exercise price of Rs. 24.4 billion (US$ 513 million) compared to Rs. 13.1
billion (US$ 276 million) in fiscal 2002. Subsequent to their initial issuance,
such options have been recorded at fair values with changes reported in the
statement of operations.
Loan Commitments
We have outstanding undrawn commitments to provide loans and financing to
customers. These loan commitments aggregated Rs. 48.8 billion (US$ 1.0 billion)
at year-end fiscal 2003 compared to Rs. 68.2 billion (US$ 1.4 billion) at
year-end fiscal 2002. The interest rate on these commitments is dependent on the
lending rates on the date of the loan disbursement. Further, the commitments
have fixed expiration dates and are contingent upon the borrower's ability to
maintain specific credit standards.
Capital Commitments
We are obligated under a number of capital contracts. Capital contracts are
job orders of a capital nature, which have been committed. Estimated amounts of
contracts remaining to be executed on capital account aggregated Rs. 264 million
(US$ 6 million) at year-end fiscal 2003 compared to Rs. 756 million (US$ 16
million) at year-end fiscal 2002 signifying the unpaid amount for acquisition of
fixed assets as per contracts entered into with suppliers.
Operating Lease Commitments
We have commitments under long-term operating leases principally for
premises. The following table sets forth, a summary of future minimum lease
rental commitments at year-end fiscal 2003, for non-cancellable leases.
130
Lease rental commitments for fiscal, in millions
------------------------------------ -----------
2003............................................................. Rs. 237
2004 ............................................................ 231
2005 ............................................................ 223
2006 ............................................................ 208
2007............................................................. 174
Thereafter ..................................................... 320
-------------
Total minimum lease commitments ................................. Rs. 1,393
=============
Guarantees
As a part of our financing activities, we issue guarantees to enhance the
credit standing of our customers. The guarantees are generally for a period not
exceeding 10 years. The credit risk associated with these products, as well as
the operating risks, are similar to those in other loan products. We have the
same appraisal process, pricing methodology and collateral requirement for
guarantees as that for any other loan product. Guarantees increased by 43.3% at
year-end fiscal 2003 compared to year-end fiscal 2002, which in turn increased
by 25.4% compared to year-end fiscal 2001.
The following table sets forth, at the dates indicated, guarantees
outstanding.
At March 31,
----------------------------------------------------------------------
2002/2001 2003/2002
2001 2002 % change 2003 2003 % change
----------------------------------------------------------------------
(in millions, except percentages)
Financial guarantees(1)............. Rs. 53,167 Rs. 53,037 (0.2)% Rs. 69,076 US$ 1,453 30.2%
Performance guarantees(2)................. 6,083 21,266 249.6% 37,402 787 75.9%
----------------------- ------------------------
Total guarantees.................... Rs. 59,250 Rs. 74,303 25.4% Rs.106,478 US$ 2,239 43.3%
======================= ========================
-----------------
(1) Consists of instruments guaranteeing the timely contractual payment of loan
obligations, primarily to foreign lenders on behalf of project companies.
(2) Consists of instruments guaranteeing the performance by a company of an
obligation, such as exports.
The following table sets forth contractual obligations on long-term debt,
operating lease and guarantees at year-end fiscal 2003.
Payments due by period
---------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
---------------------------------------------------------------------
(in millions)
Long term debt obligations............... Rs. 402,644 Rs. 86,263 Rs.161,859 Rs. 53,376 Rs.101,146
Operating Lease Obligations.............. 1,393 237 454 382 320
Guarantee
- Financial guarantees.................. 69,076 9,413 19,223 4,361 36,079
- Performance guarantees................ 37,402 8,309 8,835 3,965 16,293
---------------------------------------------------------------------
106,478 17,722 28,058 8,326 52,372
---------------------------------------------------------------------
Total.................................... Rs. 510,515 Rs. 1,04,222 Rs. 28,512 Rs. 8,708 Rs. 52,692
=====================================================================
Capital Resources
ICICI Bank is subject to the capital adequacy requirements of the Reserve
Bank of India, which are primarily based on the capital adequacy accord reached
by the Basle Committee of Banking Supervision, Bank of International Settlements
in 1988. ICICI Bank is required to maintain a
131
minimum ratio of total capital to risk adjusted assets of 9.0%, at least half of
which must be Tier 1 capital.
At year-end fiscal 2003, ICICI Bank's capital adequacy ratio calculated in
accordance with the Reserve Bank of India guidelines and based on its
unconsolidated financial statements prepared in accordance with Indian GAAP was
11.10%. Using the same basis of calculation, at year-end fiscal 2003 ICICI
Bank's Tier 1 capital adequacy ratio was 7.05% and its Tier 2 capital adequacy
ratio was 4.05%.
The following table sets forth, at the dates indicated, risk-based capital,
risk-weighted assets and risk-based capital adequacy ratios computed in
accordance with the applicable Reserve Bank of India guidelines and based on
ICICI Bank's unconsolidated financial statements prepared in accordance with
Indian GAAP.
Indian GAAP
At March 31, 2003
-------------------------------------
Tier 1 capital ................................................... Rs. 58,072 US$ 1,221
Tier 2 capital ................................................... 33,388 702
-------------------------------------
Total capital .................................................... Rs. 91,460 1,923
=====================================
On-balance sheet risk weighted assets ............................ Rs. 678,703 14,273
Off-balance sheet risk weighted assets ........................... 145,102 3,052
-------------------------------------
Total risk weighted assets ....................................... Rs. 823,805 US$ 17,325
=====================================
Tier 1 capital adequacy ratio .................................... 7.05%
Tier 2 capital adequacy ratio .................................... 4.05%
------------------
Total capital adequacy ratio ..................................... 11.10%
------------------
The principal off-balance sheet items for ICICI Bank were loan commitments,
guarantees, put options and lease and capital commitments. As described in
"Financial Condition -- Off Balance Sheet Items, Commitments and Contingencies",
ICICI Bank entered into these arrangements for normal business purposes. Capital
was provided for these items based on the existing capital adequacy guidelines
of the Reserve Bank of India. See "Supervision and Regulation - Capital Adequacy
Requirements". Lease commitments were not expected to materially affect capital
requirements. ICICI Bank provides capital on the put options outstanding and
forward contracts and derivatives contracts outstanding at year-end fiscal 2003
as per existing capital adequacy guidelines of the Reserve Bank of India. Under
the guidelines issued by the Reserve Bank of India in fiscal 2003, the deferred
tax asset is treated as an intangible asset and deducted from Tier 1 capital.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the risk
of unexpected increases in the cost of funding an asset portfolio at appropriate
maturities and the risk of being unable to liquidate a position in a timely
manner at a reasonable price. The goal of liquidity management is to be able,
even under adverse conditions, to meet all liability repayments on time and fund
all investment opportunities.
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. Incremental operations are principally funded by
accepting deposits from retail and corporate depositors. The deposits are
augmented by borrowings in the short-term inter-bank market and through the
issuance of bonds. Loan maturities and sale of investments also provide
liquidity. Most of the funds raised are used to extend loans or purchase
securities. Generally, deposits are of a shorter average maturity than loans or
investments.
Most of our incremental funding requirements, including replacement of
maturing liabilities of ICICI which generally had longer maturities, are met
through short-term funding sources, primarily in
132
the form of deposits including inter-bank deposits. However, a large portion of
its assets, primarily the assets of ICICI, have medium or long-term maturities,
creating a potential for funding mismatches. We actively monitor our liquidity
position and attempt to maintain adequate liquidity at all times to meet all
requirements of all depositors and bondholders, while also meeting the
requirement of lending groups. We seek to establish a continuous information
flow and an active dialogue between the funding and borrowing divisions of the
organization to enable optimal liquidity management. A separate group is
responsible for liquidity management.
Another source of liquidity risk is the put options written by us on the
loans which we have securitized. These options are binding on us and require us
to purchase, upon request of the holders, securities issued in such securitized
transactions. The options seek to provide liquidity to the security holders. If
exercised, we will be obligated to purchase the securities at the pre-determined
exercise price. All put options were out-of-the-money for the holders. At
year-end fiscal 2003, the aggregate put option exercise price of such
option-embedded loan and credit substitute sell-downs was Rs. 24.4 billion (US$
513 million).
We are required to maintain a certain percentage of our demand and time
liabilities, excluding specified liabilities, in cash reserves with the Reserve
Bank of India, which currently stands at 4.5%. In addition, we are also required
to maintain a statutory liquidity reserve by way of investments in government of
India securities, which is 25.0% at present.
We also have recourse to the liquidity adjustment facility and the
refinance window, which are short-term funding arrangements provided by the
Reserve Bank of India. We maintain a substantial portfolio of liquid high
quality securities that may be sold on an immediate basis to meet our liquidity
needs.
We also have the option of managing liquidity by borrowing in the
inter-bank market on a short-term basis. The overnight market which is a
significant part of the inter-bank market, is susceptible to volatile interest
rates. These interest rates on certain occasions, have touched historical highs
of 100.0% and above. To curtail reliance on such volatile funding, our liquidity
management policy has stipulated daily limits for borrowing and lending in this
market. The limit on daily borrowing is more stringent than the limit set by the
Reserve Bank of India. ICICI Securities, like us, relies for a certain
proportion of its funding on the inter-bank market for overnight money and is
therefore also exposed to similar risk of volatile interest rates.
We are required to submit gap analysis on a monthly basis to the Reserve
Bank of India. Pursuant to the Reserve Bank of India guidelines, the liquidity
gap (if negative) must not exceed 20.0% of outflows in the 1-14 day and the
15-28 day time category. We prepare fortnightly maturity gap analysis to review
its liquidity position. Static gap analysis is also supplemented by a dynamic
analysis for the short-term, to enable the liability raising units to have a
fair estimate of the short-term funding requirements. In addition, we also
monitors certain liquidity ratios on a fortnightly basis.
Our bonds are rated AAA by two Indian credit rating agencies, ICRA Limited
and Credit Analysis & Research Limited. Our term deposits are rated AAA by ICRA
Limited. Our long-term foreign currency borrowings are rated Baa3 by Moody's
Investors Service, which is one notch higher than the sovereign rating for
India, and BB by Standard and Poor's. Our short-term foreign currency ratings
are Ba2/ Not Prime by Moody's Investors Service and B by Standard and Poor's.
Any downgrade in these credit ratings, or any adverse change in these ratings
relative to other banks and financial intermediaries, could adversely impact our
ability to raise resources to meet our funding requirements, which in turn could
adversely impact our liquidity position.
In April 2003, unsubstantiated rumours, believed to have originated in
Gujarat, alleged that we were facing liquidity problems, although our liquidity
position was sound. We witnessed higher than normal deposit withdrawals during
the period April 11 to 13, 2003, on account of these unsubstantiated rumours. We
successfully controlled the situation, but if such situations were to arise
133
in future, any failure to control such situations could result in large deposit
withdrawals, which would adversely impact our liquidity position.
Capital Expenditure
The following tables set forth, for the periods indicated, certain
information related to capital expenditure by category of fixed assets.
Fiscal 2002
----------------------------------------------------------------------------------
Cost at
March 31, Additions/ Deletions/ Depreciation Net assets at March 31,
2001 transfers transfers 2002
----------------------------------------------------------------------------------
(in millions)
Land........................ Rs. 1,342 Rs. - Rs. (6) Rs. 103 Rs. 1,233 US$ 26
Buildings................... 6,642 649 (83) 429 6,779 143
Equipment, furniture, and
others (1).................. 4,558 1,420 (251) 1,625 4,102 86
Construction in progress.... 739 - (269) 6 463 10
Total....................... Rs. 13,281 Rs. 2,069 Rs. (609) Rs. 2,164 Rs. 12,577 US$ 265
---------------------
(1) Includes equipment and furniture, and others category as specified in Note
14 to our consolidated financial statements.
Fiscal 2003
----------------------------------------------------------------------------------
Cost at
March 31, Additions/ Deletions/ Depreciation Net assets at March 31,
2002 transfers transfers 2003
----------------------------------------------------------------------------------
(in millions)
Land........................ Rs. 1,336 Rs. 199 Rs. - Rs. 82 Rs. 1453 US$ 31
Buildings................... 7,208 4,224 (238) 930 10,264 217
Equipment, furniture and
others (1).................. 5,727 7,808 (874) 4,234 8,427 177
Construction in progress.... 469 1,010 (402) 6 1,071 24
Total....................... Rs. 14,740 Rs. 13,241 Rs. (1,514) Rs. 5,252 Rs. 21,215 US$ 449
---------------------
(1) Includes equipment and furniture, and others category as specified in Note
14 to our consolidated financial statements.
Our capital expenditure on property and equipment was Rs. 13.2 billion (US$
278 million) for fiscal 2003 compared to Rs. 2.1 billion (US$ 44 million) for
fiscal 2002 and Rs. 4.4 billion (US$ 92 million) for fiscal 2001. Capital
expenditure for fiscal 2003 includes capital assets acquired on amalgamation.
ICICI Bank's total fixed assets (gross) were Rs. 6.8 billion (US$ 144 million)
at year-end fiscal 2002, with Rs. 286 million (US$ 6 million) in land, Rs. 2.2
billion (US$ 46 million) in buildings and Rs. 4.0 billion (US$ 85 million) in
equipment, furniture and others.
Capital expenditure on buildings of Rs. 4.2 billion (US$ 89 million) in
fiscal 2003 primarily includes Rs. 2.2 billion (US$ 46 billion) impact of
amalgamation and expense on call centers and improvement in leasehold property.
Capital expenditure on equipment, furniture and others of Rs. 7.8 billion (US$
164 million) in fiscal 2003 primarily includes Rs. 4.0 billion (US$ 85 million)
impact of amalgamation, Rs. 2.1 billion (US$ 45 million) expense on computers
and software, and Rs. 676 million (US$ 14 million) on ATMs.
134
Significant Changes
Except as stated in this annual report, no significant changes have
occurred to us since the date of the fiscal 2003 consolidated financial
statements contained in this annual report.
Segment Revenues and Assets
Subsequent to the amalgamation of ICICI with and into ICICI Bank, the
composition of our operating segments has changed. Our operations are now
classified into the following segments: commercial banking segment, investment
banking segment and others, consisting of various operating segments that do not
meet the requirements to be reported as an individual reportable segment as
defined in SFAS No. 131 on Disclosure About Segments of an Enterprise and
Related Information. Segment data for previous periods has been reclassified on
a comparable basis.
The commercial banking segment provides medium-term and long-term project
and infrastructure financing, securitization, factoring, lease financing,
working capital finance and foreign exchange services to clients. Further, it
provides deposit and loan products to retail customers. The investment banking
segment deals in the debt, equity and money markets and provides corporate
advisory products such as mergers and acquisition advice, loan syndication
advice and issue management services.
Operating segments are defined as components of an enterprise for which
separate financial information is available that is regularly evaluated by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The chief operating decision maker evaluates performance
and allocates resources based on an analysis of various performance indicators
for each of the above reportable segments. Components of profit and loss are
evaluated for commercial banking and investment banking segments. Further, the
chief operating decision maker specifically reviews assets of the retail asset
division, which is part of commercial banking segment.
The results of ICICI Bank, were reported under the equity method of
accounting since April 1, 2000 i.e., for fiscal 2001 and 2002. However, for
management reporting, the entire results of ICICI Bank continue to be reported
as if the business were a consolidated entity. The segment-wise information
presented below is consistent with the management reporting.
Commercial Banking Segment
Fiscal 2003 compared to Fiscal 2002
Commercial banking segment made a net loss of Rs. 7.9 billion (US$ 165
million) in fiscal 2003 compared to a net income of Rs. 1.7 billion (US$ 36
million) in fiscal 2002, primarily due to an increase in provisions for loan
losses and a decrease in non-interest income.
Net interest income, including dividends, increased 16.4% to Rs. 15.6
billion (US$ 327 million) in fiscal 2003 from Rs. 13.4 billion (US$ 281 million)
in fiscal 2002 primarily due to the benefit of lower funding costs subsequent to
the amalgamation. Provisions for loan losses increased 71.4% to Rs. 19.6 billion
(US$ 413 million) in fiscal 2003 from Rs. 11.5 billion (US$ 241 million) in
fiscal 2002 primarily due to the Rs. 84.7 billion (US$ 1.8 billion) increase in
gross restructured and other impaired loans during the year.
Non-interest income decreased 52.2% to Rs. 5.2 billion (US$ 108 million) in
fiscal 2003 from Rs. 10.8 billion (US$ 227 million) in fiscal 2002 primarily due
to lower fee income on project finance and related activities and high other
than temporary diminution on equity securities and securities where application
money had been paid but securities were yet to be allotted. Non-interest expense
increased 6.8% to Rs. 12.4 billion (US$ 260 million) in fiscal 2003 from Rs.
11.6 billion (US$ 243 million) in fiscal 2002.
135
Fiscal 2002 compared to Fiscal 2001
Net income for the commercial banking segment decreased by 62.8% to Rs. 1.7
billion (US$ 36 million) in fiscal 2002 compared to Rs. 4.5 billion (US$ 95
million) in fiscal 2001, primarily due to an increase in non-interest expense
and a decrease in net interest income.
Net interest income, including dividends, decreased 7.6% to Rs. 13.4
billion (US$ 281 million) in fiscal 2002 from Rs. 14.5 billion (US$ 304 million)
in fiscal 2001 primarily due to non-accrual of interest on loans recognized as
impaired during fiscal 2002 and a reduction in the loan portfolio. Provisions
for loan losses increased 4.5% to Rs. 11.5 billion (US$ 241 million) in fiscal
2002 from Rs. 11.0 billion (US$ 231 million) in fiscal 2001.
Non-interest income increased 19.1% to Rs. 10.8 billion (US$ 227 million)
in fiscal 2002 from Rs. 9.1 billion (US$ 190 million) in fiscal 2001.
Non-interest expense increased 50.6% to Rs. 11.6 billion (US$ 243 million) in
fiscal 2002 from Rs. 7.7 billion (US$ 162 million) in fiscal 2001, primarily due
to the expenditure on the integration of the operations of Bank of Madura and
the expansion of the retail banking business.
Investment Banking Segment
Fiscal 2003 compared to Fiscal 2002
Net income for the investment banking segment decreased 5.7% to Rs. 1.2
billion (US$ 26 million) in fiscal 2003 compared to Rs. 1.3 billion (US$ 27
million) in fiscal 2002, primarily due to a decrease in net interest income and
increase in non-interest expense, offset by an increase in non-interest income.
Net interest income, including dividends, decreased to a loss of Rs. 2.1
billion (US$ 45 million) in fiscal 2003 from Rs. 1.8 billion (US$ 38 million) in
fiscal 2002 primarily due to the low-yielding government securities acquired for
meeting statutory liquidity ratio requirement on ICICI's liabilities. Our
government securities portfolio was fair valued at the time of amalgamation, and
hence was marked-up due to the decline in interest rates since the time these
securities were acquired. As a result, the amortization expense on these
securities increased significantly. Provisions for loan losses was Rs. 4 million
(US$ 84,122) in fiscal 2003 compared to Rs. 8 million (US$ 168,244) in fiscal
2002.
Non-interest income increased 244.4% to Rs. 7.0 billion (US$ 148 million)
in fiscal 2003 from Rs. 2.0 billion (US$ 43 million) in fiscal 2002 primarily
due to higher income on fixed income portfolio in a favorable interest rate
environment where interest rates steadily declined. Non-interest expense
increased 68.6% to Rs. 3.2 billion (US$ 66 million) in fiscal 2003 from Rs. 1.9
billion (US$ 39 million) in fiscal 2002.
Fiscal 2002 compared to Fiscal 2001
Net income for the investment banking segment decreased 49.8% to Rs. 1.3
billion (US$ 27 million) in fiscal 2002 from Rs. 2.6 billion (US$ 54 million) in
fiscal 2001, primarily due to an increase in non-interest expense and higher
income tax expense.
Net interest income, including dividends remained nearly the same at Rs.
1.8 billion (US$ 38 million) in fiscal 2002 as in fiscal 2001. Provisions for
loan losses was Rs. 8 million (US$ 168,224) in fiscal 2002 compared to Rs. 13
million (US$ 273,996) in fiscal 2001.
Non-interest income decreased marginally to Rs. 2.0 billion (US$ 43
million) in fiscal 2002 from Rs. 2.1 billion (US$ 43 million) in fiscal 2001.
Non-interest expense increased by 43.1% to Rs. 1.9 billion (US$ 39 million) in
fiscal 2002 from Rs. 1.3 billion (US$ 27 million) in fiscal 2001.
136
Related Party Transactions
We have transactions with our affiliates, directors and employees. The
following represent the significant transactions between ICICI Bank and such
related parties:
Insurance services
In fiscal 2003, we paid insurance premiums to ICICI Lombard General
Insurance Company amounting to Rs. 224 million (US$ 5 million) compared to Rs.
26 million (US$ 546,793) in fiscal 2002. These premiums were primarily on
account of health insurance for employees and insurance for directors' and
officers' liability.
Lease of premises and facilities
ICICI Bank has entered into lease arrangements with related parties in
respect of certain premises and facilities. In fiscal 2003, ICICI Bank received
for the lease of premises, facilities and other administrative costs from ICICI
Prudential Life Insurance Company, Rs. 84 million (US$ 2 million) as compared to
Rs. 54 million (US$ 1 million) in fiscal 2002, from Prudential ICICI Asset
Management Company, Rs. 6 million (US$ 126,183) as compared to Rs. 5 million
(US$ 105,152) in fiscal 2002, and from ICICI Lombard General Insurance Company,
Rs. 82 million (US$ 2 million) as compared to Rs. 50 million (US$ 1 million) in
fiscal 2002.
In fiscal 2002, ICICI received rentals for lease of premises, facilities
and other equipment from ICICI Bank, Rs. 256 million (US$ 5 million) as compared
to Rs. 193 million (US$ 4 million) in fiscal 2001. Similarly, in fiscal 2002,
ICICI paid rentals to ICICI Bank for lease of premises, Rs. 11 million (US$
231,335) as compared to Rs. Nil in fiscal 2001.
Secondment of employees
In fiscal 2003, we received from Prudential ICICI Asset Management Company
Limited for seconded employees, Rs. 3 million (US$ 63,091) as compared to Rs.
nil in fiscal 2001 and from ICICI Lombard General Insurance Company, Rs. 10
million (US$ 210,305) as compared to Rs. 5 million (US$ 105,152) in fiscal 2002.
In fiscal 2002, ICICI received from ICICI Bank for seconded employees, Rs.
55 million (US$ 1 million) as compared to Rs. 4 million (US$ 84,122) in fiscal
2001. Similarly, ICICI paid to ICICI Bank for employees seconded to ICICI, Rs. 8
million (US$ 168,244) as compared to Rs. 5 million (US$ 105,152) in fiscal 2001.
Asset management services
In fiscal 2003, we provided asset management services to TCW and earned
fees of Rs. 24 million (US$ 504,732) as compared to Rs. 21 million (US$ 441,640)
earned by ICICI in fiscal 2002.
Deposits and borrowings
In fiscal 2003, ICICI Bank paid interest on bonds/deposits/call borrowings
to affiliated companies totaling Rs. 12 million (US$ 252,366). In fiscal 2002,
ICICI received payments from ICICI Bank of Rs. 268 million (US$ 6 million).
137
Banking services
ICICI utilized banking services of ICICI Bank. In fiscal 2002, non-interest
expense of ICICI relating to such services amounted to Rs. 32 million (US$
672,976) as compared to Rs. 72 million (US$ 2 million) in fiscal 2001.
Derivative transactions
In fiscal 2002, ICICI entered into interest rate swap contracts and cross
currency swap contracts with ICICI Bank aggregating Rs. 10.3 billion (US$ 217
million) and Rs. Nil respectively as compared to Rs. 3.4 billion (US$ 70
million) and Rs. 1.3 billion (US$ 28 million) in fiscal 2001 respectively.
Contracts aggregating Rs. 8.8 billion (US$ 184 million) and Rs. 2.3 billion (US$
48 million) at year-end fiscal 2002 as compared to Rs. 2.9 billion (US$ 61
million) and Rs. 4.4 billion (US$ 92 million) at year-end fiscal 2001, were
outstanding for interest rate swaps and currency swaps respectively. Net
interest income in respect of these swaps amounted to Rs. 275 million (US$ 6
million) in fiscal 2002 as compared to Rs. 189 million (US$ 4 million) in fiscal
2001.
Similarly, ICICI entered into forward foreign exchange contracts with ICICI
Bank aggregating Rs. 22.5 billion (US$ 472 million) in fiscal 2002 compared to
Rs. 47.9 billion (US$ 1.0 billion)) in fiscal 2001. Contracts aggregating Rs.
251 million (US$ 5 million) at year-end fiscal 2002 compared to Rs. 2.3 billion
(US$ 48 million) at year-end fiscal 2001 were outstanding.
Reverse repurchase transactions
In fiscal 2002, ICICI entered into reverse repurchase transactions with
ICICI Bank amounting to Rs. 52.8 billion (US$ 1.1 billion) as compared to Rs.
nil in fiscal 2001. At year-end fiscal 2002, ICICI had reverse repurchase
transactions outstanding with ICICI Bank of Rs. 21.4 billion (US$ 450 million)
compared to Rs. nil in fiscal 2001.
Software development services
In fiscal 2002, ICICI provided software development services to Tricolor
Infotech Services and Prudential ICICI Asset Management Company and earned fees
of Rs. 19 million (US$ 399,579) as compared to Rs. 8 million (US$ 168,244) in
fiscal 2001.
In fiscal 2002, ICICI developed software and provided software and hardware
support services to ICICI Bank, and earned fees of Rs. 124 million (US$ 3
million) compared to Rs. 73 million (US$ 2 million) in fiscal 2001.
Back-office support services
In fiscal 2002, ICICI set up a common technology infrastructure platform
and ICICI Bank was charged as its share of the communication expenses, backbone
infrastructure expenses and data center costs, Rs. 182 million (US$ 4 million)
compared to Rs. 94 million (US$ 2 million) in fiscal 2001.
In fiscal 2002, ICICI provided telephone banking call-center services and
transaction processing services for the credit card operations of ICICI Bank,
and earned fees of Rs. 149 million (US$ 3 million) as compared to Rs. 99 million
(US$ 2 million) in fiscal 2001.
Transfer of financial assets
In fiscal 2002, ICICI transferred loans in pass-through securitization
transactions, where the beneficial interests were purchased by ICICI Bank, of
Rs. 11.2 billion (US$ 235 million) as compared to Rs. 438 million (US$ 9
million) in fiscal 2001. Gain of Rs. 98 million (US$ 2 million) in fiscal 2002
as compared to Rs. 50 million (US$ 1 million) in fiscal 2001 was recorded on the
sale.
138
Subsequently, due to a change in the status of the qualifying special
purpose entity used in the transactions, ICICI regained control of the assets
sold. At year-end fiscal 2002, obligations of Rs. 3.5 billion (US$ 74 million)
as compared to Rs. Nil at year-end fiscal 2001 relating to such repurchases had
been reflected as a component of the other borrowings.
Share transfer activities
In fiscal 2002, ICICI provided share transfer services and
dematerialization services to ICICI Bank and earned fees of Rs. 3 million (US$
63,091) as compared to Rs. 8 million (US$ 168,244) in fiscal 2001.
Other transactions
In fiscal 2002, ICICI undertook a corporate brand advertising campaign, out
of which an amount of Rs. 29 million (US$ 1 million) as compared to Rs. 15
million (US$ 315,457 million) in fiscal 2001 has been recovered from ICICI Bank.
Employee loans
ICICI Bank has advanced housing, vehicle and general purpose loans to
employees, bearing rates of interest ranging from 2.5% to 3.5%. The tenure of
these loans range from five years to 25 years. The loans are generally secured
by the assets acquired by the employees. Employee loan balances outstanding at
year-end fiscal 2003, of Rs. 2.3 billion (US$ 48 million) as compared to fiscal
2002 Rs. 949 million (US$ 20 million) are included in other assets. At year-end
fiscal 2003, loans of Rs. 25 million (US$ 525,762) were outstanding to certain
of ICICI Bank's directors and executive officers. These loans were made in the
ordinary course of business, on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable loans to
other employees, and did not involve more than the normal risk of
collectibility.
Transactions with principal government-controlled shareholders
During fiscal 2003, we entered into several transactions with our
principal government-controlled shareholders, Life Insurance Corporation of
India, Unit Trust of India and General Insurance Corporation of India and other
government-controlled general insurance companies. These transactions were in
the normal course of our business and the businesses of these
government-controlled entities. These transactions included deposit taking by us
from these entities and securitization and sale of assets by us to these
entities. These entities also acted as our counterparties in money market
operations. Life Insurance Corporation of India also administers certain of our
employee gratuity funds and our employee superannuation fund. All of these
transactions and arrangements were, and are, conducted on a third party
arms-length basis.
Related party balances
The following balances payable to and receivable from related parties
are included in the balance sheet:
As of March 31,
-----------------------------
2002 2,003
-----------------------------
(in millions)
Cash and cash equivalents...................... Rs. 4,360 Rs. -
Loans.......................................... 209 22
Other assets................................... 1,269 2,549
Deposits....................................... - 440
Other liabilities.............................. 24 3
139
Critical Accounting Policies
The notes to our consolidated financial statements contain a summary of our
significant accounting policies. Certain of these policies are considered to be
important to the portrayal of our financial condition, since they require
management to make difficult, complex or subjective judgements, some of which
may relate to matters that are inherently uncertain. The policies include
valuation of derivatives and securities where no ready market exists,
identification and measurement of other than temporary diminution in the value
of securities, valuation of securitization transactions, accounting for income
tax, deferred tax assets and deferred tax liabilities and determining the level
of allowance for credit losses.
Additional information about these policies can be found in Note 1 to our
consolidated financial statements. The statements below contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
See "Forward-Looking Statements".
Our consolidated financial statements are prepared in accordance with US
GAAP, which require us to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and the reported income and expenses during the reported period. We
believe that of its significant accounting policies, the following may involve a
higher degree of judgement and complexity.
Valuation of Securities, Derivatives Transactions and Hedging activities
We classify investments in debt and readily marketable equity securities,
other than investments held by certain venture capital subsidiaries, into two
categories based upon management's intention at the time of purchase: trading
securities and securities available for sale. Realized gains and losses on the
sale of securities are recorded at the time of sale. For computing realized
gains and losses on securities, the cost is ascertained using the
first-in-first-out method.
Trading assets, primarily debt securities and foreign exchange products,
are recorded at fair value with realized and unrealized gains and losses
included in non-interest income. Interest on trading securities is recorded in
interest income. The fair value of trading assets is based upon quoted market
prices or, if quoted market prices are not available, the value is estimated as
follows:
o The fair value of the unquoted government of India securities is estimated
based on the yields to maturity rates of these securities as published by
certain agencies approved by the Reserve Bank of India.
o The fair value of the unquoted securities (excluding government of India
securities) and preference shares is computed based on the mark-up over the
yield to maturity rates for government of India securities, as published by
certain agencies approved by the Reserve Bank of India. The mark-up is
graded according to the ratings assigned to the issuer of the securities by
the rating agencies.
o The fair values of investments in unquoted mutual fund units are estimated
based on the latest repurchase price declared by the mutual fund in respect
of each particular scheme. If the repurchase price is not available, the
fair value is estimated based on the net asset value of the respective
scheme.
o The fair values of certain derivative contracts are derived from pricing
models that consider market and contractual prices for the underlying
financial instruments, as well as the time value of money, the yield curve
and any other volatility factors underlying the positions.
140
We no longer classify investments in debt securities as held to maturity,
due to sale of certain held to maturity securities in fiscal 2002 by ICICI. In
fiscal 2002, ICICI sold debt securities classified as held to maturity. As the
securities were sold for reasons other than those specified in SFAS No. 115, all
remaining held to maturity securities were reclassified as available for sale.
Securities not classified as trading securities are classified as available
for sale. These include securities used as part of our asset liability
management strategy, which may have been sold in response to changes in interest
rates, prepayment risk, liquidity needs and similar factors. Securities
available for sale are recorded at fair value with unrealized gains and losses
recorded, net of tax, as a component of accumulated other comprehensive income.
Equity securities, which are traded on a securities exchange within six
months of the balance sheet date are considered as publicly traded. The last
quoted price of such securities is taken as their fair value. Non-readily
marketable equity securities for which there is no readily determinable fair
value are recorded at cost.
Securities on which there is an unrealized loss that is deemed to be other
than temporary are written down to fair value with the loss recorded in
non-interest income as a loss on other securities. Other than temporary decline
is identified by management based on an evaluation of all significant factors
including the length of time and the extent to which the fair value is less than
the cost, the financial condition and prospects of the issuer and our extent and
ability to retain the investment for a period of time sufficient to allow for
any probable recovery in fair value.
Securities acquired through conversion of loans in a troubled debt
restructuring are recorded at fair value on the date of conversion and
subsequently accounted for as if acquired for cash.
Our venture capital subsidiaries carry their investments at fair value,
with changes in fair value recognized in gain or loss on venture capital
investments. The fair values of publicly traded venture capital investments are
generally based upon quoted market prices. In certain situations, including
thinly traded securities, large-block holdings, restricted shares or other
special situations, the quoted market price is adjusted to produce an estimate
of the attainable fair value for the securities. For securities that are not
publicly traded, fair value is determined in good faith pursuant to procedures
established by the board of directors of the venture capital subsidiaries. In
determining the fair value of these securities, consideration is given to the
financial conditions, operating results and prospects of the underlying
companies, and any other factors deemed relevant. Generally, these investments
are carried at cost during the first year, unless a significant event occurred
that affects the long-term value of the investment. Because of the inherent
uncertainty of the valuations, those estimated values may have differed
significantly from the values that would have been used had a ready market for
the investments existed.
SFAS No. 133 and SFAS No. 138 require that all derivative instruments be
recorded on the balance sheet at their respective fair values with unrealized
gains and losses recorded either in accumulated other comprehensive income or in
the statement of income, depending on the purpose for which the derivative was
held. At the inception of a hedge transaction, we formally document the hedge
relationship and the risk management objective and strategy for undertaking the
hedge. This process includes identification of the hedging instrument, hedged
item, risk being hedged and the methodology for measuring effectiveness. In
addition, we assess, both at the inception of the hedge and on an ongoing
quarterly basis, whether the derivative used in the hedging transaction has been
highly effective in offsetting changes in fair value or cash flows of the hedged
item, and whether the derivative is expected to continue to be highly effective.
Derivatives that do not meet the criteria for designation as a hedge under SFAS
No. 133 at inception, or fail to meet the criteria thereafter, are accounted for
in other assets with changes in fair value recorded in the statement of income.
We discontinue hedge accounting prospectively when either it is determined
that the derivative is no longer highly effective in offsetting changes in the
fair value or cash flows of a hedged item; the derivative expires or is sold,
terminated or exercised; the derivative is de-designated because it is
141
unlikely that a forecasted transaction would occur; or management determines
that designation of the derivative as a hedging instrument is no longer
appropriate.
Changes in the fixed income, equity, foreign exchange markets would have
impacted our estimate of fair value in the future, potentially affecting
principal trading revenues. Similarly, pricing models and their underlying
assumptions impacted the amount and timing of unrealized gains and losses
recognized, and the use of different pricing models or assumptions could have
produced different financial results.
Allowance for loan losses
The allowance for loan losses represents management's estimate of probable
losses inherent in the portfolio. Larger balance, non-homogenous exposures
representing significant individual credit exposures are evaluated based upon
the borrower's overall financial condition, resources and payment record and the
realizable value of any collateral. Within the allowance of loan losses, a
valuation allowance is maintained for larger-balance, non-homogenous loans that
have been individually determined to be impaired. This estimate considers all
available evidence including the present value of the expected future cash flows
discounted at the loan's contractual effective rate and the fair value of
collateral. This evaluation process is subject to numerous estimates and
judgements.
Each portfolio of smaller-balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, are
individually evaluated for impairment. The allowance for loan losses attributed
to these loans are established via a process that included an estimate of
probable losses inherent in the portfolio, based upon various statistical
analysis. These included migration analysis, in which historical delinquency and
credit loss experience are applied to the current aging of the portfolio,
together with an analysis that reflects current trends and conditions. The use
of different estimates or assumptions could have produced different provisions
for smaller-balance homogeneous loan losses.
While determining the adequacy of the allowance for loan losses, management
also considers overall portfolio indicators including historical credit losses,
delinquent and non-performing loans, and trends in volumes and terms of loans;
an evaluation of overall credit quality and the credit process, including
lending policies and procedures; consideration of economic, geographical,
product, and other environmental factors; and model imprecision. This evaluation
process is subject to numerous estimates and judgements, including assumptions
as to future cashflows, time to recovery, collateral valuation and other
variables. Changes in these assumptions could have impacted, and could in the
future impact, our estimate of allowance for loan losses and produce different
financial results.
Securitization
We primarily securitize commercial loans through "pass-through"
securitizations. After the securitization, we generally continue to maintain
customer account relationships and service loans transferred to the
securitization trust. Transfers that do not meet the criteria for a sale under
SFAS No. 140 are recorded as secured borrowings with a pledge of collateral.
Such secured borrowings are reported as a component of other borrowings.
Recourse and servicing obligations and put options written are recorded as
proceeds of the sale. Retained beneficial interests in the loans and servicing
rights are measured by allocating the carrying value of the loans between the
assets sold and the retained interest, based on the relative fair value at the
date of the securitization. The fair values are determined using either
financial models, quoted market prices or sales of similar assets.
Financial models and their underlying assumptions relating to delinquency,
prepayments, servicing costs and conversions from floating rate loans to fixed
rate loans, impacted the amount and timing of gains and losses recognized, and
the use of different financial models or assumptions could have produced
different financial results.
142
Goodwill and intangible assets
On April 1, 2001, we early-adopted SFAS No. 142, Goodwill and Other
Intangible Assets. As required by SFAS No. 142, we reclassified existing
goodwill and intangible assets to conform to the new criteria in SFAS No. 141,
Business Combinations, for recognition apart from goodwill. This resulted in
reclassification of previously recorded intangible assets of Rs. 115 million
(US$ 2 million) as goodwill and a reclassification of previously recorded
goodwill of Rs. 373 million (US$ 8 million) as a separate unidentifiable
intangible asset.
As required by SFAS No. 142, we identified our reporting units and assigned
assets and liabilities, including goodwill to the reporting units on the date of
adoption. Subsequently, we compared the fair value of each reporting unit to its
carrying value, to determine whether goodwill was impaired at the date of
adoption. This transitional impairment evaluation did not indicate an impairment
loss.
Subsequent to the adoption of SFAS No. 142, we did not amortize goodwill
but instead tested goodwill for impairment at least annually. The annual
impairment test under SFAS No. 142 did not indicate an impairment loss.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. SFAS No. 147 requires that business combinations
involving financial institutions within its scope, be accounted for under SFAS
No. 141. Previously, generally accepted accounting principles for acquisitions
of financial institutions provided for recognition of the excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. Under SFAS No.
147, such excess is accounted for as goodwill. Adoption of SFAS No. 147 resulted
in a reclassification of previously recorded unidentifiable intangible asset of
Rs. 373 million (US$ 8 million) to goodwill with effect from April 1, 2001.
Further, as required by SFAS No. 147, the Company reversed the amortization
expense of Rs. 290 million (US$ 6 million) and the related income tax benefit of
Rs. 103 million (US$ 2 million), by restating the results for the year ended
March 31, 2002.
As described above, this impairment evaluation process was subject to
numerous estimates and judgements, including assumptions on business growth,
risk-free interest rate, market premium and future cashflows. Changes in these
estimates could have had a direct impact on the impairment charge.
Income taxes
We account for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the amount for financial reporting and tax basis of assets
and liabilities, using enacted tax rates expected to apply to taxable income in
the years the temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the statement of income in the period of enactment. Deferred tax
assets are recognized subject to a valuation allowance based upon management's
judgment as to whether realization is considered more likely than not.
The process of evaluating the realizability of deferred tax assets was
subject to numerous estimates and judgements. Changes in these estimates could
have had a direct impact on the valuation allowance for deferred tax assets and
could result in a change in the valuation allowance.
143
Recently Issued Accounting Standards
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The disclosure provisions of SFAS
No. 148 are applicable for fiscal periods beginning after December 15, 2002. We
continue to use the intrinsic value based method of APB Opinion No. 25 to
account for our employee stock based compensation plans. We have adopted the
disclosure provisions of SFAS No. 148 for fiscal 2003.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities - an interpretation of Accounting Research Bulletin No. 51.
FIN No. 46 is applicable to all variable interest entities created after January
31, 2003. In respect of variable interest entities created before February 1,
2003, FIN No. 46 will be applicable from fiscal periods beginning after June 15,
2003. There are no variable interest entities that require disclosure under FIN
46. Further, there were no variable interest entities at year-end fiscal 2003,
created after January 31, 2003 that were required to be consolidated under FIN
46.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Adoption of SFAS No. 149 will not have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equities. SFAS No. 150
requires entities to classify a financial instrument that is within its scope as
a liability (or an equity in some circumstances). We are currently evaluating
the requirements and impact of this statement on our consolidated results of
operations and financial position.
144
MANAGEMENT
Directors and Executive Officers
The board of directors of ICICI Bank, consisting of 18 members at
August 31, 2003, is responsible for the management of ICICI Bank's business.
The organizational documents of ICICI Bank provide for a minimum of three
directors and a maximum of 21 directors, excluding the government director and
the debenture director (defined below), if any. ICICI Bank may, subject to the
provisions of its organizational documents and the Indian Companies Act, change
the minimum or maximum number of directors by a resolution which is passed at a
general meeting by at least 75% of the present and voting shareholders. In
addition, under the Indian Banking Regulation Act, the Reserve Bank of India
may require ICICI Bank to convene a meeting of its shareholders for the
purposes of appointing new directors to its board of directors.
The Banking Regulation Act requires that at least 51% of the directors
should have special knowledge or practical experience in areas relevant to
banking including accounting, finance, agriculture, banking and small scale
industry. Accordingly, all of ICICI Bank's directors are professionals with
special knowledge of one or more of the above areas. Of the 18 directors, six
are directors who are in the wholetime employment of ICICI Bank, or wholetime
directors. The appointment of wholetime directors requires the approval of the
Reserve Bank of India. Under the terms of the loan and guarantee facilities
provided by the government of India to us, the government of India is entitled
to appoint and has appointed one representative to the board, currently Mr.
Vinod Rai. Of the remaining 11 independent directors, the Chairman of the
board, Mr. N. Vaghul, is the former chairman of ICICI, Mr. P. C. Ghosh is the
Chairman of General Insurance Corporation of India, one of ICICI Bank's large
domestic institutional shareholders, two directors are experts in the areas of
agriculture and small-scale industries respectively as required by the Banking
Regulation Act, one is a consultant, one is a practicing chartered accountant,
one is a professor of finance, one is a retired executive and three are from
industrial companies.
ICICI Bank's organizational documents also provide that ICICI Bank may
execute trust deeds securing its debentures under which the trustee or trustees
may appoint a director, known as the debenture director. The debenture director
is not subject to retirement by rotation and may only be removed as provided in
the relevant trust deed. Currently, there is no debenture director on the board
of directors.
Pursuant to the provisions of the Indian Companies Act, at least
two-thirds of the total number of directors, excluding the government director
and the debenture director, are subject to retirement by rotation. One-third of
these directors must retire from office at each annual meeting of shareholders.
A retiring director is eligible for re-election. Pursuant to the provisions of
the Indian Banking Regulation Act, none of the directors other than wholetime
directors may hold office continuously for a period exceeding eight years.
The board of directors appointed Ms. Chanda Kochhar and Dr. Nachiket
Mor as Executive Directors effective April 1, 2001, Mr. K.V. Kamath and Ms.
Lalita D. Gupte, previously non-wholetime directors on the board, as Managing
Director and CEO and Joint Managing Director respectively, effective May 3,
2002 and Ms. Kalpana Morparia and Mr. S. Mukherji as Executive Directors,
effective May 3, 2002. Mr. H. N. Sinor, who was appointed Managing Director and
CEO effective June 1, 1998 and re-designated as Joint Managing Director
effective May 3, 2002, retired effective June 1, 2003.
The tenures of appointment of Mr. K. V. Kamath, Ms. Kalpana Morparia
and Mr. S. Mukherji are until April 30, 2006. The tenure of appointment of Ms.
Lalita D. Gupte is until June 23, 2004 and the tenures of each of Ms. Chanda D.
Kochhar and Dr. Nachiket Mor is until March 31, 2006. However, in order to
145
comply with the Companies Act and ICICI Bank's organizational documents, Ms.
Lalita D. Gupte, Ms. Kalpana Morparia and Mr. S. Mukherji will be subject to
retirement by rotation if at any time the number of non-rotational directors
exceeds one-third of the total number of directors. If they are re-appointed as
directors immediately upon retirement by rotation, they will continue to hold
their offices as wholetime directors, and the retirement by rotation and
re-appointment shall not be deemed to constitute a break in their appointment.
ICICI Bank's other executive officers may hold office until they retire, unless
they are discharged earlier by ICICI Bank.
The board of directors of ICICI Bank at August 31, 2003 had the following
members:
------------------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
------------------------------------------------------------------------------------------------------------------------------------
Mr. Narayanan Vaghul 67 March 27, 2002 Chairman
Chairman Asset Reconstruction Company (India) Limited
GIVE Foundation
Chairman: Himatsingka Seide Limited
Agriculture & Small Enterprises Business Committee ICICI Knowledge Park
Board Governance and Remuneration Committee Intercommercial Bank, West Indies
Business Strategy Committee Mahindra Industrial Park Limited
Credit Committee Pratham India Education Initiative
Risk Committee Director
Air India Limited
Profession : Apollo Hospitals Enterprise Limited
Development Banker Azim Premji Foundation
Hemogenomics Private Limited
Ispat Caribbean
Ispat International N.V., Rotterdam, The
Netherlands
Ispat Mexicana, S.A. de C.V., Mexico
Mahindra & Mahindra Limited
Nicholas Piramal India Limited
Technology Network (India) Private Limited
Wipro Limited
------------------------------------------------------------------------------------------------------------------------------------
Mr. Uday Madhav Chitale 53 August 21, 1997 Partner
M.P. Chitale & Company
Chairman: M.P. Chitale & Associates
Share Transfer and Shareholders'/Investors' Director
Grievance Committee
Crossdomain Solutions Private Limited
Profession: DFK Consulting Services (India) Private Limited
Chartered Accountant DFK International (the Netherlands)
Indian Council for Dispute Resolution
Iskraemeco Seahorse Industries Limited
------------------------------------------------------------------------------------------------------------------------------------
Mr. Prabhas Chandra Ghosh 58 January 31, 2003 Chairman
General Insurance Corporation of India
Profession: GIC Asset Management Company Limited
Company Executive GIC Housing Finance Limited
Loss Prevention Association of India Limited
India International Insurance Pte. Limited
Director
Deposit Insurance and Credit Guarantee
Corporation
Export Credit Guarantee Corporation of India
Indian Register of Shipping
Kenindia Assurance Company Limited
Life Insurance Corporation of India
Institutional Nominee Director
ECE Industries Limited
Southern Petrochemical Industries Corporation
Limited
------------------------------------------------------------------------------------------------------------------------------------
146
------------------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
------------------------------------------------------------------------------------------------------------------------------------
Dr. Satish Chandra Jha 69 May 2, 1997 Director
Phillips India Limited
Profession : SREI Venture Capital Limited
Development Economist Walchand Capital Limited
------------------------------------------------------------------------------------------------------------------------------------
Mr. Lakshmi Niwas Mittal 53 May 3, 2002 Director
3019693 Nova Scotia ULC
Profession : 9064-4816 Quebec Inc.
Industrialist Artha Limited
Caribbean Ispat Limited
CMBJ Pena Colarada
Galmatias Limited
Grupo Ispat International S.A. de C.V.
Irish Ispat Limited
Iscor Limited, South Africa
Ispat Annaba Spa
Ispat Canada Inc.
Ispat Europe Group S.A.
Ispat Germany GmbH
Ispat Hamburger Stahlwerke GmbH
Ispat Inland Holdings Inc.
Ispat Inland Inc.
Ispat Inland L.P.
Ispat Inland S.A.
Ispat International Limited
Ispat International N.V.
Ispat Karmet JSC
Ispat Mexicana S.A. de C.V.
Ispat Shipping Limited
Ispat Sidbec Inc.
Ispat Sidex Holdings B.V.
Ispat Sidex (S.A.)
Ispat Stahlwerk Ruhrort GmbH
Ispat Tebessa
Ispat Unimetal S.A.
Ispat US Holdings B.V.
Ispat (US) Holding Inc.
Ispat US Investments B.V.
Kent Wire (Ispat) Limited
LNM Capital Limited
LNM Holdings B.V.
LNM Holdings N.V.
LNM Holdings S.L.
LNM International Ventures Limited
LNM Internet Ventures Limited
Lucre Limited
Nestor Limited
Nuav Limited
Penna Colarada Servicios S.A.De C.V.
PT Ispat Indo
SC Ispat Sidex S.A.
Stahl Ruhort GmbH
Tecvest Corporation N.V.
Tommyfield Limited
Trefileurope S.A.
Walker Wire (Ispat) Inc.
------------------------------------------------------------------------------------------------------------------------------------
Mr. Anupam Pradip Puri 57 May 3, 2002 Director
Daksh eServices Private Limited
Profession : Dr. Reddy's Laboratories Limited
Management Consultant Godrej Consumer Products Limited
Mahindra-British Telecom Limited
Mahindra & Mahindra Limited
-------------------------------------------------------------- --------------------------------------------------------------------
147
------------------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
------------------------------------------------------------------------------------------------------------------------------------
Mr. Vinod Rai 55 January 3, 2003 Director
Joint Secretary (IF) Bank of Baroda
IFCI Limited
Ministry of Finance & Company Affairs, Infrastructure Development Finance Company
Government of India Limited
Profession: Small Industries Development Bank of India
Government Service
------------------------------------------------------------------------------------------------------------------------------------
Mr. Somesh Ramchandra Sathe 58 January 29, 1998 Managing Director
Arbes Tools Private Limited
Profession: ESSP Meditek Private Limited
Technocrat Entrepreneur Sukeshan Equipments Private Limited
Partner
Tooltronics
------------------------------------------------------------------------------------------------------------------------------------
Mr. Ramaswamy Seshasayee 55 May 3, 2002 Managing Director
Ashok Leyland Limited
Chairman
Chairman: Irizar TVS Private Limited
Audit Committee Director
Ashley Holdings Limited
Profession: Ashley Investments Limited
Company Executive Ashok Leyland Finance Limited
EID Parry (India) Limited
Ennore Foundries Limited
Sundaram Asset Management Company Limited
------------------------------------------------------------------------------------------------------------------------------------
Mr. Mahendra Kumar Sharma 56 January 31, 2003 Vice-Chairman
Hindustan Lever Limited
Profession: Chairman
Company Executive Vasishti Detergents Limited
Director
Hind Lever Chemicals Limited
Hind Lever Trust Limited
Indexport Limited
Lever India Exports Limited
Nepal Lever Limited
Toc Disinfectants Limited
------------------------------------------------------------------------------------------------------------------------------------
Mr. Priya Mohan Sinha 63 January 22, 2002 Director
Azim Premji Foundation
Profession:: Lafarge India Limited
Professional Manager Quadra Advisory Private Limited
Wipro Limited
Indian Oil Corporation Limited
------------------------------------------------------------------------------------------------------------------------------------
Prof. Marti Gurunath Subrahmanyam 57 May 3, 2002 Director
Infosys Technologies Limited
Profession:: Nexgen Financial Holdings Limited
Professor Nexgen Re Limited
Nomura Asset Management (U.S.A.), Inc.
Supply Chainge Inc.
Usha Communication Inc.
------------------------------------------------------------------------------------------------------------------------------------
148
------------------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
------------------------------------------------------------------------------------------------------------------------------------
Mr. Kundapur Vaman Kamath 55 April 17, 1996 Chairman
Managing Director & CEO ICICI Bank UK Limited
(Managing Director ICICI Lombard General Insurance Company Limited
Chairman: and Chief Executive ICICI Prudential Life Insurance Company Limited
Committee of Directors Officer effective ICICI Securities Limited
May 3, 2002) ICICI Venture Funds Management Company
Profession: Limited
Company Executive Director
Indian Institute of Management, Ahmedabad
Director - Asia Pacific
Visa International Asia-Pacific Regional Board,
Singapore
Director - Board of Governors
Indian Institute of Information Technology
------------------------------------------------------------------------------------------------------------------------------------
Ms. Lalita Dileep Gupte 54 September 12, 1994 Director
Joint Managing Director (Joint Managing ICICI Bank UK Limited
Director effective ICICI Lombard General Insurance Company Limited
Chairperson : May 3, 2002) ICICI Prudential Life Insurance Company Limited
Asset Liability Management Committee ICICI Securities Limited
ICICI Venture Funds Management Company
Profession : Limited
Company Executive
------------------------------------------------------------------------------------------------------------------------------------
Ms. Kalpana Morparia 54 May 3, 2002 Chairperson
Executive Director ICICI Investment Management Company Limited
Director
Profession : ICICI Home Finance Company Limited
Company Executive ICICI Lombard General Insurance Company Limited
ICICI Prudential Life Insurance Company Limited
ICICI Securities Limited
ICICI Venture Funds Management Company
Limited
------------------------------------------------------------------------------------------------------------------------------------
Mr. Subrata Mukherji 50 May 3, 2002 Director
Executive Director ICICI Lombard General Insurance Company
Limited
Profession : ICICI Securities Limited
Company Executive
------------------------------------------------------------------------------------------------------------------------------------
Ms. Chanda Kochhar 41 April 1, 2001 Chairperson
Executive Director ICICI Home Finance Company Limited
ICICI Distribution Finance Private Limited
Profession : Director
Company Executive ICICI Prudential Life Insurance Company Limited
------------------------------------------------------------------------------------------------------------------------------------
Dr. Nachiket Mor 39 April 1, 2001 Director
Executive Director Azim Premji Foundation
ICICI Home Finance Company Limited
Profession : ICICI Securities Limited
Company Executive ICICI Venture Funds Management Company
Limited
------------------------------------------------------------------------------------------------------------------------------------
149
The executive officers of ICICI Bank at August 31, 2003 were as follows:
----------------------------------------------------------------------------------------------------------------------------------
Total
remuneration Bonus for Shareholdings
Designation and Years of work in fiscal fiscal at August 29,
Name Age Responsibilities experience 2003(1) 2003(2) 2003 (3)
----------------------------------------------------------------------------------------------------------------------------------
Mr. K.V. Kamath (5) 55 Managing Director and 32 Rs. 7,339,227 Rs. 2,352,000 18,500
Chief Executive Officer
Ms. Lalita D. 54 Joint Managing Director 32 Rs. 7,391,669 Rs. 1,764,000 6,041
Gupte (5) -International Banking
Ms. Kalpana Morparia (5) 54 Executive Director 27 Rs. 7,322,568 Rs. 1,234,800 16,190
- Corporate Centre
Mr. S. Mukherji (5) 50 Executive Director 25 Rs. 5,472,184 Rs. 1,234,800 2,504
- Project Finance and
Special Assets
Ms. Chanda D. 41 Executive Director 19 Rs. 3,846,740 Rs. 1,029,000 3,881
Kochhar(5) - Retail Banking
Dr. Nachiket Mor(5) 39 Executive Director 16 Rs. 4,861,571 Rs. 1,029,000 -
- Wholesale Banking
Mr. Sanjiv 52 Senior General Manager 27 Rs. 5,308,869 Rs. 960,000 4,289
Kerkar (5)
Ms. Ramni Nirula(5) 51 Senior General Manager 27 Rs. 4,445,515 Rs. 1,920,000 2,066
(Mananging Director and
CEO, (ICICI Securities
Limited)
Mr. P. H. Ravikumar (5) 52 Senior General Manager 30 Rs. 4,075,969 Rs. 1,344,000 1,070
(Managing Director
National Commodities &
Derivatives Exchange
Limited)
Mr. Balaji 38 Senior General Manager 14 Rs. 3,986,504 Rs. 2,280,000 -
Swaminathan (5)
Mr. Achintya Karati(5) 57 Senior General Manager 38 Rs. 4,433,639 Rs. 1,740,000 2,674
Table continue
---------------------------------------------------------------------------------------------------------------------
Stock Stock Total stock
options options granted at
granted in granted August
Designation and Years of work fiscal 2003 in July 31, 2003
Name Age Responsibilities experience (4) 2003
---------------------------------------------------------------------------------------------------------------------
Mr. K.V. Kamath (5) 55 Managing Director and 32 120,000 30,000 525,000
Chief Executive Officer
Ms. Lalita D. 54 Joint Managing Director 32 110,000 27,500 465,000
Gupte (5) -International Banking
Ms. Kalpana Morparia (5) 54 Executive Director 27 100,000 25,000 340,000
- Corporate Centre
Mr. S. Mukherji (5) 50 Executive Director 25 100,000 25,000 333,000
- Project Finance and
Special Assets
Ms. Chanda D. 41 Executive Director 19 80,000 20,000 255,000
Kochhar(5) - Retail Banking
Dr. Nachiket Mor(5) 39 Executive Director 16 80,000 20,000 252,000
- Wholesale Banking
Mr. Sanjiv 52 Senior General Manager 27 - - 148,000
Kerkar (5)
Ms. Ramni Nirula(5) 51 Senior General Manager 27 75,000 - 207,000
(Mananging Director and
CEO, (ICICI Securities
Limited)
Mr. P. H. Ravikumar (5) 52 Senior General Manager 30 44,000 - 154,700
(Managing Director
National Commodities &
Derivatives Exchange
Limited)
Mr. Balaji 38 Senior General Manager 14 75,000 - 180,000
Swaminathan (5)
Mr. Achintya Karati(5) 57 Senior General Manager 38 37,500 - 115,000
150
-----------------------------------------------------------------------------------------------------------------------------------
Total
remuneration Bonus for Shareholdings
Designation and Years of work in fiscal fiscal at August 29,
Name Age Responsibilities experience 2003(1) 2003(2) 2003 (3)
-----------------------------------------------------------------------------------------------------------------------------------
Mr. Bhargav Dasgupta(5) 37 Senior General Manager 13 Rs. 2,387,417 Rs. 1,140,000 -
Mr. M. N. Gopinath(5) 54 Senior General Manager 35 Rs. 3,487,546 Rs. 1,350,000 400
Mr. N. S. Kannan(5) 38 Chief Financial Officer 15 Rs. 4,296,428 Rs. 1,620,000 900
and Treasurer
Ms. Madhabi Puri-Buch(5) 37 Senior General Manager 14 Rs. 4,152,135 Rs. 1,620,000 2,341
Mr.V. Vaidyanathan(5) 35 Senior General Manager 13 Rs. 3,330,892 Rs. 1,620,000 -
Table Continue
--------------------------------------------------------------------------------------------------------------------
Stock Stock Total stock
options options granted at
granted in granted August
Designation and Years of work fiscal 2003 in July 31, 2003
Name Age Responsibilities experience (4) 2003
---------------------------------------------------------------------------------------------------------------------
Mr. Bhargav Dasgupta(5) 37 Senior General Manager 13 34,400 - 98,475
Mr. M. N. Gopinath(5) 54 Senior General Manager 35 37,500 - 132,750
Mr. N. S. Kannan(5) 38 Chief Financial Officer 15 37,500 - 112,400
and Treasurer
Ms. Madhabi Puri-Buch(5) 37 Senior General Manager 14 37,500 - 129,900
Mr.V. Vaidyanathan(5) 35 Senior General Manager 13 37,500 - 109,900
(1) Including ICICI Bank's contribution to the gratuity, superannuation fund
and provident fund as described under "-Compensation and Benefits to
Directors and Officers- Gratuity, Superannuation Fund and Provident Fund"
and excluding bonus payable for fiscal 2003 which was paid in fiscal 2004.
(2) Bonus for fiscal 2003 was paid in fiscal 2004.
(3) Executive officers and directors (wholetime and non-wholetime) as a group
held less than 0.1% of ICICI Bank's equity shares as of this date.
(4) Each stock option, once exercised, is equivalent to one equity share of
ICICI Bank. ICICI Bank granted these stock options to its executive
officers at no cost. See "-Compensation and Benefits to Directors and
Officers- Employee Stock Option Scheme" for a description of the other
terms of these stock options.
(5) In accordance with the Scheme of Amalgamation, directors and employees of
ICICI have received stock options in ICICI Bank equal to half the number
of the outstanding unexercised stock options they held in ICICI with the
exercise price of these options being equal to twice the exercise price
for the ICICI stock options exchanged. The stock options mentioned above
include ICICI stock options converted into ICICI Bank stock options on
this basis.
Mr. K.V. Kamath is a mechanical engineer and a post-graduate in
business management from the Indian Institute of Management, Ahmedabad. He
joined ICICI in 1971 and gained experience in project finance, leasing,
resources and corporate planning. In 1988, he left ICICI to join the Asian
Development Bank, where he worked for six years. In January 1995, he joined a
major private sector group in Indonesia as advisor to the Chairman. Mr. Kamath
joined the board of ICICI in October 1995. He was appointed Managing Director
and Chief Executive Officer of ICICI in May 1996 and was re-appointed in May
2001. Mr. Kamath was a non-wholetime director on the board of ICICI Bank from
April 1996. Effective May 3, 2002 the board appointed Mr. Kamath as Managing
Director & CEO.
Ms. Lalita D. Gupte has a Bachelor of Arts degree and also holds a
Masters degree in management science from the Jamnalal Bajaj Institute of
Management Studies, University of Mumbai. She joined ICICI in 1971, where she
worked in the areas of project finance, leasing, resources and treasury, and
credit operations. She joined the board of directors of ICICI in June 1994 as
an Executive Director and was designated as the Deputy Managing Director in
1996. In April 1999, she was designated as the Joint Managing Director and
Chief Operating Officer of ICICI. From July 2001, she was designated as Joint
Managing Director and Chief Operating Officer - International Business. Ms.
Lalita D. Gupte was a non-wholetime director on the board of ICICI Bank from
September 1994. Effective May 3, 2002, the board appointed Ms. Gupte as Joint
Managing Director. She is currently in charge of international business.
Ms. Kalpana Morparia holds Bachelor's degrees in science and law. She
worked in the legal department of ICICI from 1975 to 1994. From 1996, when she
was designated as General Manager, she was in charge of the legal, planning,
treasury and corporate communications departments. In 1998, she was designated
a Senior General Manager of ICICI. She joined the board of directors of ICICI
in May 2001. Effective May 3, 2002 the board of ICICI Bank appointed Ms.
Morparia as an Executive Director. She is currently in charge of ICICI Bank's
Corporate Centre which includes the strategy, risk management, legal, finance,
accounts, taxation, planning, performance management,
151
management information systems, investor relations, secretarial, human
resources management, corporate communications and facilities management and
administration departments.
Mr. S. Mukherji holds a management degree from the Jamnalal Bajaj
Institute of Management Studies, University of Mumbai and a Master's degree
from the London School of Economics. Mr. Mukherji worked in the projects and
operations department of ICICI at Mumbai between 1978 and 1992. He was Zonal
Manager of ICICI's Kolkata zonal office between 1992 and 1997. During 1997, he
headed the western regional office of ICICI. He was designated as Senior
General Manager of ICICI in 1998. He joined the board of directors of ICICI in
May 2001. Effective May 3, 2002 the board appointed Mr. Mukherji as an
Executive Director. He is currently in charge of the project finance and
special assets management groups.
Ms. Chanda D. Kochhar holds a management degree from the Jamnalal Bajaj
Institute of Management Studies, Mumbai and a degree in cost accountancy from
the Institute of Cost and Works Accountants of India and has wide experience in
the fields of corporate credit, infrastructure financing, e-commerce strategy
and retail business. She started her career in 1984 at ICICI in its projects
department. Ms. Kochhar was designated a Senior General Manager of ICICI in
2000 and was in charge of its retail business. She was appointed to the board
of directors of ICICI Bank as an Executive Director in April 2001. She is
currently responsible for the retail banking business.
Dr. Nachiket Mor holds a post-graduate diploma in finance management
from the Indian Institute of Management, Ahmedabad and a Doctorate of
Philosophy in Financial Economics from the University of Pennsylvania,
Philadelphia, USA. He started his career as an officer in the Corporate
Planning and Policy Cell of ICICI in 1987. He has specialized knowledge in
project finance, corporate planning and treasury. Dr. Mor was designated a
Senior General Manager of ICICI in 2000 and was in charge of treasury and the
social initiatives group. He was appointed to the board of directors of ICICI
Bank as an Executive Director in April 2001. He is currently responsible for
wholesale banking.
Mr. Sanjiv Kerkar is a chemical engineer and holds a management degree
from the Jamnalal Bajaj Institute of Management Studies, University of Mumbai.
He worked with ICICI from 1979 until 1993, when he joined Asian Finance and
Investment Company Limited, an affiliate of the Asian Development Bank. Mr.
Kerkar worked with Asian Finance and Investment Company from 1993 to 1996. In
1996, he re-joined ICICI as a General Manager and was in charge of the risk
management department in ICICI. In 1998 he was designated a Senior General
Manager of ICICI. Currently, Mr. Kerkar heads the Organizational Excellence
Group which is responsible for ICICI Bank's quality initiatives.
Ms. Ramni Nirula is a post-graduate in management studies from Delhi
University. She joined ICICI in 1975 and held various positions in the northern
regional office of ICICI. Ms. Nirula became General Manager in 1998 and was the
Zonal Manager of the Delhi zonal office for the period 1998 to 2000. She was
designated as Senior General Manager of ICICI in fiscal 2000. She was
designated a Senior General Manager of ICICI Bank in fiscal 2002. She is
currently the Managing Director and Chief Executive Officer of ICICI
Securities.
Mr. P.H. Ravikumar is a graduate from Osmania University. Mr. Ravikumar
started his career with Bank of India in 1972. He joined ICICI Bank in 1994. He
became Senior Executive Vice-President in 1998 and was in charge of treasury,
foreign exchange and credit. Mr. Ravikumar joined ICICI in April 2001 as Senior
General Manager. He was designated a Senior General Manager of ICICI Bank in
fiscal 2002. He is currently on secondment to the National Commodity &
Derivatives Exchange Limited as its Managing Director.
Mr. Balaji Swaminathan is a graduate in commerce from Calcutta
University, a chartered accountant and a cost and works accountant. Mr. Balaji
Swaminathan started his career with KPMG International in 1989. He worked in
KPMG India as Partner/Director from 1994 to 2001. He joined ICICI in August
2001 as its Chief Financial Officer and was the Chief Financial Officer of
ICICI up to March 31, 2002. He was the Chief Financial Officer of ICICI Bank
from April 1, 2002 to March
152
31, 2003. Currently, he is in charge of the Corporate Banking Group in the
Wholesale Banking Group.
Mr. Achintya Karati holds Bachelor's degrees in commerce and law. He
joined ICICI in 1978 in the legal department. In 2003 he was designated a
Senior General Manager of ICICI Bank. Currently, he is in charge of the
Government Banking Group and the Rural, Micro-banking & Agri-business Group in
the Wholesale Banking Group.
Mr. Bhargav Dasgupta is an engineer and has a post graduate degree in
management from Indian Institute of Management, Bangalore. He joined ICICI in
1992 in the project finance department. In 2003 he was designated a Senior
General Manager of ICICI Bank. Currently, he is in charge of the International
Banking Group.
Mr. M. N. Gopinath is a graduate in commerce and has a post-graduate
degree in business administration from Madras University. Mr. Gopinath started
his career with Bank of India in 1970. He worked in various positions at Bank
of India including as Vice-President in its New York Branch. He joined ICICI
Bank in 1995 as Senior Vice-President. In 2003 he was designated a Senior
General Manager of ICICI Bank. Currently, he is in charge of the Retail
Operations and Services Group in the Retail Banking Group.
Mr. N. S. Kannan is an engineer and a Chartered Financial Analyst from
the Institute of Chartered Financial Institutes of India and has a
post-graduate degree in management from the Indian Institute of Management,
Bangalore. Mr. Kannan joined ICICI in 1991 in the project finance department.
In 2003 he was designated a Senior General Manager of ICICI Bank. Currently, he
is the Chief Financial Officer and Treasurer of ICICI Bank.
Ms. Madhabi Puri-Buch is a graduate in mathematical economics and has a
post-graduate degree in management from the Indian Institute of Management,
Ahmedabad. She joined ICICI in 1989 in the project finance department. She left
ICICI in 1992 and worked in ANZ Grindlays Bank and ORG MARG & Research before
re-joining ICICI again in January 1997 in the planning and treasury department.
In 2003 she was designated a Senior General Manager of ICICI Bank. Currently,
she is in charge of Retail Asset Operations and the Product and Technology
Group in the Wholesale Banking Group.
Mr. V. Vaidyanathan has Bachelor's and Master's degrees in business
administration from Birla Institute of Technology & Science, Ranchi. He worked
in Citibank N.A. before joining ICICI in 2000 in the personal financial
services division. In 2003 he was designated a Senior General Manager of ICICI
Bank. Currently, he is in charge of the Retail Products & Distribution Group in
the Retail Banking Group.
Corporate Governance
ICICI Bank's corporate governance policies recognize the accountability
of the board and the importance of making the board transparent to all its
constituents, including employees, customers, investors and the regulatory
authorities, and to demonstrate that the shareholders are the ultimate
beneficiaries of ICICI Bank's economic activities.
ICICI Bank's corporate governance framework is based on an effective
independent board, the separation of the board's supervisory role from the
executive management and the constitution of board committees, comprising a
majority of independent directors and chaired by an independent director, to
oversee critical areas and functions of executive management.
ICICI Bank's corporate governance philosophy encompasses not only
regulatory and legal requirements, such as the terms of listing agreements with
stock exchanges, but also several voluntary practices aimed at a high level of
business ethics, effective supervision and enhancement of value for all
shareholders.
153
The board's role, functions, responsibility and accountability are
clearly defined. In addition to its primary role of monitoring corporate
performance, the functions of the board include:
o approving corporate philosophy and mission;
o participating in the formulation of strategic and business plans;
o reviewing and approving financial plans and budgets;
o monitoring corporate performance against strategic and business plans,
including overseeing operations;
o ensuring ethical behavior and compliance with laws and regulations;
o reviewing and approving borrowing limits;
o formulating exposure limits; and
o keeping shareholders informed regarding plans, strategies and performance.
To enable the board of directors to discharge these responsibilities
effectively, executive management gives detailed reports on the performance of
ICICI Bank on a quarterly basis.
The board functions either as a full board or through various
committees constituted to oversee specific operational areas. These board
committees meet regularly. The constitution and main functions of the various
committees are given below.
Audit Committee
The Audit Committee comprises four independent directors - Mr. R.
Seshasayee and Mr. Uday M. Chitale, who are chartered accountants, Mr. M.K.
Sharma and Mr. Somesh R. Sathe. This committee is chaired by Mr. R. Seshasayee.
The Audit Committee provides direction to the audit and risk management
function and monitors the quality of the internal and statutory audit. The
responsibilities of the Audit Committee include overseeing the financial
reporting process to ensure that the financial statements are fair, sufficient
and credible, recommending appointment and removal of central and branch
statutory auditors and fixing their remuneration, reviewing the annual
financial statements before submission to the board, reviewing adequacy of
internal control systems and the internal audit function, reviewing compliance
with the inspection and audit reports of the Reserve Bank of India and reports
of statutory auditors, reviewing findings of internal investigations,
discussing the scope of audit with external auditors and examining reasons for
substantial defaults, if any, of non-payment to stakeholders.
Board Governance & Remuneration Committee
The Board Governance & Remuneration Committee comprises four independent
directors - Mr. N. Vaghul, Mr. Anupam Puri, Mr. R. Seshasayee and Mr. P. M.
Sinha, and is chaired by Mr. N. Vaghul.
The functions of the Board Governance & Remuneration Committee include
recommending appointments to the board, evaluating the performance of the
Managing Director and Chief Executive Officer, the board and individual
members, on pre-determined parameters, recommending to the board the
remuneration (including performance bonus and perquisites) to wholetime
directors, approving the policy for and amount of bonus payable to employees,
framing guidelines for the employees stock option scheme and recommending the
grant of stock options to the employees and wholetime directors of ICICI Bank
and its subsidiary companies and formulating a code of ethics and governance.
154
Business Strategy Committee
The Business Strategy Committee comprises six directors - Mr. N. Vaghul,
Mr. Anupam Puri, Mr. R. Seshasayee, Mr. M.K. Sharma, Mr. P. M. Sinha and Mr. K.
V. Kamath. The majority of the members of this committee are independent
directors and it is chaired by Mr. N. Vaghul.
The functions of this committee are to approve the annual income and
expenditure and capital expenditure budgets for presentation to the board for
final approval and to review and recommend to the board the business strategy
of ICICI Bank.
Credit Committee
The Credit Committee comprises four directors - Mr. N. Vaghul, Dr.
Satish C. Jha, Mr. Somesh R. Sathe and Mr. K. V. Kamath. The majority of the
members of the committee are independent directors and it is chaired by Mr. N.
Vaghul.
The functions of this Committee include reviewing developments in key
industrial sectors and approving credit proposals in accordance with the
authorization approved by the board.
Risk Committee
The Risk Committee comprises four directors - Mr. N. Vaghul, Mr. Uday M.
Chitale, Prof. Marti G. Subrahmanyam and Mr. K. V. Kamath. The majority of the
members of this committee are independent directors and it is chaired by Mr. N.
Vaghul.
This committee reviews ICICI Bank's risk management policies in
relation to various risks including portfolio, liquidity, interest rate,
off-balance sheet and operational risks, investment policies and strategy, and
regulatory and compliance issues in relation thereto.
Share Transfer & Shareholders'/Investors' Grievance Committee
The Share Transfer & Shareholders'/Investors' Grievance Committee
comprises four directors - Mr. Uday M. Chitale, Mr. Somesh R. Sathe, Ms. Kalpana
Morparia and Ms. Chanda D. Kochhar, and is chaired by an independent director,
Mr. Uday M. Chitale.
The functions and powers of this committee include approving and
rejecting transfers or transmissions of equity and preference shares, bonds,
debentures and securities, issuance of duplicate certificates, allotment of
shares and securities issued from time to time, including under stock options,
review and redressal of shareholders' and investors' complaints, opening and
operating of bank accounts for payment of interest and dividend and the listing
of securities on stock exchanges.
Committee of Directors
The Committee of Directors comprises all the wholetime directors and it
is chaired by Mr. K.V. Kamath, Managing Director and Chief Executive Officer.
The functions and powers of this committee include reviewing
performance against targets for various business segments and credit approvals
in accordance with authorization approved by the board, borrowing and treasury
operations and premises and property related matters.
Asset-Liability Management Committee
The Asset Liability Management Committee comprises five wholetime
directors and is chaired by Ms. Lalita D. Gupte, Joint Managing Director.
155
The functions of this committee include managing the balance sheet,
reviewing the asset-liability profile with a view to managing the market risk
exposure and determining the deposit and lending rates.
Agriculture & Small Enterprises Business Committee
Effective July 1, 2003, the Board has constituted an Agriculture & Small
Enterprises Business Committee comprising five independent Directors - Mr. N.
Vaghul, Dr. Satish C. Jha, Mr. Somesh R. Sathe, Mr. P.M. Sinha and Mr. M.K.
Sharma, and chaired by Mr. N. Vaghul.
The functions of the Agriculture & Small Enterprises Business Committee
include reviewing the business strategy of ICICI Bank in the agri-business and
small enterprises segments and also reviewing the quality of the agricultural
lending and small enterprises finance credit portfolio.
Compensation and Benefits to Directors and Officers
Remuneration
Under ICICI Bank's organizational documents, each non-wholetime
director, except the government director, is entitled to receive remuneration
for attending each meeting of the board or of a board committee. The amount of
remuneration payable to non-wholetime directors is set by the board from time
to time in accordance with limitations prescribed by the Indian Companies Act
or the government of India. The remuneration for each board or committee
meeting is currently fixed at Rs. 20,000 (US$ 421). In addition, ICICI Bank
reimburses directors for travel and related expenses in connection with board
and committee meetings and related matters. If a director is required to
perform services for ICICI Bank beyond attending meetings, ICICI Bank may
remunerate the director as determined by the board of directors and this
remuneration may be either in addition to or as substitution for the
remuneration discussed above. Non-wholetime directors are not entitled to the
payment of any benefits at the end of their term of office.
At its meeting held on April 26, 2002, the board of directors appointed
Mr. K. V. Kamath as Managing Director and Chief Executive Officer, Ms. Lalita
D. Gupte as Joint Managing Director and Ms. Kalpana Morparia and Mr. S.
Mukherji as Executive Directors effective May 3, 2002, and approved their
remuneration effective that date. The board also revised the remuneration
payable to Ms. Chanda D. Kochhar and Dr. Nachiket Mor effective May 3, 2002.
This was approved at the annual general meeting of the shareholders on
September 16, 2002. At its meeting held on July 25, 2003, the board revised the
salary range of Ms. Lalita D. Gupte. This was approved at the annual general
meeting of the shareholders on August 25, 2003. The remuneration of wholetime
directors requires the approval of the Reserve Bank of India. Approval of the
Reserve Bank of India for the appointment and remuneration of the wholetime
directors has been received.
The board or any committee thereof may fix within the range stated
below the salary payable to the wholetime directors, subject to the approval of
the Reserve Bank of India:
Mr. K. V. Kamath, Managing Director and Chief Executive
Officer.................................................... Rs. 400,000 to Rs. 650,000 (US$ 8,412 to US$ 13,670) per month
Ms. Lalita D. Gupte, Joint Managing Director................. Rs. 200,000 to Rs. 650,000 (US$ 4,206 to US$ 13,670) per month
Ms. Kalpana Morparia, Executive Director..................... Rs. 200,000 to Rs. 400,000 (US$ 4,206 to US$ 8,412) per month
Mr. S. Mukherji, Executive Director.......................... Rs. 200,000 to Rs. 400,000 (US$ 4,206 to US$ 8,412) per month
Ms. Chanda D. Kochhar, Executive Director.................... Rs. 150,000 to Rs. 400,000 (US$ 3,155 to US$ 8,412) per month
Dr. Nachiket Mor, Executive Director......................... Rs. 150,000 to Rs. 400,000 (US$ 3,155 to US$ 8,412) per month
The wholetime directors are entitled to perquisites (evaluated pursuant
to Indian Income-Tax Rules, wherever applicable, and otherwise at actual cost
to ICICI Bank), such as furnished accommodation, gas, electricity, water and
furnishings, club fees, personal insurance, use of car and telephone at
residence or reimbursement of expenses in lieu thereof, payment of income-tax
on perquisites by ICICI Bank to the extent permissible under the Indian
Income-tax Act, 1961, medical reimbursement, leave and leave travel concession,
education benefits, provident fund, superannuation
156
fund, gratuity and other retirement benefits, in accordance with the scheme(s)
and rule(s) applicable to employees of ICICI Bank from time to time.
Where accommodation is not provided, each of the wholetime directors is
eligible for a house rent allowance of Rs. 50,000 (US$ 1,052) per month and
maintenance of accommodation including furniture, fixtures and furnishings, as
may be provided by ICICI Bank.
The total compensation paid by ICICI Bank to its wholetime directors and
executive officers, Mr. K.V. Kamath, Mr. H. N. Sinor, Ms. Lalita D. Gupte, Ms.
Kalpana Morparia, Mr. S. Mukherji, Ms. Chanda D. Kochhar, Dr. Nachiket Mor, Mr.
Sanjiv Kerkar, Ms. Ramni Nirula, Mr. P.H. Ravikumar, Mr. Balaji Swaminathan, Mr.
Achintya Karati, Mr. Bhargav Dasgupta, Mr. M.N. Gopinath, Mr. N.S. Kannan, Ms.
Madhabi Puri Buch and Mr. V. Vaidyanathan in fiscal 2003 was Rs. 107 million
(US$ 2 million) including bonus for fiscal 2003 to wholetime directors and other
executive officers paid in fiscal 2004.
Bonus
Each year, the board of directors awards discretionary bonuses to
employees and wholetime directors on the basis of performance and seniority.
The performance of each employee is judged by a performance management
appraisal system. The aggregate amount paid by ICICI Bank for bonuses to all
eligible employees and wholetime directors for fiscal 2003 was Rs. 646 million
(US$ 14 million). This amount was paid in fiscal 2004.
Employee Stock Option Scheme
On January 24, 2000, ICICI Bank's board approved an employee stock
option scheme to attract, encourage and retain high performing employees. ICICI
Bank's shareholders approved this scheme at the extraordinary general meeting
on February 21, 2000. This scheme was drafted in accordance with guidelines
issued by the Securities and Exchange Board of India. Under this scheme, up to
5.0% of ICICI Bank's issued equity shares at March 31, 2000 could be allocated
to employee stock options.
The employee stock option scheme as amended by the Scheme of
Amalgamation limits the maximum number of options granted to any eligible
employee (as defined below) to 0.05% of ICICI Bank's issued equity shares at
the time of the grant, and the aggregate of all such options is limited to 5.0%
of ICICI Bank's issued equity shares following the amalgamation. The stock
options entitle ICICI Bank's eligible employees, and eligible employees of
ICICI Bank's subsidiary companies, to apply for equity shares. The options vest
annually in a graded manner over a three-year period, with 20.0%, 30.0% and
50.0% of the grants vesting each year, commencing not earlier than 12 months
from the date of grant. The options can be exercised within 10 years from the
date of grant or five years from the date of vesting, whichever is later. The
exercise price of the options is the closing market price on the stock
exchange, which records the highest trading volume on the date of grant. An
eligible employee is a permanent employee or a director of ICICI Bank or of its
subsidiaries or its holding company. ICICI Bank has no holding company.
In February 2000, the Securities and Exchange Board of India directed
the National Securities Depository Limited to instruct companies to issue
shares which are pari passu in all respects. The National Securities Depository
Limited issued the instruction in March 3, 2000. ICICI Bank's board of
directors, at its meeting held on July 25, 2003, amended ICICI Bank's Employees
Stock Option Scheme to give effect to the requirements of the National
Securities Depository Limited.
On June 30, 2003, the Securities and Exchange Board of India revised
its guidelines on employee stock options. While the revised guidelines provide
that companies are free to determine the exercise price of stock options
granted by them, they prescribe accounting rules and other disclosures,
including expensing of stock options in the income statement, which are
applicable to our Indian GAAP financial statements, in the event the exercise
price is not equal to the average of the high and
157
low market price of the equity shares in the two week period preceding the date
of grant of the options, on the stock exchange which records the highest trading
volume during the two week period.
The following table sets forth certain information regarding the stock
option grants ICICI Bank has made under its employee stock option scheme. ICICI
Bank granted all of these stock options at no cost to its employees. ICICI Bank
has not granted any stock options to its non-wholetime directors.
---------------------- ---------------------------- --------------------------
Date of grant Number of options granted Exercise price (1)
---------------------- ---------------------------- --------------------------
February 21, 2000..... 1,713,000 Rs. 171.90 US$ 3.62
April 26, 2001........ 1,580,200 170.00 3.58
March 27, 2002........ 3,155,000 120.35 2.53
April 25, 2003........ 7,338,300 132.05 2.78
July 25, 2003......... 147,500 157.03 3.30
_______________
(1) The exercise price for options granted prior to June 30, 2003 is equal to
the market price of ICICI Bank's equity shares on the date of grant on the
stock exchange that recorded the highest trading volume on the date of grant.
The exercise price for options granted on July 25, 2003 is equal to the average
of the high and low market price of the equity shares in the two week period
preceding the date of grant of the options, on the stock exchange which
recorded the highest trading volume during the two week period.
ICICI also had an employee stock option scheme for its directors and
employees and the directors and employees of its subsidiary companies, the
terms of which were substantially similar to the employee stock option scheme
of ICICI Bank. The following table sets forth certain information regarding the
stock option grants made by ICICI under its employee stock option scheme prior
to the amalgamation. ICICI granted all of these stock options at no cost to its
employees. ICICI had not granted any stock options to its non-wholetime
directors.
---------------------- ---------------------------- --------------------------
Date of grant Number of options granted Exercise price (1)
---------------------- ---------------------------- --------------------------
August 3, 1999........ 2,323,750 Rs. 85.55 US$ 1.80
April 28, 2000........ 2,902,500 133.40 2.81
November 14, 2000..... 20,000 82.90 1.74
May 3, 2001........... 3,145,000 82.00 1.72
August 13, 2001....... 60,000 52.50 1.10
March 27, 2002........ 6,473,700 60.25 1.27
______________
(1) The exercise price is equal to the market price of ICICI's equity shares on
the date of grant. However, the share options granted on August 3, 1999 were
accounted as a variable plan resulting in a compensation cost of Rs. 97 million
(US$ 2 million) which is being amortized over the vesting period.
In accordance with the Scheme of Amalgamation, directors and employees
of ICICI and its subsidiary companies received stock options in ICICI Bank
equal to half the number of their outstanding unexercised stock options in
ICICI. The exercise price for these options is equal to twice the exercise
price for the ICICI stock options. All other terms and conditions of these
options are similar to those applicable to ICICI Bank's stock options pursuant
to its employee stock option scheme.
The following table sets forth certain information regarding the
options granted by ICICI Bank (including options granted by ICICI adjusted in
accordance with the Scheme of Amalgamation) as at August 31, 2003.
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------------------------------------------- ------------------------------
Particulars ICICI Bank
------------------------------------------- ------------------------------
------------------------------------------- ------------------------------
Options granted............................ 21,396,475
Options vested............................. 6,585,758
Options exercised.......................... 193,545
Options forfeited/lapsed................... 1,506,775
Extinguishment or modification of options.. -
Amount realized by sale of options......... Rs. 24,089,206
Total number of options in force........... 19,696,155
In April 2000, ICICI Infotech approved an employee stock option plan.
Under the plan, ICICI Infotech is authorized to issue up to 5.0% of its issued
equity shares at the time of grant of the options to an eligible employee and
25.0% of its issued equity shares at the time of grant of the options, in
aggregate, to all the eligible employees. Eligible employees are granted an
option to purchase shares subject to vesting conditions. The options vest in a
graded manner over a three-year period with 20.0%, 30.0% and 50.0% of the
options vesting at the end of each year from the date of grant of the options.
The options can be exercised within 10 years from the date of grant or five
years from the date of vesting, whichever is later. ICICI Infotech granted
713,500 options during fiscal 2003 at the fair value of the underlying shares
on the grant date of Rs. 100 (US$ 2.10) per equity share. ICICI Infotech had
also granted 2,044,800 stock options during fiscal 2002 at the fair value of
the underlying shares on the grant date of Rs. 68 (US$ 1.43) per equity share.
ICICI Infotech had also granted 2,347,800 stock options during fiscal 2001 at
the fair value of the underlying shares on the grant date of Rs. 37.50 (US$
0.79) per equity share. The fair values for fiscal 2001, 2002 and 2003 have
been determined by an external valuer. As the shares of ICICI Infotech are not
quoted on stock exchanges, the fair value, as determined by the valuer,
represents management's best estimates considering all known factors. Of the
stock options granted since fiscal 2001, 884,720 were forfeited by year-end
fiscal 2003. Of the stock options granted since fiscal 2001, 1,867,200 were
granted to ICICI Bank's directors and executive officers.
In July 2000, ICICI Venture Funds Management Company approved an
employee stock option plan under which ICICI Venture Funds Management Company
was authorized to issue up to 125,000 equity shares to its employees and
employees of ICICI and ICICI group companies. Eligible employees were granted
an option to purchase shares subject to vesting conditions. The options vested
over a period of three years with 20.0%, 30.0% and 50.0% of the options vesting
at the end of each year. The options could have been exercised within 10 years
from the date of the grant. ICICI Venture Funds Management Company granted
81,400 stock options during fiscal 2001 at the fair value of the underlying
shares on the grant date of Rs. 835 (US$ 17.56) per equity share. As shares of
ICICI Venture Funds Management Company are not quoted on exchanges, the fair
value represented management's best estimates considering all known factors. Of
the above, 2,500 stock options were forfeited by year-end fiscal 2001. Of the
stock options granted, 20,425 were granted to ICICI Bank's directors and
executive officers. ICICI Venture Funds Management Company did not grant any
stock options in fiscal 2002. ICICI Venture Funds Management Company's employee
stock option plan was withdrawn in February 2002 and all outstanding stock
options under the plan were cancelled. The board of directors of ICICI Venture
Funds Management Company, at its meeting held on October 30, 2002, approved a
Carry Plan for its employees. The Carry Plan provides for ICICI Venture Funds
Management Company to directly pay carry from the performance fee earned by it
from the funds managed or advised on by it, to its employees through a special
trust created for the purpose. Pursuant to the approval of the board of
directors of ICICI Venture Funds Management Company, the Carry Plan is in the
process of being documented and implemented. A copy of the "Description of the
Carry Plan of ICICI Venture Funds Management Company" has been filed as an
exhibit to this annual report.
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Loans
ICICI Bank has internal rules and regulations to grant loans to
employees to acquire certain assets such as property, vehicles and other
consumer durables. ICICI Bank's loans to employees have been made at interest
rates ranging from 2.5% to 3.5% per annum and are repayable over fixed periods
of time. The loans are generally secured by the assets acquired by the
employees. ICICI Bank had given loans to its employees for purchasing its
shares in the offering made by ICICI in June 1997 at the public offering price.
Bank of Madura had also given loans to employees for purchasing preferential
shares in the offering made by Bank of Madura in August 1995. Pursuant to the
Banking Regulation Act, ICICI Bank's non-wholetime directors were not eligible
for any loans. At year-end fiscal 2003, there were loans of Rs. 2.4 billion
(US$ 50 million) compared to loans of Rs. 745 million (US$ 16 million) at
year-end fiscal 2002. outstanding to ICICI Bank employees. This amount included
loans of Rs. 25 million (US$ 525,762), compared to Rs. 11 million (US$ 231,335)
at year-end fiscal 2002, to certain of its directors and executive officers,
made prior to the enactment of the Sarbanes-Oxley Act of 2002 on July 30, 2002
and in relation to which there has been no material modification to any term or
any renewal on or after July 30, 2002.
Gratuity
Under Indian law, ICICI Bank is required to pay a gratuity to employees
who retire or resign after at least five years of continuous service. ICICI
Bank makes contributions to three separate gratuity funds, for employees
inducted from ICICI, employees inducted from Bank of Madura and employees of
ICICI Bank other than employees inducted from ICICI and Bank of Madura.
The gratuity funds for employees inducted from ICICI and Bank of Madura
are separate gratuity funds managed by in-house trustees. Actuarial valuation
of the gratuity liability is determined by an independent actuary. The
investments of the funds are made according to rules prescribed by the
government of India. The accounts of the funds are audited by independent
auditors. The total corpuses of these funds based on the latest unaudited
figures, at year-end fiscal 2003 was Rs. 756 million (US$ 16 million).
The gratuity fund for employees of ICICI Bank other than employees
inducted from ICICI and Bank of Madura, is administered by the Life Insurance
Corporation of India. In accordance with the gratuity fund's rules, actuarial
valuation of gratuity liability is calculated based on certain assumptions
regarding rate of interest, salary growth, mortality and staff turnover. The
total corpus of the funds at year-end fiscal 2003 was Rs. 53 million (US$ 1
million).
Superannuation Fund
ICICI Bank contributes 15.0% of the total annual salary of each
employee to two separate superannuation funds, for ICICI Bank employees and
employees inducted from ICICI respectively. The funds are administered by the
Life Insurance Corporation of India. ICICI Bank's employees get an option on
retirement or resignation to receive one-third of the total balance and a
monthly pension based on the remaining two-third balance. In the event of death
of an employee, his or her beneficiary receives the remaining accumulated
balance of 66.7%. ICICI Bank also gives a cash option to its employees,
allowing them to receive the amount contributed by ICICI Bank in their monthly
salary during their employment. The total corpus of the two superannuation
funds was Rs. 640 million (US$ 13 million) at year-end fiscal 2003, compared to
Rs. 510 million (US$ 11 million) at year-end fiscal 2002.
Provident Fund
ICICI Bank is statutorily required to maintain a provident fund as a
part of its retirement benefits to its employees. There are separate provident
funds for employees inducted from ICICI, Bank of Madura (other than those
employees who have opted for pensions), ICICI Personal Financial Services,
ICICI Capital Services and for other employees of ICICI Bank. These funds are
managed by
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in-house trustees. Each employee contributes 12.0% of his or her basic salary
(10% for clerks and sub-staff of Bank of Madura) and ICICI Bank contributes an
equal amount to the funds. The investments of the funds are made according to
rules prescribed by the government of India. The accounts of the funds are
audited by independent auditors. The total corpuses of the funds for employees
inducted from ICICI, Bank of Madura, ICICI Personal Financial Services, ICICI
Capital Services and other employees of ICICI Bank, based on the latest
unaudited figures, at year-end fiscal 2003 were Rs. 448 million (US$ 9 million),
Rs. 747 million (US$ 16 million), Rs. 41 million (US$ 1 million), Rs. 13 million
(US$ 273,396) and Rs. 395 million (US$ 8 million) respectively. ICICI Bank made
aggregate contributions of Rs. 162 million (US$ 3 million) to these funds during
fiscal 2003. The provident funds for employees inducted from ICICI, ICICI
Personal Financial Services, ICICI Capital Services and for other employees of
ICICI Bank have now been merged.
Pension Fund
Out of the employees inducted from Bank of Madura, 1,162 employees
opted for pensions and 1,499 employees opted for a provident fund. For
employees who opted for a provident fund, ICICI Bank's contribution of 12.0% of
his or her basic salary (10% for clerks and sub-staff of Bank of Madura) is
credited to the provident fund every month. For employees who opted for
pensions, ICICI Bank's contribution of 12.0% of his or her basic salary (10%
for clerks and sub-staff of Bank of Madura) is credited to the pension fund
every month. These funds are managed by in-house trustees. The investments of
the funds are made according to rules prescribed by the government of India.
The accounts of the fund are audited by independent auditors. The employees who
opted for pensions are entitled to a monthly pension from the day after their
retirement. ICICI Bank also gives a cash option to employees, allowing them to
receive the present value of one-third of their monthly pension in total
satisfaction. Upon death of an employee, family members are entitled to payment
of a family pension pursuant to the rules in this regard. The corpus of the
fund at year-end fiscal 2003 was Rs. 963 million (US$ 20 million).
Interest of Management in Certain Transactions
Except as otherwise stated in this annual report, no amount or benefit
has been paid or given to any of ICICI Bank's directors or executive officers.
161
OVERVIEW OF THE INDIAN FINANCIAL SECTOR
The information in this section has been extracted from publicly
available documents from various sources, including officially prepared
materials from the government of India and its various ministries and the
Reserve Bank of India, and has not been prepared or independently verified by
us. This is the latest available information to our knowledge at year-end
fiscal 2003.
Introduction
The Reserve Bank of India, the central banking and monetary authority
of India, is the central regulatory and supervisory authority for the Indian
financial system. A variety of financial intermediaries in the public and
private sectors participate in India's financial sector, including the
following:
o commercial banks;
o long-term lending institutions;
o non-bank finance companies, including housing finance companies;
o other specialized financial institutions, and state-level financial
institutions;
o insurance companies; and
o mutual funds.
Until the early 1990s, the Indian financial system was strictly
controlled. Interest rates were administered, formal and informal parameters
governed asset allocation, and strict controls limited entry into and expansion
within the financial sector. The government of India's economic reform program,
which began in 1991, encompassed the financial sector. The first phase of the
reform process began with the implementation of the recommendations of the
Committee on the Financial System, the Narasimham Committee I. The second phase
of the reform process began in 1999. See "--Banking Sector Reform--Committee on
Banking Sector Reform (Narasimham Committee II)".
This discussion presents an overview of the role and activities of the
Reserve Bank of India and of each of the major participants in the Indian
financial system, with a focus on the commercial banks and the long-term
lending institutions. This is followed by a brief summary of the banking reform
process along with the recommendations of various committees that have played a
key role in the reform process. A brief discussion on the impact of the
liberalization process on long-term lending institutions and commercial banks
is then presented. Finally, reforms in the non-banking financial sector are
briefly reviewed.
Reserve Bank of India
The Reserve Bank of India, established in 1935, is the central banking
and monetary authority in India. The Reserve Bank of India manages the
country's money supply and foreign exchange and also serves as a bank for the
government of India and for the country's commercial banks. In addition to
these traditional central banking roles, the Reserve Bank of India undertakes
certain developmental and promotional roles.
The Reserve Bank of India issues guidelines on exposure standards,
income recognition, asset classification, provisioning for impaired assets,
investment valuation and capital adequacy standards for commercial banks,
long-term lending institutions and non-bank finance companies. The Reserve Bank
of India requires these institutions to furnish information relating to their
businesses to the Reserve Bank of India on a regular basis. For further
discussion regarding the Reserve Bank of India's role as the regulatory and
supervisory authority of India's financial system and its impact on ICICI Bank,
see "Supervision and Regulation".
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Commercial Banks
Commercial banks in India have traditionally focused only on meeting
the short-term financial needs of industry, trade and agriculture. At year-end
fiscal 2003, there were 290 scheduled commercial banks in the country, with a
network of 66,436 branches serving approximately Rs. 12.79 trillion (US$ 269
billion) in deposit accounts. Scheduled commercial banks are banks that are
listed in the schedule to the Reserve Bank of India Act, 1934, and may further
be classified as public sector banks, private sector banks and foreign banks.
Scheduled commercial banks have a presence throughout India, with nearly 70.8%
of bank branches located in rural or semi-urban areas of the country. A large
number of these branches belong to the public sector banks.
Public Sector Banks
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India and its associate banks, 19
nationalized banks and 196 regional rural banks. Excluding the regional rural
banks, the remaining public sector banks have 46,233 branches, and account for
70.9% of the outstanding gross bank credit and 74.6% of the aggregate deposits
of the scheduled commercial banks. The public sector banks' large network of
branches enables them to fund themselves out of low cost deposits.
The State Bank of India is the largest public sector bank in India. At
year-end fiscal 2003, the State Bank of India and its seven associate banks had
13,578 branches. They accounted for 23.9% of aggregate deposits and 24.1% of
outstanding gross bank credit of all scheduled commercial banks.
Regional rural banks were established from 1976 to 1987 by the central
government, state governments and sponsoring commercial banks jointly with a
view to develop the rural economy. Regional rural banks provide credit to small
farmers, artisans, small entrepreneurs and agricultural laborers. There were
196 regional rural banks at year-end fiscal 2003 with 14,462 branches,
accounting for 3.9% of aggregate deposits and 2.9% of gross bank credit
outstanding of scheduled commercial banks.
Private Sector Banks
After the first phase of bank nationalization was completed in 1969,
public sector banks made up the largest portion of Indian banking. The focus on
public sector banks was maintained throughout the 1970s and 1980s. Furthermore,
existing private sector banks which showed signs of an eventual default were
merged with state-owned banks. In July 1993, as part of the banking reform
process and as a measure to induce competition in the banking sector, the
Reserve Bank of India permitted entry by the private sector into the banking
system. This resulted in the introduction of nine private sector banks,
including ICICI Bank. These banks are collectively known as the "new" private
sector banks. There are nine "new" private sector banks at present, following
the merger in February 2000 of Times Bank Limited, a new private sector bank,
into another new private sector bank, HDFC Bank Limited and the conversion of
Kotak Mahindra Finance Limited, a large non-bank finance company into a bank in
February 2003. In addition, 24 private sector banks existing prior to July 1993
are currently operating. Bank of Madura was an "old" private sector bank before
it was acquired by ICICI Bank effective March 10, 2001.
At year-end fiscal 2003, private sector banks accounted for
approximately 17.0% of aggregate deposits and 19.2% of gross bank credit
outstanding of the scheduled commercial banks. Their network of 5,553 branches
accounted for 8.4% of the total branch network of scheduled commercial banks in
the country. At year-end fiscal 2003, ICICI Bank accounted for approximately
5.5% of aggregate deposits and 7.0% of gross bank credit outstanding of the
scheduled commercial banks.
Foreign Banks
At year-end fiscal 2003, there were 37 foreign banks with 188 branches
operating in India. Foreign banks accounted for 4.5% of aggregate deposits and
7.0% of outstanding gross bank credit of
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scheduled commercial banks at year-end fiscal 2003. As part of the
liberalization process, the Reserve Bank of India has permitted foreign banks to
operate more freely, subject to requirements largely similar to those imposed on
domestic banks. Foreign banks operate in India through branches of the parent
bank. While presenting its budget for fiscal 2003, the government of India
announced that foreign banks would be permitted to incorporate subsidiaries in
India. Subsidiaries of foreign banks will have to adhere to all banking
regulations, including priority sector lending norms, applicable to domestic
banks. The primary activity of most foreign banks in India has been in the
corporate segment. However, in recent years, some of the larger foreign banks
have started to make consumer financing a larger part of their portfolios based
on the growth opportunities in this area in India. These banks offer products
such as automobile finance, home loans, credit cards and household consumer
finance.
Cooperative Banks
Cooperative banks cater to the financing needs of agriculture, small
industry and self-employed businessmen in urban and semi-urban areas of India.
The state land development banks and the primary land development banks provide
long-term credit for agriculture. In the light of liquidity and insolvency
problems experienced by some cooperative banks in fiscal 2001, the Reserve Bank
of India undertook several interim measures, pending formal legislative
changes, including measures related to lending against shares, borrowings in
the call market and term deposits placed with other urban cooperative banks.
Presently the Reserve Bank of India is responsible for supervision and
regulation of urban co-operative societies, and the National Bank for
Agriculture and Rural Development (NABARD) for State Co-operative Banks and
District Central Co-operative Banks. The Banking Regulation (Amendment) and
Miscellaneous Provisions Bill, 2003, which has recently been introduced in the
Indian Parliament, provides for the regulation of all co-operative banks by the
Reserve Bank of India.
Long-Term Lending Institutions
The long-term lending institutions were established to provide
medium-term and long-term financial assistance to various industries for
setting up new projects and for the expansion and modernization of existing
facilities. These institutions provide fund-based and non-fund-based assistance
to industry in the form of loans, underwriting, direct subscription to shares,
debentures and guarantees. The primary long-term lending institutions include
Industrial Development Bank of India, IFCI Limited and Industrial Investment
Bank of India and included ICICI prior to the amalgamation
The long-term lending institutions were expected to play a critical
role in Indian industrial growth and, accordingly, had access to concessional
government funding. However, in recent years, the operating environment of the
long-term lending institutions has changed substantially. Although the initial
role of these institutions was largely limited to providing a channel for
government funding to industry, the reform process required them to expand the
scope of their business activities. Their new activities included:
o fee-based activities like investment banking and advisory services;
and
o short-term lending activity including issuing corporate finance and
working capital loans.
Pursuant to the recommendations of the Narasimham Committee II and the
Khan Working Group, a working group created in 1999 to harmonize the role and
operations of long-term lending institutions and banks, the Reserve Bank of
India, in its mid-term review of monetary and credit policy for fiscal 2000,
announced that long-term lending institutions would have the option of
transforming themselves into banks subject to compliance with the prudential
norms as applicable to banks. In April 2001, the Reserve Bank of India issued
guidelines on several operational and regulatory issues which were required to
be addressed in evolving the path for transition of a long-term lending
institution into a universal bank. See "-Recent Structural Reforms - Universal
Banking Guidelines". In April 2002, ICICI merged with ICICI Bank. The
Industrial Development Bank (Transfer of Undertaking and Repeal) Bill, 2002 has
been introduced in the Indian Parliament and if
164
passed as presently drafted, will convert the Industrial Development Bank of
India into a banking company, and will exempt it from certain statutory and
regulatory norms applicable to banks, including exemption for a period of five
years from the statutory liquidity ratio.
Non-Bank Finance Companies
There are over 10,000 non-bank finance companies in India, mostly in
the private sector. All non-bank finance companies are required to register
with the Reserve Bank of India. The non-bank finance companies may be
categorized into entities which take public deposits and those which do not.
The companies which accept public deposits are subject to strict supervision
and capital adequacy requirements of the Reserve Bank of India. ICICI
Securities Limited and ICICI Distribution Finance Private Limited, which are
subsidiaries of ICICI Bank, are non-bank finance companies, which do not accept
public deposits. The scope and activities of non-bank finance companies have
grown significantly over the years. The primary activities of the non-bank
finance companies are consumer credit, including automobile finance, home
finance and consumer durable products finance, wholesale finance products such
as bill discounting for small and medium-sized companies, and fee-based
services such as investment banking and underwriting. In 2003, Kotak Mahindra
Finance Limited, a large non-bank finance company was granted a banking license
by the Reserve Bank of India and converted itself into Kotak Mahindra Bank.
Over the past few years, certain non-bank finance companies have
defaulted to investors and depositors, and consequently actions (including
bankruptcy proceedings) have been initiated against them, many of which are
currently pending.
Housing Finance Companies
Housing finance companies form a distinct sub-group of the non-bank
finance companies. As a result of the various incentives given by the
government for investing in the housing sector in recent years, the scope of
this business has grown substantially. Until recently, Housing Development
Finance Corporation Limited was the premier institution providing housing
finance in India. In recent years, several other players including banks have
entered the housing finance industry. ICICI Bank is a major housing finance
provider and also has a housing finance subsidiary, ICICI Home Finance Company
Limited. The National Housing Bank and the Housing and Urban Development
Corporation Limited are the two government-controlled financial institutions
created to improve the availability of housing finance in India. The National
Housing Bank Act provides for securitization of housing loans, foreclosure of
mortgages and setting up of the Mortgage Credit Guarantee Scheme. The Reserve
Bank of India has directed commercial banks to lend at least 3.0% of their
incremental deposits in the form of housing loans. Further, the Reserve Bank of
India has reduced the risk weight for loans for residential properties to 50.0%
for the purpose of determining capital adequacy. Housing loans up to certain
limits prescribed by the Reserve Bank of India as well as mortgage-backed
securities qualify as priority sector lending under the Reserve Bank of India's
directed lending rules. See also "Supervision and Regulation - Capital Adequacy
Requirements" and "Supervision and Regulation - Directed Lending - Priority
Sector Lending."
Other Financial Institutions
Specialized Financial Institutions
In addition to the long-term lending institutions, there are various
specialized financial institutions which cater to the specific needs of
different sectors. They include the National Bank for Agricultural and Rural
Development, Export Import Bank of India, Small Industries Development Bank of
India, ICICI Venture Funds Management Company Limited, Risk Capital and
Technology Finance Corporation Limited, Tourism Finance Corporation of India
Limited, National Housing Bank, Power Finance Corporation Limited and the
Infrastructure Development Finance Corporation Limited.
165
State Level Financial Institutions
State financial corporations operate at the state level and form an
integral part of the institutional financing system. State financial
corporations were set up to finance and promote small and medium-sized
enterprises. The state financial institutions are expected to achieve balanced
regional socio-economic growth by generating employment opportunities and
widening the ownership base of industry. At the state level, there are also
state industrial development corporations, which provide finance primarily to
medium-sized and large-sized enterprises.
Insurance Companies
Currently, there are 27 insurance companies in India, of which 13 are
life insurance companies, 13 are general insurance companies and 1 is a
reinsurance company. Of the 13 life insurance companies, 12 are in the private
sector and one is in the public sector. Among the general insurance companies,
eight are in the private sector and 5 are in the public sector. The reinsurance
company, General Insurance Corporation of India, is in the public sector. Life
Insurance Corporation of India, General Insurance Corporation of India and
public sector general insurance companies also provide long-term financial
assistance to the industrial sector. We have joint ventures in each of the life
insurance and the general insurance sectors. Our life insurance joint venture,
ICICI Prudential Life Insurance Company Limited and our general insurance joint
venture, ICICI Lombard General Insurance Company Limited, are both major
players in their respective segments. During fiscal 2003, the total gross
premiums underwritten of all general insurance companies were Rs. 142.8 billion
(US$ 3.0 billion) and the total new premiums of all life insurance companies
were Rs. 123.3 billion (US$ 2.6 billion).
The R. N. Malhotra Committee was set up in April 1993 to recommend
reforms in the insurance sector. This committee submitted its report on January
7, 1994 and its major recommendations included permitting entry of the private
sector in the insurance industry, expediting the settlement of claims and
strengthening the regulatory apparatus. As a first step towards implementation
of the recommendations, the government of India's budget for fiscal 1996
indicated that an independent regulatory authority would be set up for the
insurance industry, and the Insurance Regulatory Authority was set up in 1996.
In December 1999, the parliament passed the Insurance Regulatory and
Development Authority Act, 1999. This Act opened up the Indian insurance sector
for foreign and private investors. The Act allows foreign equity participation
in new insurance companies of up to 26.0%. The new company should have a
minimum paid up equity capital of Rs. 1.0 billion (US$ 21 million) to carry out
the business of life insurance or general insurance or Rs. 2.0 billion (US$ 42
million) to carry out exclusively the business of reinsurance. The Insurance
Regulatory and Development Authority was established to protect the interests
of holders of insurance policies, to regulate, promote and ensure orderly
growth of the insurance industry and for related matters. Currently, the
insurance sector in India is regulated by the Insurance Regulatory and
Development Authority.
In the monetary and credit policy for fiscal 2001, the Reserve Bank of
India issued guidelines governing the entry of banks and financial institutions
into the insurance business. The guidelines permit banks and financial
institutions to enter the business of insurance underwriting through joint
ventures provided they meet stipulated criteria relating to their net worth,
capital adequacy ratio, profitability track record, level of impaired loans and
the performance of their existing subsidiary companies.
Mutual Funds
At the end of January 2003, there were 33 mutual funds in India with
total assets of Rs. 1,218.1 billion (US$ 25.6 billion). From 1963 to 1987, Unit
Trust of India was the only mutual fund operating in the country. It was set up
in 1963 at the initiative of the government and the Reserve Bank of India. From
1987 onwards, several other public sector mutual funds entered this sector.
These mutual funds were established by public sector banks, the Life Insurance
Corporation of India and General
166
Insurance Corporation of India. The mutual funds industry was opened up to the
private sector in 1993. In this year, the SEBI (Mutual Fund) Regulation 1993 was
issued by the Securities and Exchange Board of India, under which all mutual
funds except for the Unit Trust of India, were to be registered and governed.
The industry is now regulated by a more comprehensive SEBI (Mutual Fund)
Regulation, 1996 which replaced the SEBI (Mutual Fund) Regulation 1993.
Unit Trust of India, with a high level of investment in equity
securities, started to face difficulties in meeting redemption and assured
return obligations due to a significant decline in the market value of its
securities portfolio. In response, the government of India implemented a
package of reform measures for Unit Trust of India, including guaranteeing
redemption and assured return obligations to the unit holders, subject to
restrictions on the maximum permissible redemption amount. As part of the
reforms, Unit Trust of India was divided into two mutual funds structured in
accordance with the regulations of the Securities and Exchange Board of India,
one comprising assured return schemes and the other comprising net asset value
based schemes.
Impact of Liberalization on the Indian Financial Sector
Until 1991, the financial sector in India was heavily controlled and
commercial banks and long-term lending institutions, the two dominant financial
intermediaries, had mutually exclusive roles and objectives and operated in a
largely stable environment, with little or no competition. Long-term lending
institutions were focused on the achievement of the Indian government's various
socio-economic objectives, including balanced industrial growth and employment
creation, especially in areas requiring development. Long-term lending
institutions were extended access to long-term funds at subsidized rates
through loans and equity from the government of India and from funds guaranteed
by the government of India originating from commercial banks in India and
foreign currency resources originating from multilateral and bilateral
agencies.
The focus of the commercial banks was primarily to mobilize household
savings through demand and time deposits and to use these deposits to meet the
short-term financial needs of borrowers in industry, trade and agriculture. In
addition, the commercial banks provided a range of banking services to
individuals and business entities.
However, since 1991, there have been comprehensive changes in the
Indian financial system. Various financial sector reforms, implemented since
1991, have transformed the operating environment of the banks and long-term
lending institutions. In particular, the deregulation of interest rates,
emergence of a liberalized domestic capital market, and entry of new private
sector banks, along with the broadening of long-term lending institutions'
product portfolios, have progressively intensified the competition between
banks and long-term lending institutions. The Reserve Bank of India has
permitted the transformation of long-term lending institutions into banks
subject to compliance with the prudential norms applicable to banks.
Banking Sector Reform
Most large banks in India were nationalized in 1969 and thereafter were
subject to a high degree of control until reform began in 1991. In addition to
controlling interest rates and entry into the banking sector, these regulations
also channeled lending into priority sectors. Banks were required to fund the
public sector through the mandatory acquisition of low interest-bearing
government securities or statutory liquidity ratio bonds to fulfill statutory
liquidity requirements. As a result, bank profitability was low, impaired
assets were comparatively high, capital adequacy was diminished, and
operational flexibility was hindered.
Committee on the Financial System (Narasimham Committee I)
The Committee on the Financial System (The Narasimham Committee I) was
set up in August 1991 to recommend measures for reforming the financial sector.
Many of the recommendations made by the committee, which addressed
organizational issues, accounting practices and operating
167
procedures, were implemented by the government of India. The major
recommendations that were implemented included the following:
o with fiscal stabilization and the government increasingly resorting to
market borrowing to raise resources, the statutory liquidity ratio or
the proportion of the banks' net demand and time liabilities that were
required to be invested in government securities was reduced from
38.5% in the pre-reform period to 25.0% in October 1997. This meant
that the significance of the statutory liquidity ratio shifted from
being a major instrument for financing the public sector in the
pre-reform era to becoming a prudential requirement;
o similarly, the cash reserve ratio or the proportion of the bank's net
demand and time liabilities that were required to be deposited with
the Reserve Bank of India was reduced from 15.0% in the pre-reform
period to 4.5% currently;
o special tribunals were created to resolve bad debt problems;
o most of the restrictions on interest rates for deposits were removed.
Commercial banks were allowed to set their own level of interest rates
for all deposits except savings bank deposits;
o substantial capital infusion to several state-owned banks was approved
in order to bring their capital adequacy closer to internationally
accepted standards. By the end of fiscal 2002, aggregate
recapitalization amounted to Rs. 217.5 billion (US$ 4.6 billion). The
stronger public sector banks were given permission to issue equity to
further increase capital; and
o banks were granted the freedom to open or close branches.
Committee on Banking Sector Reform (Narasimham Committee II)
The second Committee on Banking Sector Reform (Narasimham Committee II)
submitted its report in April 1998. The major recommendations of the committee
were in respect of capital adequacy requirements, asset classification and
provisioning, risk management and merger policies. The Reserve Bank of India
accepted and began implementing many of these recommendations in October 1998.
Recent Structural Reforms
Proposed Amendments to the Banking Regulation Act
Legislation seeking to amend the Banking Regulation Act has recently
been introduced in the Indian Parliament. As presently drafted, the main
amendments propose to:
o permit banking companies to issue non-redeemable and redeemable
preference shares;
o make prior approval of the Reserve Bank of India mandatory for the
acquisition of more than 5.0% of a banking company's paid up capital
by any individual or firm or group;
o prohibit lending to relatives of directors and to non-subsidiary
companies that are under the same management as the banking company,
joint ventures, associates or the holding company of the banking
company. Lending to directors and to companies with directors common
to the banking company is already prohibited;
o remove the minimum statutory liquidity ratio requirement of 25.0%,
giving the Reserve Bank of India discretion to reduce the statutory
liquidity ratio to less than 25.0%. See also "Supervision and
Regulation - Legal Reserve Requirements - Statutory Liquidity Ratio";
o bring mergers of non-bank finance companies with banking companies
into the governance of the Indian Banking Regulation Act. Mergers of
non-bank finance companies with banking companies are currently
governed by the Indian Companies Act, 1956. The Banking Regulations
(Amendment) and Miscellaneous Provisions Bill, 2003 will, if passed,
require mergers of non-bank finance companies with banking companies
to be approved by the majority of the shareholders of both companies
and by the Reserve Bank of India. It also
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provides, if the merger is approved, for dissenting shareholders at
their option to be paid in exchange for their shares the value of
their shares as determined by the Reserve Bank of India;
o bring all co-operative banks under the supervision of the Reserve Bank
of India; and
o remove the limit of 10.0% on the maximum voting power exercisable by a
shareholder in a banking company.
Legislative Framework for Recovery of Debts due to Banks
In fiscal 2003, the Indian Parliament passed the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002. This Act provides that a secured creditor may, in respect of loans
classified as non-performing in accordance with the Reserve Bank of India
guidelines, give notice in writing to the borrower requiring it to discharge
its liabilities within 60 days, failing which the secured creditor may take
possession of the assets constituting the security for the loan, and exercise
management rights in relation thereto, including the right to sell or otherwise
dispose of the assets. This Act also provides for the setting up of asset
reconstruction companies regulated by the Reserve Bank of India to acquire
assets from banks and financial institutions. The Reserve Bank of India has
issued guidelines for asset reconstruction companies in respect of their
establishment, registration and licensing by the Reserve Bank of India, and
operations. Asset Reconstruction Company (India) Limited, promoted by us,
Industrial Development Bank of India, State Bank of India and certain other
private sector banks and institutions, has recently received registration from
the Reserve Bank of India.
Currently, however, several petitions challenging the constitutional
validity of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 are pending before the Indian
Supreme Court.
Earlier, following the recommendations of the Narasimham Committee, the
Recovery of Debts due to Banks and Financial Institutions Act, 1993 was
enacted. This legislation provides for the establishment of a tribunal for
speedy resolution of litigation and recovery of debts owed to banks or
financial institutions. The Act creates tribunals before which the banks or the
financial institutions can file a suit for recovery of the amounts due to them.
However, if a scheme of reconstruction is pending before the Board for
Industrial and Financial Reconstruction, under the Sick Industrial Companies
(Special Provision) Act, 1985, no proceeding for recovery can be initiated or
continued before the tribunals. While presenting its budget for fiscal 2002,
the government of India announced measures for the setting up of more debt
recovery tribunals and the eventual repeal of the Sick Industrial Companies
(Special Provision) Act, 1985. To date, however, this Act has not been
repealed.
Corporate Debt Restructuring Forum
To put in place an institutional mechanism for the restructuring of
corporate debt, the Reserve Bank of India has devised a corporate debt
restructuring system. The objective of this framework is to ensure a timely and
transparent mechanism for the restructuring of corporate debts of viable
entities facing problems, outside the purview of the Board of Industrial and
Financial Rehabilitation, debt recovery tribunals and other legal proceedings.
In particular, this framework aims to preserve viable corporates that are
affected by certain internal and external factors and minimize the losses to
the creditors and other stakeholders through an orderly and coordinated
restructuring program. The corporate debt restructuring system is a
non-statutory mechanism and a voluntary system based on debtor-creditor and
inter-creditor agreements.
Universal Banking Guidelines
Universal banking in the Indian context means the transformation of
long-term lending institutions into banks. Pursuant to the recommendations of
the Narasimham Committee II and the Khan Working Group, the Reserve Bank of
India, in its mid-term review of monetary and credit policy for fiscal 2000,
announced that long-term lending institutions would have the option of
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transforming themselves into banks subject to compliance with the prudential
norms as applicable to banks. If a long-term lending institution chose to
exercise the option available to it and formally decided to convert itself into
a universal bank, it could formulate a plan for the transition path and a
strategy for smooth conversion into a universal bank over a specified time
frame. In April 2001, the Reserve Bank of India issued guidelines on several
operational and regulatory issues which were required to be addressed in
evolving the path for transition of a long-term lending institution into a
universal bank. The salient features of the guidelines included the following.
Reserve requirements. Following conversion into a universal bank, a
long-term lending institution would have to comply with the cash reserve ratio
and statutory liquidity ratio requirements under the provisions of the Reserve
Bank of India Act and the Indian Banking Regulation Act;
Priority sector lending. Following conversion of a long-term lending
institution into a universal bank, the obligation to lend to the priority
sector up to a prescribed percentage of net bank credit would apply;
Permissible activities. Any activity currently undertaken by a
long-term lending institution but not permissible for a bank under the
provisions of the Banking Regulation Act would have to cease or be divested
after the conversion of a long-term lending institution into a universal bank;
Nature of subsidiaries. If any of the existing subsidiaries of a
long-term lending institution were engaged in an activity not permitted under
the provisions of the Indian Banking Regulation Act, then on conversion of the
long-term lending institution into a universal bank, such subsidiary or
activity would have to be separated from the operations of the universal bank
since the provisions of the Indian Banking Regulation Act permit a bank to have
subsidiaries only for specified activities;
Restriction on investments. A long-term lending institution with an
equity investment in a company in excess of 30.0% of the paid up share capital
of that company or 30.0% of its own paid-up share capital and reserves,
whichever is less, following its conversion into a universal bank, would be
required to divest such excess holding to comply with the provisions of the
Indian Banking Regulation Act.
Credit Policy Measures
As part of its effort to continue bank reform, the Reserve Bank of
India has announced a series of measures in its monetary and credit policy
statements aimed at deregulating and strengthening the financial system.
Credit Policy for Fiscal 2003
In the monetary and credit policy for fiscal 2003 announced in April
2002 and in the mid-term review announced in October 2002, the Reserve Bank of
India effected the following key measures:
o With effect from October 29, 2002, the bank rate, the rate at which
the Reserve Bank of India provides refinance to the banking system,
was reduced from 6.5% to 6.25%, its lowest level since 1973;
o The cash reserve ratio, the minimum cash reserve balance required to
be maintained by banks with the Reserve Bank of India, was reduced
from 5.0% to 4.75% of their demand and time liabilities in India,
excluding inter-bank liabilities;
o Banks were given the discretion to decide the interest payment period
of interest on variable rate deposits; and
o Banks were required to announce the maximum spread over the prime
lending rate for all advances other than retail loans, as well as
provide information on maximum and minimum rates charged to their
borrowers and deposit rates for various maturities.
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Credit Policy for Fiscal 2004
In the monetary and credit policy for fiscal 2004 announced in April
2003, the Reserve Bank of India introduced the following key measures:
o The bank rate was reduced further by 0.25% from 6.25% to 6.0% and the
cash reserve ratio was also reduced by 0.25% to 4.5%. Earlier, the
Indian government's budget for fiscal 2004 had reduced the interest
rates on small savings schemes and public provident fund by 100 basis
points to 8.0% and at the same time the Reserve Bank of India reduced
the interest rate on savings bank accounts by 50 basis points to 3.5%;
and
o The maturity period for non-resident external deposits was increased
from six months to one year.
Reforms of the Non-Bank Finance Companies
The standards relating to income recognition, provisioning and capital
adequacy were prescribed for non-bank finance companies in June 1994. The
registered non-bank finance companies were required to achieve a minimum
capital adequacy of 6.0% by year-end fiscal 1995 and 8.0% by year-end fiscal
1996 and to obtain a minimum credit rating. To encourage the companies
complying with the regulatory framework, the Reserve Bank of India announced in
July 1996 certain liberalization measures under which the non-bank finance
companies registered with it and complying with the prudential norms and credit
rating requirements were granted freedom from the ceiling on interest rates on
deposits and amount of deposits. Other measures introduced include requiring
non-bank finance companies to maintain a certain percentage of liquid assets
and to create a reserve fund. The percentage of liquid assets to be maintained
by non-bank finance companies has been revised uniformly upwards and since
April 1999, 15.0% of public deposits must be maintained.
Efforts have also been made to integrate non-bank finance companies
into the mainstream financial sector. The first phase of this integration
covered measures relating to registrations and standards. The focus of
supervision has now shifted to non-bank finance companies accepting public
deposits. This is because companies accepting public deposits are required to
comply with all the directions relating to public deposits, prudential norms
and liquid assets. A task force on non-bank finance companies set up by the
government of India submitted its report in October 1998, and recommended
several steps to rationalize the regulation of non-bank finance companies.
Accepting these recommendations, the Reserve Bank of India issued new
guidelines for non-bank finance companies, which were as follows:
o a minimum net owned fund of Rs. 2.5 million (US$ 52,576) is mandatory
before existing non-bank finance companies may accept public deposits;
o a minimum investment grade rating is compulsory for loan and
investment companies accepting public deposits, even if they have the
minimum net owned funds;
o permission to accept public deposits was also linked to the level of
capital to risk assets ratio. Different capital to risk assets ratio
levels for non-bank finance companies with different ratings were
specified; and
o non-bank finance companies were advised to restrict their investments
in real estate to 10.0% of their net owned funds.
In the monetary and credit policy for fiscal 2000, the Reserve Bank of
India stipulated a minimum capital base of Rs. 20 million (US$ 420,610) for all
new non-bank finance companies. In the government of India's budget for fiscal
2002, the procedures for foreign direct investment in non-bank finance
companies were substantially liberalized.
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SUPERVISION AND REGULATION
The main legislation governing commercial banks in India is the Banking
Regulation Act. Other important laws include the Reserve Bank of India Act, the
Negotiable Instruments Act and the Banker's Books Evidence Act. Additionally,
the Reserve Bank of India, from time to time, issues guidelines to be followed
by the bank. Compliance with all regulatory requirements is evaluated with
respect to financial statements under Indian GAAP.
Reserve Bank of India Regulations
Commercial banks in India are required under the Banking Regulation Act
to obtain a license from the Reserve Bank of India to carry on banking business
in India. Before granting the license, the Reserve Bank of India must be
satisfied that certain conditions are complied with, including (i) that the
bank has the ability to pay its present and future depositors in full as their
claims accrue; (ii) that the affairs of the bank will not be or are not likely
to be conducted in a manner detrimental to the interests of present or future
depositors; (iii) that the bank has adequate capital and earnings prospects;
and (iv) that the public interest will be served if such license is granted to
the bank. The Reserve Bank of India can cancel the license if the bank fails to
meet the above conditions or if the bank ceases to carry on banking operations
in India.
ICICI Bank, being licensed as a banking company, is regulated and
supervised by the Reserve Bank of India. The Reserve Bank of India requires
ICICI Bank to furnish statements, information and certain details relating to
its business. It has issued guidelines for commercial banks on recognition of
income, classification of assets, valuation of investments, maintenance of
capital adequacy and provisioning for impaired assets. The Reserve Bank of
India has set up a Board for Financial Supervision, under the chairmanship of
the Governor of the Reserve Bank of India. The appointment of the auditors of
banks is subject to the approval of the Reserve Bank of India. The Reserve Bank
of India can direct a special audit in the interest of the depositors or in the
public interest.
Regulations relating to the Opening of Branches
Banks are required to obtain licenses from the Reserve Bank of India to
open new branches. Permission is granted based on factors such as the financial
condition and history of the company, its management, adequacy of capital
structure and earning prospects and the public interest. The Reserve Bank of
India may cancel the license for violations of the conditions under which it
was granted. Under the banking license granted to ICICI Bank by the Reserve
Bank of India, ICICI Bank is required to have at least 25.0% of its branches
located in rural and semi-urban areas. A rural area is defined as a center with
a population of less than 10,000. A semi-urban area is defined as a center with
a population of greater than 10,000 but less than 100,000. These population
figures relate to the 1991 census conducted by the government of India.
Capital Adequacy Requirements
ICICI Bank is subject to the capital adequacy requirements of the
Reserve Bank of India, which, based on the guidelines of the Basle Committee on
Banking Regulations and Supervisory Practices, 1998, require ICICI Bank to
maintain a minimum ratio of capital to risk adjusted assets and off-balance
sheet items of 9.0%, at least half of which must be Tier 1 capital.
The total capital of a banking company is classified into Tier 1 and
Tier 2 capital. Tier 1 capital, the core capital, provides the most permanent
and readily available support against unexpected losses. It comprises paid-up
capital and reserves consisting of any statutory reserves, free reserves and
capital reserve pursuant to the Indian Income-tax Act as reduced by equity
investments in subsidiaries, intangible assets, gap in provisioning and losses
in the current period and those brought forward from the previous period. In
fiscal 2003, the Reserve Bank of India issued a guideline requiring a bank's
deferred tax asset to be treated as an intangible asset and deducted from its
Tier 1 capital.
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Tier 2 capital consists of undisclosed reserves, revaluation reserves
(at a discount of 55.0%), general provisions and loss reserves (allowed up to a
maximum of 1.25% of risk weighted assets), hybrid debt capital instruments
(which combine certain features of both equity and debt securities) and
subordinated debt. Any subordinated debt is subject to progressive discounts
each year for inclusion in Tier 2 capital and total subordinated debt
considered as Tier 2 capital cannot exceed 50.0% of Tier 1 capital. Tier 2
capital cannot exceed Tier 1 capital.
With a view to the building up of adequate reserves to guard against
any possible reversal of the interest rate environment in the future due to
unexpected developments, the Reserve Bank of India has advised banks to build
up an investment fluctuation reserve of a minimum of 5.0% of the bank's
investment portfolio within a period of five years. This reserve has to be
computed with respect to investments in held for trading and available for sale
categories. Investment fluctuation reserve is included in Tier 2 capital.
Risk adjusted assets and off-balance sheet items considered for
determining the capital adequacy ratio are the risk weighted total of specified
funded and non-funded exposures. Degrees of credit risk expressed as percentage
weighting have been assigned to various balance sheet asset items and
conversion factors to off-balance sheet items. The value of each item is
multiplied by the relevant weight or conversion factor to produce risk-adjusted
values of assets and off-balance-sheet items. Standby letters of credit/
guarantees and documentary credits are treated as similar to funded exposure
and are subject to similar risk weight. All foreign exchange open position
limits of the bank carry a 100.0% risk weight. Capital requirements have also
been prescribed for open foreign currency exposures and open positions in gold.
In respect of banks and financial institutions, a risk weight of 2.5% to cover
market risk has to be assigned in respect of the entire investment portfolio
effective March 31, 2001 over and above the existing risk weights for credit
risk in non-government and non-approved securities. Banks and financial
institutions are required to assign a 100.0% risk weight for all state
government guaranteed securities issued by defaulting entities. The aggregate
risk weighted assets are taken into account for determining the capital
adequacy ratio.
Loan Loss Provisions and Impaired Assets
In April 1992, the Reserve Bank of India issued formal guidelines on
income recognition, asset classification, provisioning standards and valuation
of investments applicable to banks, which are revised from time to time. These
guidelines are applied for the calculation of impaired assets under Indian
GAAP. The discussion of asset quality in this annual report is under US GAAP
and the US GAAP standards applied are set forth in "`Business--Impaired Loans."
The principal features of these Reserve Bank of India guidelines, which
have been implemented with respect to ICICI Bank's loans, debentures, lease
assets, hire purchases and bills are set forth below.
Impaired Assets
Until year-end fiscal 2003, an impaired asset (also called
non-performing assets pursuant to the Reserve Bank of India guidelines) was an
asset in respect of which any amount of interest or principal was overdue for
more than two quarters. In particular, an advance was an impaired asset where:
o interest and/or installment of principal remained overdue for a period
of more than 180 days in respect of a term loan;
o the account remained "out-of-order" for a period of more than 180 days
in respect of an overdraft or cash credit;
o the bill remained overdue for a period of more than 180 days in case
of bills purchased and discounted;
o interest and/or principal remained overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance
granted for agricultural purposes; and
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o any amount to be received remained overdue for a period of more than
180 days in respect of other accounts.
Effective fiscal 2004, banks are now required to classify an asset as
impaired when principal or interest has remained overdue for more than 90 days.
Interest in respect of impaired assets is not recognized or credited to the
income account unless collected.
Asset Classification
In line with the Reserve Bank of India master circular on income
recognition, asset classification and provisioning pertaining to advances
portfolio of banks, issued in August 2003 for banks, non-performing assets are
classified as described below:
Sub-Standard Assets. Assets that are non-performing assets for a period
not exceeding 18 months (12 months effective year-end fiscal 2004). In such
cases, the current net worth of the borrower / guarantor or the current market
value of the security charged is not enough to ensure recovery of dues to the
banks in full. Such an asset has well-defined credit weaknesses that jeopardize
the liquidation of the debt and are characterized by the distinct possibility
that the bank will sustain some loss, if deficiencies are not corrected.
Doubtful Assets. Assets that are non-performing assets for more than 18
months. A loan classified as doubtful has all the weaknesses inherent in assets
that are classified as sub-standard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
known facts, conditions and values, highly questionable and improbable. With
effect from year-end fiscal 2004, an asset will be classified as doubtful if it
remains in the sub-standard category for 12 months.
Loss Assets. Assets on which losses have been identified by the bank or
internal or external auditors or the Reserve Bank India inspection but the
amount has not been written off fully.
There are separate guidelines for projects under implementation which
are based on the achievement of financial closure and the date of approval of
the project financing.
The Reserve Bank of India also has separate guidelines for restructured
loans. A rescheduling of the installments of principal alone does not cause a
standard asset to be classified in the sub-standard category provided the loan
or credit facility is fully secured. A rescheduling of interest element does
not cause an asset to be downgraded to the sub-standard category subject to the
condition that the amount of sacrifice, if any, in the element of interest,
measured in present value terms, is either written off or provision is made to
the extent of the sacrifice involved. In respect of restructured sub-standard
accounts, a rescheduling of the installments of principal alone renders a
sub-standard asset eligible to be continued in the sub-standard category for
the specified period, provided the loan/credit facility is fully secured. A
rescheduling of interest element renders a sub-standard asset eligible to be
continued to be classified in the sub-standard category for the specified
period subject to the condition that the amount of sacrifice, if any, in the
element of interest, measured in present value terms, is either written off or
provision is made to the extent of the sacrifice involved. The sub-standard
accounts which have been subjected to restructuring, whether in respect of
principal installment or interest amount, by whatever modality, are eligible to
be upgraded to the standard category only after the specified period, i.e., a
period of one year after the date when first payment of interest or of
principal, whichever is earlier, falls due, subject to satisfactory performance
during the period.
To put in place an institutional mechanism for the restructuring of
corporate debt, the Reserve Bank of India has devised a corporate debt
restructuring system. See "Overview of the Indian Financial Sector - Recent
Structural Reforms".
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Provisioning and Write-Offs
Provisions are based on guidelines specific to the classification of
the assets. The following guidelines apply to the various asset
classifications:
o Standard Assets. A general provision of 0.25% is required.
o Sub-Standard Assets. A general provision of 10.0% is required.
o Doubtful Assets. A 100.0% write-off is required to be taken against
the unsecured portion of the doubtful asset and charged against
income. The value assigned to the collateral securing a loan is the
amount reflected on the borrower's books or the realizable value
determined by third party appraisers. In cases where there is a
secured portion of the asset, depending upon the period for which the
asset remains doubtful, a 20.0% to 50.0% provision is required to be
taken against the secured asset as follows:
o Up to one year: 20.0% provision
o One to three years: 30.0% provision
o More than three years: 50.0% provision
o Loss Assets. The entire asset is required to be written off or
provided for.
o Restructured Assets. A provision is made equal to the net present
value of the reduction in the rate of interest on the loan over its
maturity.
While the provisions indicated above are mandatory, a higher provision
in a loan amount would be required if considered necessary.
Regulations relating to Making Loans
The provisions of the Banking Regulation Act govern the making of loans
by banks in India. The Reserve Bank of India issues directions covering the
loan activities of banks. Some of the major guidelines of Reserve Bank of
India, which are now in effect, are as follows:
o The Reserve Bank of India has prescribed norms for bank lending to
non-bank financial companies.
o Banks are free to determine their own lending rates but each bank must
declare its prime lending rate as approved by its board of directors.
Each bank should also indicate the maximum spread over the prime
lending rate for all credit exposures other than retail loans. The
interest charged by banks on advances up to Rs. 200,000 (US$ 4,206) to
any one entity (other than most retail loans) must not exceed the
prime lending rate. Banks are also given freedom to lend at a rate
below the prime lending rate in respect of creditworthy borrowers and
exposures. Interest rates for certain categories of advances are
regulated by the Reserve Bank of India. Currently, separate prime
lending rates can be fixed for short-term and long-term credit.
However, the Reserve Bank of India has recently proposed the
introduction of benchmark prime lending rates based on various
parameters including cost of funds, operating expenses, capital charge
and profit margin, and discontinuation of the system of prime lending
rates linked to the maturity of the credit facility.
With respect to cash credit facilities (revolving asset-backed
overdraft facilities for meeting working capital needs), up to 80.0% of the
facility can be in the form of a demand loan.
Penalty interest represents additional interest charged over and above
the base rate of interest on certain events, including default in the repayment
of loans. Penalty interest is not chargeable for loans up to Rs. 25,000 (US$
526). For loans over Rs. 25,000 (US$ 526), penalty interest cannot exceed 2.0%.
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There are guidelines on loans against equity shares in respect of
amount, margin requirement and purpose.
Directed Lending
Priority Sector Lending
The Reserve Bank of India requires commercial banks to lend a certain
percentage of their net bank credit to specific sectors (the priority sectors),
such as agriculture, small-scale industry, small businesses and housing
finance. Total priority sector advances should be 40.0% of net bank credit with
agricultural advances required to be 18.0% of net bank credit and advances to
weaker sections required to be 10.0% of net bank credit, and 1.0% of the
previous year's net bank credit required to be lent under the Differential Rate
of Interest scheme. Any shortfall in the amount required to be lent to the
priority sectors may be required to be deposited with government sponsored
developmental banks like the National Bank for Agriculture and the Rural
Development and Small Industries Development Bank of India. These deposits can
be for a period of one year or five years.
The Reserve Bank of India requires banks to lend up to 3.0% of their
incremental deposits in the previous fiscal year towards housing finance. This
can be in the form of home loans to individuals or subscription to the
debentures and bonds of the National Housing Bank and housing development
institutions recognized by the government of India.
Prior to the amalgamation, the advances of ICICI were not subject to
the requirement applicable to banks in respect of priority sector lending.
Pursuant to the terms of the Reserve Bank of India's approval of the
amalgamation, ICICI Bank is required to maintain a total of 50.0% of its net
bank credit on the residual portion of its advances (i.e., the portion of its
total advances excluding advances of ICICI at year-end fiscal 2002) in the form
of priority sector advances. This additional requirement of 10.0% by way of
priority sector advances will apply until such time as the aggregate priority
sector advances reach a level of 40.0% of the total net bank credit of ICICI
Bank.
Export Credit
The Reserve Bank of India also requires commercial banks to make loans
to exporters at concessional rates of interest. This enables exporters to have
access to an internationally competitive financing option. Pursuant to existing
guidelines, 12.0% of a bank's net bank credit is required to be in the form of
export credit. ICICI Bank provides export credit for pre-shipment and
post-shipment requirements of exporter borrowers in rupees and foreign
currencies.
Credit Exposure Limits
As a prudent measure aimed at better risk management and avoidance of
concentration of credit risk, the Reserve Bank of India has prescribed credit
exposure limits for banks and long-term lending institutions in respect of
their lending to individual borrowers and to all companies in a single group
(or sponsor group).
The limits set by the Reserve Bank of India are as follows:
1. Exposure ceiling for a single borrower is 15.0% of capital funds
effective from March 31, 2002. Group exposure limit is 40.0% of
capital funds effective from March 31, 2002. In case of financing for
infrastructure projects, the exposure limit is extendable by another
10.0%, i.e., up to 50.0% of capital funds.
2. Capital funds is the total capital as defined under capital adequacy
standards (Tier 1 and Tier 2 capital).
3. Non-fund based exposures are calculated at 100.0% and in addition,
banks include forward contracts in foreign exchange and other
derivative products, like currency swaps and options,
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at their replacement cost value in determining individual or group
borrower exposure ceilings, effective from April 1, 2003.
Credit exposure is the aggregate of:
1. all types of funded and non-funded credit limits,
2. facilities extended by way of equipment leasing, hire purchase finance
and factoring services,
3. advances against shares, debentures, bonds and units of mutual funds
to stock brokers and market makers,
4. bank loan for financing promoters' contributions, and
5. bridge loans against equity flows/issues.
At year-end fiscal 2003, ICICI Bank was in compliance with these
limits, except in the case of two borrowers to whom its exposures are in excess
of the single borrower exposure limit. This is mainly due to the write-down of
ICICI's reserves pursuant to the fair valuation of ICICI's assets for the
purpose of accounting for the amalgamation under Indian GAAP. ICICI had not
exceeded the limit at the time of providing the assistance. The Reserve Bank of
India has granted approval for exceeding the norms in the case of these two
borrowers until the date of completion or stabilization of the projects.
To ensure that exposures are evenly spread, the Reserve Bank of India
requires banks to fix internal limits of exposure to specific sectors. These
limits are subject to periodical review by the banks. ICICI Bank has fixed a
ceiling of 15.0% on its exposure to any one industry (other than retail loans)
and monitors its exposures accordingly.
Regulations relating to Investments and Capital Market Exposure Limits
There are no limits on the amount of investments by banks in
non-convertible debt instruments. However, credit exposure limits specified by
the Reserve Bank of India in respect of lending to individual borrowers and
borrower groups also apply in respect of these investments.
Pursuant to the Reserve Bank of India guidelines, the exposure of banks
to capital markets by way of investments in shares, convertible debentures,
units of equity oriented mutual funds and loans to brokers, should not exceed
5.0% of outstanding domestic credit (excluding inter-bank lending and advances
outside India) at March 31 of the previous fiscal year and investments in
shares, convertible debentures and units of equity oriented mutual funds should
not exceed 20.0% of the bank's net worth. These guidelines were revised on May
11, 2001 specifying the types of capital market exposure that could be
undertaken by banks. Further, the 5.0% ceiling is now required to be computed
in relation to the total advances (including commercial paper) at March 31 of
the previous fiscal year. Pursuant to the terms of the Reserve Bank of India's
approval for the amalgamation, ICICI's project finance related investments are
excluded from the computation of these limits for a period of five years.
In April 1999, the Reserve Bank of India, in its monetary and credit
policy, stated that the investment by a bank in subordinated debt instruments,
representing Tier 2 capital, issued by other banks and financial institutions
should not exceed 10.0% of the investing bank's capital including Tier 2
capital and free reserves.
Consolidated Supervision Guidelines
In fiscal 2003, the Reserve Bank of India issued guidelines for
consolidated accounting and consolidated supervision for banks. These
guidelines became effective April 1, 2003. The principal features of these
guidelines are:
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Consolidated Financial Statements. Banks are required to prepare
consolidated financial statements intended for public disclosure.
Consolidated Prudential Returns. Banks are required to submit to the
Reserve Bank of India, consolidated prudential returns reporting their
compliance with various prudential norms on a consolidated basis, excluding
insurance subsidiaries. Compliance on a consolidated basis is required in
respect of the following main prudential norms:
o Single borrower exposure limit of 15.0% of capital funds (20.0% of
capital funds provided the additional exposure of up to 5.0% is for
the purpose of financing infrastructure projects);
o Borrower group exposure limit of 40.0% of capital funds (50.0% of
capital funds provided the additional exposure of up to 10.0% is for
the purpose of financing infrastructure projects);
o Deduction from Tier 1 capital of the bank, of any shortfall in capital
adequacy of a subsidiary for which capital adequacy norms are
specified; and
o Consolidated capital market exposure limit of 2.0% of consolidated
advances and 10.0% of consolidated net worth.
ICICI Bank is in compliance with these guidelines, except for the
consolidated capital market exposure limits. ICICI Bank has submitted to the
Reserve Bank of India that the limit of 2.0% of consolidated advances and 10.0%
of consolidated net worth effectively reduces the standalone capital market
exposure limit of 5.0% of advances and 20.0% of net worth. On a consolidated
basis, ICICI Bank has exceeded the exposure limits in respect of two borrowers.
The Reserve Bank of India has granted approval for exceeding the norms in these
two cases. See also "-Credit Exposure Limits".
Banks' Investment Classification and Valuation Norms
Based on the comments to the Report of the Informal Group on Banks'
Investment Portfolio, the Reserve Bank of India finalized its guidelines on
categorization and valuation of banks' investment portfolio. These guidelines
were effective from September 30, 2000. The salient features of the guidelines
are given below:
o The entire investment portfolio is required to be classified under
three categories: (a) held to maturity, (b) held for trading and (c)
available for sale. Held to maturity includes securities acquired with
the intention of being held up to maturity; held for trading includes
securities acquired with the intention of being traded to take
advantage of the short-term price/interest rate movements; and
available for sale includes securities not included in held to
maturity and held for trading. Banks should decide the category of
investment at the time of acquisition.
o Held to maturity investments compulsorily include (a) recapitalization
bonds, (b) investments in subsidiaries and joint ventures and (c)
investments in debentures deemed as advance. Held to maturity
investments also include any other investment identified for inclusion
in this category subject to the condition that such investments cannot
exceed 25.0% of the total investment excluding recapitalization bonds
and debentures.
o Profit on the sale of investments in the held to maturity category is
appropriated to the capital reserve account after being taken in the
income statement. Loss on any sale is recognized in the income
statement.
o The market price of the security available from the stock exchange,
the price of securities in subsidiary general ledger transactions, the
Reserve Bank of India price list or prices declared by Primary Dealers
Association of India (PDAI) jointly with the Fixed Income Money Market
and Derivatives Association of India (FIMMDA) serves as the "market
value" for investments in available for sale and held for trading
securities.
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o Investments under the held for trading category should be sold within
90 days; in the event of inability to sell due to adverse factors
including tight liquidity, extreme volatility or a unidirectional
movement in the market, the unsold securities should be shifted to the
available for sale category.
o Profit or loss on the sale of investments in both held for trading and
available for sale categories is taken in the income statement.
o Shifting of investments from or to held to maturity may be done with
the approval of the board of directors once a year, normally at the
beginning of the accounting year; shifting of investments from
available for sale to held for trading may be done with the approval
of the board of directors, the Asset Liability Management Committee or
the Investment Committee; shifting from held for trading to available
for sale is generally not permitted.
o The Reserve Bank of India no longer announces the yield to maturity
rates on unquoted government of India securities for the purpose of
valuation of investments by banks.
Held to maturity securities are not marked to market and are carried at
acquisition cost or at an amortized cost if acquired at a premium over the face
value.
Available for sale and held for trading securities are valued at market
or fair value as at the balance sheet date. Depreciation or appreciation for
each basket within the available for sale and held for trading categories is
aggregated. Net appreciation in each basket, if any, that is not realized is
ignored, while net depreciation is provided for.
With a view to the building up of adequate reserves to guard against
any possible reversal of interest rate environment in the future due to
unexpected developments, the Reserve Bank of India has advised banks to build
up an investment fluctuation reserve of a minimum of 5.0% of the bank's
investment portfolio within a period of five years starting fiscal 2002. This
reserve has to be computed with respect to investments in held for trading and
available for sale categories. It is not be necessary to include investments
under the held to maturity category for the purpose of building up this
reserve.
Restrictions on Investments in a Single Company
No bank may hold shares in any company exceeding 30.0% of the paid up
share capital of that company or 30.0% of its own paid up share capital and
reserves, whichever is less.
Limit on Transactions through Individual Brokers
Guidelines issued by the Reserve Bank of India require banks to empanel
brokers for transactions in securities. These guidelines also require that a
disproportionate part of the bank's business should not be transacted only
through one broker or a few brokers. The Reserve Bank of India specifies that
not more than 5.0% of the total transactions through empanelled brokers can be
transacted through one broker. If for any reason this limit is breached, the
Reserve Bank of India has stipulated that the board of directors of the bank
concerned should ratify such action.
Prohibition on Short-Selling
The Reserve Bank of India does not permit short selling of securities
by banks.
Regulations relating to Deposits
The Reserve Bank of India has permitted banks to independently
determine rates of interest offered on term deposits. However, banks are not
permitted to pay interest on current account deposits. Further, banks may only
pay interest of up to 3.5% per annum on savings deposits. In respect of savings
and time deposits accepted from employees, ICICI Bank is permitted by the
Reserve Bank of India to pay an additional interest of 1.0% over the interest
payable on deposits from the public.
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Domestic time deposits have a minimum maturity of 15 days (seven days
in respect of deposits over Rs. 1.5 million (US$ 31,546) with effect from April
19, 2001) and a maximum maturity of 10 years. Time deposits from non-resident
Indians denominated in foreign currency have a minimum maturity of one year and
a maximum maturity of three years. The minimum balance for opening a Foreign
Currency Non Resident (FCNR) deposit is US $ 1,000, GBP 1,000, Euro 1,000 or
JPY 200,000 as appropriate.
Starting April 1998, the Reserve Bank of India has permitted banks the
flexibility to offer varying rates of interests on domestic deposits of the
same maturity subject to the following conditions:
o Time deposits are of Rs. 1.5 million (US$ 31,546) and above; and
o Interest on deposits is paid in accordance with the schedule of
interest rates disclosed in advance by the bank and not pursuant to
negotiation between the depositor and the bank.
ICICI Bank stipulates a minimum balance of Rs. 10,000 (US$ 210) for a
non-resident rupee savings deposit (NRE deposit). Interest of 3.5% is paid on
deposits up to Rs. 25,000 (US$ 526). The principal amount in excess of that
earns the interest applicable to fixed deposits. The Reserve Bank of India has,
effective September 15, 2003, stipulated that the interest rate on NRE deposits
should not exceed 100 basis points over the US dollar LIBOR/ swap rates for the
corresponding maturity.
Deposit Insurance
Demand and time deposits of up to Rs. 100,000 (US$ 2,103) accepted by
Indian banks have to be mandatorily insured with the Deposit Insurance and
Credit Guarantee Corporation, a wholly-owned subsidiary of the Reserve Bank of
India. Banks are required to pay the insurance premium for the eligible amount
to the Deposit Insurance and Credit Guarantee Corporation on a semi-annual
basis. The cost of the insurance premium cannot be passed on to the customer.
Regulations relating to Knowing the Customer and Anti-Money Laundering
The Reserve Bank of India has issued several guidelines relating to
identification of depositors and has advised banks to put in place systems and
procedures to control financial frauds, identify money laundering and
suspicious activities, and monitor high value cash transactions. The Reserve
Bank of India has also issued guidelines from time to time advising banks to be
vigilant while opening accounts for new customers to prevent misuse of the
banking system for perpetration of frauds.
The Reserve Bank of India requires banks to open accounts only after
verifying the identity of customers as to their name, residence and other
details to ensure that the account is being opened by the customer in his own
name. To open an account, a prospective customer is required to be introduced
by an existing customer who has had his own account with the bank for at least
six months duration and has satisfactorily conducted that account, or a
well-known person in the local area where the prospective customer is residing.
If the prospective customer does not have an introducer, the
prospective customer is required to submit documents such as his identity card,
passport or details of bank accounts with other banks.
The Prevention of Money Laundering Act, 2002 has been passed by Indian
Parliament and has received the assent of the President of India on January 17,
2003. However the provisions of the Act shall come into force and effect only
on dates notified by the Indian government, which has not so far notified these
dates. The Act seeks to prevent money laundering and to provide for
confiscation of property derived from, or involved in, money laundering and for
incidental and connected matters.
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Legal Reserve Requirements
Cash Reserve Ratio
A banking company such as ICICI Bank is required to maintain a
specified percentage of its demand and time liabilities, excluding inter-bank
deposits, by way of cash reserve with itself and by way of balance in current
account with the Reserve Bank of India. The cash reserve ratio can be a minimum
of 3.0% and a maximum of 20.0% pursuant to section 42 of the Reserve Bank of
India Act. At present, the cash reserve ratio is 4.5%.
The following liabilities are excluded from the calculation of the cash
reserve ratio:
o inter-bank liabilities;
o liabilities to primary dealers; and
o refinancing from the Reserve Bank of India and other institutions
permitted to offer refinancing to banks.
The Reserve Bank of India pays no interest on the cash reserves up to
3.0% of the demand and time liabilities and pays interest at the bank rate,
currently 6.0%, on the balance.
The cash reserve ratio has to be maintained on an average basis for a
fortnightly period and should not be below 50.0% of the required cash reserve
ratio for the first seven days of the fortnight and 70.0% for any day of the
rest of the fortnight, except the last business day of the fortnight. On the
last business day of the fortnight, no restrictions apply.
Statutory Liquidity Ratio
In addition to the cash reserve ratio, a banking company such as ICICI
Bank is required to maintain a specified percentage of its net demand and time
liabilities by way of liquid assets like cash, gold or approved securities. The
percentage of this liquidity ratio is fixed by the Reserve Bank of India from
time to time, and it can be a minimum of 25.0% and a maximum of 40.0% pursuant
to section 24 of the Banking Regulation Act. At present, the Reserve Bank of
India requires banking companies to maintain a liquidity ratio of 25.0%. The
Banking Regulation (Amendment) and Miscellaneous Provisions Bill, 2003 recently
introduced in the Indian Parliament proposes to amend section 24 of the Banking
Regulation Act to remove the minimum Statutory Liquidity Ratio stipulation,
thereby giving the Reserve Bank of India the freedom to fix the Statutory
Liquidity Ratio below this level. See also "Overview of the Indian Financial
Sector - Recent Structural Reforms - Proposed Amendments to the Banking
Regulation Act".
Regulations on Asset Liability Management
At present, the Reserve Bank of India's regulations for asset liability
management require banks to draw up asset-liability gap statements separately
for rupee and for four major foreign currencies. These gap statements are
prepared by scheduling all assets and liabilities according to the stated and
anticipated re-pricing date, or maturity date. These statements have to be
submitted to the Reserve Bank of India on a quarterly basis. The Reserve Bank
of India has advised banks to actively monitor the difference in the amount of
assets and liabilities maturing or being re-priced in a particular period and
place internal prudential limits on the gaps in each time period, as a risk
control mechanism. Additionally, the Reserve Bank of India has asked banks to
manage their asset-liability structure such that the negative liquidity gap in
the 1-14 day and 15-28 day time periods does not exceed 20.0% of cash outflows
in these time periods. This 20.0% limit on negative gaps was made mandatory
with effect from April 1, 2000.
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Foreign Currency Dealership
The Reserve Bank of India has granted ICICI Bank a full-fledged
authorized dealers' license to deal in foreign exchange through its designated
branches. Under this license, ICICI Bank has been granted permission to:
o engage in foreign exchange transactions in all currencies;
o open and maintain foreign currency accounts abroad;
o raise foreign currency and rupee denominated deposits from non
resident Indians;
o grant foreign currency loans to on-shore and off-shore corporations;
o open documentary credits;
o grant import and export loans;
o handle collection of bills, funds transfer services;
o issue guarantees; and
o enter into derivative transactions and risk management activities that
are incidental to its normal functions authorized under its
organizational documents.
ICICI Bank's foreign exchange operations are subject to the guidelines
specified by the Reserve Bank of India in the exchange control manual. As an
authorized dealer, ICICI Bank is required to enroll as a member of the Foreign
Exchange Dealers Association of India, which prescribes the rules relating to
foreign exchange business in India.
Authorized dealers, like ICICI Bank, are required to determine their
limits on open positions and maturity gaps in accordance with the Reserve Bank
of India's guidelines and these limits are approved by the Reserve Bank of
India. Further, ICICI Bank is permitted to hedge foreign currency loan
exposures of Indian corporations in the form of interest rate swaps, currency
swaps and forward rate agreements, subject to certain conditions.
Statutes Governing Foreign Exchange and Cross-Border Business Transactions
The foreign exchange and cross border transactions undertaken by banks
are subject to the provisions of the Foreign Exchange Management Act. All
branches should monitor all non-resident accounts to prevent money laundering.
Requirements of the Banking Regulation Act
Prohibited Business
The Banking Regulation Act specifies the business activities in which a
bank may engage. Banks are prohibited from engaging in business activities
other than the specified activities.
Reserve Fund
Any bank incorporated in India is required to create a reserve fund to
which it must transfer not less than 25.0% of the profits of each year before
dividends. If there is an appropriation from this account, the bank is required
to report the same to the Reserve Bank of India within 21 days, explaining the
circumstances leading to such appropriation. The government of India may, on
the recommendation of the Reserve Bank of India, exempt a bank from
requirements relating to its reserve fund.
Restrictions on Payment of Dividends
Pursuant to the provisions of the Banking Regulation Act, a bank can
pay dividends on its shares only after all its capitalized expenses (including
preliminary expenses, organization expenses, share
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selling commission, brokerage, amounts of losses and any other item of
expenditure not represented by tangible assets) have been completely written
off. The government of India may exempt banks from this provision by issuing a
notification on the recommendation of the Reserve Bank of India. ICICI Bank
obtained approval to write off, over a period of three years including fiscal
2002, its issue expenses incurred in respect of its ADS program for preparing
its accounts as provided under the Banking Regulation Act.
Prior approval of the Reserve Bank of India is required for a dividend
payment above 25.0% of face value of a company's shares or for an interim
dividend payment.
The government of India may, on the recommendation of the Reserve Bank
of India, exempt a bank from the restrictions on dividend payment.
Restriction on Share Capital and Voting Rights
Banks can issue only ordinary shares. The Banking Regulation Act
specifies that no shareholder in a banking company can exercise voting rights
on poll in excess of 10.0% of total voting rights of all the shareholders of
the banking company.
Only banks incorporated before January 15, 1937 can issue preferential
shares. Prior to the amalgamation, ICICI had preference share capital of Rs.
3.5 billion (US$ 74 million). The government of India, on the recommendation of
the Reserve Bank of India, has granted an exemption to ICICI Bank which allows
the inclusion of preference capital in the capital structure of ICICI Bank for
a period of five years, though ICICI Bank is a bank incorporated after January
15, 1937.
Legislation recently introduced in the Indian Parliament proposes to
amend the Banking Regulation Act to remove the limit of 10.0% on the maximum
voting power exercisable by an shareholder in a banking company and allow banks
to issue redeemable and non-redeemable preference shares. See also "Overview of
the Indian Financial Sector - Recent Structural Reforms - Proposed Amendments
to the Banking Regulation Act".
Regulatory Reporting and Examination Procedures
The Reserve Bank of India is empowered under the Banking Regulation Act
to inspect a bank. The Reserve Bank of India monitors prudential parameters at
quarterly intervals. To this end and to enable off-site monitoring and
surveillance by the Reserve Bank of India, banks are required to report to the
Reserve Bank of India on aspects such as:
o assets, liabilities and off-balance sheet exposures;
o the risk weighting of these exposures, the capital base and the
capital adequacy ratio;
o the unaudited operating results for each quarter;
o asset quality;
o concentration of exposures;
o connected and related lending and the profile of ownership, control
and management; and
o other prudential parameters.
The Reserve Bank of India also conducts periodical on-site inspections
on matters relating to the bank's portfolio, risk management systems, internal
controls, credit allocation and regulatory compliance, at intervals ranging
from one to three years. ICICI Bank has been and at present also, is, subject
to the on-site inspection by the Reserve Bank of India at yearly intervals. The
inspection report, along with the report on actions taken by ICICI Bank, has to
be placed before the board of directors. On approval by the board of directors,
ICICI Bank is required to submit the report on actions taken by it to the
Reserve Bank of India. The Reserve Bank of India also discusses the report with
the management team including the Managing Director and Chief Executive
Officer.
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The Reserve Bank of India also conducts on-site supervision of selected
branches of ICICI Bank with respect to their general operations and foreign
exchange related transactions.
Appointment and Remuneration of the Chairman, Managing Director and Other
Directors
ICICI Bank is required to obtain prior approval of the Reserve Bank of
India before it appoints its chairman and managing director and any other
wholetime directors and fixes their remuneration. The Reserve Bank of India is
empowered to remove an appointee to the posts of chairman, managing director
and wholetime directors on the grounds of public interest, interest of
depositors or to ensure the proper management of ICICI Bank. Further, the
Reserve Bank of India may order meetings of ICICI Bank's board of directors to
discuss any matter in relation to ICICI Bank, appoint observers to such
meetings and in general may make such changes to the management as it may deem
necessary and may also order the convening of a general meeting of the
shareholders of ICICI Bank to elect new directors.
Penalties
The Reserve Bank of India may impose penalties on banks and its
employees in case of infringement of regulations under the Banking Regulation
Act. The penalty may be a fixed amount or may be related to the amount involved
in any contravention of the regulations. The penalty may also include
imprisonment.
Restriction on Transfer of Shares
The Reserve Bank of India's approval is required for the transfer of
shares of ICICI Bank to an individual or a group which acquires 5.0% or more of
ICICI Bank's total paid up capital.
Assets to be Maintained in India
Every bank is required to ensure that its assets in India (including
import-export bills drawn in India and Reserve Bank of India approved
securities, even if the bills and the securities are held outside India) are
not less than 75.0% of its demand and time liabilities in India.
Secrecy Obligations
ICICI Bank's obligations relating to maintaining secrecy arise out of
common law principles governing its relationship with its customers. ICICI Bank
cannot disclose any information to third parties except under clearly defined
circumstances. The following are the exceptions to this general rule:
o where disclosure is required to be made under any law;
o where there is an obligation to disclose to the public;
o where ICICI Bank needs to disclose information in its interest; and
o where disclosure is made with the express or implied consent of the
customer.
ICICI Bank is required to comply with the above in furnishing any
information to any parties. ICICI Bank is also required to disclose information
if ordered to do so by a court. The Reserve Bank of India may, in the public
interest, publish the information obtained from the bank. Under the provisions
of the Banker's Books Evidence Act, a copy of any entry in a bankers' book,
such as ledgers, day books, cash books and account books certified by an
officer of the bank may be treated as prima facie evidence of the transaction
in any legal proceedings.
Regulations and Guidelines of the Securities and Exchange Board of India
The Securities and Exchange Board of India was established to protect
the interests of public investors in securities
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and to promote the development of, and to regulate, the Indian securities
market. ICICI Bank is subject to Securities and Exchange Board of India
regulations for its capital issuances, as well as its underwriting, custodial,
depositary participant, investment banking, registrar and transfer agents,
brokering and debenture trusteeship activities. These regulations provide for
its registration with the Securities and Exchange Board of India for each of
these activities, functions and responsibilities. ICICI Bank is required to
adhere to a code of conduct applicable for these activities.
Public Financial Institution Status
ICICI was a public financial institution under the Indian Companies
Act, 1956. The special status of public financial institutions is also
recognized under other statutes including the Indian Income-tax Act, 1961, Sick
Industrial Companies (Special Provisions) Act, 1985 and Recovery of Debts Due
to Banks and Financial Institutions Act, 1993. ICICI Bank is not a public
financial institution. As a public financial institution, ICICI was entitled to
certain benefits under various statutes. These benefits included the following:
o For income tax purposes, ICICI's deposits and bonds were prescribed
modes for investing and depositing surplus money by charitable and
religious trusts. Since ICICI Bank is a scheduled bank, its deposits
and bonds are also prescribed modes for investment by religious and
charitable trusts.
o The government of India had permitted non-government provident,
superannuation and gratuity funds to invest up to 40.0% of their
annual accretion of funds in bonds and securities issued by public
financial institutions. Further, the trustees of these funds could at
their discretion invest an additional 20.0% of such accretions in
these bonds and securities. These funds can invest up to only 10.0% of
their annual accretion in bonds and securities issued by private
sector banks, such as ICICI Bank.
o Indian law provides that a public financial institution cannot, except
as provided by law or practice, divulge any information relating to,
or to the affairs of, its customers. ICICI Bank has similar
obligations relating to maintaining secrecy arising out of common law
principles governing its relationship with its customers.
o The Recovery of Debts Due to Banks and Financial Institutions Act,
1993 provides for establishment of debt recovery tribunals for
recovery of debts due to any bank or public financial institution or
to a consortium of banks and public financial institutions. Under this
Act, the procedures for recoveries of debt were simplified and time
frames were fixed for speedy disposal of cases. Upon establishment of
the debt recovery tribunal, no court or other authority can exercise
jurisdiction in relation to matters covered by this Act, except the
higher courts in India in certain circumstances. This Act applies to
banks as well as public financial institutions and therefore applies
to ICICI Bank.
ICICI's cessation as a public financial institution would have
constituted an event of default under certain of ICICI's loan agreements
related to its foreign currency borrowings. Prior to the amalgamation becoming
effective, such event of default was waived by the respective lenders pursuant
to the terms of such foreign currency borrowing agreements.
Income Tax Benefits
As a banking company, ICICI Bank is entitled to certain tax benefits
under the Indian Income-tax Act including the following:
o ICICI Bank is allowed a deduction of up to 40.0% of its taxable
business income derived from the business of long-term financing
(defined as loans and advances extended for a period of not less than
five years) which is transferred to a special reserve, provided that
the total amount of this reserve does not exceed two times the paid-up
share capital and general reserves. ICICI Bank is entitled to this
benefit because it is a financial corporation. Effective fiscal 1998,
if a special reserve is created, it must be maintained and if it is
utilized, it is treated as taxable income in the year in which it is
utilized.
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o ICICI Bank is entitled to a tax deduction on the provisioning towards
bad and doubtful debts equal to 7.5% of ICICI Bank's total business
income, computed before making any deductions permitted pursuant to
the Indian Income-tax Act, to the extent of 10.0% of the aggregate
average advances made by its rural branches computed in the manner
prescribed. ICICI Bank has the option of claiming a deduction in
respect of the provision made by it for any assets classified pursuant
to the Reserve Bank of India's guidelines as doubtful or loss assets
to the extent of 10.0% of the amount of such assets as on the last day
of the year.
o ICICI Bank is eligible to issue tax saving bonds approved in
accordance with the provisions of the Indian Income-tax Act. The
subscription to such bonds by certain categories of investors is a
prescribed mode of investing for the purposes of availing of a tax
rebate.
o For income tax purposes, ICICI Bank's deposits and bonds are
prescribed modes of investing and depositing surplus money by
charitable and religious trusts.
o The income of non-resident persons and persons not ordinarily resident
in India, by way of interest on ICICI Bank's deposits in a foreign
currency qualifying under section 10(15)(iv)(fa) is exempt from tax.
Regulations governing Insurance Companies
ICICI Prudential Life Insurance Company and ICICI Lombard General
Insurance Company, the subsidiaries of ICICI Bank offering life insurance and
non-life insurance respectively, are subject to the provisions of the Insurance
Act, 1938 and the various regulations prescribed by the Insurance Regulatory
and Development Authority. These regulations regulate and govern, among other
things, registration as an insurance company, investment, licensing of
insurance agents, advertising, sale and distribution of insurance products and
services and protection of policyholders' interests. In May 2002, the Indian
parliament approved the Insurance (Amendment) Act 2002, which facilitates the
appointment of corporate agents by insurance companies and prohibits
intermediaries and brokers from operating as surrogate insurance agents.
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EXCHANGE CONTROLS
Restrictions on Conversion of Rupees
There are restrictions on the conversion of rupees into dollars. Before
February 29, 1992, the Reserve Bank of India determined the official value of
the rupee in relation to a weighted basket of currencies of India's major
trading partners. In the February 1992 budget, a new dual exchange rate
mechanism was introduced by allowing conversion of 60.0% of the foreign
exchange received on trade or current account at a market-determined rate and
the remaining 40.0% at the official rate. All importers were, however, required
to buy foreign exchange at the market rate except for certain specified
priority imports. In March 1993, the exchange rate was unified and allowed to
float. In February 1994 and again in August 1994, the Reserve Bank of India
announced relaxations in payment restrictions in case of a number of
transactions. Since August 1994, the government of India has substantially
complied with its obligations owed to the International Monetary Fund, under
which India is committed to refrain from using exchange restrictions on current
international transactions as an instrument in managing the balance of
payments. Effective July 1995, the process of current account convertibility
was advanced by relaxing restrictions on foreign exchange for various purposes,
such as foreign travel and medical treatment.
In December 1999, the Indian parliament passed the Foreign Exchange
Management Act, 1999, which became effective on June 1, 2000, replacing the
earlier Foreign Exchange Regulation Act, 1973. This legislation indicates a
major shift in the policy of the government with regard to foreign exchange
management in India. While the Foreign Exchange Regulation Act, 1973 was aimed
at the conservation of foreign exchange and its utilization for the economic
development of the country, the objective of the Foreign Exchange Management
Act, 1999 is to facilitate external trade and promote the orderly development
and maintenance of the foreign exchange market in India.
The Foreign Exchange Management Act, 1999 regulates transactions
involving foreign exchange and provides that certain transactions cannot be
carried out without the general or special permission of the Reserve Bank of
India. The Foreign Exchange Management Act, 1999 has eased restrictions on
current account transactions. However, the Reserve Bank of India continues to
exercise control over capital account transactions (i.e., those which alter the
assets or liabilities, including contingent liabilities, of persons). The
Reserve Bank of India has issued regulations under the Foreign Exchange
Management Act, 1999 to regulate the various kinds of capital account
transactions, including certain aspects of the purchase and issuance of shares
of Indian companies.
Restrictions on Sale of the Equity Shares underlying the ADSs and Repatriation
of Sale Proceeds
ADSs issued by Indian companies to non-residents have free
transferability outside India. However, under Indian regulations and practice,
the approval of the Reserve Bank of India is required for the sale of equity
shares underlying the ADSs by a non-resident of India to a resident of India as
well as for renunciation of rights to a resident of India. However sale of such
shares under the portfolio investment scheme prescribed by the Reserve Bank of
India, does not require the approval of the Reserve Bank of India provided the
same is made on a recognized stock exchange and through a registered stock
broker.
If the prior approval of the Reserve Bank of India has been obtained
for the sale of the equity shares underlying the ADSs, then the sale proceeds
may be remitted in terms of such an approval. However, if the equity shares
underlying the ADSs are sold under the portfolio investment scheme then the
sale proceeds may be remitted through an authorized dealer, without the
approval of the Reserve Bank of India provided that the equity shares are sold
on a recognized stock exchange through a registered stock broker and a no
objection/ tax clearance certificate from the income-tax authority has been
produced.
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After the announcement of India's budget for fiscal 2002, the Reserve
Bank of India issued certain notifications for the liberalization of the
capital account. Pursuant to the notifications, in contrast to prior
regulations, two-way fungibility in ADS/GDR issues of Indian companies has been
introduced, subject to sectoral caps, wherever applicable.
An Indian company may sponsor an issue of ADSs with an overseas
depository against shares held by its shareholders at a price to be determined
by the lead manager. The proceeds of the issue shall be repatriated to India
within a period of one month. The sponsoring company must comply with the
provisions of the Scheme for Issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and the
guidelines issued thereunder by the government of India from time to time. The
sponsoring company must also furnish full details of the issue in the
prescribed forms to the Reserve Bank of India within 30 days from the date of
closure of the issue.
The Reserve Bank of India has issued a notification under the
provisions of the Foreign Exchange Management Act, 1999 permitting a registered
broker in India to purchase shares of any Indian company on behalf of a person
resident outside India, for the purpose of converting the shares so purchased
into ADSs provided that:
o the shares are purchased on a recognized stock exchange;
o the Indian company has issued ADSs;
o the shares are purchased with the permission of the custodian of the
ADSs of the concerned Indian company and are deposited with the
custodian;
o the number of shares so purchased shall not exceed the number of ADSs
converted into underlying shares and shall be subject to sectoral caps
as applicable; and
o the non-resident investor, broker, custodian and the overseas
depository comply with the provisions of the Scheme for Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time.
On November 23, 2002, the government of India's Ministry of Finance
issued Operative Guidelines for Disinvestment of Shares by the Indian Companies
in the Overseas Market through the Issue of ADSs. Under these guidelines, the
shareholders may divest their holdings in the overseas market through the
mechanism of a sponsored ADS issue by the Indian company. The holdings which
may be divested are holdings in Indian companies which are listed either in
India or on an overseas exchange.
The divestment process is initiated when the Indian company whose
shares are being offered for divestment in the overseas market sponsors an ADS
issue against the block of existing shares offered by the shareholders under
these guidelines. Such ADS issues against existing shares offered for
divestment must also comply with the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeover) Regulations, 1997, if the ADSs
are cancelled and the underlying shares are to be registered with the company.
Such divestment would result in foreign equity investment and would also need
to conform to the foreign direct investment sectoral policy. All mandatory
approvals including those under the Companies Act, 1956 and the approval of the
Foreign Investment Promotion Board for foreign equity induction through the
offer of existing shares would have to be obtained.
The Reserve Bank of India has permitted Indian companies to retain
abroad for any period, the funds raised through an issue of ADSs, in order to
meet their future foreign exchange requirement. Further, pending repatriation
or utilization, the Indian company may invest the foreign currency funds raised
in:
188
o deposits or certificates of deposit or other products offered by banks
who have been rated not less than AA(-) by Standard and Poor's Ratings
Service/Fitch IBCA or Aa3 by Moody's Investors Service;
o deposits with an overseas branch of an authorized dealer in India; and
o treasury bills and other monetary instruments of one-year maturity
having a minimum rating as indicated above.
The Reserve Bank of India has permitted resident shareholders of Indian
companies, who offer their shares for conversion to ADSs, to receive the sale
proceeds in foreign currency. However, the conversion to such ADSs should have
the approval of the Foreign Investment Promotion Board. Further, the sale
proceeds received by residents are also permitted to be credited to their
Exchange Earners' Foreign Currency/Resident Foreign Currency (Domestic)
accounts or to their rupee accounts in India at their option.
189
MARKET PRICE INFORMATION
Equity Shares
Our outstanding equity shares are currently listed and traded on the
Chennai, Delhi, Kolkata and Vadodara Stock Exchanges, the Bombay Stock Exchange
or the BSE and on the National Stock Exchange of India Limited or the NSE. We
have received shareholder approval in our Annual General Meeting held on August
25, 2003 for the delisting of our equity shares from the Chennai, Delhi,
Kolkata and Vadodara stock exchanges. At September 5, 2003, 613.2 million
equity shares were outstanding. The prices for equity shares as quoted in the
official list of each of the Indian stock exchanges are in Indian rupees.
The following table shows:
o the reported high and low closing prices quoted in rupees for our
equity shares on the NSE; and
o the reported high and low closing prices for our equity shares,
translated into US dollars, based on the noon buying rate on the last
business day of each period presented.
Price per equity share(1)
-------------------------------------------------------------------------
High Low High Low
-------------------------------------------------------------------------
Annual prices:
Fiscal 1999................................. Rs. 65.00 Rs. 20.75 US$ 1.53 US$ 0.49
Fiscal 2000................................. 275.00 22.70 6.30 0.52
Fiscal 2001................................. 279.65 189.70 5.97 4.05
Fiscal 2002 ................................ 193.50 66.75 3.96 1.37
Fiscal 2003 ................................ 161.75 110.55 3.40 2.32
Quarterly prices:
Fiscal 2002:
First Quarter............................... 193.50 124.60 4.11 2.65
Second Quarter.............................. 140.00 66.75 2.92 1.39
Third Quarter 114.55 71.50 2.37 1.48
Fourth Quarter.............................. 144.90 85.95 2.97 1.76
Fiscal 2003:
First Quarter............................... 161.75 111.70 3.31 2.27
Second Quarter.............................. 154.50 132.30 3.19 2.73
Third Quarter 149.50 110.55 3.11 2.30
Fourth Quarter.............................. 149.95 132.65 3.15 2.79
Fiscal 2004:
First Quarter............................... 150.15 120.80 3.24 2.60
Second Quarter (through September 5, 2003).. 187.60 145.10 4.09 3.16
Monthly prices:
March 2003.................................. 149.85 132.90 3.15 2.80
April 2003.................................. 138.90 121.15 2.93 2.56
May 2003.................................... 138.80 120.80 2.95 2.57
June 2003................................... 150.15 136.75 3.24 2.95
July 2003................................... 163.20 145.10 3.54 3.14
August 2003 ................................ 183.70 147.15 4.00 3.21
_______________
(1) Data from the NSE. The prices quoted on the BSE and other stock exchanges
may be different.
190
On September 5, 2003, the closing price of equity shares on the NSE was
Rs. 182.9 equivalent to US$ 3.99 per equity share (US$ 7.98 per ADS on an
imputed basis) translated at the noon buying rate of Rs. 45.88 per US$ 1.00 on
September 5, 2003.
At September 5, 2003, there were approximately 535,875 holders of
record of equity shares, of which 123 had registered addresses in the United
States and held an aggregate of approximately 104,692 equity shares.
ADSs
Our ADSs, each representing two equity shares, were originally issued
in March 2000 in a public offering and are listed and trade on the New York
Stock Exchange under the symbol IBN. The equity shares underlying the ADSs have
been listed on the Calcutta, Chennai, Delhi and Vadodara Stock Exchanges, the
BSE and the NSE. We have received shareholder approval in our Annual General
Meeting held on August 25, 2003 for the delisting of our equity shares from the
Chennai, Delhi, Kolkata and Vadodara stock exchanges.
At September 5, 2003, ICICI Bank had approximately 79.9 million ADSs,
equivalent to 159.9 million equity shares, outstanding. At this date, there
were 25 record holders of ICICI Bank's ADSs, all of which have registered
addresses in the United States.
The following table sets forth, for the periods indicated, the reported
high and low closing prices on the New York Stock Exchange for the outstanding
ICICI Bank ADSs traded under the symbol IBN.
Price per ADS
-----------------------------------
High Low
-----------------------------------
Fourth Quarter (from March 28, 2000)....... US$ 15.38 US$ 14.38
Annual prices:
Fiscal 2001................................ 18.75 4.62
Fiscal 2002................................ 7.50 2.50
Fiscal 2003................................ 7.94 4.52
Quarterly prices:
Fiscal 2002:
First Quarter.............................. 7.50 5.00
Second Quarter............................. 5.85 2.50
Third Quarter.............................. 5.30 2.80
Fourth Quarter............................. 6.80 4.00
Fiscal 2003:
First Quarter.............................. 8.31 4.89
Second Quarter............................. 7.02 5.18
Third Quarter.............................. 6.68 4.52
Fourth Quarter............................. 6.81 5.78
Fiscal 2004:
First Quarter.............................. 6.95 4.95
Second Quarter (through September 5, 2003). 9.90 6.91
Monthly prices:
March 2003................................. 6.81 5.94
April 2003................................. 6.36 4.95
May 2003................................... 6.42 5.10
June 2003.................................. 6.95 6.53
July 2003.................................. 8.33 6.91
August 2003................................ 9.90 7.70
191
RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
India strictly regulates ownership of Indian companies by foreigners.
Foreign investment in Indian securities, including the equity shares
represented by the ADSs, is generally regulated by the Foreign Exchange
Management Act, 1999, which permits transactions involving the inflow or
outflow of foreign exchange and empowers the Reserve Bank of India to prohibit
or regulate such transactions.
The Foreign Exchange Management Act, 1999 regulates transactions
involving foreign exchange and provides that certain transactions cannot be
carried out without the general or special permission of the Reserve Bank of
India. The Foreign Exchange Management Act, 1999 has eased restrictions on
current account transactions. However, the Reserve Bank of India continues to
exercise control over capital account transactions (i.e., those which alter the
assets or liabilities, including contingent liabilities, of persons). The
Reserve Bank of India has issued regulations under the Foreign Exchange
Management Act, 1999 to regulate the various kinds of capital account
transactions, including certain aspects of the purchase and issuance of shares
of Indian companies.
An Indian company may sponsor an issue of ADSs with an overseas
depositary against shares held by its shareholders at a price to be determined
by the lead manager. The proceeds of the issue must be repatriated to India
within a period of one month. The sponsoring company must comply with the
provisions of the Scheme for Issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and the
guidelines issued thereunder by the government of India from time to time. The
sponsoring company must also furnish full details of the issue in the
prescribed forms to the Reserve Bank of India within 30 days from the date of
closure of the issue.
On November 23, 2002, the government of India's Ministry of Finance
issued Operative Guidelines for Disinvestment of Shares by the Indian Companies
in the Overseas Market through the Issue of ADSs. Under these guidelines, the
shareholders may divest their holdings in the overseas market through the
mechanism of a sponsored ADS issue by the Indian company. The holdings which
may be divested are holdings in Indian companies which are listed either in
India or on an overseas exchange.
The divestment process is initiated when the Indian company whose
shares are being offered for divestment in the overseas market sponsors an ADS
issue against the block of existing shares offered by the shareholders under
these guidelines. Such ADS issues against existing shares offered for
divestment must also comply with the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeover) Regulations, 1997, if the ADSs
are cancelled and the underlying shares are to be registered with the company.
Such divestment would result in foreign equity investment and would also need
to conform to the foreign direct investment sectoral policy. All mandatory
approvals including those under the Companies Act, 1956 and the approval of the
Foreign Investment Promotion Board for foreign equity induction through the
offer of existing shares, would have to be obtained.
The Reserve Bank of India has issued a notification under the
provisions of the Foreign Exchange Management Act, 1999 permitting a registered
broker in India to purchase shares of any Indian company on behalf of a person
resident outside India, for the purpose of converting the shares so purchased
into ADSs, provided that:
o the shares are purchased on a recognized stock exchange;
o the Indian company has issued ADSs;
o the shares are purchased with the permission of the custodian of the
ADSs of the concerned Indian company and are deposited with the
custodian;
192
o the number of shares so purchased shall not exceed the number of ADSs
converted into underlying shares and shall be subject to sectoral caps
as applicable; and
o the non-resident investor, broker, custodian and the overseas
depository comply with the provisions of the Scheme for Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time.
Under the foreign investment rules, the following are the applicable
restrictions on foreign ownership:
o Under the foreign direct investment scheme, foreign investors may own
up to 49.0% of our equity shares subject to conformity with guidelines
issued by the Reserve Bank of India from time to time.
o Under the Issue of Foreign Currency Convertible Bonds and Equity
Shares (Through Depositary Receipt Mechanism) Scheme, 1993, foreign
investors may purchase ADSs or GDRs, subject to the receipt of all
necessary government approvals at the time the depositary receipt
program is set up.
o Under the portfolio investment scheme, foreign institutional
investors, subject to registration with the Securities and Exchange
Board of India and the Reserve Bank of India, and non-resident Indians
and overseas corporate bodies may hold in aggregate up to 49.0% of our
paid-up equity capital, provided that (i) no single foreign
institutional investor may own more than 10.0% of our total paid-up
equity capital; and (ii) no single non-resident Indian or overseas
corporate body may own more than 5.0% of our total paid-up equity
capital.
Pursuant to a circular dated November 29, 2001, the Reserve Bank of
India notified that, as of that date, overseas corporate bodies are not
permitted to invest under the portfolio investment scheme, though they may
continue to hold investments that have already been made under the portfolio
investment scheme until such time as these investments are sold on the stock
exchange.
ICICI Bank obtained the approval of the Foreign Investment Promotion
Board for its ADS offering in March 2000 which was a foreign direct investment.
The investments through the portfolio investment scheme in the secondary market
in India by foreign institutional investors, non-resident Indians and overseas
corporate bodies and investments through the foreign direct investment scheme
are distinct schemes that are available concurrently. As of August 29, 2003,
foreign investors owned approximately 66.7% of our equity in total, of which
26.1% was through the ADS program.
As an investor in ADSs, you do not need to seek the specific approval
from the government of India to purchase, hold or dispose of your ADSs. In the
ADS offering, ICICI Bank obtained the approval of the government of India's
Department of Company Affairs and the relevant stock exchanges.
Equity shares which have been withdrawn from the depositary facility
and transferred on ICICI Bank's register of shareholders to a person other than
the depositary or its nominee may be voted by that person provided the
necessary procedural requirements have been met. However, you may not receive
sufficient advance notice of shareholder meetings to enable you to withdraw the
underlying equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the ADS program, its investment in the equity shares would be
subject to the general restrictions on foreign ownership noted above and may be
subject to the portfolio investment restrictions. Secondary purchases of
securities of a banking company in India by foreign direct investors or
investments by non-resident Indians, overseas corporate bodies and foreign
institutional investors above the ownership levels set forth above require
government of India approval on a case-by-case basis. It is unclear whether
similar case-by-case
193
approvals of ownership of equity shares withdrawn from the depositary facility
by foreign institutional investors, non-resident Indians and overseas corporate
bodies would be required.
You will be required to make a public offer to the remaining
shareholders if you withdraw your equity shares from the ADS program and your
direct or indirect holding in ICICI Bank exceeds 15.0% of our total equity
under the Securities and Exchange Board of India (Substantial Acquisition of
Shares and Takeover) Regulations, 1997.
ADSs issued by Indian companies to non-residents have free
transferability outside India. However, under Indian regulations and practice,
the approval of the Reserve Bank of India is required for the sale of equity
shares underlying the ADSs by a non-resident of India to a resident of India as
well as for renunciation of rights to a resident of India. However sale of such
shares under the portfolio investment scheme prescribed by the Reserve Bank of
India, does not require the approval of the Reserve Bank of India provided the
same is made on a recognized stock exchange and through a registered stock
broker.
Any new issue of equity shares of a banking company, either through the
automatic route or with the specific approval of the Foreign Investment
Promotion Board, does not require further approval of the Reserve Bank of
India, but must comply with certain reporting requirements.
194
DIVIDENDS
Under Indian law, a company pays dividends upon a recommendation by its
board of directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each
fiscal year. The shareholders have the right to decrease but not increase the
dividend amount recommended by the board of directors. Dividends may be paid
out of the company's profits for the fiscal year in which the dividend is
declared or out of undistributed profits of prior fiscal years. ICICI Bank paid
dividends consistently every year from fiscal 1996, the second year of its
operations, to fiscal 2002. ICICI Bank paid the dividend for fiscal 2002 as an
interim dividend during fiscal 2002 itself and accordingly there was no
dividend outflow during fiscal 2003 in respect of dividends declared in fiscal
2002. For fiscal 2003, ICICI Bank declared a dividend, excluding dividend tax,
of Rs. 7.50 (US$ 0.16) per equity share aggregating to Rs. 4.6 billion (US$ 967
million). We paid the dividend in August 2003.
The following table sets forth, for the periods indicated, the dividend
per equity share and the total amount of dividends paid out on the equity
shares during the fiscal year by ICICI Bank, each exclusive of dividend tax.
This may be different from the dividend declared for the year.
Dividend per Total amount of
equity share dividends paid
------------ --------------
(in millions)
Dividend paid during the fiscal year
1999 ................................... Rs. 1.20 Rs. 162
2000 ................................... 1.20 198
2001 ................................... 1.50 247
2002(1) ................................ 4.00(1) 881
2003.................................... - -
______________
(1) Includes dividend of Rs. 2.00 per share declared for each of the fiscal
years 2001 and 2002.
Until May 1997, investors were required to pay tax on dividend income.
From June 1997, dividend income was made tax-exempt. However, ICICI Bank was
required to pay a 10.0% tax on distributed profits. From fiscal 1999, this tax
rate rose to 11.0% because of a 10.0% surcharge imposed on all taxes by the
government. For all distributions subsequent to May 2000, ICICI Bank was
required to pay a 22.6% tax on distributed profits which included a 20.0% tax
and a 13.0% surcharge on such tax. The tax rate was then reduced and ICICI Bank
was required to pay a 10.2% tax on distributed profits for all distributions
subsequent to May 2001, which included a 10.0% tax and a 2.0% surcharge on such
tax. The government of India's budget for fiscal 2003 abolished this tax on
distributed profits, but investors were required to pay tax on dividend income.
The government of India's budget for fiscal 2004 has now exempted dividend
income from being taxable in the hands of the investors. We are required to pay
a 12.8% tax (including surcharge) on distributed profits.
Future dividends will depend upon our revenues, cash flow, financial
condition and other factors. Owners of ADSs will be entitled to receive
dividends payable in respect of the equity shares represented by such ADSs. The
equity shares represented by ADSs rank pari passu with existing equity shares.
At present, ICICI Bank has equity shares issued in India and equity shares
represented by ADSs.
Pursuant to guidelines issued by the Securities and Exchange Board of
India in February 2000, with respect to equity shares issued by us during a
particular fiscal year, dividends declared and paid for such fiscal year are
paid in full and are no longer prorated from the date of issuance to the end of
such fiscal year.
195
Before paying any dividend on its shares, ICICI Bank is required under
the Indian Banking Regulation Act to write off all capitalized expenses
(including preliminary expenses, organization expenses, share-selling
commission, brokerage, amounts of losses incurred or any other item of
expenditure not represented by tangible assets). Before declaring dividends,
ICICI Bank is required to transfer at least 20.0% of the balance of profits of
each year before payment of dividend to a reserve fund. The government of India
may, however, on the recommendation of the Reserve Bank of India, exempt ICICI
Bank from such a requirement. ICICI Bank requires prior approval from the
Reserve Bank of India to pay a dividend of more than 25.0% of the par value of
its shares. ICICI Bank also requires prior approval from the Reserve Bank of
India to pay an interim dividend.
For a description of the tax consequences of dividends paid to
shareholders, see "Taxation -- Indian Tax -- Taxation of Distributions".
The following table sets forth, for the periods indicated, the dividend
per equity share and the total amount of dividends paid out on the equity
shares during the year, each exclusive of dividend tax, for ICICI, prior to the
amalgamation. This may be different from the dividend declared for the year.
Dividend per Total amount of
equity share(1) dividends paid
--------------- --------------
(in millions)
Dividend paid during the fiscal year
1999.................................... Rs. 11.00 Rs. 2,618
2000.................................... 11.00 2,641
2001.................................... 11.00 3,505
2002(2)................................. 22.00(2) 8,639
_________________
(1) For fiscal 1999, 2000, 2001 and 2002, based on the exchange ratio of 1:2 in
which shareholders of ICICI were issued shares of ICICI Bank, number of
shares have been adjusted by dividing by two. Hence, these numbers are
different from the numbers reported in last year's annual report on Form
20-F for fiscal 2002.
(2) Includes dividend of Rs. 11.00 per share declared for each of the fiscal
years 2001 and 2002, both of which were paid during fiscal 2002.
196
TAXATION
Indian Tax
The following discussion of Indian tax consequences for investors in
ADSs and equity shares received upon redemption of ADSs who are not resident in
India whether of Indian origin or not is based on the provisions of the Indian
Income-tax Act, 1961 (the "Income-tax Act"), including the special tax regime
for ADSs contained in Section 115AC, which has been extended to cover
additional ADSs that an investor may acquire in an amalgamation or
restructuring of the company, and certain regulations implementing the Section
115AC regime. The Income-tax Act is amended every year by the Finance Act of
the relevant year. Some or all of the tax consequences of the Section 115AC
regime may be amended or modified by future amendments to the Income-tax Act.
The summary is not intended to constitute a complete analysis of the
tax consequences under Indian law of the acquisition, ownership and sale of
ADSs and equity shares by non-resident investors. Potential investors should,
therefore, consult their own tax advisers on the tax consequences of such
acquisition, ownership and sale, including specifically the tax consequences
under Indian law, the law of the jurisdiction of their residence, any tax
treaty between India and their country of residence, and in particular the
application of the regulations implementing the Section 115AC regime.
Residence
For the purpose of the Income-tax Act, an individual is a resident of
India during any fiscal year, if he (i) is in India in that year for 182 days
or more or (ii) having been in India for a period or periods amounting in all
to 365 days or more within the four years preceding that year, is in India for
a period or periods amounting in all to 60 days or more in that year. The
period of 60 days is substituted by 182 days in the case of an Indian citizen
or person of Indian origin who being resident outside India comes on a visit to
India during the financial year or an Indian citizen who leaves India for the
purposes of his employment during the financial year. A company is resident in
India in any fiscal year if it is registered in India or the control and
management of its affairs is situated wholly in India in that year. A firm or
other association of persons is resident in India except where the control and
the management of its affairs are situated wholly outside India.
Taxation of Distribution
The dividend distributed by ICICI Bank is now subject to dividend
distribution tax at 12.8125% under section 115 O in the hands of ICICI Bank
consequent to dividends distributed by an Indian company being subject to
dividend distribution tax after March 31, 2003. ICICI Bank, while making such
distribution, will not be required to withhold any tax upon the distribution of
the dividend. The dividend so paid is not taxable under section 115AC in the
hands of the ADS holders.
Taxation on Redemption of ADSs
The acquisition of equity shares upon a redemption of ADSs by a
non-resident investor will not give rise to a taxable event for Indian tax
purposes.
Taxation on Sale of Equity Shares or ADSs
Any transfer of ADSs outside India by a non-resident investor to
another non-resident investor does not give rise to Indian capital gains tax in
the hands of the transferor.
Subject to any relief under any relevant double taxation treaty, a gain
arising on the sale of an equity share will generally give rise to a liability
for Indian capital gains tax in the hands of the transferor. Such tax is
required to be withheld at source. Where the equity share has been held for
197
more than 12 months (measured from the date of advice of redemption of the ADS
by the Depositary as specified below), the rate of tax is 10.00% (plus
applicable surcharge). Where the equity share has been held for 12 months or
less, the rate of tax varies and the gain will be subject to tax at normal
rates of income-tax applicable to non-residents under the provisions of the
Income-Tax Act, subject to a maximum of 40% (plus applicable surcharge) in the
case of foreign companies. The actual rate depends on a number of factors,
including without limitation the nature of the non-resident investor. During
the period the underlying equity shares are held by non-resident investors on a
transfer from the depository upon redemption, the provisions of the double
taxation treaty entered into by the government of India with the country of
residence of the non-resident investors will be applicable in the matter of
taxation of any capital gain arising on a transfer of the equity shares. The
double taxation treaty between the United States and India does not provide US
residents with any relief from Indian tax on capital gains. However, set off of
Indian taxes will be allowed in USA subject to the provisions of the treaty and
applicable US Laws.
For purposes of determining the amount of capital gains arising on a
sale of an equity share for Indian tax purposes, the cost of acquisition of an
equity share received upon redemption of an ADR will be the price of the share
prevailing on the BSE or the NSE on the date on which the Depositary advises
the custodian of such redemption, not the acquisition cost of the ADR being
redeemed. The holding period of an equity share received upon redemption of an
ADR will commence from the date of advice of redemption by the depositary.
Rights
Distribution to non-resident holders of additional ADSs or equity
shares or rights to subscribe for equity shares made with respect to ADSs or
equity shares are not subject to tax in the hands of the non-resident holder.
It is unclear as to whether capital gain derived from the sale of
rights by a non-resident holder not entitled to exemption under a tax treaty to
another non-resident holder outside India will be subject to Indian capital
gains tax. If the rights are deemed by the Indian tax authorities to be
situated within India, as the merged entity's situs is in India, the gains
realized on the sale of rights will be subject to customary Indian taxation as
discussed above.
Stamp Duty
Upon the issuance of the equity shares underlying the ADSs, we are
required to pay a stamp duty of 0.1% per share of the issue price. A transfer
of ADSs is not subject to Indian stamp duty. Normally, upon the acquisition of
equity shares from the depositary in exchange for ADSs representing such equity
shares in physical form, an investor would be liable for Indian stamp duty at
the rate of 0.5% of the market value of the equity shares at the date of
registration and the stamp duty applicable on re-materialization, which is same
as stamp duty payable on the original subject to a maximum of Rs. 20/- per
share. Similarly, a sale of equity shares in physical form by an investor would
also be subject to Indian stamp duty at the rate of 0.5% of the market value of
the equity shares on the trade date, although customarily such tax is borne by
the transferee, that is, the purchaser. However, our equity shares are
compulsorily deliverable in dematerialized form except for trades up to 500
shares only, which may be for delivery in physical form. Under Indian stamp
law, no stamp duty is payable on the acquisition or transfer of equity shares
in dematerialized form.
Other Taxes
At present, there are no taxes on wealth, gifts and inheritance which
apply to the ADRs and underlying equity shares.
198
Service Tax
Brokerage paid to stockbrokers in connection with the sale or purchase
of shares is through a recognised stock exchange in India subject to a service
tax of 8% with effect from May 14, 2003. The stockbroker is responsible for
collecting the service tax and paying it to the relevant authority.
United States Tax
The following discussion describes certain US federal income tax
consequences of the acquisition, ownership and sale of equity shares or ADSs
that are generally applicable to US investors. For these purposes, you are an
US investor if you are:
1. a citizen or resident of the United States under US federal income tax
laws;
2. a corporation, or other entity taxable as a corporation, organized
under the laws of the United States or of any political subdivision of
the United States; or
3. an estate or trust the income of which is includable in gross income
for US federal income tax purposes regardless of its source.
This discussion only applies to ADSs or equity shares that you own as
capital assets.
Please note that this discussion does not discuss all of the tax
consequences that may be relevant in light of your particular circumstances. In
particular, it does not address investors subject to special rules, including:
(1) insurance companies;
(2) tax-exempt entities;
(3) dealers in securities;
(4) financial institutions;
(5) persons who own the equity shares or ADSs as part of an integrated
investment (including a straddle, hedging or conversion transaction)
comprised of the ADS, and one or more other positions for tax purposes;
(6) persons whose functional currency is not the US dollar; or
(7) persons who own, actually or constructively, 10.0% or more of ICICI Bank's
voting stock.
This discussion is based on the tax laws of the United States currently
in effect (including the Internal Revenue Code of 1986, as amended, referred to
as "the Code"), Treasury Regulations, Revenue Rulings and judicial decisions.
These laws may change, possibly with retroactive effect.
For US federal income tax purposes, if you own an ADS, you will
generally be treated as the owner of the equity shares underlying the ADS.
Please consult your tax advisor with regard to the application of the
US federal income tax laws to the ADSs or equity shares in your particular
circumstances, including the passive foreign investment company rules described
below, as well as any tax consequences arising under the laws of any state,
local or other taxing jurisdiction.
Taxation of Dividends
Subject to the discussion under "Passive Foreign Investment Company
Rules" below, dividends you receive on the ADSs or equity shares, other than
certain pro rata distributions of equity shares or ADSs or rights to acquire
equity shares or ADSs, will generally constitute foreign source dividend
199
income for US federal income tax purposes. The amount of the dividend you will
be required to include in income will equal the US dollar value of the rupees,
calculated by reference to the exchange rate in effect on the date the payment
is received by the depositary (in the case of ADS) or by you (in the case of
equity shares) regardless of whether the payment is converted into US dollars.
If you realize gain or loss on a sale or other disposition of rupees, it will be
US source ordinary income or loss. You will not be entitled to claim a
dividends-received deduction for dividends paid by ICICI Bank.
Under recently enacted legislation, dividends received by non-corporate
US holders on ADSs or ordinary shares may be subject to US federal income tax
at lower rates than other types of ordinary income if certain conditions are
met. You should consult your own tax advisor regarding the application of this
new legislation to your particular circumstances.
Taxation of Capital Gains
Subject to the discussion under "Passive Foreign Investment Company
Rules" below, you will recognize capital gain or loss for US federal income tax
purposes on the sale or exchange of ADSs or equity shares in the same manner as
you would on the sale or exchange of any other shares held as capital assets.
The gain or loss will generally be US source income or loss. You should consult
your own tax advisors about the treatment of capital gains, which may be taxed
at lower rates than ordinary income for non-corporate taxpayers, and capital
losses, the deductibility of which may be limited.
Under certain circumstances as described under "Taxation - Indian
Taxation - Taxation on Sale of Equity Shares or ADSs", you may be subject to
Indian tax upon the disposition of equity shares. In such circumstances and
subject to applicable limitations under the Code, you may elect to treat the
gain as foreign source income and to credit the Indian tax against your US
Federal income tax liability with respect to the gain.
Passive Foreign Investment Company Rules
Based upon proposed Treasury regulations, which are proposed to be
effective for taxable years after December 31, 1994, and upon certain
management estimates, ICICI Bank does not expect to be considered a passive
foreign investment company for its most recent taxable year or in the
foreseeable future. In general, a foreign corporation is a passive foreign
investment company for any taxable year in which (i) 75.0% or more of its gross
income consists of passive income (such as dividends, interest, rents and
royalties) or (ii) 50.0% or more of the average quarterly value of its assets
consists of assets that produce, or are held for the production of, passive
income. ICICI Bank has based the expectation that it is not a passive foreign
investment company on, among other things, provisions in the proposed
regulations that provide that certain restricted reserves (including cash and
securities) of banks are assets used in connection with banking activities and
are not passive assets, as well as the composition of ICICI Bank's income and
assets. Since there can be no assurance that the proposed regulations will be
finalized in their current form and the manner of the application of the
proposed regulations is not entirely clear, and the composition of ICICI Bank's
income and assets will vary over time, there can be no assurance that ICICI
Bank will not be considered a passive foreign investment company for any fiscal
year.
If ICICI Bank is treated as a passive foreign investment company for
any year during your holding period and you have not made the mark-to-market
election, as described below, you will be subject to special rules generally
intended to eliminate any benefits from the deferral of U.S. federal income tax
that a holder could derive from investing in a foreign corporation that does
not distribute all of its earnings on a current basis. Upon a disposition of
equity shares or ADSs, including, under certain circumstances, a disposition
pursuant to an otherwise tax-free reorganization, gain recognized by you would
be allocated ratably over your holding period for the ADS or equity share. The
amounts allocated to the taxable year of the sale or other exchange and to any
year before ICICI Bank became a passive foreign investment company would be
taxed as ordinary income. The amount allocated to each other taxable year would
be subject to tax at the highest rate in effect for individuals or
200
corporations, as appropriate, and an interest charge would be imposed on the
amount allocated to such taxable year. Further, any distribution in respect of
ADSs or equity shares in excess of 125 per cent of the average of the annual
distributions on ADSs or equity shares received by you during the preceding
three years or your holding period, whichever is shorter, would be subject to
taxation as described above.
If the equity shares or ADSs are regularly traded on a "qualified
exchange", you may make a mark-to-market election. A "qualified exchange"
includes a foreign exchange that is regulated by a governmental authority in
which the exchange is located and with respect to which certain other
requirements are met. The Internal Revenue Service has not yet identified
specific foreign exchanges that are "qualified" for this purpose. The New York
Stock Exchange on which the ADSs are traded is a qualified exchange for US
federal income tax purposes.
If you make the election, you generally will include each year as
ordinary income the excess, if any, of the fair market value of the ADSs at the
end of the taxable year over their adjusted basis, and will be permitted an
ordinary loss in respect of the excess, if any, of the adjusted basis of the
ADSs over their fair market value at the end of the taxable year (but only to
the extent of the net amount of previously included income as a result of the
mark-to-market election). If you make the election, your basis in the ADSs will
be adjusted to reflect any such income or loss amounts. Any gain recognized on
the sale or other disposition of ADSs will be treated as ordinary income.
If you own shares or ADSs during any year in which ICICI Bank is a
passive foreign investment company, you must file Internal Revenue Service Form
8621.
201
PRESENTATION OF FINANCIAL INFORMATION
ICICI Bank and ICICI prepared their historical financial statements in
accordance with Indian generally accepted accounting principles. Starting in
fiscal 2000, ICICI Bank published in its annual shareholders' report its
financial statements in US GAAP as well as in Indian GAAP. Starting in fiscal
1999, ICICI published in its annual shareholders' report its financial
statements in US GAAP as well as in Indian GAAP.
The financial information in this annual report has been prepared in
accordance with US GAAP, unless indicated otherwise. Our fiscal year, like
ICICI Bank's and ICICI's fiscal year prior to the amalgamation, ends on March
31 of each year so all references to a particular fiscal year are to the year
ended March 31 of that year. Our financial statements, including the notes to
these financial statements, audited by KPMG, independent accountants, are set
forth at the end of this annual report.
The Statement on Financial Accounting Standard No. 141 on "Business
Combinations", issued by the Financial Accounting Standards Board, requires
that business combinations be accounted for in the period in which the
combination is consummated. Accordingly, under US GAAP, the amalgamation has
been reflected in the financial statements contained in this annual report for
fiscal 2003, as it was consummated in April 2002. The effective date of the
amalgamation for accounting purposes under US GAAP was April 1, 2002. Under US
GAAP, the amalgamation was accounted for as a reverse acquisition. This means
that ICICI was recognized as the accounting acquirer in the amalgamation,
although ICICI Bank was the legal acquirer. Accordingly, the financial
statements and other financial information contained in this annual report for
fiscal 2002 and prior years, except where specifically stated otherwise,
present the assets, liabilities and results of operations of ICICI.
Under Indian GAAP, the amalgamation was accounted for on March 30,
2002, the Appointed Date specified in the Scheme of Amalgamation, with ICICI
Bank being recognized as the accounting acquirer.
As ICICI Bank is the surviving legal entity in the amalgamation, the
other subsidiaries and affiliates of ICICI have become subsidiaries and
affiliates of ICICI Bank.
ICICI's consolidated subsidiaries for and at year-end fiscal 2002 and
year-end fiscal 2001 did not include ICICI Bank. Effective March 10, 2001,
ICICI Bank acquired Bank of Madura, an old private sector bank in India, in an
all stock merger and, as a result, the ownership interest of ICICI was reduced
from 62.2% to 55.6%. In addition, during March 2001, ICICI reduced its interest
in ICICI Bank to 46% through sales of equity shares in the Indian secondary
markets to institutional investors. As a result of the foregoing, ICICI Bank
ceased to be one of ICICI's subsidiaries as of March 22, 2001 and was accounted
for under the equity method of accounting from April 1, 2000, the beginning of
the fiscal year in which ICICI's majority ownership interest in ICICI Bank was
deemed to be temporary. ICICI Bank continues to be reported on a consolidated
basis for the years ended March 31, 1999 and 2000. As a result, the financial
statements for fiscal 2002 and 2001 are not strictly comparable with those for
fiscal 2000 and 1999.
The consolidation of ICICI's majority ownership interest in two
insurance companies, ICICI Prudential Life Insurance Company Limited and ICICI
Lombard General Insurance Company Limited, in each of fiscal 2001 and 2002 has
now been deemed inappropriate because of substantive participative rights
retained by the minority shareholders. Accordingly, such investees are no
longer consolidated but are accounted for by the equity method. Prior period
financial statements have been restated and as a result, the financial
statements for fiscal 2001 and 2002 contained in this annual report are not the
same as those contained in our annual report for fiscal 2002. There is no
resultant impact on net income or stockholders' equity for fiscal 2001 and
2002.
Although we have translated in this annual report certain rupee amounts
into dollars for convenience, this does not mean that the rupee amounts
referred to could have been, or could be,
202
converted into dollars at any particular rate, the rates stated earlier in this
annual report, or at all. Except in the section on "Market Price Information",
all translations from rupees to dollars are based on the noon buying rate in the
City of New York for cable transfers in rupees at March 28, 2003. The Federal
Reserve Bank of New York certifies this rate for customs purposes on each date
the rate is given. The noon buying rate on March 28, 2003 was Rs. 47.55 per
US$1.00.
203
ADDITIONAL INFORMATION
Memorandum and Articles of Association
Objects and Purposes
Pursuant to Clause III. A. 1 of ICICI Bank's Memorandum of Association,
ICICI Bank's main objective is to carry on the business of banking in any part
of India or outside India.
Directors' Powers
ICICI Bank's directors' powers include the following:
o Article 140 of the Articles of Association provides that no director
of ICICI Bank shall, as a director, take any part in the discussion of
or vote on any contract or arrangement if such director is directly or
indirectly concerned or interested.
o Directors have no powers to vote in absence of a quorum.
o Article 83 of the Articles of Association provides that the directors
may raise and secure the payment of amounts in a manner and upon such
terms and conditions in all respects as they think fit and in
particular by the issue of bonds, debenture stock, or any mortgage or
charge or other security on the undertaking or the whole or any part
of the property of ICICI Bank (both present and future) including its
uncalled capital.
Amendment to Rights of Holders of Equity Shares
Any change to the existing rights of the equity holders can be made
only by amending the Articles of Association which would require a special
resolution of the shareholders, which must be passed by not less than three
times the number of votes cast against the resolution.
Change in Control Provisions
Article 59 of the Articles of Association provides that the board of
directors may at their discretion decline to register or acknowledge any
transfer of shares in respect of shares upon which we have a lien. Moreover,
the board of directors may refuse to register the transfer of any shares if the
total nominal value of the shares or other securities intended to be
transferred by any person would, together with the total nominal value of any
shares held in ICICI Bank, exceed 1% of the paid up equity share capital of the
merged entity or if the board of directors is satisfied that as a result of
such transfer, it would result in the change in the board of directors or
change in the controlling interest of ICICI Bank and that such change would be
prejudicial to the interests of ICICI Bank. However, under the Indian Companies
Act, the enforceability of such transfer restrictions is unclear.
Material Contracts
Scheme of Amalgamation of ICICI, ICICI Personal Financial Services and
ICICI Capital Services with ICICI Bank
Pursuant to the Scheme of Amalgamation among ICICI, ICICI Personal
Financial Services, ICICI Capital Services and ICICI Bank, sanctioned by the
High Court of Gujarat at Ahmedabad on March 7, 2002 and by the High Court of
Judicature at Bombay on April 11, 2002 and approved by the Reserve Bank of
India on April 26, 2002, ICICI, ICICI Personal Financial Services and ICICI
Capital Services were merged with ICICI Bank in an all-stock merger. ICICI Bank
is the surviving legal entity in the amalgamation. ICICI Bank issued
204
equity shares to the equity shareholders of ICICI in the ratio of one equity
share of ICICI Bank, par value Rs. 10 each, fully paid up, for two equity shares
of ICICI, par value Rs. 10 each, fully paid up. As there were five equity shares
of ICICI underlying each ADR of ICICI and two equity shares of ICICI Bank
underlying each ADR of ICICI Bank, ICICI Bank issued ADRs of ICICI Bank to ADR
holders of ICICI in the ratio of five ADRs of ICICI Bank for two ADRs of ICICI.
For more information about the amalgamation, see "Business-History". This Scheme
of Amalgamation is attached as an exhibit to this annual report.
Documents on Display
The documents concerning us which are referred to herein may be
inspected at the Securities and Exchange Commission ("SEC"). You may read and
copy any document filed or furnished by us at the SEC's public reference rooms
in Washington D.C., New York and Chicago, Illinois or obtain them by mail upon
payment of prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information. The SEC also maintains a website at www.sec.gov, which contains,
in electronic form, each of the reports and other information that we have
filed electronically with the SEC. Information about ICICI Bank is also
available on the web at www.icicibank.com.
Incorporation by Reference
We incorporate by reference the information disclosed under
"Description of Equity Shares" and "Description of the American Depositary
Shares" in ICICI Bank's Registration Statement on Form F-1 (File No.
333-30132).
205
Index to Consolidated Financial Statements
Contents Page
Independent auditors' report............................................... F-2
Consolidated balance sheets................................................ F-3
Consolidated statements of operations...................................... F-4
Consolidated statements of stockholders' equity and other
comprehensive income..................................................... F-6
Consolidated statements of cash flows...................................... F-7
Notes to the consolidated financial statements............................. F-9
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ICICI Bank Limited
We have audited the accompanying consolidated balance sheets of ICICI Bank
Limited and subsidiaries as of March 31, 2002 and 2003, and the related
consolidated statements of operations, stockholders' equity and other
comprehensive income, and cash flows for each of the years in the three-year
period ended March 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ICICI Bank
Limited and subsidiaries as of March 31, 2002 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
April 1, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets and SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. As discussed in Note 1
to the consolidated financial statements, effective October 1, 2002, the
Company adopted the provisions of SFAS No. 147, Acquisitions of Certain
Financial Institutions, retroactive to April 1, 2001, the adoption date of SFAS
No. 142.
The United States dollar amounts are presented in the accompanying
consolidated financial statements solely for the convenience of the readers and
have been translated into United States dollar on the basis described in Note 1
to the consolidated financial statements.
Mumbai, India KPMG
June 28, 2003
F-2
ICICI Bank Limited and subsidiaries
Consolidated balance sheets
In millions, except share data
Convenience
translation
into US$,
---------------
As of March 31, As of March 31,
---------------------------- ---------------
2002(1) 2003 2003
------------- ------------- ---------------
(unaudited)
Assets
Cash and cash equivalents ...................................................... Rs. 41,476 Rs. 72,453 US$ 1,524
Trading assets ................................................................. 42,376 39,634 834
Securities:
Available for sale .......................................................... 47,857 267,499 5,626
Non-readily marketable equity securities .................................... 8,268 9,418 198
Venture capital investments ................................................. 3,921 3,704 78
Investments in affiliates ...................................................... 10,086 2,615 55
Loans, net of allowance for loan losses, security deposits and
unearned income ............................................................. 523,601 630,421 13,258
Customers' liability on acceptances ............................................ 4,783 43,252 910
Property and equipment, net .................................................... 12,577 21,215 446
Assets held for sale ........................................................... 2,029 2,306 48
Goodwill ....................................................................... 2,250 4,787 101
Intangible assets, net ......................................................... - 5,118 107
Deferred tax assets ............................................................ 7,295 6,423 135
Interest and fees receivable ................................................... 9,482 12,472 262
Other assets ................................................................... 27,361 58,946 1,240
------------- ------------- -------------
Total assets ................................................................... Rs. 743,362 Rs. 1,180,263 US$ 24,822
============= ============= =============
Liabilities
Interest bearing deposits ...................................................... 7,380 456,051 9,591
Non-interest bearing deposits .................................................. - 35,239 741
Trading liabilities ............................................................ 17,105 26,086 549
Short-term borrowings .......................................................... 70,804 42,095 885
Bank acceptances outstanding ................................................... 4,783 43,252 910
Long-term debt ................................................................. 511,458 400,812 8,429
Redeemable preferred stock ..................................................... 772 853 18
Other borrowings ............................................................... 5,787 - -
Taxes and dividends payable .................................................... 11,050 16,880 355
Deferred tax liabilities ....................................................... 1,144 460 9
Other liabilities .............................................................. 41,471 66,198 1,392
------------- ------------- -------------
Total liabilities .............................................................. 671,754 1,087,926 22,879
============= ============= =============
Commitments and contingencies (Note 29)
Minority interest .............................................................. 260 124 3
Stockholders' equity:
Common stock at Rs. 10 par value: 800,000,000 and 1,550,000,000 shares
authorized as of March 31, 2002 and 2003; Issued and outstanding
392,672,724 and 613,034,404 shares as of March 31, 2002 and 2003,
respectively ................................................................ 3,922 6,127 129
Additional paid-in capital ..................................................... 42,036 64,863 1,364
Retained earnings .............................................................. 26,229 18,246 384
Deferred compensation .......................................................... (7) - -
Accumulated other comprehensive income ......................................... (832) 2,977 63
------------- ------------- -------------
Total stockholders' equity ..................................................... 71,348 92,213 1,940
------------- ------------- -------------
Total liabilities and stockholders' equity ..................................... Rs. 743,362 Rs. 1,180,263 US$ 24,822
============= ============= =============
See accompanying notes to the consolidated financial statements.
1) As restated for reverse acquisition and adoption of SFAS No. 147
F-3
ICICI Bank Limited and subsidiaries
Consolidated statements of operations
In millions, except share data
Convenience
translation
into US$
-----------
Year ended
Year ended March 31, March 31,
----------------------------------------- -----------
2001(1) 2002(2) 2003 2003
----------- ----------- ----------- -----------
(unaudited)
Interest and dividend income
Interest and fees on loans ................................ Rs. 75,272 Rs. 75,237 Rs. 75,080 US$ 1,579
Interest and dividends on securities ...................... 499 1,447 17,022 358
Interest and dividends on trading assets .................. 2,837 1,715 2,754 58
Interest on balances and deposits with banks .............. 910 368 1,151 24
Other interest income ..................................... 586 100 2,096 44
----------- ----------- ----------- -----------
Total interest and dividend income ........................ 80,104 78,867 98,103 2,063
----------- ----------- ----------- -----------
Interest expense
Interest on deposits ...................................... 490 744 26,033 547
Interest on long-term debt ................................ 56,830 59,798 48,163 1,013
Interest on short-term borrowings ......................... 9,123 7,717 3,829 81
Interest on trading liabilities ........................... 1,446 911 3,114 65
Other interest expense .................................... 4 350 2,069 44
----------- ----------- ----------- -----------
Total interest expense .................................... 67,893 69,520 83,208 1,750
----------- ----------- ----------- -----------
Net interest income ....................................... 12,211 9,347 14,895 313
Provision for loan losses ................................. 9,892 9,743 19,649 413
----------- ----------- ----------- -----------
Net interest income/ (loss) after provision for loan
losses ................................................. 2,319 (396) (4,754) (100)
Non-interest income
Fees, commission and brokerage ............................ 5,317 4,703 5,722 120
Net gain on trading activities ............................ 847 2,442 3,075 65
Net gain/(loss) on venture capital investments ............ 62 (316) (1,278) (27)
Net gain/(loss) on other securities ....................... (1,776) (3,256) 956 20
Net gain on sale of loans and credit substitutes .......... 705 1,979 2,795 59
Foreign exchange income/(loss) ............................ (108) 78 92 2
Software development and services ......................... 701 1493 1,062 22
Gain on sale of stock of subsidiaries/affiliates .......... 2,507 165 - -
Gain/(loss) on sale of property and equipment ............. (31) 29 16 -
Rent ...................................................... 413 310 117 2
Other non-interest income ................................. 606 521 696 15
----------- ----------- ----------- -----------
Total non-interest income ................................. 9,243 8,148 13,253 278
----------- ----------- ----------- -----------
Non-interest expense
Salaries and employee benefits ............................ 1,877 2,980 5,383 113
General and administrative expenses ....................... 3,342 4,616 12,581 264
Amortization of goodwill and intangible assets ............ 260 - 645 13
----------- ----------- ----------- -----------
Total non-interest expense ................................ 5,479 7,596 18,609 390
----------- ----------- ----------- -----------
Income/(loss) before equity in earning/(loss) of
affiliates, minority interest, income taxes and
cumulative effect of accounting changes ................ 6,083 156 (10,110) (212)
Equity in earning/(loss) of affiliates .................... 735 294 (958) (20)
Minority interest ......................................... 1 83 24 -
----------- ----------- ----------- -----------
Income/(loss) before income taxes and cumulative effect
of accounting changes .................................. 6,819 533 (11,044) (232)
Income tax (expense)/benefit .............................. (189) (251) 3,061 64
----------- ----------- ----------- -----------
Income/(loss) before cumulative effect of accounting
changes ................................................ 6,630 282 (7,983) (168)
Cumulative effect of accounting changes, net of tax ....... - 1,265 - -
----------- ----------- ----------- -----------
Net income/(loss) ......................................... Rs. 6,630 Rs. 1,547 Rs. (7,983) US$ (168)
=========== =========== =========== ===========
F-4
ICICI Bank Limited and subsidiaries
Consolidated statements of operations
In millions, except share data
Convenience
translation
into US$
-----------
Year ended
Year ended March 31, March 31,
--------------------------------------- -----------
2001(1) 2002(2) 2003 2003
----------- ----------- ----------- -----------
(unaudited)
Earnings per equity share: Basic (Rs.)
Net income/ (loss) before cumulative effect of
accounting changes ............................... Rs. 16.88 Rs. 0.72 Rs. (14.18) US$ (0.30)
Cumulative effect of accounting changes ............. - 3.22 - -
----------- ----------- ----------- -----------
Net income/ (loss) .................................. 16.88 3.94 (14.18) (0.30)
Earnings per equity share: Diluted (Rs.)
Net income/ (loss) before cumulative effect of
accounting changes ............................... Rs. 16.81 Rs. 0.72 Rs. (14.18) US$ (0.30)
Cumulative effect of accounting changes ............. - 3.22 - -
----------- ----------- ----------- -----------
Net income/(loss) ................................... 16.81 3.94 (14.18) (0.30)
Weighted average number of equity shares used in
computing earnings per equity share (millions)
Basic ............................................... 393 393 563 563
Diluted ............................................. 393 393 563 563
See accompanying notes to the consolidated financial statements.
1) Restated for reverse acquisition.
2) Restated for reverse acquisition and adoption of SFAS No. 147.
F-5
ICICI Bank Limited and subsidiaries
Consolidated statements of stockholders' equity and other comprehensive income
In millions, except share data
Common stock Treasury Stock
------------------------------- ----------------------------
No. of shares(1) Amount No. of shares Amount
---------------- ----------- ------------- -----------
Balance as of March 31, 2000 ................................. 392,655,774 Rs. 7,832 Rs. - Rs. -
------------------------------------------------------------------------------------------------------------------------------
Effect of reverse acquisition on capital structure ........... - (3,926) - -
Common stock issued on exercise of stock options ............. 16,250 - - -
Amortization of compensation ................................. - - - -
Increase in carrying value on direct issuance of
stock by subsidiary ....................................... - - - -
Tax effect of increase in carrying value on direct
issuance of stock by subsidiary ........................... - - - -
Comprehensive income
Net income ................................................ - - - -
Net unrealized gain/(loss) on securities, net of
realization ............................................... - - - -
Translation adjustments ................................... - - - -
Comprehensive income/ (loss) .................................
Cash dividends declared (Rs. 1 per common share) ............. - - - -
Other ........................................................ - 16 - -
------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001 ................................. 392,672,024 Rs. 3,922 - -
------------------------------------------------------------------------------------------------------------------------------
Common stock issued on exercize of stock options ............. 700 - - -
Amortization of compensation ................................. - - - -
Comprehensive income
Net income ................................................... - - - -
Net unrealized gain/(loss) on securities, net of realization . - - - -
Translation adjustments ...................................... - - - -
Comprehensive income/(loss) ..................................
Cash dividends declared (Rs. 11 per common share) ............ - - - -
------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2002(2) .............................. 392,672,724 Rs. 3,922 - -
------------------------------------------------------------------------------------------------------------------------------
Common stock issued on reverse acquisition ................... 118,962,731 1,190 - -
Fair value of stock options assumed on reverse acquisition ... - -
Treasury stock arising due to reverse acquisition ............ 101,395,949 (101,395,949) (8,204)
Sale of treasury stock ...................................... - 1,015 101,395,949 8,204
Common stock issued on exercise of stock options ............. 3,000 - - -
Increase in carrying value on direct issuance of stock by
subsidiary ............................................... - - - -
Amortization of compensation ................................. - - - -
Comprehensive income
Net income/ (loss) ........................................... - - - -
Net unrealized gain/(loss) on securities, net of realization . - - - -
Translation adjustments ...................................... - - - -
Comprehensive income/ (loss) ................................. - - -
------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2003 ................................. 613,034,404 Rs. 6,127 Rs. - Rs. -
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2003 (US$) (unaudited) .............. 129 - -
------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Comprehensive
Paid-In Retained Deferred Income,
Capital Earnings Compensation Net of Tax
------------ ------------ ------------ -------------
Balance as of March 31, 2000 ................................. Rs. 37,347 Rs. 28,338 Rs. (70) Rs. (2,539)
-----------------------------------------------------------------------------------------------------------------------------
Effect of reverse acquisition on capital structure ........... 3,926 - - -
Common stock issued on exercise of stock options ............. 3 - - -
Amortization of compensation ................................. - - 37 -
Increase in carrying value on direct issuance of
stock by subsidiary ....................................... 1,242 - - -
Tax effect of increase in carrying value on direct
issuance of stock by subsidiary ........................... (605) - - -
Comprehensive income
Net income ................................................ - 6,630 - -
Net unrealized gain/(loss) on securities, net of
realization ............................................... - - - (1,674)
Translation adjustments ................................... - - - 14
Comprehensive income/ (loss) .................................
Cash dividends declared (Rs. 1 per common share) ............. - (772) - -
Other ........................................................ 123 - - -
-----------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001 ................................. Rs. 42,036 Rs. 34,196 Rs. (33) Rs. (4,199)
-----------------------------------------------------------------------------------------------------------------------------
Common stock issued on exercize of stock options ............. - - - -
Amortization of compensation ................................. - - 26 -
Comprehensive income
Net income ................................................... - 1,547 - -
Net unrealized gain/(loss) on securities, net of realization . - - - 3,283
Translation adjustments ...................................... - - - 84
Comprehensive income/(loss) ..................................
Cash dividends declared (Rs. 11 per common share) ............ - (9,514) - -
-----------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2002(2) .............................. Rs. 42,036 Rs. 26,229 Rs. (7) Rs. (832)
-----------------------------------------------------------------------------------------------------------------------------
Common stock issued on reverse acquisition ................... 10,838 - - -
Fair value of stock options assumed on reverse acquisition ... 409 - - -
Treasury stock arising due to reverse acquisition ............ 8,204 - - -
Sale of treasury stock ...................................... 3,336 - - -
Common stock issued on exercise of stock options ............. - - - -
Increase in carrying value on direct issuance of stock by
subsidiary ............................................... 40 - - -
Amortization of compensation ................................. - - 7 -
Comprehensive income
Net income/ (loss) ........................................... - (7,983) - -
Net unrealized gain/(loss) on securities, net of realization . - - - 3,731
Translation adjustments ...................................... - - - 78
Comprehensive income/ (loss) ................................. - - - -
-----------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2003 ................................. Rs. 64,863 Rs. 18,246 Rs. - Rs. 2,977
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2003 (US$) (unaudited) .............. 1,364 384 - 63
-----------------------------------------------------------------------------------------------------------------------------
Total
Stockholders's
Equity
--------------
Balance as of March 31, 2000 ................................. Rs. 70,908
-------------------------------------------------------------------------------
Effect of reverse acquisition on capital structure ........... -
Common stock issued on exercise of stock options ............. 3
Amortization of compensation ................................. 37
Increase in carrying value on direct issuance of
stock by subsidiary ....................................... 1,242
Tax effect of increase in carrying value on direct
issuance of stock by subsidiary ........................... (605)
Comprehensive income
Net income ................................................ 6,630
Net unrealized gain/(loss) on securities, net of
realization ............................................... (1,674)
Translation adjustments ................................... 14
----------
Comprehensive income/ (loss) ................................. 4,970
----------
Cash dividends declared (Rs. 1 per common share) ............. (772)
Other ........................................................ 139
-------------------------------------------------------------------------------
Balance as of March 31, 2001 ................................. Rs. 75,922
-------------------------------------------------------------------------------
Common stock issued on exercize of stock options ............. -
Amortization of compensation ................................. 26
Comprehensive income
Net income ................................................... 1,547
Net unrealized gain/(loss) on securities, net of realization . 3,283
Translation adjustments ...................................... 84
----------
Comprehensive income/(loss) .................................. 4,914
----------
Cash dividends declared (Rs. 11 per common share) ............ (9,514)
-------------------------------------------------------------------------------
Balance as of March 31, 2002(2) .............................. Rs. 71,348
-------------------------------------------------------------------------------
Common stock issued on reverse acquisition ................... 12,028
Fair value of stock options assumed on reverse acquisition ... 409
Treasury stock arising due to reverse acquisition ............ -
Sale of treasury stock ...................................... 12,555
Common stock issued on exercise of stock options ............. -
Increase in carrying value on direct issuance of stock by
subsidiary ............................................... 40
Amortization of compensation ................................. 7
Comprehensive income
Net income/ (loss) ........................................... (7,983)
Net unrealized gain/(loss) on securities, net of realization . 3,731
Translation adjustments ...................................... 78
----------
Comprehensive income/ (loss) ................................. (4,174)
----------
-------------------------------------------------------------------------------
Balance as of March 31, 2003 ................................. Rs. 92,213
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Balance as of March 31, 2003 (US$) (unaudited) .............. 1,940
-------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
1) Restated for reverse acquisition.
2) Restated for reverse acquisition and adoption of SFAS No. 147.
F-6
ICICI Bank Limited and subsidiaries
Consolidated statements of cash flows
In millions, except share data
Convenience
translation
into US$
------------
Year ended
Year ended March 31, March 31,
-------------------------------------------- ------------
2001 2002(1) 2003 2003
------------ ------------ ------------ ------------
(unaudited)
Operating activities
Net income/(loss) ........................................ Rs. 6,630 Rs. 1,547 Rs. (7,983) US$ (168)
Adjustments to reconcile net income to net cash (used
in)/provided by operating activities:
Provision for loan and other credit losses ............ 9,892 10,532 19,649 413
Depreciation .......................................... 663 786 2,438 51
Amortization .......................................... 1,180 1,193 5,815 122
Deferral of discounts and expenses on borrowings ...... 1,213 1,307 607 13
Deferred income tax ................................... (4,339) (3,245) (4,348) (91)
Unrealized loss/(gain)on trading securities ........... 136 (80) (117) (2)
Unrealized loss on venture capital investments ........ - 300 1,278 27
Other than temporary decline in value of other
securities .......................................... 1,835 3,480 2,098 44
Unrealized loss/ (gain)on derivative transactions ..... - 190 (1,009) (21)
Undistributed equity in earning/(loss) of affiliates .. (735) (9) 958 20
Minority interest ..................................... (1) (83) (24) (1)
(Gain)/loss on sale of property and equipment, net .... 31 (29) (16) -
(Gain)/loss on sale of securities available for sale .. (121) (349) (956) (20)
Gain on sale of subsidiary's stock .................... (2,507) (165) - -
Gain on sale of loans ................................. (705) (1979) (2,795) (59)
Cumulative effect of accounting changes, net of tax ... - (1,265) - -
Change in assets and liabilities
Trading account assets .............................. 10,153 (23,421) 29,944 630
Interest and fees receivable ........................ (107) 3,583 (2,990) (63)
Other assets ........................................ (2,389) (12,783) (34,295) (721)
Trading account liabilities ......................... (4,857) 4,352 (13,656) (287)
Taxes payable ....................................... (1,302) 552 5,830 122
Other liabilities ................................... 879 14,422 4,663 98
------------ ------------ ------------ ------------
Net cash provided by operating activities ................ 15,549 (1,164) 5,091 107
------------ ------------ ------------ ------------
Investing activities
Purchase of held to maturity securities .................. (861) - - -
Purchase of available for sale securities ............... (5,230) (68,043) (717,765) (15,095)
Purchase of venture capital investments .................. (4,094) (504) (1,268) (27)
Purchase of non-readily marketable equity securities ..... - (2,015) (1,150) (24)
Proceeds from sale of held to maturity securities ........ - 640 - -
Proceeds from sale of available for sale securities ...... 1,756 28,512 684,769 14,401
Proceeds from sale of venture capital investments ........ - 53 207 4
Proceeds from sale of non-readily marketable equity
securities ............................................ 148 183 - -
Proceeds from sale of subsidiary's stock ................. 4,075 302 - -
Origination of loans, net ................................ (97,868) 69,439 (56,243) (1,183)
Purchase of property and equipment ....................... (3,785) (1,701) (6,943) (146)
Proceeds from sale of property and equipment ............. 145 128 504 11
Investments in affiliates ................................ (1,161) (1,159) (1,691) (36)
Payment for business acquisition, net of cash acquired ... (1,950) (143) 98,487 2,071
------------ ------------ ------------ ------------
Net cash (used in)/provided by investing activities ...... (108,825) 25,692 (1,093) (24)
------------ ------------ ------------ ------------
F-7
ICICI Bank Limited and subsidiaries
Consolidated statements of cash flows
In millions, except share data
Convenience
translation
into US$
------------
Year ended
Year ended March 31, March 31,
-------------------------------------------- ------------
2001 2002(1) 2003 2003
------------ ------------ ------------ ------------
(unaudited)
Financing activities
Increase in deposits, net ....................................... Rs. 8,050 Rs. 1,308 Rs. 158,290 US $3,329
Proceeds/ Repayment from short-term
borrowings, net .............................................. 21,204 (28,852) (30,118) (633)
Proceeds from other borrowings .................................. - 5,787 - -
Proceeds from issuances of long-term debt ....................... 182,015 158,905 10,631 224
Repayment of long-term debt ..................................... (112,047) (142,019) (124,979) (2,628)
Redemption of redeemable preferred stock ........................ (9,577) - - -
Proceeds from issuance of common stock .......................... 142 - 13,155 277
Proceeds from issuance of common stock
by subsidiary ................................................ 465 390 - -
Cash dividends paid ............................................. (775) (9,514) - -
------------ ------------ ------------ ------------
Net cash provided by/(used in) financing activities ............. 89,477 (13,995) 26,979 569
------------ ------------ ------------ ------------
Effect of de-consolidation of subsidiary on cash
and cash equivalents ......................................... (36,361) - - -
------------ ------------ ------------ ------------
Effect of exchange rate on cash and cash equivalents ............ (14) (14) - -
------------ ------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents ............ (40,174) 10,519 30,977 652
Cash and cash equivalents at the beginning of
the year ..................................................... 71,131 30,957 41,476 872
------------ ------------ ------------ ------------
Cash and cash equivalents at the end of the year ................ Rs. 30,957 Rs. 41,476 Rs. 72,453 US $1,524
============ ============ ============ ============
Supplementary information:
Cash paid for:
Interest ..................................................... Rs. 57,144 Rs. 66,587 Rs. 86,143 US$ 1,812
Taxes ........................................................ 2,919 4,505 1,027 22
Non-cash items:
Foreclosed assets ............................................ 2,024 1,188 673 14
Conversion of loan to equity shares .......................... 1,982 1,586 4,495 95
Transfer of securities from held to maturity category
to available for sale category ............................. - 866 - -
Change in unrealized gain/(loss) on securities available
for sale, net .............................................. (1,674) 3,283 5,205 109
Acquisitions
Fair value of net assets acquired, excluding cash and
cash equivalents ........................................... - - (37,948) 798
Shares issued ................................................ - - 118,965,731 -
Treasury stock ............................................... - - 8,204 173
See accompanying notes to the consolidated financial statements.
1) Restated for reverse acquisition and adoption of SFAS No. 147
F-8
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
1. Significant accounting policies
Overview
ICICI Bank Limited (ICICI Bank) together with its subsidiaries and
affiliates (collectively, the Company) is a diversified financial services
group providing a variety of banking and financial services including project
and corporate finance, working capital finance, venture capital finance,
investment banking, treasury products and services, retail banking, broking and
insurance. Further, the Company has an interest in the software development and
services business. The Company is headquartered in Mumbai, India.
Effective April 1, 2002, ICICI Bank (which for periods prior to April 1,
2002 is referred to as the `acquiree') and ICICI Limited (ICICI) consummated a
transaction whereby shareholders of ICICI were issued shares of the acquiree in
the ratio of 1:2. The transaction has been treated as a reverse acquisition for
financial reporting purposes with ICICI (the `acquirer') as the accounting
acquirer and is further discussed in Note 3.
The consolidated balance sheet as of March 31, 2002, and the consolidated
statements of operations, cash flows and stockholders' equity and other
comprehensive income for the year ended March 31, 2001 and 2002, presented
herein, are those of the acquirer, even though the acquiree is the surviving
legal entity subsequent to the reverse acquisition. As such, as further
described in Note 2, they include the acquirer's less than majority ownership
interest in the acquiree accounted for by the equity method.
Principles of consolidation
The consolidated financial statements include the accounts of ICICI Bank
and all of its subsidiaries, which are more than 50% owned and controlled. All
significant inter company accounts and transactions are eliminated on
consolidation. The Company accounts for investments in common stock of
affiliates by the equity method where its investment in the voting stock gives
it the ability to exercise significant influence over the investee.
The consolidation of the Company's majority ownership interest in two
insurance companies acquired in each of fiscal 2001 and 2002 has now been
deemed inappropriate because of substantive participative rights retained by
the minority shareholders. Accordingly, such investees are no longer
consolidated but are accounted for by the equity method. Prior period financial
statements have been restated with no resultant impact on net income or
stockholders' equity.
Basis of preparation
The accounting and reporting policies of the Company used in the
preparation of these consolidated financial statements reflect general industry
practices and conform to generally accepted accounting principles in the United
States (US GAAP).
The preparation of consolidated financial statements in conformity with US
GAAP requires that management makes estimates and assumptions that affect the
reported amount of assets and liabilities and disclosures of contingent assets
and liabilities as of the date of the consolidated financial statements and the
reported income and expense for the reporting period. The Company makes
estimates for valuation of derivatives and securities, where no ready market
exists, determining the level of allowance for loan losses and assessing
recoverability of goodwill, intangible assets and deferred tax assets.
Management believes that the estimates used in the preparation of the
consolidated financial statements are prudent and reasonable. The actual
results could differ from these estimates.
F-9
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Foreign currencies
The consolidated financial statements are reported in Indian rupees (Rs.),
the national currency of India. The functional currency of each entity within
the Company is its respective local currency.
The assets and liabilities of the Company's foreign operations are
translated into Indian rupees at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Resulting
translation adjustments are reflected as a component of accumulated other
comprehensive income.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred.
Solely for the convenience of the readers, the financial statements as of
and for the year ended March 31, 2003, have been translated into United States
dollar at the noon buying rate in New York City on March 28, 2003, for cable
transfers in Indian rupees, as certified for customs purposes by the Federal
Reserve of New York of US$ 1 = Rs. 47.55. No representation is made that the
Indian rupee amounts have been, could have been or could be converted into
United States dollars at such a rate or any other certain rate on March 31,
2003, or at any other certain date.
Revenue recognition
Interest income is accounted on an accrual basis except in respect of
impaired loans, where it is recognized on a cash basis. Income from leasing and
hire purchase operations is accrued in a manner to provide a fixed rate of
return on outstanding investments.
Fees from activities such as investment banking, loan syndication and
financial advisory services are accrued based on milestones specified in the
customer contracts. Fees for guarantees and letters of credit are amortized
over the contracted period of the commitment.
Revenues from software development and services comprise income from
time-and-material and fixed-price contracts. Revenue with respect to
time-and-material contracts is recognized as related services are performed.
Revenue with respect to fixed-price contracts is recognized in accordance with
the percentage of completion method of accounting. Provisions for estimated
losses on contracts-in-progress are recorded in the period in which such losses
become probable based on the current contract estimates.
Cash equivalents
The Company considers all highly liquid investments, which are readily
convertible into cash and have contractual maturities of three months or less
from the date of purchase, to be cash equivalents. The carrying value of cash
equivalents approximates fair value.
Securities and trading activities
The Company classifies investments in debt and readily marketable equity
securities, other than investments held by certain venture capital
subsidiaries, into two categories based upon management's intention at the time
of purchase: trading securities and securities available for sale. Realized
gains and losses on the sale of securities are recorded at the time of sale.
For computing realized gains and losses on securities, the cost is ascertained
using the First-In-First-Out Method.
F-10
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
As more fully explained in Note 6, the Company no longer classifies
investments in debt securities as held to maturity, due to sale of certain held
to maturity securities during the year ended March 31, 2002.
Trading assets, primarily debt securities and foreign exchange products,
are recorded at fair value with realized and unrealized gains and losses
included in non-interest income. Interest on trading securities is recorded in
interest income. The fair value of trading assets is based upon quoted market
prices or, if quoted market prices are not available, estimates using similar
securities or pricing models.
Securities not classified as trading securities are classified as
available for sale. These include securities used as part of the Company's
asset liability management strategy, which may be sold in response to changes
in interest rates, prepayment risk, liquidity needs and similar factors.
Securities available for sale are recorded at fair value with unrealized gains
and losses recorded, net of tax, as a component of accumulated other
comprehensive income.
Equity securities, which are traded on a securities exchange within six
months of the balance sheet date are considered as publicly traded. The last
quoted price of such securities is taken as their fair value. Non-readily
marketable equity securities for which there is no readily determinable fair
value are recorded at cost.
Securities on which there is an unrealized loss that is deemed to be other
than temporary are written down to fair value with the loss recorded in
non-interest income as a loss on other securities. Other than temporary decline
is identified by management based on an evaluation of all significant factors
including the length of time and the extent to which the fair value has been
less than the cost, the financial condition and prospects of the issuer and the
extent and ability of the Company to retain the investment for a period of time
sufficient to allow for any probable recovery in fair value.
Securities acquired through conversion of loans in a troubled debt
restructuring are recorded at the fair value on the date of conversion and
subsequently accounted for as if acquired for cash.
The Company's venture capital subsidiaries carry their investments at fair
value, with changes in fair value recognized in gain/loss on venture capital
investments. The fair values of publicly traded venture capital investments are
generally based upon quoted market prices. In certain situations, including
thinly traded securities, large-block holdings, restricted shares or other
special situations, the quoted market price is adjusted to produce an estimate
of the attainable fair value for the securities. For securities that are not
publicly traded, fair value is determined in good faith pursuant to procedures
established by the Board of Directors of the venture capital subsidiaries. In
determining the fair value of these securities, consideration is given to the
financial conditions, operating results and prospects of the underlying
companies, and any other factors deemed relevant. Generally, these investments
are carried at cost during the first year, unless a significant event occurs
that affects the long-term value of the investment. Because of the inherent
uncertainty of the valuations, those estimated values may differ significantly
from the values that would have been used had a ready market for the
investments existed.
Trading liabilities represent borrowings from banks in the inter-bank call
money market, borrowings from banks and corporates in the course of trading
operations and balances arising from repurchase transactions.
F-11
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Loans
Loans are reported at the principal amount outstanding, inclusive of
interest accrued and due per the contractual terms, except for certain
non-readily marketable privately placed debt instruments, which are considered
credit substitutes and are, therefore classified as loans but accounted for as
debt securities. Loan origination fees (net of loan origination costs) are
deferred and recognized as an adjustment to yield over the life of the loan.
Interest is accrued on the unpaid principal balance and is included in interest
income.
Loans include aggregate rentals on lease financing transactions and
residual values, net of security deposits and unearned income. Lease financing
transactions substantially represent direct financing leases. Loans also
include the aggregate value of purchased securitized receivables, net of
unearned income.
The Company identifies a commercial loan as impaired and places it on
non-accrual status when it is probable that it will be unable to collect the
scheduled payments of principal and interest due under the contractual terms of
the loan agreement. A commercial loan is also considered to be impaired and
placed on a non-accrual basis if interest or principal is greater than 180 days
overdue. Delays or shortfalls in loan payments are evaluated along with other
factors to determine if a loan should be classified as impaired. The decision
to classify a loan as impaired is also based on an evaluation of the borrower's
financial condition, collateral, liquidation value and other factors that
affect the borrower's ability to pay.
The Company classifies a loan as a restructured loan where it has made
concessionary modifications, that it would not otherwise consider, to the
contractual terms of a loan to a borrower experiencing financial difficulties.
Such loans are placed on non-accrual status.
Generally, at the time a loan is placed on non-accrual status, interest
accrued and uncollected on the loan in the current fiscal year is reversed from
income, and interest accrued and uncollected from the prior year is charged off
against the allowance for loan losses. Thereafter, interest on non-accrual
loans is recognized as interest income only to the extent that cash is
received. When borrowers demonstrate over an extended period the ability to
repay a loan in accordance with the contractual terms of a loan, which the
Company classified as non-accrual, the loan is returned to accrual status. With
respect to restructured loans, performance prior to the restructuring or
significant events that coincide with the restructuring are evaluated in
assessing whether the borrower can meet the rescheduled terms and may result in
the loan being returned to accrual status after a performance period.
Consumer loans are generally identified as impaired not later than a
predetermined number of days overdue on a contractual basis. The number of days
is set at an appropriate level by loan product. The policy for suspending
accruals of interest and impairment on consumer loans varies depending on the
terms, security and loan loss experience characteristics of each product.
Allowance for loan losses
The allowance for loan losses represents management's estimate of probable
losses inherent in the portfolio. Larger balance, non-homogenous exposures
representing significant individual credit exposures are evaluated based upon
the borrower's overall financial condition, resources and payment record and
the realizable value of any collateral. Within the allowance of loan losses, a
valuation allowance is maintained for larger-balance, non-homogenous loans that
have been individually determined to be impaired. This estimate considers all
available evidence including the present value of the expected future cash
flows discounted at the loan's contractual effective rate and the fair value of
collateral.
F-12
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Each portfolio of smaller-balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, is
individually evaluated for impairment. The allowance for loan losses attributed
to these loans is established via a process that includes an estimate of
probable losses inherent in the portfolio, based upon various statistical
analysis. These include migration analysis, in which historical delinquency and
credit loss experience is applied to the current aging of the portfolio,
together with an analysis that reflects current trends and conditions.
While determining the adequacy of the allowance for loan losses,
management also considers overall portfolio indicators including historical
credit losses, delinquent and non-performing loans, and trends in volumes and
terms of loans; an evaluation of overall credit quality and the credit process,
including lending policies and procedures; consideration of economic,
geographical, product, and other environmental factors.
The Company also includes in the allowances provision for credit losses on
its performing portfolio based on the estimated probable losses inherent in the
portfolio. The allowances on the performing portfolio are established after
considering historical and projected default rates and loss severities,
internal risk rating and geographic, industry and other environmental factors;
and model imprecision.
The company evaluates its impaired loan portfolio at the end of every
period and loan balances which are deemed irrecoverable are charged off against
related allowances for credit losses.
Transfers and servicing of financial assets
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of SFAS No. 125. The provisions of SFAS No. 140 relating to
transfers and servicing of financial assets are effective for transactions
after March 31, 2001. The Company transfers commercial and consumer loans
through securitization transactions. The transferred loans are de-recognized
and gains/losses are recorded only if the transfer qualifies as a sale under
SFAS No. 140. Recourse and servicing obligations and put options written are
recorded as proceeds of the sale. Retained beneficial interests in the loans
and servicing rights are measured by allocating the carrying value of the loans
between the assets sold and the retained interest, based on the relative fair
value at the date of the securitization. The fair values are determined using
either financial models, quoted market prices or sales of similar assets.
Loans held-for-sale
Loans originated for sale are classified as loans held-for-sale and are
accounted for at the lower of cost or fair value. Such loans are reported as
other assets. Market value of such loans are determined at rates applicable to
similar loans.
Derivatives instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Certain Hedging Activities. In June 2000, the FASB issued SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activity, an Amendment of SFAS No. 133. SFAS No. 133 and SFAS No. 138 require
that all derivative instruments be recorded on the balance sheet at their
respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all
fiscal quarters of all fiscal years beginning after June 30, 2000. On April 1,
2001, the Company adopted SFAS No. 133 and SFAS No. 138 on a prospective basis.
F-13
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Under SFAS No. 133, the Company may designate a derivative as either a
hedge of the fair value of a recognized fixed rate asset or liability or an
unrecognized firm commitment (fair value hedge), a hedge of a forecasted
transaction or the variability of future cash flows of a floating rate asset or
liability (cash flow hedge) or a foreign-currency fair value or cash flow hedge
(foreign currency hedge). All derivatives are recorded as assets or liabilities
on the balance sheet at their respective fair values with unrealized gains and
losses recorded either in accumulated other comprehensive income or in the
statement of income, depending on the purpose for which the derivative is held.
Derivatives that do not meet the criteria for designation as a hedge under SFAS
No. 133 at inception, or fail to meet the criteria thereafter, are accounted
for in other assets with changes in fair value recorded in the statement of
income.
Changes in the fair value of a derivative that is designated and qualifies
as a fair value hedge along with the gain or loss on the hedged asset or
liability that is attributable to the hedged risk, are recorded in the
statement of income as other non-interest income. To the extent of the
effectiveness of a hedge, changes in the fair value of a derivative that is
designated and qualifies as a cash flow hedge, are recorded in accumulated
other comprehensive income, net of tax. For all hedge relationships,
ineffectiveness resulting from differences between the changes in fair value or
cash flows of the hedged item and changes in the fair value of the derivative
are recognized in the statement of income as other non-interest income.
At the inception of a hedge transaction, the Company formally documents
the hedge relationship and the risk management objective and strategy for
undertaking the hedge. This process includes identification of the hedging
instrument, hedged item, risk being hedged and the methodology for measuring
effectiveness. In addition, the Company assesses, both at the inception of the
hedge and on an ongoing quarterly basis, whether the derivative used in the
hedging transaction has been highly effective in offsetting changes in fair
value or cash flows of the hedged item, and whether the derivative is expected
to continue to be highly effective.
The Company discontinues hedge accounting prospectively when either it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item; the derivative
expires or is sold, terminated or exercised; the derivative is de-designated
because it is unlikely that a forecasted transaction will occur; or management
determines that designation of the derivative as a hedging instrument is no
longer appropriate.
When a fair value hedge is discontinued, the hedged asset or liability is
no longer adjusted for changes in fair value and the existing basis adjustment
is amortized or accreted over the remaining life of the asset or liability.
When a cash flow hedge is discontinued but the hedged cash flow or forecasted
transaction is still expected to occur, gains and losses that were accumulated
in other comprehensive income are amortized or accreted into the statement of
income. Gains and losses are recognized in the statement of income immediately
if the cash flow hedge was discontinued because a forecasted transaction did
not occur.
The Company may occasionally enter into a contract (host contract) that
contains a derivative that is embedded in the financial instrument. If
applicable, an embedded derivative is separated from the host contract and can
be designated as a hedge; otherwise, the derivative is recorded as a
freestanding derivative.
Prior to the adoption of SFAS No. 133, derivatives used for interest rate
risk management were not recorded at fair value. Rather, the net interest
settlement on designated derivatives that either effectively altered the
interest rate characteristics of assets and liabilities or hedged exposures to
risk was treated as an adjustment to the interest income or interest expense of
the related assets or liabilities. The effect of adopting SFAS No. 133 at April
1, 2001 did not result in any impact on the statement of operations.
F-14
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Variable interest entities
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. FIN 46 changes the method of
determining whether certain entities, including securitization entities, should
be included in the Company's consolidated financial statements. An entity is
subject to FIN 46 and is called a variable interest entity (VIE) if it has (1)
equity that is insufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties, (2)
equity investors that cannot make significant decisions about the entity's
operations, or (3) equity that does not absorb the expected losses or receive
the expected returns of the entity. A VIE is consolidated by its primary
beneficiary, which is the party involved with the VIE that has a majority of
the expected losses or a majority of the expected residual returns or both. The
provisions of FIN 46 are to be applied immediately to VIEs created after
January 31, 2003, and to VIEs in which an enterprise obtains an interest after
that date. For VIEs in which an enterprise holds a variable interest that it
acquired before February 1, 2003, FIN 46 applies in the first fiscal period
beginning after June 15, 2003. For any VIEs that must be consolidated under FIN
46 that were created before February 1, 2003, the assets, liabilities and
non-controlling interest of the VIE would be initially measured at their
carrying amounts with any difference between the net amount added to the
balance sheet and any previously unrecognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying amounts
is not practicable, fair value at the date FIN 46 first applies may be used to
measure the assets, liabilities and non-controlling interest of the VIE. FIN 46
also mandates new disclosures about VIEs, some of which are required to be
presented in financial statements issued after January 31, 2003.
There are no VIEs that require disclosure under FIN 46. Further, there are
no VIEs created after January 31, 2003 that are required to be consolidated
under FIN 46.
Guarantees and indemnifications
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which requires that, for guarantees within the scope of
FIN 45 issued or amended after December 31, 2002, a liability for the fair
value of the obligation undertaken in issuing the guarantee be recognized. FIN
45 also requires additional disclosures in financial statements for periods
ending after December 15, 2002. Accordingly, the required disclosures are
included in Note 29 to the consolidated financial statements of the Company.
The recognition and measurement provisions of FIN 45 were adopted effective
January 1, 2003 and did not have a material impact on the consolidated
financial statements of the Company.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
The cost of additions, capital improvements and interest during the
construction period are capitalized, while maintenance and repairs are charged
to expense when incurred. Property and equipment held to be disposed off are
reported as assets held for sale at the lower of carrying amount or fair value,
less cost to sell.
Depreciation is provided over the estimated useful lives of the assets or
lease term whichever is shorter.
F-15
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Property under construction and advances paid towards acquisition of
property and equipment are disclosed as capital work in progress. The interest
costs incurred for funding an asset during its construction period are
capitalized based on the average outstanding investment in the asset and the
average cost of funds. The capitalized interest cost is included in the cost of
the relevant asset and is depreciated over the estimated useful life of the
asset.
Capitalized costs of computer software obtained for internal use represent
costs incurred to purchase computer software from third parties and direct
costs of materials and services incurred on internally developed software. The
capitalized costs are amortized on a straight-line basis over the estimated
useful life of the software.
Impairment of long-lived assets
Long-lived assets and certain intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
Business combinations
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also specifies the
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocated to an assembled workforce may not be
accounted separately.
As of April 1, 2001, the Company had an unamortized deferred credit of Rs.
1,265 million related to an excess of the fair value of assets acquired over
the cost of an acquisition. As required by SFAS No. 141, in conjunction with
the early adoption of SFAS No. 142, the unamortized deferred credit as of April
1, 2001, has been written-off and recognized as the effect of a change in
accounting principle.
Goodwill and intangible assets
On April 1, 2001, the Company early-adopted SFAS No. 142, Goodwill and
Other Intangible Assets. As required by SFAS No. 142, the Company reclassified
existing goodwill and intangible assets to conform with the new criteria in
SFAS No. 141 for recognition apart from goodwill. This resulted in
reclassification of previously recorded intangible assets of Rs. 115 million as
goodwill and a reclassification of previously recorded goodwill of Rs. 373
million as a separate unidentifiable intangible asset.
As required by SFAS No. 142, the Company identified its reporting units
and assigned assets and liabilities, including goodwill to the reporting units
on the date of adoption. Subsequently, the Company compared the fair value of
each reporting unit to its carrying value, to determine whether goodwill is
impaired at the date of adoption. This transitional impairment evaluation did
not indicate an impairment loss.
Subsequent to the adoption of SFAS No. 142, the Company does not amortize
goodwill but instead tests goodwill for impairment at least annually. The
annual impairment test under SFAS No. 142 did not indicate an impairment loss.
F-16
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Net income and basic and diluted earnings per share excluding the impact
of amortization of goodwill, for all periods presented would have been as
follows:
Year ended March 31,
-----------------------------------------
2001(1) 2002(2) 2003
----------- ----------- -----------
Net income/(loss) (in millions)
As reported ................................... Rs. 6,630 Rs. 1,547 Rs. (7,983)
Add: Amortization of goodwill ................. 145 - -
----------- ----------- -----------
Pro forma net income/ (loss) .................. 6,775 1,547 (7,983)
=========== =========== ===========
Earnings/ (Loss) per share: Basic (in Rs.)
As reported ................................... 16.88 3.94 (14.18)
Add: Amortization of goodwill ................. 0.37 - -
----------- ----------- -----------
Pro forma ..................................... 17.25 3.94 (14.18)
=========== =========== ===========
Earnings/ (Loss) per share: Diluted (in Rs.)
As reported ................................... 16.81 3.94 (14.18)
Add: Amortization of goodwill ................. 0.37 - -
----------- ----------- -----------
Pro forma ..................................... 17.18 3.94 (14.18)
=========== =========== ===========
1) Restated for reverse acquisition.
2) Restated for reverse acquisition and adoption of SFAS No. 147
Intangible assets are amortized over their estimated useful lives in
proportion to the economic benefits consumed in each period.
The useful life of other intangible assets is as follow:
No. of years
Marketing-related intangibles.................................................. 5
Customer-related intangibles................................................... 3-10
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. SFAS No. 147 requires that business combinations
involving financial institutions within its scope, be accounted for under SFAS
No. 141. Previously, generally accepted accounting principles for acquisitions
of financial institutions provided for recognition of the excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. Under SFAS
No. 147, such excess is accounted for as goodwill. Adoption of SFAS No. 147
resulted in a reclassification of previously recorded unidentifiable intangible
asset of Rs. 373 million to goodwill with effect from April 1, 2001. Further,
as required by SFAS No. 147, the Company reversed the amortization expense of
Rs. 290 million and the related income tax benefit of Rs. 103 million, by
restating the results for the year ended March 31, 2002.
Income taxes
The Company accounts for income taxes under the provisions of SFAS No.
109, Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the amount for financial reporting and tax basis of assets
and liabilities, using enacted tax rates expected to apply to taxable income in
the years the temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the statement of income in the period of
F-17
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
enactment. Deferred tax assets are recognized subject to a valuation allowance
based upon management's judgment as to whether realization is considered more
likely than not.
Issue of shares by subsidiary/affiliate
An issuance of shares by a subsidiary/affiliate to third parties reduces
the proportionate ownership interest of the Company in the investee. A change
in the carrying value of the investment in a subsidiary/affiliate due to such
direct sale of unissued shares by the investee is accounted for as a capital
transaction, and is recognized in stockholders' equity when the transaction
occurs.
Trading assets and liabilities
Trading assets and liabilities include securities and derivatives and are
recorded either at market value or where, market prices are not readily
available, fair value, which is determined under an alternative approach. The
determination of market or fair value considers various factors including stock
exchange quotations, time value and volatility factors underlying derivatives,
counterparty credit quality and derivative transaction cash maintenance during
that period.
Derivatives in a net receivable position are reported as trading assets.
Similarly derivatives in a net payable position are reported as trading
liabilities.
Employee benefit plans
The Company provides a variety of benefit plans to eligible employees.
Contributions to defined contribution plans are charged to income in the period
in which they accrue. Current service costs for defined benefit plans are
accrued in the period to which they relate. Prior service costs, if any,
resulting from amendments to the plans are recognized and amortized over the
remaining period of service of the employees.
Stock-based compensation
The Company uses the intrinsic value based method of Accounting Principle
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to
account for its employee stock-based compensation plans. Compensation cost for
fixed and variable stock based awards is measured by the excess, if any, of the
fair market price of the underlying stock over the exercise price. Compensation
cost for fixed awards is measured at the grant date, while compensation cost
for variable awards is estimated until the number of shares an individual is
entitled to receive and the exercise price are known (measurement date).
In December 2002, FASB issued SFAS No. 148 Accounting for Stock Based
Compensation-transition and disclosures, an amendment of FASB No. 123. SFAS No.
148 amends SFAS No. 123, Accounting for Stock Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock based employee compensation and the effect of
the method used on reported results. The disclosure provisions of SFAS No. 148
are applicable for fiscal periods beginning after December 15, 2002
F-18
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Had compensation cost been determined in a manner consistent with the fair
value approach described in SFAS No. 123, the Company's net income and earnings
per share as reported would have changed to the amounts indicated below:
Year ended March 31,
-----------------------------------------
2001(1) 2002(2) 2003
----------- ----------- -----------
Net income/(loss) (in millions)
As reported ....................................................................... Rs. 6,630 Rs. 1,547 Rs. (7,983)
Add: Stock based employee compensation expense included in reported net
income, net of tax effects ..................................................... 37 26 7
Less: Stock based employee compensation expense determined under fair
value based method, net of tax effects ......................................... (128) (58) (358)
----------- ----------- -----------
Pro forma net income/ (loss) ...................................................... 6,539 1,515 (8,334)
=========== =========== ===========
Earnings/ (loss) per share: Basic (in Rs.)
As reported ....................................................................... 16.88 3.94 (14.18)
Pro forma ......................................................................... 16.65 3.86 (14.80)
Earnings/ loss) per share: Diluted (in Rs.)
As reported ....................................................................... 16.81 3.94 (14.18)
Pro forma ......................................................................... 16.59 3.86 (14.80)
1) Restated for reverse acquisition.
2) Restated for reverse acquisition and adoption of SFAS No. 147.
The fair value of the options is estimated on the date of the grant using
the Black-Scholes options pricing model, with the following assumptions:
2001 2002 2003
----------- ----------- -----------
Dividend yield .................................................................... 5.9% 5.5% 1.7%
Expected life ..................................................................... 10 years 10 years 10 years
Risk free interest rate ........................................................... 10.4% 7.4% 8.9%
Volatility ........................................................................ 30% 55% 54%
Dividends
Dividends on common stock and the related dividend tax are recognized on
approval by the Board of Directors.
Earnings/ (Loss) per share
Basic earnings/ (loss) per share is computed by dividing net income/
(loss) by the weighted average number of common stock outstanding during the
period. Diluted earnings/ (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue equity shares were
exercised or converted.
Reclassifications
Certain other reclassifications have been made in the financial statements
of prior years to conform to classifications used in the current year. These
changes had no impact on previously reported results of operations or
stockholders' equity.
2. Dilution of ownership interest in the acquiree
Until March 2000, the Company held a 74.2% controlling interest in the
acquiree. In March 2000, the acquiree issued 15.9 million American Depository
Shares (ADS) to third parties. As a result of the issuance, the proportionate
ownership interest of the Company in the acquiree reduced from 74.2% to 62.2%.
F-19
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The offering price per share exceeded the Company's carrying amount per
share in the acquiree, resulting in an increase in the carrying value of the
Company's investment in the acquiree by Rs. 4,114 million. This change in the
carrying value was recognized in the statement of stockholders' equity as a
capital transaction.
In March 2001, the acquiree acquired Bank of Madura Limited, a banking
company, through issuance of stock. The acquisition was recorded by the
purchase method. As a result of the issuance, the ownership interest of the
Company in the acquiree was reduced from 62.2% to 55.6%. The issuance price
exceeded the Company's carrying amount per share in the acquiree resulting in
an increase in the carrying value of the Company's investment in the acquiree
by Rs. 1,242 million. This change in the carrying value, net of the related tax
effect of Rs. 140 million, has been recognized in the statement of
stockholders' equity as a capital transaction.
Subsequently, during March 2001, the Company sold a 9.2% interest in the
acquiree to institutional investors for a consideration of Rs. 3,499 million.
The gain on sale of Rs. 1,996 million is included in the statement of income.
This reduced the Company's interest in the acquiree to 46.4%.
In view of the Company's ownership interest in the acquiree having been
reduced to below majority level, the Company determined that consolidation of
the acquiree was not appropriate and accounted for its ownership interest under
the equity method beginning April 1, 2000, the beginning of the fiscal year in
which the ownership interest was less than majority.
During the year ended March 31, 2002, the Company further reduced its
ownership interest to 46%. This resulted in a gain of Rs. 57 million, which is
included in the statement of income.
3. Acquisitions
Reverse acquisition
Effective April 1, 2002, the acquiree and the Company consummated a
transaction whereby shareholders of the Company were issued shares of the
acquiree in the ratio of 1:2. The transaction has been treated as a reverse
acquisition, with the acquiree as the surviving legal entity but the Company as
the accounting acquirer.
On the acquisition date, the Company held a 46% ownership interest in the
acquiree. Accordingly, the acquisition of the balance 54% ownership interest
has been accounted for as a step-acquisition. The operations of the acquiree
have been consolidated in the Company's financial statements effective April 1,
2002.
As a result of the acquisition, the Company became a universal banking
company offering the entire spectrum of financial services. The acquisition is
expected to reduce the cost of funds for the Company through access to the
extensive branch network and deposit base of the acquiree. Further, the
acquisition is expected to benefit the Company through greater opportunities to
generate fee-based income, participation in the payment networks and ability to
provide transaction banking services. Subsequent to the acquisition, the
operations of the Company will be governed by the Banking Regulation Act, 1949.
F-20
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The components of the purchase price and allocation are as follows:
(in millions)
Fair value of common stock issued on reverse acquisition ...... Rs. 12,028
Direct acquisition costs ...................................... 1,627
Fair value of stock options assumed on reverse acquisition .... 409
-----------
Total ......................................................... Rs. 14,064
===========
The fair value of common stock issued on reverse acquisition was based on
the average prices of the equity shares for the two trading days before and
after October 25, 2002, the date, the terms of the acquisition were agreed to
and announced.
The total purchase price has been allocated to the acquired assets and
assumed liabilities as of the date of acquisition based on management's
estimates and independent appraisals as follows:
(in millions)
Assets
Cash and cash equivalents ..................................... Rs. 53,183
Investments ................................................... 113,725
Loans ......................................................... 39,102
Property and equipment ........................................ 2,609
Intangible assets ............................................. 5,470
Other assets .................................................. 11,093
-----------
Total assets acquired ......................................... Rs. 225,182
===========
Liabilities
Deposits ...................................................... Rs. 176,018
Borrowings .................................................... 16,174
Other liabilities ............................................. 19,745
-----------
Total liabilities assumed .................................... Rs. 211,937
===========
Net tangible and intangible assets ............................ Rs. 13,245
Goodwill ...................................................... 819
-----------
Total ......................................................... Rs. 14,064
===========
The goodwill recognized above is not deductible for tax purposes.
The intangible assets relate to customer and deposit relationships and
would be amortized over a period of 10 years.
Consequent to the acquisition, the 46% ownership interest held by the
Company in the acquiree was recorded as treasury stock at its historical
carrying value. In September 2002, the treasury stock was sold to institutional
investors for Rs. 13,154 million. The difference between the sale proceeds and
the carrying value, net of related tax effects of Rs. 599 million, was
recognized in the statement of stockholders equity as a capital transaction.
Step-acquisition of Tricolour Infotech Services Limited
In September 2002, the Company acquired the remaining 50% ownership
interest in Tricolor Infotech International Inc., Mauritius for a cash
consideration of Rs. 110 million. The total purchase price has been allocated
to the acquired assets and assumed liabilities based on management estimates as
follows:
F-21
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
(in millions)
Net tangible assets ............................................... Rs. 16
Marketing-related intangibles ..................................... 76
Goodwill .......................................................... 18
----------
Total ............................................................. Rs. 110
==========
The goodwill recognized above is not deductible for tax purposes.
Acquisition of Customer Asset India Private Limited
In April 2002, the Company acquired a 100% ownership interest in Customer
Asset India Private Limited, a company engaged in the business of providing
contact center services through its offshore contact center at Bangalore, for a
cash consideration aggregating Rs. 959 million. The acquisition would enable
the Company to enter the IT enabled services market. The total purchase price
has been allocated to the acquired assets and assumed liabilities based on
management estimates as follows:
(in millions)
Net tangible assets ............................................... Rs. 177
Customer-related intangibles ...................................... 165
Goodwill .......................................................... 617
----------
Total ............................................................. Rs. 959
==========
The goodwill recognized above is not deductible for tax purposes.
Pro forma information (unaudited)
Unaudited pro forma results of the operations for the years ended March
31, 2002 and 2003 as if the acquisitions had been made at the beginning of the
periods is given below. The pro forma results include estimates and assumptions
which management believes are reasonable. However, these do not reflect any
benefits from economies or synergies, which might be achieved from combining
the operations. The pro forma consolidated results of operations include
adjustments to give effect to amortization of acquired intangible assets other
than goodwill. The pro forma information is not necessarily indicative of the
operating results that would have occurred had the purchase been made at the
beginning of the periods presented.
Year ended March 31,
----------------------
2002 2003
-------- --------
Revenues (in millions) ........................... 87,274 111,421
Net income/(loss) (in millions) .................. 1,231 (8,017)
EPS (Basic and Diluted) (in Rs.) ................. 3.13 (14.24)
4. Sale of stock of ICICI Infotech Services Limited
During the year ended March 31, 2001, the Company diluted its interest in
ICICI Infotech Services Limited to 92% through sale of an 8% interest to a
strategic investor for a consideration of Rs. 576 million. The gain on sale of
Rs. 511 million is included in the statement of operations.
F-22
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
5. Cash and cash equivalents
Cash and cash equivalents as of March 31, 2003, includes deposits with
Reserve Bank of India of Rs. 45,506 million (2002: Nil) (including Rs. 39,805
million (2002: Nil) in accordance with the guidelines governing minimum cash
reserve requirements) and interest-bearing deposits with other banks of Rs.
6,919 million (2002: Rs. 35,508 million). The balance maintained with the
Reserve Bank of India towards cash reserve requirements are subject to
withdrawal and usage restrictions.
6. Trading assets
A listing of the trading assets is set out below:
As of March 31
------------------------
2002 2003
---------- ----------
(in millions)
Government of India securities ............................. Rs. 15,602 Rs. 26,658
Securities purchased under agreements to resell ............ 21,399 5,399
Corporate debt securities .................................. 4,627 6,704
Equity securities .......................................... 742 187
Fair value of derivative and foreign exchange contracts .... 6 686
---------- ----------
Total ...................................................... Rs. 42,376 Rs. 39,634
========== ==========
As of March 31, 2003, trading assets include Government of India (GOI)
securities amounting to Rs. 8,050 million (2002: Rs. 11,866 million), which are
pledged for the purpose of collateralizing short-term borrowings.
7. Securities
The portfolio of securities is set out below:
As of March 31, 2002 As of March 31, 2003
------------------------------------------------- --------------------------------------------------
Amortized Gross Gross Fair Amortized Gross Gross Fair
cost unrealized unrealized value cost unrealized unrealized value
gain loss gain loss
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions)
Available for sale
Corporate debt securities . Rs. 4,446 Rs. 502 Rs. (513) Rs. 4,435 Rs. 10,636 Rs. 389 Rs. (79) Rs. 10,946
GOI securities ............ 26,662 438 - 27,100 240,187 4,403 (459) 244,131
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total debt securities ..... 31,108 940 (513) 31,535 250,823 4,792 (538) 255,077
Equity securities ......... 19,181 365 (3,223) 16,322 13,609 745 (1,932) 12,422
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total securities
available for sale ...... Rs. 50,289 Rs. 1,305 Rs. (3,736) Rs. 47,857 Rs.264,432 Rs. 5,537 Rs. (2,470) Rs.267,499
========== ========== ========== ========== ========== ========== ========== ==========
Non-readily marketable
equity securities (1) ... Rs. 8,268 Rs. 9,418
========== ==========
Venture capital
investments (2) ........ Rs. 3,921 Rs. 3,704
========== ==========
(1) Primarily represents securities acquired as a part of project financing
activities or conversion of loans in debt restructurings.
(2) Represents venture capital investments held by venture capital
subsidiaries of the Company.
During the year ended March 31, 2003, as part of its ongoing evaluation of
its securities portfolio, the Company recorded an impairment charge of Rs.
2,098 million (2002: Rs. 3,480 million, 2001: Rs. 1,835 million) for other than
temporary decline in value of available for sale and non-readily marketable
equity securities.
F-23
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Privately placed corporate debt securities reported as loans (credit
substitutes)
The portfolio of credit substitutes is set out below:
As of March 31, 2002 As of March 31, 2003
------------------------------------------------- --------------------------------------------------
Amortized Gross Gross Fair Amortized Gross Gross Fair
cost unrealized unrealized value cost unrealized unrealized value
gain loss gain loss
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions)
Available for sale.......... Rs. 59,707 Rs. 1,077 Rs. (502) Rs. 60,282 Rs. 61,295 Rs. 2,539 Rs. (1,118) Rs. 62,716
During the year ended March 31, 2002, the Company sold debt securities
classified as held to maturity. The debt securities were sold for Rs. 640
million resulting in a realized gain of Rs. 102 million. As the securities were
sold for reasons other than those specified in SFAS No. 115, all remaining held
to maturity securities were reclassified as available for sale. Subsequent to
the sale, the Company no longer classifies debt securities as held to maturity.
Income from securities available for sale
A listing of income from securities available for sale is set out below:
Year ended March 31,
------------------------------------------
2001 2002 2003
------------ ------------ ------------
(in millions)
Interest ......................... Rs. 123 Rs. 1,027 Rs. 16,633
Dividends ........................ 345 267 389
------------ ------------ ------------
Total ............................ Rs. 468 Rs. 1,294 Rs. 17,022
============ ============ ============
Gross realized gain .............. Rs. 474 Rs. 1,238 6,845
Gross realized loss .............. (348) (7) (5,022)
------------ ------------ ------------
Total ............................ Rs. 126 Rs. 1,231 Rs. 1,823
============ ============ ============
Income from credit substitutes available for sale
A listing of income from credit substitutes available for sale is set out
below:
Year ended March 31,
-------------------------
2002 2003
----------- -----------
(in millions)
Interest .......................................... Rs. 2,872 Rs. 8,406
Dividends ......................................... 45 381
----------- -----------
Total ............................................. Rs. 2,917 Rs. 8,787
=========== ===========
Gross realized gain ............................... Rs. 282 Rs. 1,200
Gross realized loss ............................... - (75)
----------- -----------
Total ............................................. Rs. 282 Rs. 1,125
=========== ===========
F-24
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Maturity profile of debt securities
A listing of each category of available for sale debt securities as of
March 31, 2003, by maturity is set out below:
Available for sale
Amortized Cost Fair value
(in millions)
Corporate debt securities
Less than one year....................... Rs. 285 Rs. 267
One to five years........................ 8,436 8,719
Five to ten years........................ 1,862 1,900
Greater than ten years................... 53 60
------------- -------------
Total Corporate debt securities Rs. 10,636 Rs. 10,946
------------- -------------
GOI securities
Less than one year....................... 76,238 76, 216
One to five years........................ 54,976 55,922
Five to ten years........................ 54,170 54,614
Greater than ten years................... 54,803 57,379
------------- -------------
Total GOI securities Rs. 240,187 Rs. 244,131
------------- -------------
Total debt securities.................... Rs. 250,893 Rs. 255,077
============= =============
Credit substitutes
Less than one year....................... 14,584 14,618
One to five years........................ 32,984 34,683
Five to ten years........................ 12,760 12,448
Greater than ten years................... 967 967
------------- -------------
Total credit substitutes................ Rs. 61,295 Rs. 62,716
============= =============
8. Repurchase transactions
The Company has undertaken repurchase and reverse repurchase transactions
in GOI securities. The average level of repurchase transactions outstanding
during the year ended March 31, 2003, was Rs. 7002 million (2002: Rs. 1,743
million). The average level of reverse repurchase transactions outstanding
during the year ended March 31, 2003, was Rs. 4,483 million (2002: Rs. 1,347
million). As of March 31, 2003, outstanding repurchase and reverse repurchase
transactions were Rs. 3,000 million (2002: Rs. 595 million) and Rs. 5,399
million (2002: Rs. 21,399 million) respectively.
9. Investments in affiliates
The acquiree
For the year ended March 31, 2002, the Company accounted for its 46%
(2001: 46.4%) interest in the acquiree using the equity method. The carrying
value of the investment in the acquiree as of March 31, 2002, was Rs. 8,204
million (2001: Rs. 7,562 million). The Company's equity in the income of the
acquiree for the year ended March 31, 2002 was Rs. 929 million (2001: Rs. 811
million). During the year ended March 31, 2002, the Company received dividends
of Rs. 403 million (2001: Rs. 184 million) from the acquiree.
F-25
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The summarized balance sheets and statements of income of the acquiree are
set out below:
Balance sheet As of March 31,
---------------------
2001 2002
---- ----
(in millions)
Cash and cash equivalents...................... Rs. 47,306 Rs. 89,371
Trading assets................................. 18,725 26,075
Securities..................................... 35,731 180,052
Loans.......................................... 93,030 72,474
Other assets................................... 25,746 36,833
------------ -----------
Total assets................................... Rs. 220,538 Rs. 404,805
============ ===========
Deposits....................................... Rs. 164,254 325,221
Trading liabilities............................ 5,958 1,237
Long-term debt................................. 2,421 5,740
Other liabilities.............................. 31,598 54,457
Stockholders' equity........................... 16,307 18,150
------------ -----------
Total liabilities and stockholders' equity..... Rs. 220,538 Rs. 404,805
============ ===========
Statement of income Year ended March 31,
--------------------
2001 2002
---- ----
(in millions)
Interest income................................. Rs. 12,406 Rs. 20,837
Interest expense................................ (8,408) (15,116)
------------ -----------
Net interest income............................ 3,998 5,721
Provision for loan losses...................... (1,082) (1,722)
Non-interest income............................ 1,754 5,213
Non-interest expense........................... (3,104) (6,260)
Income taxes................................... (258) (931)
Cumulative effect of accounting change......... - 16
------------ -----------
Net income..................................... Rs. 1,308 Rs. 2,037
============ ===========
Insurance companies
The Company accounts for its 74% ownership interest in ICICI Prudential
Life Insurance Limited (`Prulife') and ICICI Lombard General Insurance Company
Limited (`Lombard') by the equity method of accounting because of substantive
participative rights held by the minority shareholders.
The carrying value of the investment in these companies as of March 31,
2003, was Rs. 2,230 million (2002: Rs. 1,496 million). The Company's equity in
the loss of these affiliates for the year ended March 31, 2003 was Rs. 971
million (2002: Rs. 681 million, 2001: Rs. 118 million).
F-26
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The summarized balance-sheets and statements of operations of these
entities as of and for the year ended March 31, 2002 is set out below:
Balance sheet As of March 31, 2002
Prulife Lombard
------- -------
(in millions)
Cash and cash equivalents ............................ Rs. 108 Rs. 186
Securities. .......................................... 1,924 1,088
Other assets ......................................... 757 296
----------- ------------
Total assets ......................................... Rs. 2,789 Rs. 1,570
=========== ============
Liabilities .......................................... Rs. 1,776 Rs. 561
Stockholders' equity.................................. 1,013 1,009
----------- ------------
Total liabilities and stockholders' equity............ Rs. 2,789 Rs. 1,570
----------- ------------
Statement of income Year ended March 31, 2002
Prulife Lombard
------- -------
(in millions)
Interest income......................................... Rs. 124 Rs. 56
Interest expense........................................ - -
Net interest income..................................... 124 56
Non-interest income..................................... 1,291 55
Non-interest expense.................................... (2,238) (227)
Income tax (expense)/ benefit........................... (11) 30
----------- ------------
Net income/(loss)....................................... Rs. (834) Rs. ( 86)
=========== ============
Others
The other affiliates of the Company are Prudential ICICI Asset Management
Company Limited (Pru-ICICI), Prudential ICICI Trust Limited (Pru-Trust),
TCW/ICICI Investment Partners LLC (TCW) and Semantik Solutions Gmbh, Germany.
The carrying value of the investment in such affiliates as of March 31, 2003,
was Rs. 385 million (2002: Rs. 386 million). The Company's equity in the income
of such affiliates for the year ended March 31, 2003, was Rs. 13 million (2002:
Rs. 46 million, 2001: Rs. 42 million).
F-27
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
10. Loans
A listing of loans by category is set out below:
As of March 31,
2002 2003
------------- -------------
(in millions)
Project and corporate finance (1) (2) ............................. Rs. 416,386 Rs. 387,870
Working capital finance (including working capital term loans)..... 42,225 74,422
Lease financing.................................................... 49,865 26,927
Consumer loans and credit card receivables......................... 73,013 188,286
Other .............................................................. 10,346 18,959
Gross loans........................................................ 591,835 696,464
------------- -------------
Unearned income.................................................... (20,013) (8,902)
Security deposits ................................................. (11,574) (2,922)
------------- -------------
Loans, net of unearned income and security deposits ............... 560,248 684,640
Allowances for loan losses......................................... (36,647) (54,219)
------------- -------------
Loans, net......................................................... Rs. 523,601 Rs. 630,421
============= =============
1) Non-readily marketable privately placed debt instruments are classified as
loans to reflect the substance of such transactions as substitutes for
direct lending (credit substitutes).
2) Includes Rs. 62,716 million (2002: Rs. 60,282 million) of credit
substitutes classified as loans.
Project and corporate finance loans are generally secured by property,
plant and equipment and other tangible assets. Generally, the working capital
loans are secured by a first lien on current assets, principally comprising
inventory and receivables. Additionally, in certain cases the Company may
obtain additional security for working capital loans through a first or second
lien on property and equipment, pledge of financial assets like marketable
securities and corporate/personal guarantees.
Lease financing
Contractual maturities of the Company's investment in lease financing and
its components, which are included in loans are set out below:
As of March 31,
2003
---------------
(in millions)
Gross finance receivables for the year ending March 31,
2004........................................................... Rs. 5,900
2005........................................................... 4,159
2006........................................................... 3,531
2007........................................................... 2,925
2008........................................................... 2,793
Thereafter..................................................... 7,619
--------------
26,927
Unearned income................................................ (6,213)
Security deposits.............................................. (2,852)
--------------
Investment in lease financing.................................. Rs. 17,862
==============
F-28
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Maturity profile of loans
A maturity profile of gross loans, other than investment in lease
financing is set out below:
As of March 31,
---------------
2002 2003
----------- -----------
(in millions)
Less than one year................................ Rs. 143,309 Rs. 147,707
One to five years................................. 237,025 328,692
Greater than five years........................... 161,636 193,138
----------- -----------
Total............................................. Rs. 541,970 Rs. 669,537
=========== ===========
Interest and fees on loans
A listing of interest and fees on loans (net of unearned income) is set
out below:
As of March 31,
---------------------------------
2001 2002 2003
---- ---- ----
(in millions)
Project and corporate finance........................................ Rs. 60,900 Rs. 56,032 Rs. 45,307
Working capital finance (including working capital term loans)....... 5,892 6,418 8,241
Lease financing...................................................... 4,948 4,977 2,484
Consumer loans and credit card receivables........................... 2,088 6,593 15,372
Other ............................................................... 1,444 1,217 3,676
---------- ---------- ----------
Total................................................................ Rs. 75,272 Rs. 75,237 Rs. 75,080
========== ========== ==========
Restructured loans
The Company classifies a loan as a restructured loan where it has made
concessionary modifications, that it would not otherwise consider, to the
contractual terms of a loan to a borrower experiencing financial difficulties.
As of March 31, 2003, the Company had committed to lend Rs. 2,822 million
(2002: Rs. 18,616 million), to borrowers who are parties to troubled debt
restructurings.
Impaired loans, including restructured loans
A listing of restructured loans is set out below:
As of March 31,
2002 2003
---- ----
(in millions)
Project and corporate finance............................................... Rs. 84,048 Rs. 135,421
Working capital finance (including working capital term loans).............. 5,283 11,084
Other....................................................................... 5,757 886
Restructured loans.......................................................... 95,088 147,391
Allowance for loan losses................................................... (17,722) (24,732)
---------- ------------
Restructured loans, net..................................................... Rs. 77,366 Rs. 122,659
========== ============
Restructured loans:
With a valuation allowance.................................................. Rs. 95,088 Rs. 147,391
Without a valuation allowance............................................... - -
---------- ------------
Restructured loans.......................................................... Rs. 95,088 Rs. 147,391
========== ============
F-29
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
A listing of other impaired loans is set out below:
As of March 31,
---------------
2002 2003
---- ----
(in millions)
Project and corporate finance............................................... Rs. 48,093 Rs. 67,906
Working capital finance (including working capital term loans).............. 1,699 11,907
Lease financing............................................................. 731 1,550
Consumer loans and credit card receivables.................................. 190 1,752
Other....................................................................... 41 41
---------- ----------
Other impaired loans........................................................ 50,754 83,156
Allowance for loan losses................................................... (17,567) (27,837)
---------- ----------
Other impaired loans, net................................................... Rs. 33,187 Rs. 55,319
========== ==========
Other impaired loans:
With a valuation allowance.................................................. 50,754 83,087
Without a valuation allowance............................................... - 69
---------- ----------
Other impaired loans........................................................ Rs. 50,754 Rs. 83,156
========== ==========
During the year ended March 31, 2003, interest income of Rs. 2,358 million
(2002: Rs. 3,257 million, 2001: Rs. 1,989 million) was recognized on impaired
loans on a cash basis. Gross impaired loans (including restructured loans)
averaged Rs. 188,195 million during the year ended March 31, 2003 (2002: Rs.
115,543 million).
Concentration of credit risk
Concentration of credit risk exists when changes in economic, industry or
geographic factors similarly affect groups of counterparties whose aggregate
credit exposure is material in relation to Company's total credit exposure. The
Company's portfolio of financial instruments is broadly diversified along
industry, product and geographic lines within India.
11. Allowance for loan losses
Changes in the allowance for loan losses
Movements in the allowance for loan losses are set out below:
Year ended March 31,
--------------------------------------
2001 2002 2003
---- ---- ----
(in millions)
Allowance for loan losses at the beginning of the year........................ Rs. 34,085 Rs. 33,035 Rs. 36,647
Effect of reverse acquisition on allowance for loan losses.................... - - 1,297
Effect of de-consolidation of subsidiary on allowance for loan losses ........ (747) - -
Provisions for loan losses, net of releases of provisions as a result of cash
collections ................................................................ 9,892 9,743 Rs. 19,649
43,230 42,778 57,593
Loans charged-off............................................................. (10,195) (6,131) (3,374)
---------- ---------- ----------
Allowance for loan losses at the end of the year.............................. Rs. 33,035 Rs. 36,647 Rs. 54,219
========== ========== ==========
F-30
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
12. Securitization activity
The Company primarily securitizes commercial loans through `pass-through'
securitizations. After the securitization, the Company generally continues to
maintain customer account relationships and services loans transferred to the
securitization trust. Generally, the securitizations are with or without
recourse and the Company does not provide any credit enhancement. In a few
cases, the Company may enter into derivative transactions such as written put
options and interest rate swaps with the transferees. Generally, the Company
does not retain any beneficial interests in the assets sold.
During the year ended March 31, 2003, the Company securitized loans and
credit substitutes with a carrying value of Rs. 51,780 million (2002: Rs.
40,851 million), which resulted in gains of Rs. 2,070 million (2002: Rs. 1,079
million, 2001: Rs. 434 million). The gains are reported as a component of gain
on sale of loans and credit substitutes.
Transfers that do not meet the criteria for a sale under SFAS No. 140, are
recorded as secured borrowings with a pledge of collateral. As of March 31,
2003, the Company recorded secured borrowings of Nil (2002: Rs. 5,787 million)
that arise on securitization transaction involving trusts that are not
considered as qualifying special purpose entities under the guidance provided
by SFAS No. 140. Such secured borrowings are reported as a component of other
borrowings.
As discussed above, the Company has written put options, which require the
Company to purchase, upon request of the holders, securities issued in certain
securitization transactions. The put options seek to provide liquidity to
holders of such instruments. If exercised, the Company will be obligated to
purchase the securities at the predetermined exercise price.
As of March 31, 2003, the Company sold loans and credit substitutes with
an aggregate put option exercise price of Rs. 24,404 million (2002 : Rs. 13,108
million). Subsequent to their initial issuance, such options are recorded at
fair values with changes reported in the statement of operations.
13. Derivative instruments and hedging activities
The Company manages its exposures to market rate movements by modifying
its mix of assets and liabilities, either directly or through the use of
derivative financial products including interest rate swaps, cross currency
swaps, equity index futures, equity index options and forward exchange
contracts.
All such freestanding derivatives, whether held for trading or non-trading
purposes, are carried at their fair value as either assets or liabilities and
related gains and losses are included in other non-interest income. The Company
has not identified any significant derivative features embedded in other
contracts that are not clearly and closely related to the host contract and
meet the definition of a derivative.
Fair values for derivatives are based on quoted market prices, which take
into account current market and contractual prices of the underlying instrument
as well as time value underlying the positions.
All the designated hedges entered into by the Company qualify as fair
value hedges under SFAS No. 133. There are no cash flow hedges or hedges of net
investments in foreign operations. For fair value hedges, changes in the fair
value of the hedged asset or liability due to the risk being hedged are
recognized in the statement of operations along with changes in the fair value
of the derivative. The Company assesses the effectiveness of the hedge
instrument at inception and continually on a quarterly basis. The
ineffectiveness, to the extent to which offsetting gains or loss are not
achieved, is recorded through the statement of operations.
F-31
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The table below summarizes certain information relating to the Company's
hedging activities:
As of March 31, 2002 As of March 31, 2003
-------------------- --------------------
(in millions)
Fair value hedges................................... Rs. 1,161 Rs. 1,836
Hedge ineffectiveness recognized in earnings........ 77 128
14. Property and equipment
A listing of property and equipment by asset category is set out below:
As of March 31,
-------------------------
2002 2003
--------- ---------
(in millions)
Land............................................ Rs. 1,336 Rs. 1,535
Buildings....................................... 7,208 11,194
Equipment and furniture......................... 5,304 4,068
Capital work-in-progress........................ 469 1,077
Others.......................................... 423 8,593
---------- ----------
Gross value of property and equipment........... 14,740 26,467
Accumulated depreciation........................ (2,163) (5,252)
---------- ----------
Property and equipment, net..................... Rs. 12,577 Rs. 21,215
========== ==========
As of March 31, 2003, land and buildings include certain assets of Rs. 622
million (2002: Rs. 397 million), which have not yet been registered in the
Company's name pending regulatory transfer approvals.
15. Assets held for sale
As of March 31, 2003, assets held for sale represent certain assets of Rs.
2,306 million (2002: Rs 2,029 million) acquired through foreclosure of loans.
16. Goodwill and intangible assets, net
A listing of goodwill and intangible assets by category is set out below:
As of March 31,
---------------------------
2002 2003
--------- ---------
(in millions)
Goodwill........................................ Rs. 2,304 Rs. 4,841
Accumulated amortization........................ (54) (54)
--------- ---------
Goodwill, net 2,250 4,787
Customer-related intangibles.................... 5,635
Accumulated amortization........................ - (590)
--------- ---------
Customer related intangibles, net............... 5,045
Other intangibles............................... - 76
Accumulated amortization........................ - (3)
--------- ---------
Other intangibles, net.......................... - 73
--------- ---------
Goodwill and intangible assets, net............. Rs. 2,250 Rs. 9,905
========= =========
F-32
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The following table presents the changes in goodwill during the year ended
March 31, 2003.
(in millions)
Balance as of March 31, 2002............................................. Rs. 2,250
Goodwill relating to acquisitions consummated during the period.......... 1,454
Equity method goodwill reclassified on reverse acquisition of acquiree... 1,083
----------
Balance as of March 31, 2003............................................. Rs. 4,787
=== ===== ==========
No goodwill impairment loss has been recorded during the year ended March
31, 2002 and March 31, 2003.
Goodwill as of March 31, 2003 has been allocated to the following
segments:
Segment (in millions)
Commercial Banking....................................... Rs. 2,275
ICICI Infotech........................................... 1,895
ICICI OneSource.......................................... 617
---------
Rs. 4,787
=========
Amortization of intangible assets
The estimated amortization schedule for intangible assets, on a straight
line basis, for the next five years is set out below:
Year ended March 31, (in millions)
-------------------- -------------
2004 Rs. 630
2005 617
2006 574
2007 562
2008 562
Total ---------
Rs. 2,945
=========
17. Other assets
Other assets consist of the following:
As of March 31,
--------------------------
2002 2003
---- ----
(in millions)
Debtors....................................... Rs. 1,398 Rs. 4,748
Staff advances................................ 948 2,273
Advance taxes................................. 16,566 28,273
Security deposits............................. 1,004 2,789
Advance for purchases of securities........... 3,339 15,415
Prepaid expenses.............................. 164 522
Derivatives................................... 896 -
Recoverable from Indian Government(1)......... 1,111 -
Others(2)..................................... 1,935 4,926
---------- ----------
Total......................................... Rs. 27,361 Rs. 58,946
========== ==========
(1) Recoverable from Indian Government represents foreign exchange
fluctuations on specific foreign currency long-term debt, guaranteed by
and recoverable from the Indian Government.
(2) Others include loans held for sale of Rs. 1,387 million (2002: Rs. Nil).
F-33
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
18. Deposits
Deposits include demand deposits, which are non-interest-bearing, and
savings and time deposits, which are interest bearing. A listing of deposits is
set out below:
As of March 31,
---------------
2002 2003
---- ----
(in millions)
Interest bearing
Savings deposits............................... Rs. - Rs. 37,932
Time deposits.................................. 7,380 418,119
--------- -----------
7,380 456,051
========= ===========
Non-interest bearing
Demand deposits................................ - 35,239
--------- -----------
Total.......................................... Rs. 7,380 Rs. 491,290
========= ===========
Contractual maturities of deposits as of March 31, 2003 are set out below:
(in millions)
Deposits maturing during the year ending March 31,
2004........................................................ Rs. 334,351
2005........................................................ 37,410
2006........................................................ 25,055
2007........................................................ 6,697
2008........................................................ 6,798
Thereafter ................................................. 7,808
------------
Total deposits.............................................. Rs. 418,119
============
As of March 31, 2003, the aggregate of deposits with individual balances
greater than Rs. 5 million was Rs. 267,297 million (2002: Rs. 1,922 million).
19. Short term borrowings
Short term borrowings represent non-trading borrowings with an original
maturity of one year or less.
20. Long-term debt and redeemable preferred stock
Long-term debt
Long-term debt represents debt with an original maturity of greater than
one year. Maturity distribution is based on contractual maturities or earlier
dates at which the debt is callable at the option of the holder. A significant
portion of the long-term debt bears a fixed rate of interest. Interest rates on
floating-rate debt are generally linked to the London Inter-Bank Offer Rate or
similar money market rates. The segregation between fixed-rate and
floating-rate obligations is based on the contractual terms.
F-34
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
A listing of long-term debt as of March 31, 2003, by maturity and interest
rate profile is set out below:
Fixed-rate Floating-rate
obligations obligations Total
-------------- --------------- -----------
(in millions)
Long-term debt maturing during the year ending March 31,
2004...................................................... Rs. 77,994 Rs. 8,269 Rs. 86,263
2005...................................................... 67,022 2,977 69,999
2006...................................................... 85,660 6,200 91,860
2007...................................................... 20,190 5,143 25,333
2008...................................................... 26,136 1,907 28,043
Thereafter................................................ 88,020 13,126 101,146
----------- ---------- -----------
Total..................................................... Rs. 365,022 Rs. 37,622 Rs. 402,644
Less: Unamortized debt issue cost........................ 1,832
-----------
Total...................................................... Rs. 400,812
===========
All long-term debt is unsecured. Debt aggregating Rs. 35,151 million 2002:
Rs. 40,439 million) is guaranteed by the Government of India (GOI).
Long-term debt is denominated in various currencies. As of March 31, 2003,
long-term debt comprises Indian rupee debt of Rs. 350,633 million (2002: Rs.
438,529 million) and foreign currency debt of Rs. 50,179 million (2002: Rs.
72,894 million).
Indian rupee debt
A listing of major category of Indian rupee debt is set out below:
As of March 31,
------------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------- ----------------------------------------------
Category Weighted Weighted
average Average average Average
interest Residual interest residual
Amount rate Range maturity Amount rate Range maturity
-------- -------- ------ -------- ---------- -------- -------- --------
(In millions)
Bonds issued to institutional
/individual investors(1)...... Rs. 413,388 11.9% 8.4-16.5% 3.4 years Rs. 309,488 11.71% 7-16.40% 3.26 years
Bonds eligible for statutory
reserve requirements(2)....... 18,240 11.3% 7.8-12% 6.8 years 14,815 11.87% 11.50-12% 7.22 years
Borrowings from GOI(3) 6,936 10.3% 11-16% 4.9 years 6,137 10.13% 11-13% 4.44 years
Refinance from financial
institutions.................. 20,193 7.35% 6.5-17% 3.64 years
----------- ---- --------- ----------- ----- ----------
Total................ Rs. 438,564 11.9% 3.5 years Rs. 350,633 11.28% 3.46 years
=========== ==== ========= =========== ===== ==========
1) Includes application money received on bonds outstanding at the end of the
year.
2) Banks in India are required to mandatorily maintain a specified percentage
of certain liabilities as cash or in approved securities. These bonds
issued by the Company are approved securities under the rules.
3) Includes interest-free borrowing from the GOI aggregating Rs. 296 million
(2002: Rs. 255 million). The borrowing was initially recorded at its fair
value of Rs. 100 million based on the prevailing interest rate of 16% for
borrowings of a similar term and risk. Interest is being imputed for each
reporting period using this rate.
F-35
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Foreign currency debt
A listing of major category of foreign currency debt is set out below:
As of March 31,
---------------------------------------------------------------------------------------------
2002 2003
------------------------------------------ ---------------------------------------------
Category Weighted Weighted
average Average average Average
interest residual interest Residual
Amount rate Range maturity Amount rate Range Maturity
------ -------- ----- -------- ------ -------- ----- --------
(In millions)
Borrowings from
international development
agencies (1) (2)(3)...... Rs. 25,224 3.0% 0-6.8% 13.6 years Rs. 25,417 4.14% 0-8.5% 9.50 years
Other borrowings from
international markets.... 47,670 3.8% 2-9.1% 2.1 years 24,762 3.37% 0-9.15% 2.52 years
---------- --- ---- ----------- ---- ----------
Total.................... Rs. 72,894 3.5% 6.08 years Rs. 50,179 3.69% 6.05 years
========== === ==== =========== ==== ==========
1) These borrowings have been raised under specific lines of credit from
international development agencies. The borrowings have lender-imposed
restrictions that limit the use of the funds for specified purposes, which
include lending to specified sectors.
2) As of March 31, 2003, under these lines of credit, the Company has an
unutilized option to borrow Rs. 6,265 million (2002: Rs. 5,349 million) as
per an agreed schedule over a period of 5 years at various interest rates.
3) Exchange rate fluctuations on certain borrowings are guaranteed by the
GOI.
Redeemable preferred stock
The Company issued preferred stock with a face value of Rs. 3,500 million
during the year ended March 31, 1998 under the scheme of business combination
with ITC Classic Finance Limited. This preferred stock bears a dividend yield
of 0.001% and is redeemable at face value after 20 years. The preferred stock
was initially recorded at its fair value of Rs. 466 million. Subsequently,
interest is being imputed for each reporting period. The imputed interest rate
of 10.6% was determined based on the then prevailing interest rate for
securities of similar maturity. The carrying amount of this redeemable
preferred stock as of March 31, 2003 is Rs. 853 million (2002: Rs. 772
million).
Banks in India are not allowed to issue preferred stock. However, the
Company has been currently exempted from the restriction, which prohibits issue
of preference shares by banks.
21. Other liabilities
Interest accrued
Other liabilities as of March 31, 2003, include Rs. 16,276 million (2002:
Rs. 21,435 million) of interest accrued but not due on interest bearing
liabilities.
Borrowings from Kreditanstalt fur Wiederaufbau
The Company has borrowings from Kreditanstalt fur Wiederaufbau (KfW), an
international development agency, under specific lines of credit. The terms of
the borrowings provide for limitations on usage, whereby funds can be used only
for specified purposes. The borrowings are guaranteed by the GOI.
F-36
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
With respect to certain borrowings, the terms of the borrowing agreement
provide that a portion of the interest payable on the borrowing shall be paid
to the GOI instead of the lender. KfW and the GOI have entered into an
agreement whereby the interest paid to the GOI is repaid to the Company either
in the form of a grant or a loan. While the loan is repayable as per a
specified schedule, the grants do not have a repayment schedule. The interest
amounts received from the GOI bear limitations on usage and are required to be
advanced as loans/contributions for specified purposes. Similarly, with respect
to certain other borrowings from KfW, the terms of the borrowing agreement
provide that a portion of the interest payable on the borrowings shall be
retained by the Company and used to be advanced as loans/contributions for
specified purposes.
The Company periodically advances loans/contributions for specified
purposes out of these funds and reports such utilizations to the GOI/KfW.
However, no time schedule has been specified for the usage of the funds. In the
event that the funds are not utilized for specified purposes, the GOI/KfW have
the right to require repayment of the grant/retained interest. Additionally,
KfW can modify the scope of the specified purposes. The Company retains the
income derived from the loans made out of the funds. Similarly, it bears the
risks of default on the loans.
The interest repaid by the GOI in the form of grants and the interest
retained under the agreement with KfW do not represent contributions as they
specify donor-imposed conditions, the breach of which, would enable the donor
to demand repayment of the grants/retained interest. Accordingly, the
grants/retained interest have been reported as liabilities.
Other liabilities as of March 31, 2003, include grants of Rs. 2,052
million (2002: Rs. 2,689 million) and retained interest of Rs. 496 million
(2002: Rs. 439 million).
22. Common stock
The Company presently has only one class of common stock. In the event of
liquidation of the affairs of the Company, all preferential amounts, if any,
shall be discharged by the Company. The remaining assets of the Company, after
such discharge, shall be distributed to the holders of common stock in
proportion to the common stock held by shareholders.
The Company has issued American Depository Shares (ADS) representing
underlying common stock. The common stock represented by the ADS is similar to
other common stock, except for voting rights. While every holder of common
stock, as reflected in the records of the Company, has one vote in respect of
each share held, the ADS holders have no voting rights due to a condition
contained in the approval of the offering from the Ministry of Finance of
India. Under the depository agreement, the depository of the ADS will vote as
directed by the Board of Directors of the Company.
As discussed in Note 3, the Company consummated the reverse acquisition
with the acquiree effective April 1, 2002, whereby shareholders of the Company
were issued common shares of the acquiree in the ratio of 1:2. The effect of
the reverse acquisition on the capital structure (including outstanding stock
options) of the Company has been retroactively adjusted in the financial
statements. On consummation of the reverse acquisition, adjustments were made
to the value of the common stock and the additional paid in capital.
F-37
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
23. Retained earnings and dividends
Retained earnings at March 31, 2003 computed as per generally accepted
accounting principles of India include profits aggregating to Rs. 5,514 million
which are not distributable as dividends under the Banking Regulation Act,
1949. These relate to requirements regarding earmarking a part of the profits
under banking laws in India. Utilization of these balances is subject to
approval of the Board of Directors and needs to be reported to Reserve Bank of
India. Statutes governing the operations of the Company mandate that dividends
be declared out of distributable profits only after the transfer of at least
25% of net income each year, computed in accordance with current banking
regulations, to a statutory reserve. Additionally, the remittance of dividends
outside India is governed by Indian statutes on foreign exchange transactions.
Retained earnings as of March 31, 2002, include profits aggregating to Rs.
12,153 million (2001: Rs. 11,875 million), which are not distributable as
dividends under Indian company law. These relate to profits on redemption of
preferred stock and requirements regarding earmarking a part of profits under
banking laws.
Retained earnings as of March 31, 2003, include reserves of Rs. 10,940
million (2002: Rs. 10,866 million) earmarked under Indian tax laws to avail tax
benefits and which are not distributable as dividends. Any transfer of balances
from such earmarked reserves would result in withdrawal of the tax exemption on
the transferred amounts.
24. Earnings per share
A computation of the earnings per share is set out below:
Year ended March 31,
--------------------------------------------------------------------
2001 2002 2003
------------------ ----------------- ------------------
(in millions, except earnings per share data)
Fully Fully Fully
Basic Diluted Basic diluted Basic diluted
----- ------- ----- ------- ----- -------
Earnings
Net income before extraordinary items and cumulative
effect of accounting change (before dilutive impact)..... Rs.6,630 Rs. 6,630 Rs. 282 Rs. 282 Rs.(7,983) Rs. (7,983)
Contingent issuances of subsidiaries/affiliates.......... - (25) - - - -
-------- --------- -------- --------- --------- ----------
Net income before cumulative effect of accounting change
(adjusted for full dilution)............................. 6,630 6,605 282 282 (7,983) (7,983)
Cumulative effect of accounting change, net of tax....... 1,265 1,265 - -
-------- --------- -------- --------- --------- ----------
Net income available to common stockholders (adjusted for
full dilution)........................................... 6,630 6,605 1,547 1,547 (7,983) (7,983)
======== ========= ======== ========= ========= ==========
Common stock
Weighted-average common stock outstanding................ 393 393 393 393 563 563
Dilutive effect of convertible debt instruments.......... - - - - -
Dilutive effect of employee stock options................ - - - - - -
-------- --------- -------- --------- --------- ----------
Total.................................................... 393 393 393 393 563 563
======== ========= ======== ========= ========= ==========
Earnings per share ......................................
Net income before extraordinary items and cumulative
effect of accounting change ............................. 16.88 16.81 0.72 0.72 (14.18) (14.18)
Cumulative effect of accounting change .................. 3.22 3.22 - -
-------- --------- -------- --------- ---------- ----------
Net income............................................... Rs. 16.88 Rs. 16.81 Rs. 3.94 Rs. 3.94 Rs. (14.18) Rs. (14.18)
F-38
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Options to purchase 7,015,800 equity shares and 12,610,275 equity shares
granted to employees at a weighted average exercise price of Rs. 81.30 and Rs.
154.70 were outstanding during the year ended March 31, 2002 and 2003,
respectively, but were not included in the computation of diluted earnings per
share because the exercise price of the options was greater than the average
market price of the equity shares during the period. During the year ended
March 31, 2003, the Company has reported a net loss and accordingly all
outstanding options are anti-dilutive.
25. Segmental disclosures and related information
Segmental disclosures
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for the reporting of information about
operating segments. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
regularly evaluated by the Chief Operating Decision Maker (CODM) in deciding
how to allocate resources and in assessing performance. As discussed in Note 3,
the Company consummated the reverse acquisition with the acquiree effective
April 1, 2002. Subsequent to the reverse acquisition, the Company changed the
structure of its internal organisation, which changed the composition of its
operating segments. The Company's operations have been classified into the
following segments: Commercial Banking segment, Investment Banking segment and
Others. Segment data for previous periods have been reclassified on a
comparable basis.
The Commercial Banking segment provides medium-term and long-term project
and infrastructure financing, securitization, factoring, lease financing,
working capital finance and foreign exchange services to clients. Further, it
provides deposit and loan products to retail customers. The Investment Banking
segment deals in the debt, equity and money markets and provides corporate
advisory products such as mergers and acquisition advice, loan syndication
advice and issue management services.
Others consist of various operating segments that do not meet the
requirements to be reported as on individual reportable segment as defined in
SFAS No. 131.
The CODM evaluates the Company's performance and allocates resources based
on performance indicators (components of profit and loss) of each of the
segments. Further, the CODM specifically reviews assets of the personal
financial services division, which is a part of commercial banking segment.
F-39
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The profit and loss of reportable segments is set out below:
Commercial Banking Investment Banking
--------------------------------------- ----------------------------------
Year ended March 31, Year ended March 31,
--------------------------------------- ----------------------------------
2001 2002 2003 2001 2002 2003
--------- --------- ----------- --------- --------- ---------
(in millions) (in millions)
Income from external customers
Interest income..................... Rs. 85,169 Rs. 91,445 Rs. 76,498 Rs. 7,328 Rs. 8,239 Rs. 21,595
Non - interest income............... 8,401 9,747 4,771 1,824 1,826 6,792
Income from other operating segments
Interest income..................... 1,413 3,796 8,533 8,823 11,007 189
Non - interest income............... 658 1,040 384 236 219 251
--------- --------- ----------- --------- --------- ---------
Total income........................ 95,641 106,028 90,186 18,211 21,291 28,827
--------- --------- ----------- --------- --------- ---------
Interest expense.................... 72,111 81,867 69,462 14,327 17,454 23,916
Depreciation ....................... 948 1,244 2,008 67 89 231
Provision for loan losses........... 10,962 11,458 19,645 13 8 4
Other expenses...................... 6,731 10,321 10,343 1,240 1,781 2,921
--------- --------- ----------- --------- --------- ---------
Income/ (loss) before taxes......... 4,889 1,138 (11,272) 2,564 1,959 1,755
Income tax (expense)/ benefit....... (347) (728) 3,420 24 (659) (529)
Cumulative effect of accounting
changes, net of tax................. - 1,281 - - - -
--------- --------- ----------- --------- --------- ---------
Net income/ (loss).................. Rs. 4,542 Rs. 1,691 Rs. (7,852) Rs. 2,588 Rs. 1,300 Rs. 1,226
========= ========= =========== ========= ========= =========
A listing of certain assets of reportable segments is set out below:
Elimination of
Commercial Banking Investment Banking Others the acquiree Total
-------------------- ------------------- -------------------- ---------------- ---------------------
As of March 31, 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003
--------- --------- -------- --------- --------- --------- --------- ------ ---------- ----------
(in millions)
Property
and equipment............ Rs.13,157 Rs. 16,048 Rs.2,152 Rs. 2,754 Rs. 2,099 Rs. 2,413 Rs.(4,831) - Rs. 12,577 Rs. 21,215
Investment in
equity affiliates... 15 - - 252 1,867 2,363 - - 1,882 2,615
Inter segment transactions are generally based on transfer pricing
measures as determined by management. Income, expenses, assets and liabilities
are either specifically identifiable with individual segments or have been
allocated to segments on a systematic basis. Corporate overheads and assets
have also been allocated to segments on a systematic basis.
F-40
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
A reconciliation between the segment income and consolidated totals of the Company is set out below:
Total income Income/ (loss) before taxes and Net income/ (loss)
accounting changes
Year ended March 31, Year ended March 31, Year ended March 31,
2001 2002 2003 2001 2002 2003 2001 2002 2003
(in millions)
Commercial banking... Rs. 95,641 Rs. 106,028 Rs. 90,186 Rs. 4,889 Rs. 1,138 Rs. (11,272) Rs. 4,542 Rs. 1,691 Rs. (7,852)
Investment banking... 18,211 21,291 28,827 2,564 1,959 1,755 2,588 1,300 1,226
Others............... 1,659 2,789 2,874 116 (549) (1,527) (7) (343) (1,357)
Eliminations of the
acquiree............. (15,219) (29,308) - (750) (2,015) - (493) (1,101)
Other reconciling
adjustments.......... (10,945) (13,785) (10,531) - - - - -
Consolidated total... Rs. 89,347 Rs. 87,015 Rs. 111,681 Rs. 6,819 Rs. 533 Rs. (11,044) Rs. 6,630 Rs. 1,547 Rs. (7,983)
A reconciliation between the segments and consolidated total assets of the
Company is set out below:
As of March 31
----------------------
2002 2003
---- ----
(in millions)
Commercial Banking(1)........................ Rs. 858,039 Rs. 767,343
Investment Banking........................... 268,726 398,574
Others....................................... 7,418 9,850
----------- -----------
Total segment assets......................... 1,134,183 1,175,767
Unallocable assets........................... 15,397 16,826
Eliminations................................. (406,218) (12,330)
----------- -----------
Consolidated total assets.................... 743,362 1,180,263
=========== ===========
1) Commercial banking includes retail assets of Personal financial services
division of Rs. 172,208 million (March 2002: Rs. 75,072 million), which
are reviewed separately by the CODM.
Geographic distribution
The business operations of the Company are largely concentrated in India.
Activities outside India are restricted to resource mobilization in the
international markets and operations of certain software development and
services subsidiaries in the United States.
Major customers
The Company provides banking and financial services to a wide base of
customers. There is no major customer, which contributes more than 10% of total
income.
F-41
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
26. Employee benefits
Gratuity
In accordance with Indian regulations, the Company provides for gratuity,
a defined benefit retirement plan covering all employees. The plan provides a
lump sum payment to vested employees at retirement or termination of employment
based on the respective employee's salary and the years of employment with the
Company. The gratuity benefit provided by the Company to its employees is equal
to or greater than the statutory minimum.
In respect of the parent company, the gratuity benefit is provided to the
employee either through a fund administered by a Board of Trustees and managed
by Life Insurance Corporation of India (LIC) or through a fund administered and
managed by a Board of Trustees. The Company is responsible for settling the
gratuity obligation through contributions to the fund. The plan is fully
funded.
In respect of the remaining entities within the group, the gratuity
benefit is provided through annual contributions to a fund administered and
managed by the LIC. Under this scheme, the settlement obligation remains with
the Company, although the LIC administers the scheme and determines the
contribution premium required to be paid by the Company.
The following table sets forth the funded status of the plans and the
amounts recognized in the financial statements:
As of March 31,
-------------------------
2002 2003
---- ----
(in millions)
Change in benefit obligations
Projected benefit obligations at beginning of the year............... Rs. 207 Rs. 263
Divestitures......................................................... - -
Obligations assumed on acquisition................................... - 393
Service cost......................................................... 29 69
Interest cost........................................................ 25 64
Expected benefits payments........................................... (14) (18)
Unrecognized prior service cost...................................... - 59
Actuarial (gain)/loss on obligations................................. 17 63
--- ---
Projected benefit obligations at the end of the year................. 264 893
--- ---
Change in plan assets
Fair value of plan assets at beginning of the year................... 213 248
Fair value of plan assets acquired on acquisition.................... 402
Expected return on plan assets....................................... 26 70
Employer contributions............................................... 29 163
Actual benefits paid................................................. (16) (32)
Actuarial (gain)/loss................................................ (5) 22
--- ---
Plan assets at the end of the year................................... 247 873
--- ---
Funded status........................................................ (17) (20)
Unrecognized actuarial loss.......................................... 86 136
Unrecognized transitional obligation................................. (19) (17)
Unrecognized prior service cost...................................... 9
--- ---
Net prepaid gratuity cost............................................ Rs. 59 Rs. 99
F-42
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The components of the net gratuity cost are set out below:
Year ended March 31,
2001 2002 2003
(in millions)
Service cost................................................ Rs. 12 Rs. 29 Rs. 69
Interest cost............................................... 16 25 64
Expected return on assets................................... (16) (29) (70)
Amortization of transition asset/liability.................. (1) (1) 1
Amortization of prior service cost.......................... 1 1 1
Actuarial (gain)/loss....................................... - 2 2
------ ------ ------
Net gratuity cost........................................... Rs. 12 Rs. 27 Rs. 67
====== ====== ======
The actuarial assumptions used in accounting for the gratuity plan are
given below:
As of March 31,
2002 2003
---- ----
Discount rate........................................... 10% 8%
Rate of increase in the compensation levels............. 9% 7%
Rate of return on plan assets........................... 9.5% 7.5%
As of March 31, 2003, of the total plan assets, Rs. 46 million (2002: Rs.
3 million) has been invested in debt securities of the Company.
Pension
The Company provides for pension, a deferred retirement plan covering
certain employees. The plan provides for a pension payment on a monthly basis
to these employees on their retirement based on the respective employee's
salary and years of employment with the Company. Employees covered by the
pension plan are not eligible for benefits under the provident fund plan, a
defined contribution plan. The pension plan is the continuation of the
acquiree's plan and hence there are no comparatives for the current year.
The pension plan is funded through periodic contributions to a fund set-up
by the Company and administrated by a Board of Trustees. Such contributions are
actuarially determined.
The following table sets forth the funded status of the plan and the
amounts recognized in the financial statements.
As of March 31, 2003
(in millions)
Change in benefit obligations
Projected benefit obligations at beginning of the year...... Rs. 913
Service cost................................................ 22
Interest cost............................................... 89
Expected benefits payments.................................. (42)
Actuarial (gain)/loss on obligations........................ (129)
---------
Projected benefit obligations at the end of the year ....... 853
---------
Change in plan assets.......................................
Fair value of plan assets at beginning of the year.......... 914
Expected return on plan assets.............................. 86
Employer contributions...................................... 16
(Gain)/loss on plan assets.................................. 166
Benefits paid............................................... (26)
---------
Plan assets at the end of the year.......................... 1,156
---------
Net prepaid benefit......................................... Rs. 303
=========
F-43
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
The components of the net pension cost are set out below:
Year ended March 31, 2003
(in millions)
Service cost......................................... Rs. 22
Interest cost........................................ 89
Expected return on assets............................ (86)
Actuarial (gain)/loss................................ -
Net pension cost..................................... Rs. 25
The assumptions used in accounting for the pension plan are given below:
As of March 31, 2003
Discount rate.............................................. 8%
Rate of increase in the compensation levels................ 7%
Rate of return on plan assets.............................. 7.5%
Superannuation
The permanent employees of the Company are entitled to receive retirement
benefits under the superannuation scheme operated by the Company.
Superannuation is a defined contribution plan under which the Company
contributes annually a sum equivalent to 15% of the employee's eligible annual
salary to LIC, the manager of the fund, which undertakes to pay the lump sum
and annuity payments pursuant to the scheme. The Company contributed Rs. 51
million, Rs. 50 million and Rs. 97 million to the employees superannuation plan
for the year ended March 31, 2001, 2002 and 2003 respectively.
Provident fund
In accordance with Indian regulations, employees of the Company (excluding
those covered under the pension scheme) are entitled to receive benefits under
the provident fund, a defined contribution plan, in which, both the employee
and the Company contribute monthly at a determined rate. These contributions
are made to a fund set up by the Company and administered by a Board of
Trustees. Further, in the event the return on the fund is lower than 9.5%
(current guaranteed rate of return to the employees), such difference is
contributed by the Company and charged to income. The contribution to the
employees provident fund amounted to Rs 55 million, Rs. 89 million and Rs. 106
million in year ended March 31, 2001, 2002 and 2003 respectively.
27. Employee Stock Option Plan
In August 1999, the Company approved an Employee Stock Option Plan (ICICI
Plan). Under the ICICI Plan, the Company is authorized to issue up to 39.27
million equity shares to eligible employees. Eligible employees are granted an
option to purchase shares subject to vesting. The options vest in a graded
manner over 3 years with 20%, 30% and 50% of the options vesting at the end of
each year. The options can be exercised within 10 years from the date of the
grant. Compensation expense under the ICICI Plan for the year ended March 31,
2003 is Rs. 7 million (2002: Rs.26 million, 2001: Rs. 37 million).
As a result of the reverse acquisition, all outstanding options of the
Company were exchanged for options of the acquiree in the ratio of 1:2 with an
adjustment to the exercise price in the same ratio. This transaction is similar
to an equity restructuring. In accordance with FIN 44, Accounting for Certain
Transactions involving Stock Compensation, the above transaction had no
accounting consequence.
F-44
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Under the terms of the reverse acquisition, the Company assumed the
employee options outstanding under the acquiree's option plan. As the intrinsic
value of all the assumed options was negative on the date of consummation, no
amount has been allocated to deferred compensation under FIN 44.
Stock option activity
Stock option activity under the above stock option plans is set out below:
Year ended March 31, 2001
-----------------------------------------------------------------------------
ICICI Bank Limited
--------------------------------------
Range of
exercise Weighted average Weighted average
prices and exercise remaining
Option grant price and contractual
shares date fair grant date fair life (months)
outstanding values values
------------ --------------- ----------------- ----------------
Outstanding at the beginning of the year. 1,161,875 Rs. 171.0 Rs. 171.0 112
Granted during the year.................. 1,461,250 266.8 266.8 108
Forfeited during the year................ (60,200) 171.0 171.0 -
Exercised during the year................ (16,250) 171.0 171.0 -
--------- --------------- --------- ---
Outstanding at the end of the year....... 2,546,675 Rs. 171.0-266.8 Rs. 226.0 109
========= =============== ========= ===
Exercisable at the end of the year....... 231,175 Rs. 171.0 Rs. 171.0 -
Year ended March 31, 2001
-----------------------------------------------------------------------------
ICICI Bank Limited
--------------------------------------
Range of
exercise Weighted average Weighted average
prices and exercise remaining
Option grant price and contractual
shares date fair grant date fair life (months)
outstanding values values
------------ --------------- ----------------- ----------------
Outstanding at the beginning of the year . 2,546,675 Rs. 171.0-266.8 Rs. 226.0 109
Granted during the year .................. 4,887,500 105.0-164.0 134.4 116
Forfeited during the year ................ (417,675) 164.0-266.8 218.4 -
Exercised during the year ................ (700) 171.0 171.0 -
------------ --------------- --------- ---
Outstanding at the end of the year ....... 7,015,800 Rs. 105.0-266.8 Rs. 162.6 114
============ =============== ========= ===
Exercisable at the end of the year ....... 74,300 Rs. 171.0-266.8 Rs. 205.6 -
Year ended March 31, 2001
-----------------------------------------------------------------------------
ICICI Bank Limited
--------------------------------------
Range of
exercise Weighted average Weighted average
prices and exercise remaining
Option grant price and contractual
shares date fair grant date fair life (months)
outstanding values values
------------ --------------- ----------------- ----------------
Outstanding at the beginning of the year.. 7,015,800 Rs. 105.0-266.8 Rs. 162.6 114
Acquisitions.............................. 6,327,825 120.4-171.9 146.0 110
Forfeited during the year................. (730,350) 120.4-266.8 154.6
Exercised during the year................. (3,000) 105.0 105.0
------------ --------------- --------- ---
Outstanding at the end of the year........ 12,610,275 Rs. 105.0-266.8 Rs. 154.7 98
============ =============== ========= ===
Exercisable at the end of the year........ 5,222,317 Rs. 52.5-266.8 Rs. 169.9 -
F-45
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
ICICI Infotech
In April 2000, ICICI Infotech approved an Employee Stock Option Plan
(Infotech Plan). Under the Infotech Plan, ICICI Infotech is authorized to issue
up to 12 million equity shares to its employees and employees of the parent
company. Eligible employees are granted an option to purchase shares subject to
vesting conditions. The options vest in a graded manner over 3 years with 20%,
30% and 50% of the options vesting at the end of each year. The options can be
exercised within 10 years from the date of the grant.
During the year ended March 31, 2001, 2002 and 2003, the Company has not
recorded any compensation cost as the exercise price was equal to the fair
value of the underlying equity shares on the grant date. As shares of ICICI
Infotech are not quoted on exchanges, the fair value represents management's
best estimates considering all available factors.
Stock option activity under the above stock option plan is set out below:
Year ended March 31, 2001
-----------------------------------------------------------------------
ICICI Infotech
--------------
Range of
exercise Weighted average Weighted average
Option prices and exercise price remaining
shares grant date and grant date contractual life
outstanding fair values fair values (months)
----------- ----------- ----------- --------
Outstanding at the beginning of the year... - Rs. - Rs. - -
Granted during the year.................... 2,344,800 37.5 37.5 108
Forfeited during the year.................. (103,400) 37.5 - -
Exercised during the year.................. - - - -
--------- ---- ---- ---
Outstanding at the end of the year......... 2,241,400 Rs. 37.5 Rs. 37.5 108
========= ==== ==== ===
Exercisable at the end of the year......... - - - -
Year ended March 31, 2002
-----------------------------------------------------------------------
ICICI Infotech
--------------
Range of
exercise Weighted average Weighted average
Option prices and exercise price remaining
shares grant date and grant date contractual life
outstanding fair values fair values (months)
----------- ----------- ----------- --------
Outstanding at the beginning of the year... 2,241,400 Rs. 37.5 Rs. 37.5 108
Granted during the year.................... 1,974,800 68.0 68.0 99
Forfeited during the year.................. (342,960) 37.5 - 68.0 42.0 -
Exercised during the year.................. (10,220) 37.5 37.5 -
--------- ------------- -------- ---
Outstanding at the end of the year......... 3,863,020 Rs. 37.5-68.0 Rs. 52.7 104
========= ============= ======== ===
Exercisable at the end of the year......... 369,448 Rs. 37.5 Rs. 37.5 -
Year ended March 31, 2003
-----------------------------------------------------------------------
ICICI Infotech
--------------
Range of Weighted average Weighted average
Option exercise exercise price remaining
shares prices and and grant date contractual life
outstanding grant date fair values (months)
fair values
Outstanding at the beginning of the year... 3,863,020 Rs. 37.5- 68.0 Rs. 52.7 104
Granted during the year.................... 783,500 68.0-100.0 97.1 108
Forfeited during the year.................. (435,360) 37.5-100.0 59.1 -
Exercised during the year.................. (10,200) 37.5-68.0 55.7 -
--------- ---------- ---- --
Outstanding at the end of the year......... 4,200,960 Rs. 37.5-100.0 Rs. 60.3 75
========= ========== ==== ==
Exercisable at the end of the year......... 1,235,070 Rs. 37.5-100.0 Rs. 46.2 87
F-46
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
ICICI Venture
In July 2000, ICICI Venture, a consolidated subsidiary, approved an
Employee Stock Option Plan (Venture Plan). As of March 31, 2001, 78,900 options
with an exercise price of Rs. 835 per share were outstanding. The Company did
not record compensation cost, as the exercise price was equal to the fair value
of the underlying equity shares on the grant date. During the year ended March
31, 2002, the Venture Plan was discontinued and all the options outstanding
were voluntarily forfeited by the employees. The Company does not intend to
replace such cancelled options.
ICICI OneSource Limited
In September 2002, ICICI OneSource, a consolidated subsidiary, approved an
Employee Stock Options Plan (OneSource plan). Under the OneSource Plan, ICICI
OneSource is authorized to issue equity shares up to 10% of the share capital
to the employees. Eligible employees are granted an option to purchase shares
subject to vesting conditions. The options vest in a graded manner over 4 years
with 25% at the end of the first year and 12.5% of the options vesting at the
end of each subsequent six month period. The options can be exercised within 10
years from the date of the grant.
Stock option activity under the above stock option plan is set out below:
Year ended March 31, 2003
------------------------------------------------------------------------
ICICI One Source Limited
------------------------
exercise Weighted average Weighted average
Option prices and exercise price remaining
shares grant date and grant date contractual life
outstanding fair values fair values (months)
----------- ----------- ----------- --------
Outstanding at the beginning of the year... - - - -
Granted during the year.................... 4,250,000 Rs. 11.3 Rs. 11.3 113
Forfeited during the year.................. (395,000) 11.3 11.3 -
Exercised during the year.................. - - - -
--------- -------- -------- ---
Outstanding at the end of the year......... 3,855,000 Rs. 11.3 Rs. 11.3 113
========= ======== ======== ===
Exercisable at the end of the year......... - - - -
The Company has not recorded any compensation cost, as the exercise price
was equal to the fair value of the underlying equity shares on the grant date.
As shares of ICICI OneSource Limited are not quoted on exchanges, the fair
value represents management's best estimates considering all available factors.
28. Income taxes
Components of deferred tax balances
The tax effects of temporary differences are reflected through a deferred
tax asset/liability, which is included in the balance sheet of the Company.
F-47
The components of the deferred tax balances are set out below:
As of March 31,
---------------
2002 2003
---- ----
(in millions)
Deferred tax assets
Allowance for loan losses................................Rs. 12,263 Rs. 16,228
Available for sale securities............................ 2,141 1,044
Investments in trading securities........................ 176 62
Unearned income.......................................... 1,264 693
Capital loss carry forward............................... 31 23
Business loss carry forward.............................. 175 219
Deposits................................................. - 94
Other.................................................... 676 574
------ ------
16,726 18,937
Valuation allowance...................................... (226) (524)
------ ------
Total deferred tax asset.................................Rs. 16,500 Rs. 18,413
Deferred tax liabilities
Property and equipment................................... (9,416) (9,216)
Undistributed earnings of subsidiary and affiliates...... (875) (294)
Intangibles.............................................. - (1,857)
Investment in trading securities......................... - (39)
Long term debt........................................... - (666)
Available for sale securities............................ - (20)
Others................................................... (58) (358)
Total deferred tax liability............................. (10,349) (12,450)
Net deferred tax asset...................................Rs. 6,151 Rs. 5,963
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of the
deferred tax asset is dependent on the generation of future taxable income
during the periods in which the temporary differences become deductible.
Management considers the scheduled reversal of the projected future taxable
income, and tax planning strategies in making this assessment. Based on the
level of historical taxable income and projections for future taxable incomes
over the periods in which the deferred tax assets are deductible, management
believes that it is more likely than not that the Company will realize the
benefits of those deductible differences. The amount of deferred tax assets
considered realizable, however could be reduced in the near term if estimates
of future taxable income are reduced.
The Company would require taxable income of Rs. 21,266 million in the
future periods to be able to fully realize the benefit of net deferred asset
recognized in these consolidated financial statements.
The company had a valuation allowance of Rs. 97 million as at April 1,
2001. The net change in the total valuation allowance for the year ended March
31, 2002 and March 31, 2003 was an increase of Rs. 129 and Rs. 298 million
respectively. The majority of the valuation allowance as of March 31, 2002
related to business loss carried forward and capital loss carried forward. As
at March 31, 2003, included in the above, the Company has recorded a valuation
allowance of Rs. 280 million pertaining to an excess of the amount for
financial reporting over the tax basis carried forward pertaining to investment
in equity affiliates.
F-48
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
As at March 31, 2003, the Company has business loss carry forward of Rs.
505 million, with expiration dates as follows: March 31, 2009 - Rs. 108
million, March 31, 2010 - Rs. 43 million. Further, business loss carry forward
pertaining to the Company's US subsidiary was Rs. 321 million which expires in
2022 and Australian subsidiary was Rs. 33 million which has no expiration date.
The Company's capital loss carried forward of Rs. 110 million expires in March
31, 2006.
Reconciliation of tax rates
The Indian statutory tax rate is 35% plus a surcharge. During each of the
years presented, legislation was enacted in the first few months of the fiscal
year that changed the amount of the surcharge for that fiscal year and future
years. The surcharge was changed to 13%, 2% and 5% during the years ended March
31, 2001, 2002 and 2003, respectively, and resulted in a total statutory tax
rate of 39.55%, 35.70% and 36.75% for the years ended March 31, 2001 2002 and
2003, respectively.
The following is the reconciliation of expected income taxes at statutory
income tax rate to income tax expense /benefit as reported:
Year ended March 31,
--------------------
2001 2002 2003
---- ---- ----
(in millions)
Income/(loss) before income taxes ........................... Rs. 6,819 Rs. 533 Rs.(11,044)
Statutory tax rate........................................... 39.55% 35.70% 36.75%
Income tax expense/(benefit) at the statutory tax rate....... 2,697 190 (4,059)
Increases/(reductions) in taxes on account of:
Special tax deductions available to financial institutions... (542) (333) (38)
Exempt interest and dividend income.......................... (525) (800) (558)
Income charged at rates other than statutory tax rate........ (927) 280 916
Changes in the statutory tax rate............................ (192) 360 (109)
Expenses disallowed for tax purposes......................... 179 109 486
Tax on undistributed earnings of subsidiary.................. 227 234 62
Change in valuation allowance................................ 97 129 298
Tax adjustments in respect of prior year tax assessments..... - 175 (31)
Tax adjustment on account of change in tax status of subsidiary - - (97)
Other........................................................ (825) (93) 69
------- ------- ---------
Income tax expense/(benefit) reported........................ Rs. 189 Rs. 251 Rs.(3,061)
======= ======= =========
Components of income tax expense from continuing operations
The components of income tax expense/(benefit) from continuing operations
are set out below:
Year ended March 31,
--------------------
2001 2002 2003
---- ---- ----
(in millions)
Current................................................ Rs. 4,458 Rs. 3,474 Rs. 1,287
Deferred............................................... (4,269) (3,223) (4,348)
---------- ------------ -----------
Income tax expense/(benefit) reported.................. Rs. 189 Rs. 251 Rs. (3,061)
========== ============ ===========
Only an insignificant amount of the Company's income/(loss) before income
taxes and income tax expense/(benefit) was from outside India.
F-49
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Allocation of income taxes
The total income tax expense/(benefit) was recorded as follows:
Year ended March 31,
--------------------
2001 2002 2003
---- ---- ----
(in millions)
Income/(loss) from continuing operations............................. Rs. 189 Rs. 251 Rs. (3,061)
Unrealized gain/(loss) on securities available for sale.............. (481) 890 1,461
Additional paid in capital........................................... 605 - 599
------- --------- ----------
Income tax expense/(benefit) reported Rs. 313 Rs. 1,141 Rs. (1,001)
======= ========= ==========
29. Commitments and contingencies
Loan commitments
The Company has outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs. 48,759 million as
of March 31, 2003 (2002: Rs. 68,217 million). The interest rate on these
commitments is dependent on the lending rates on the date of the loan
disbursement. Further, the commitments have fixed expiration dates and are
contingent upon the borrower's ability to maintain specific credit standards.
Guarantees
As a part of its project financing and commercial banking activities, the
Company has issued guarantees to enhance the credit standing of its customers.
These generally represent irrevocable assurances that the Company will make
payments in the event that the customer fails to fulfill its financial or
performance obligations. Financial guarantees are obligations to pay a third
party beneficiary where a customer fails to make payment towards a specified
financial obligation. Performance guarantees are obligations to pay a third
party beneficiary where a customer fails to perform a non-financial contractual
obligation. The guarantees are generally for a period not exceeding 10 years.
The credit risk associated with these products, as well as the operating
risks, are similar to those relating to other types of financial instruments.
The current carrying amount of the liability for the Company's obligations
under the guarantee amounted to Rs. 346 million (2002: Nil)
Details of guarantees outstanding are set out below:
Nature of guarantee Maximum potential amount of future payments under guarantee
Less than 1 year 1-3 year 3-5 year Over 5 year Total
(in millions)
Financial guarantees... Rs. 9,413 Rs. 19,223 Rs. 4,361 Rs. 36,079 Rs. 69,076
Performance guarantees.. 8,309 8,835 3,965 16,293 37,402
------------ ------------ ------------ ----------- ------------
Total Rs. 17,722 Rs. 28,058 Rs. 8,326 Rs. 52,372 Rs. 106,478
============ ============ ============ ==== ====== ============
F-50
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Capital commitments
The Company is obligated under a number of capital contracts. Capital
contracts are job orders of a capital nature which have been committed. As of
the balance sheet date, work had not been completed to this extent. Estimated
amounts of contracts remaining to be executed on capital account aggregated Rs.
264 million as of March 31, 2003 (2002: Rs. 756 million).
Tax contingencies
Various tax-related legal proceedings are pending against the Company.
Potential liabilities, if any, have been adequately provided for, and the
Company does not estimate any incremental liability in respect of these
proceedings.
Litigation
Various litigation and claims against the Company and its subsidiaries are
in process and pending. Based upon a review of open matters with legal counsel,
management believes that the outcome of such matters will not have a material
effect upon the Company's consolidated financial position, results of
operations or cashflows.
Operating lease commitments
The Company has commitments under long-term operating leases principally
for premises and automated teller machines. The following is a summary of
future minimum lease rental commitments as of March 31, 2003, for
non-cancelable leases:
(in millions)
Lease rental commitments for the year ending March 31,
2004................................................................. Rs. 237
2005................................................................. 231
2006................................................................. 223
2007................................................................. 208
2008................................................................. 174
Thereafter........................................................... 320
-----------
Total minimum lease commitments...................................... Rs. 1,393
===========
30. Related party transactions
The Company has transactions with its affiliates and directors/employees.
The following represent the significant transactions between the Company and
such related parties:
Insurance services
During the year ended March 31, 2003 the Company paid insurance premium to
Lombard amounting to Rs. 224 million (2002: Rs 26 million, 2001:Nil).
Lease of premises and facilities
During the year ended March 31, 2003, the Company received for lease of
premises, facilities and other administrative costs from Prulife, Rs. 84
million (2002: Rs. 54 million. 2001:Rs. 22 million), from Pru-ICICI, Rs. 6
million (2002: Rs. 5 million, 2001: Rs. 3 million) and from Lombard, Rs. 82
million (2002: Rs. 50 million, 2001: Nil).
F-51
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
During the year ended March 31, 2002, the Company received rentals for
lease of premises, facilities and other equipment from the acquiree, Rs. 256
million (2001: Rs. 193 million). Similarly, during the year ended March 31,
2002, the Company paid rentals to the acquiree for lease of premises, Rs. 11
million (2001: Nil).
Secondment of employees
During the year ended March 31, 2003, the Company received from Prulife
for seconded employees, Rs. 3 million (2002: Nil, 2001: Nil) and from Lombard,
Rs. 10 million (2002: Rs. 5 million, 2001: Nil).
During the year ended March 31, 2002, the Company received from the
acquiree for seconded employees, Rs. 55 million (2001: Rs. 4 million) during
the year ended March 31, 2002, Similarly, the Company paid to the acquiree for
employees seconded to the Company, Rs. 8 million (2001: Rs. 5 million).
Asset management services
During the year ended March 31, 2003, the Company provided asset
management services to TCW and earned fees of Rs. 24 million (2002: Rs. 21
million, 2001: Rs. 31 million).
Deposits and borrowings
During the year ended March 31, 2003, the Company paid interest on
bonds/deposits/call borrowings to its affiliated companies, Rs. 12 million
(2002: Rs. 268 million, 2001: Rs. 202 million).
Banking services
The Company utilized banking services of the acquiree. During the year
ended March 31, 2002, non-interest expense of the Company relating to such
services, amounted to Rs. 32 million (2001: Rs. 72 million).
Derivative transactions
During the year ended March 31, 2002, the Company entered into interest
rate swap contracts and cross currency swap contracts with the acquiree
aggregating Rs. 10,310 million and Rs. Nil (2001: Rs. 3,350 million and Rs.
1,331 million) respectively. Contracts aggregating Rs. 8,760 million and Rs.
2,272 million (2001: Rs. 2,900 million and Rs. 4,352 million) were outstanding
as of March 31, 2002, for interest rate swaps and currency swaps respectively.
Net interest income in respect of these swaps amounted to Rs. 275 million
(2001: Rs. 189 million) during the year ended March 31, 2002.
Similarly, the Company entered into forward foreign exchange contracts
with the acquiree aggregating Rs 22,466 million (2001: Rs. 47,863 million)
during the year ended March 31, 2002. Contracts aggregating Rs. 251 million
(2001: Rs. 2,262 million) were outstanding as of March 31, 2002.
Reverse repurchase transactions
During the year ended March 31, 2002, the Company has entered into reverse
repurchase transactions with the acquiree amounting to Rs. 52,792 million
(2001: Rs. Nil). As of March 31, 2002, the Company had reverse repurchase
transactions outstanding with the acquiree of Rs. 21,399 million (2001:Rs.
Nil).
F-52
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Software development services
During the year ended March 31, 2002, the Company provided software
development services to Tricolor and Pru-ICICI and earned fees of Rs. 19
million (2001: Rs. 8 million).
During the year ended March 31, 2002, the Company developed software and
provided software and hardware support services to the acquiree, and earned
fees of Rs. 124 million (2001: Rs. 73 million).
Back-office support services
During the year ended March 31, 2002, the Company set up a common
technology infrastructure platform and the acquiree was charged towards
communication expenses, backbone infrastructure expenses and data centre costs,
Rs. 182 million (2001: Rs. 94 million).
During the year ended March 31, 2002, the Company provided telephone
banking call-centre services and transaction processing services for the credit
card operations of the acquiree, and earned fees of Rs. 149 million (2001: Rs.
99 million).
Transfer of financial assets
During the year ended March 31, 2002, the Company transferred loans in
pass-through securitization transactions, where the beneficial interests were
purchased by the acquiree, of Rs. 11,152 million (2001: Rs. 438 million). Gains
of Rs. 98 million (2001: Rs. 50 million) was recorded on the sale.
Subsequently, due to a change in the status of the qualifying special purpose
entity used in the transactions, the Company regained control of the assets
sold. As at March 31, 2002, obligations of Rs. 3,526 million (2001: Rs. Nil)
relating to such repurchases are reflected as a component of the other
borrowings.
Share transfer activities
During the year ended March 31, 2002, the Company provided share transfer
services and dematerialization services to the acquiree and earned fees of Rs.
3 million (2001: Rs. 8 million).
Other transactions
During the year ended March 31, 2002, the Company undertook a corporate
brand advertising campaign, out of which an amount of Rs. 29 million (2001: Rs.
15 million) has been recovered from the acquiree.
Employee loans
The Company has advanced housing, vehicle and general purpose loans to
employees, bearing interest ranging from 2.5% to 6%. The tenure of these loans
range from 5 years to 25 years. The loans are generally secured by the assets
acquired by the employees. Employee loan balances outstanding as of March 31,
2003, of Rs. 2,273 million (2002: Rs. 949 million) are included in other
assets.
F-53
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Related party balances
The following balances payable to/receivable from related parties are
included in the balance sheet:
As of March 31,
---------------
2002 2003
---- ----
(in millions)
Cash and cash equivalents................... Rs. 4,360 Rs. -
Loans....................................... 209 22
Other assets................................ 1,269 2,549
Deposits.................................... - 440
Other liabilities........................... 24 3
31. Estimated fair value of financial instruments
The Company's financial instruments include financial assets and
liabilities recorded on the balance sheet, as well as off-balance sheet
instruments such as foreign exchange and derivative contracts.
Fair value estimates are generally subjective in nature, and are made as
of a specific point in time based on the characteristics of the financial
instruments and relevant market information. Where available, quoted market
prices are used. In other cases, fair values are based on estimates using
present value or other valuation techniques. These techniques involve
uncertainties and are significantly affected by the assumptions used and
judgments made regarding risk characteristics of various financial instruments,
discount rates, estimates of future cash flows, future expected loss experience
and other factors. Changes in assumptions could significantly affect these
estimates and the resulting fair values. Derived fair value estimates cannot
necessarily be substantiated by comparison to independent markets and, in many
cases, could not be realized in an immediate sale of the instruments.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments.
Disclosure of fair values is not required for certain items such as investment
accounted for under the equity method of accounting, obligations for pension
and other post-retirement benefits, income tax assets and liabilities, property
and equipment, prepaid expenses, core deposit intangibles and the value of
customer relationships associated with certain types of consumer loans,
particularly the credit card portfolio, and other intangible assets.
Accordingly, the aggregate fair value amount presented do not purport to
represent, and should not be considered representative of, the underlying
market or franchise value of the Company. In addition, because of differences
in methodologies and assumptions used to estimate fair values, the Company's
fair values should not be compared to those of other financial institutions.
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments.
Cash and cash equivalents
The carrying amounts reported in the balance sheet approximate fair values
because maturities are less than three months.
F-54
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Trading assets and liabilities
Trading account assets and liabilities are carried at fair value in the
balance sheet. Values for trading securities are generally based on quoted, or
other independent, market prices. Values for interest rate and foreign exchange
products are based on quoted, or other independent, market prices, or are
estimated using pricing models or discounted cash flows.
Securities
Fair values are based primarily on quoted, or other independent, market
prices. For certain debt and equity investments that do not trade on
established exchanges, and for which markets do not exist, estimates of fair
value are based upon management's review of the investee's financial results,
condition and prospects.
Loans
The fair values of certain commercial and consumer loans are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
The carrying value of certain other loans approximates fair value due to the
short-term and/or repricing characteristics of these loans. For impaired loans,
the impairment is considered while arriving at the fair value.
Deposits
The carrying amount of deposits with no stated maturity is considered to
be equal to their fair value. Fair value of fixed-rate time deposits is
estimated by discounting contractual cash flows using interest rates currently
offered on the deposit products. Fair value for variable-rate time deposits
approximates their carrying value. Fair value estimates for deposits do not
include the benefit that results from the low-cost funding provided by the
deposit liabilities compared to the cost of alternative forms of funding (core
deposit intangibles).
Long-term debt, short-term borrowings and redeemable preferred stock
The fair value of the Company's debt, including short-term borrowings, is
estimated based on quoted market prices for the issues for which there is a
market, or by discounting cash flows based on current rate available to the
Company for similar types of borrowing arrangements.
F-55
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
A listing of the fair values by category of financial assets and financial
liabilities is set out below:
As of March 31, 2002 As of March 31, 2003
-------------------- --------------------
Carrying Estimated Carrying Estimated
Value fair value Value fair value
-------- --------- -------- ---------
(in millions)
Financial assets
Trading account assets........................... Rs. 42,376 Rs. 42,376 Rs. 39,634 Rs. 39,634
Securities (Note 1).............................. 60,046 60,046 280,621 280,621
Loans (Note 2)................................... 523,601 527,167 630,421 641,048
Other financial assets (Note 3).................. 46,259 46,259 115,705 115,705
----------- ----------- ------------- -------------
Total............................................ Rs. 672,282 Rs. 675,848 Rs. 1,066,381 Rs. 1,077,008
=========== =========== ============= =============
Financial liabilities
Interest-bearing deposits........................ Rs. 7,380 Rs. 7,609 Rs. 456,051 Rs. 454,251
Non-interest-bearing deposits.................... - - 35,239 35,239
Trading account liabilities...................... 17,105 17,105 26,086 26,086
Short-term borrowings............................ 70,804 70,954 42,095 42,017
Long-term debt................................... 511,458 540,649 400,812 426,928
Redeemable preferred stock....................... 772 980 853 1,035
Other financial liabilities (Note 4)............. 4,783 4,783 43,252 43,252
----------- ----------- ------------- -------------
Total Rs. 612,302 Rs. 642,080 Rs. 1,004,388 Rs. 1,028,808
=========== =========== ============= =============
Note 1: Includes non-readily marketable equity securities of Rs. 9,418
million (2002: Rs. 8,268 million) for which there are no readily
determinable fair values.
Note 2: The carrying value of loans is net of the allowance for loan losses,
security deposits and unearned income.
Note 3: Includes cash and cash equivalents and customers acceptance liability
for which the carrying value is a reasonable estimate of fair value.
Note 4: Represents acceptances outstanding, for which the carrying value is a
reasonable estimate of fair value.
32. Regulatory matters
Subsequent to the reverse acquisition of the acquiree, the Company is a
banking company within the meaning of the Indian Banking Regulation Act, 1949,
registered with and subject to examination by the Reserve Bank of India.
Statutory liquidity requirements
In accordance with the Banking Regulation Act, 1949, the Company is
required to maintain a specified percentage of its net demand and time
liabilities by way of liquid unencumbered assets like cash, gold and approved
securities. The amount of securities required to be maintained at March 31,
2003 was Rs. 230,644 million (2002: Rs. Nil)
F-56
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
Capital adequacy requirements
The Company is subject to the capital adequacy requirements set by the
Reserve Bank of India, which stipulate a minimum ratio of capital to risk
adjusted assets and off-balance sheet items of 9% to be maintained. The capital
adequacy ratio of the Company calculated in accordance with the Reserve Bank of
India guidelines at March 31, 2003, was 11.10%.
For and on behalf of the Board
K.V. KAMATH KALPANA MORPARIA
Managing Director & Executive Director
Chief Executive Officer
JYOTIN MEHTA N. S. KANNAN
General Manager & Chief Financial Officer & Treasurer
Company Secretary
G. VENKATAKRISHNAN BALAJI SWAMINATHAN
General Manager Senior General Manager
Corporate Accounts & Taxation
F-57
EXHIBIT INDEX
Exhibit No. Description of Document
1.1 ICICI Bank Memorandum of Association, as amended.
1.2 ICICI Bank Articles of Association, as amended.
2.1 Deposit Agreement among ICICI Bank, Deutsche Bank and the holders from
time to time of American Depositary Receipts issued thereunder
(including as an exhibit, the form of American Depositary Receipt)
(incorporated herein by reference to ICICI Bank's Registration Statement
on Form F-1 (File No. 333-30132)).
2.2 Letter Agreements dated February 19, 2002 and April 1, 2002 amending and
supplementing the Deposit Agreement (incorporated herein by reference to
ICICI Bank's Annual Report on Form 20-F for the year ended March 31,
2002 filed on September 30, 2002).
2.3 ICICI Bank's Specimen Certificate for Equity Shares (incorporated herein
by reference to ICICI Bank's Registration Statement on Form F-1 (File
No. 333-30132)).
4.1 ICICI Bank's Employee Stock Option Plan, as amended.
4.2 ICICI Infotech Employee Stock Option Plan (incorporated herein by
reference to ICICI Bank's Annual Report on Form 20-F for the year
ended March 31, 2002 filed on September 30, 2002).
4.3 Description of the Carry Plan of ICICI Venture Funds Management Company.
4.4 ICICI Bank's Early Retirement Option Plan.
4.5 Scheme of Amalgamation of ICICI, ICICI Personal Financial Services,
ICICI Capital Services with ICICI Bank (incorporated herein by reference
to ICICI Bank's Annual Report on Form 20-F for the year ended March 31,
2002 filed on September 30, 2002).
206
4.6 Letter from the Reserve Bank of India to ICICI Bank dated April 26, 2002
approving the Scheme of Amalgamation of ICICI, ICICI Personal Financial
Services, ICICI Capital Services with ICICI Bank (incorporated herein by
reference to ICICI Bank's Annual Report on Form 20-F for the year ended
March 31, 2002 filed on September 30, 2002).
8.1 List of Subsidiaries (included under "Business - Subsidiaries and
Affiliates" herein).
12.1 Certification of the principal executive officer of the Company required
by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as
amended.
12.2 Certification of the principal financial officer of the Company required
by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as
amended.
13 Certification required by Rule 13a-14(b) of the Securities and Exchange
Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of
the United States Code.
207
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
For ICICI BANK LIMITED
By : /s/ Jyotin Mehta
------------------------
Name : Mr. Jyotin Mehta
Title : General Manager and Company Secretary.
Place : Mumbai
Date : September 29, 2003