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, 2001
[ ] 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 Towers
Bandra-Kurla Complex
Mumbai 400051, India
(Address of principal executive or organization)
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 -220,358,680 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......
1
TABLE OF CONTENTS
Page
----
Cross Reference Sheet....................................................... 3
Certain Definitions ........................................................ 5
Forward-Looking Statements.................................................. 6
Exchange Rates.............................................................. 7
Risk Factors................................................................ 8
Relationship with the ICICI Group...........................................22
Business
Overview.................................................................26
History..................................................................26
Our Strategy.............................................................27
Our Principal Business Activities........................................31
Corporate Banking........................................................31
Retail Banking...........................................................41
Treasury.................................................................51
Funding..................................................................55
Loan Portfolio...........................................................56
Impaired Loans...........................................................59
Risk Management..........................................................68
Technology...............................................................79
Competition..............................................................80
Employees................................................................82
Properties...............................................................83
Legal and Regulatory Proceedings.........................................83
Selected Financial and Operating Data.......................................84
Operating and Financial Review and Prospects................................92
Management.................................................................114
Overview of the Indian Financial Sector....................................123
Supervision and Regulation.................................................133
Exchange Controls..........................................................144
Market Price Information...................................................145
Restriction on Foreign Ownership of Indian Securities......................147
Principal Shareholders.....................................................149
Dividends..................................................................150
Taxation...................................................................151
Use of Proceeds............................................................155
Presentation of Financial Information......................................155
Additional Information.....................................................155
Index to US GAAP Financial Statements......................................F-1
Exhibit Index..............................................................157
2
CROSS REFERENCE SHEET
Form 20-F Item Number and Caption Location Page
--------- ----------------------- -------- ----
Part - I
1 Identity of Directors, Senior Not applicable
Management and Advisers
2 Offer Statistics and Expected Not applicable
Timetable
3 Key Information Exchange Rates.................................... 7
Risk Factors...................................... 8
Selected Financial and Operating Data............ 84
4 Information on the Company Business.......................................... 26
Operating and Financial Review and Prospects...... 92
Overview of the Indian Financial Sector........... 123
Supervision and Regulation........................ 133
Relationship with the ICICI Group................. 22
5 Operating and Financial
Review and Prospects Operating and Financial Review and Prospects...... 92
6 Directors, Senior
Management and Employees Management........................................ 114
Business--Employees............................... 82
7 Major Shareholders and
Related Party Transactions Relationship with the ICICI Group................. 22
Management--Interest of Management in Certain
Transactions...................................... 122
Market Price Information.......................... 145
Principal Shareholders............................ 149
Note 21 in Notes to ICICI Bank's US GAAP Financial
Statements........................................ F-8
8 Financial Information Report of Independent Auditors on ICICI Bank's
US GAAP Financial Statements...................... F-2
ICICI Bank's US GAAP Financial Statements and the
notes thereto..................................... F-3
9 The Offer and Listing Market Price Information.......................... 145
Restriction on Foreign Ownership of Indian
Securities ....................................... 147
10 Additional Information Exchange Controls................................. 144
Restriction on Foreign Ownership of Indian
Securities ....................................... 147
Dividends......................................... 150
Taxation.......................................... 151
Additional Information............................ 155
3
Quantitative and Qualitative Business-Quantitative and Qualitative Disclosures
Disclosures About Market Risk About Market Risk................................. 72
Description of Securities Other Not applicable
than Equity Securities
Part - II
13 Defaults, Dividend Arrears and Not applicable
Delinquencies
14 Material Modifications to the
Rights of Security Holders and Use of Proceeds................................... 155
Use of Proceeds
Part - III
18 Financial Statements Report of Independent Auditors on ICICI Bank's
US GAAP Financial Statements ..................... F-2
ICICI Bank's US GAAP Financial Statements and the
notes thereto. ................................... F-3
19 Exhibits Exhibit index and attached exhibits................ 157
4
CERTAIN DEFINITIONS
In this annual report, all references to "we", "our", "us" and "ICICI
Bank" are to ICICI Bank Limited (including Bank of Madura Limited acquired by
ICICI Bank Limited effective March 10, 2001). References to "ICICI" are to
ICICI Limited on an unconsolidated basis and references to the "ICICI group"
and "the group" are to ICICI Limited and its consolidated subsidiaries.
ICICI's consolidated subsidiaries at and for the year ended March 31, 2001
did not include ICICI Bank. Effective March 10, 2001, ICICI Bank acquired Bank
of Madura Limited, 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 us to
46.4% 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 40.0 %
over a period of time. As a result of the foregoing, 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, the beginning of the fiscal year in
which control was deemed to be temporary. During the first five months (April
to August) of fiscal 2002, ICICI sold another 0.4% equity interest in ICICI
Bank to institutional investors in the Indian secondary markets and at August
31, 2001, ICICI held 46.0% of our equity shares. See "Relationship with the
ICICI Group " for a discussion of the various corporate structuring
alternatives that ICICI is considering as part of its efforts to transform
itself into a universal bank.
5
FORWARD-LOOKING STATEMENTS
We have included statements in this annual report which contain words or
phrases such as "will", "aim", "will likely result", "is likely", "are likely",
"believe", "expect", "will continue", "will achieve", "anticipate", "estimate",
"intend", "plan", "contemplate", "seek 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, the market acceptance
of and demand for Internet banking services, future levels of impaired loans,
our growth and expansion, our ability to integrate any recent or future mergers
or acquisitions, 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 a party to, the future impact of new accounting standards,
our ability to implement our dividend policy and our exposure to market risks.
By their nature, certain of the market risk disclosures are only estimates and
could be materially different from what actually occur in the future. As a
result, actual future gains, losses or impact on net interest 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, south east 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 the terrorist
attacks in the US in September 2001, any anti-terrorist attacks by the US, a
US-led coalition or any other country or any other acts of terrorism worldwide,
the monetary and interest rate policies 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, regional or general
changes in asset valuations, our ability to integrate the Bank of Madura or any
future acquisitions into our operations and the ICICI group's possible
conversion into a universal bank. For further discussion on the factors that
could cause actual results to differ, see the discussion under "Risk Factors"
contained in this annual report. We undertake no obligation to update any of
our forward-looking statements.
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 rupee has consistently declined against
the dollar since 1980. In early July 1991, the government of India adjusted the
rupee downward by an aggregate of approximately 20.0% against the dollar as
part of an economic package designed to overcome an external payments crisis.
In fiscal 2001, the rupee has declined sharply against the US dollar and
other currencies as a result of a number of factors including rising petroleum
prices and decisions by international fund and other investment managers to
sell rupee assets. The decline in the rupee caused the Reserve Bank of India to
announce an increase in the bank rate by 100 basis points on July 21, 2000
which led to an increase in domestic interest rates.
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 Average(1)
-------------------------------------------------------------------------------
1997............................................... 35.88 35.70
1998............................................... 39.53 37.37
1999............................................... 42.50 42.27
2000............................................... 43.65 43.46
2001 .............................................. 46.85 45.88
2002 (through September 21) ....................... 48.08 45.66
Month High Low
-------------------------------------------------------------------------------
March 2001......................................... 46.85 46.53
April 2001......................................... 47.07 46.58
May 2001........................................... 47.06 46.83
June 2001 ......................................... 47.09 47.00
July 2001 ......................................... 47.21 47.11
August 2001 ....................................... 47.19 47.11
---------
(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 we have translated certain rupee amounts in this annual report
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 30, 2001. 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
30, 2001 was Rs. 46.85 per US$ 1.00 and on September 21, 2001 was 48.08 per US$
1.00. The exchange rates used for convenience translations differ from the
actual rates used in the preparation of our financial statements.
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.
Our performance and the quality and growth of our assets are necessarily
dependent on the health of the Indian economy. The Indian economy has shown
sustained growth over the five years ended fiscal 2001 with an average real GDP
growth rate of approximately 6.2%, compared to the average real GDP growth rate
of 5.8% achieved in the 1980s. However, industrial production in India
witnessed lower growth during the years 1997, 1998 and 1999 primarily due to
the global downturn in commodity prices, particularly in the man-made fibers,
iron and steel and textile sectors. There was a moderate improvement in
industrial growth in fiscal 2000. However, industrial growth declined in fiscal
2001 due to a slowdown in the manufacturing and electricity sectors. Any future
slowdown in the Indian economy or future volatility of global commodity prices
could adversely affect our borrowers and contractual counterparties. This in
turn 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.
The high price of crude oil could affect our banking business.
India imports approximately 59.0% 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
affected the overall state of liquidity in the banking system which led to the
intervention by the Reserve Bank of India. Any significant increase in global
crude oil prices could impact further the overall Indian economy and the Indian
banking 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.
We are an Indian banking company and all our operations are conducted, and
almost all of our assets and customers are 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. A coalition government led by the Bharatiya Janata Party was
formed with A. B. Vajpayee as the Prime Minister of India. Although the
Vajpayee government has continued India's current economic liberalization and
deregulation policies, a significant change in these policies could adversely
affect business and economic conditions in India in general as well as 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 in Asia, 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, Russia and elsewhere in the world in past
years has affected the Indian economy even though India was relatively
unaffected by the financial and liquidity crisis 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. For example, the terrorist attacks in
the US in September 2001 are likely to have an adverse effect on the US
economy, which could adversely affect the
8
Indian economy. This in turn could negatively impact 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 future financial performance, our stockholders' equity and the
price of our equity shares and our ADSs.
If regional hostilities or terrorist attacks 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 with neighboring countries. In recent years, there have been
military confrontations between India and Pakistan in the Kashmir region.
Currently, there are tensions involving Afghanistan, a neighbor of Pakistan.
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. This is important
in the current context, as the terrorist attacks in the US in September 2001
have affected the markets all over the world. The possible prolonged battle
against terrorism by the US could lengthen these regional hostilities and
tensions thereby affecting the Indian economy as well as our business, our
future financial performance, our stockholders' equity 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 2001, India experienced a trade deficit of Rs.
653.8 billion (US$ 14.4 billion). In fiscal 2001, our trade deficit was
affected adversely by a rising oil-bill on account of higher global crude oil
prices. If trade deficits increase or are no longer manageable, the Indian
economy, our business 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 is in a state of transition. The share of the services
sector of total GDP is rising while that of the agricultural sector is
declining. The share of the services sector of total GDP increased to 54.2% in
fiscal 2001 from 48.7 % in fiscal 1997 and the share of the agricultural sector
of total GDP declined to 24.0% in fiscal 2001 from 28.6% in fiscal 1997. It is
difficult to gauge the 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.
If there are any severe natural calamities, then our business could suffer and
the price of our equity shares and our ADSs could go down.
In fiscal 2001, the Indian economy was affected by an earthquake in the
western state of Gujarat. This caused considerable damage to private households
as well as industry. Industrial output in the state was affected and fiscal
measures were introduced for reconstruction. Any recurrence of such natural
disasters could adversely affect the state of Indian industry as well as the
Indian banking sector, our future performance and the price of our shares and
our ADSs.
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 could go down.
Unit Trust of India, a large investment institution in India, with a high
level of investment in equity securities, is currently facing problems due to a
significant decline in the market value of its securities portfolio caused by
depressed equity capital markets in fiscal 2001. 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. These developments could create adverse market perception about
commercial banks, like us, which in turn could adversely affect our business,
our future financial performance and the price of our equity shares and our
ADSs.
9
The recent down-grading of the sovereign rating of India could cause our
business to suffer and the price of our equity shares and our ADSs could go
down.
Standard and Poor's, an international rating agency, has recently
adversely revised its outlook from stable to negative on India's "BB-"
long-term foreign currency rating. It has also adversely revised its rating
from "BBB" to "BBB-" on its long-term local currency rating. Another
international agency, Moody's, has also recently adversely revised its outlook
from positive to stable on India's Ba2 long-term foreign currency rating.
Moody's has also adversely revised its outlook from positive to negative on
India's Ba2 long-term domestic currency rating. Although the revision in the
sovereign rating may not affect our business, we cannot assure you that any
further adverse revisions in the sovereign rating will not 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 United
States, and we may not set aside comparable amounts of allowance for loan
losses.
ICICI Bank identifies a commercial loan as a "troubled debt restructuring"
or an "other impaired loan" (collectively referred to as an impaired loan) and
places it on a non-accrual basis (that is, ICICI Bank no longer recognizes
interest accrued or due unless and until payments are actually received) when
it is probable that ICICI Bank 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, when interest or principal is overdue for more than 180 days
(typically two interest or principal payments). Delays or shortfalls in loan
payments are evaluated along with other factors to determine if a loan should
be classified as impaired. The time period of 180 days is substantially longer
than in more developed countries, like the United States 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 on a quarterly basis unlike in more developed countries, like
the US, where payments on most loans are on a monthly basis. In India, payments
on most loans are on a quarterly basis unlike in more developed countries, like
the U.S., where payments on most loans are on a monthly basis. However, it is
likely that calculation of interest and payments on our loans will be on a
monthly basis effective October 1, 2001. As a result, we obtain information
later than they would in developed countries and this delay in receiving
current information may impact the classification of and creating allowance
against impaired loans. Consequently, we are likely to classify and create
allowances against impaired loans significantly later than they would in more
developed countries. For a discussion of impaired loans under Indian GAAP, see
"Supervision and Regulation-Loan Loss Provision and Impaired Assets". In terms
of the 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.
We have high concentrations of loans to certain customers and to certain
sectors and if any of these loans were to become impaired, the quality of our
loan portfolio could be adversely affected.
At year-end fiscal 2001, our 10 largest loans, based on outstanding
balances, totaled approximately Rs. 21.6 billion (US$ 462 million), which
represented approximately 23.3% of our total net loans and 132.5% of our
stockholders' equity. These loans are over different industry sectors. Our
largest single loan exposure, based on outstanding balances at that date, was
Rs. 3.0 billion (US$ 64 million), which represented approximately 3.2% of our
total net loans and approximately 18.4% of our stockholders' equity. At March
31, 2001, even in the case of lending to a group of companies under the same
management control, our largest exposure accounted for approximately 2.7% of
our total net loans and approximately 15.3% of our stockholders' equity. At
year-end fiscal 2001, none of our 10 largest loans based on outstanding
balances was classified as impaired and our largest impaired loan was our 54
largest loan based on outstanding principal balance. However, if any of our 10
largest loans was to become impaired, the quality of our loan portfolio and the
price of our equity shares and our ADSs could be adversely affected.
At year-end fiscal 2001, we had extended loans to nearly every industrial
sector in India. At that date, approximately 23.5% of our gross impaired loan
portfolio, based on outstanding principal balance, was concentrated
10
in four sectors: finance (9.7%), light manufacturing (7.0%), textiles (3.7%)
and agriculture (3.1%). As a comparison, in our gross loan portfolio as at
March 31, 2000, these groups constituted 29.7%. 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 effect our business, our future financial
performance, our stockholder's 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.
Our gross impaired loans represented 3.0% of our gross loan portfolio at
March 31, 2000 and 5.5% at March 31, 2001. Out of our gross impaired loans at
March 31, 2001, troubled debt restructurings (restructured loans) represented
0.9% of our gross loan portfolio and other impaired loans represented 4.6% of
our gross loan portfolio. Our net impaired loans represented 1.4% of our net
loans at March 31, 2000 and 2.6% at March 31, 2001. We cannot assure you that
our provisions will be adequate to cover any further increase in the amount of
impaired loans or any further deterioration in our impaired loan portfolio.
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 is
higher than the average percentage of impaired loans in the portfolios of banks
in more developed countries. In absolute terms, our gross impaired loans
actually increased by Rs. 3.9 billion (US$ 83 million) or 273.0% in fiscal 2001
whereas the same had decreased by Rs. 195 million (US$ 4 million) or 12.1% in
fiscal 2000. However, the figures are not comparable since impaired loans
aggregating Rs. 2.2 billion (US$ 47 million) were added consequent to our
acquisition of Bank of Madura. Also, at March 31, 2001, 8.7% of our gross
directed lending loan portfolio was impaired compared to 3.5% at March 31,
2000. Under directed lending regulations in India, we are required to lend
40.0% of our net bank credit to priority sectors, including, among others,
small-scale industries, the agriculture sector and small businesses, and lend
12.0% of our net bank credit in the form of export credit. We may experience a
significant increase in impaired loans in our directed lending portfolio
because economic difficulties are likely to affect these borrowers more
severely and we are less able to control the quality of this portfolio. The
growth in impaired loans can be attributed to several factors, including
increased competition arising from economic liberalization in India, a slowdown
in industrial growth, a sharp decline in commodity prices, which reduced
profitability for certain of our borrowers, and the restructuring of certain
Indian companies in sectors such as iron and steel,man-made fibers and
textiles. Further, our growth-oriented strategy has involved a significant
increase in our loan portfolio. We cannot assure you that there will be no
additional impaired loans on account of these new loans.
A number of factors which are not in our control will likely affect our
ability to control and reduce impaired loans, including changes in the Indian
economy, movements in global commodity markets, global competition, interest
rates and exchange rates. Although we are increasing our efforts to improve
collections and to foreclose on existing impaired loans, we may not be
successful in our efforts and the overall quality of our loan portfolio may
deteriorate in the future. If we are unable to control and reduce our impaired
loans, we may be unable to execute our business plan as expected and that could
adversely affect the price of our equity shares and our ADSs. Further, our
growth-oriented strategy has involved a significant increase in our loan
portfolio in recent years which could result in additional impaired loans.
If we are unable to improve our allowance for loan losses as a percentage of
impaired loans, the price of the equity shares and the ADS could go down.
Our allowance for loan losses represented 54.1% of our gross impaired
loans at March 31, 2001 compared to 52.8% at March 31, 2000. Although we
believe that our allowance for loan losses is adequate to cover all known
losses in our asset portfolio and is in accordance with US GAAP, we cannot
assure you that our allowance will be adequate to cover any further
deterioration in our impaired loan portfolio. In the event of any further
deterioration in our impaired loan portfolio, there will be an adverse impact
on our business, our future financial performance, our stockholders' equity and
the price of our equity shares and our ADSs.
11
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.
Our loan portfolio consists primarily of working capital loans that are
typically secured by a first lien on inventory, receivables and other current
assets. 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.
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 in, or be accompanied by, a
decrease in the value of the collateral. These delays can last for up to
several years leading to deterioration in the physical condition and market
value of the collateral. Collateral, consisting of inventory and receivables,
is particularly likely to decrease in value due to any delay in enforcement. In
the event a 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 normally
stayed.
Although we have taken utmost care, we cannot guarantee that we will be
able to realize the full value on our collateral, 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. We may also face problems in realizing the full value of any
fixed assets in which we have only a subordinated or second lien security
interest if the party having the first lien security interest has already
partly or fully realized the value of this collateral.
Additionally, we are a member of a consortium of banks for which we are
not the lead lender for 15 companies, or 25.4% of our impaired loans,
including, five of our top 10 impaired loans. Accordingly, we do not control the
negotiation, restructuring or settlement of these loans and may not be able to
enforce these obligations on the most advantageous terms to us. A failure to
recover the expected value of collateral security could expose us to a
potential loss, which could reduce the value of our stockholders' equity and
adversely affect our business.
We face greater credit risks than banks in more developed countries.
Our principal business is providing financing to our clients, virtually
all of whom are based in India. Our loans to middle market companies can be
expected to be more severely affected than loans to large corporations by
adverse developments in the Indian economy due to their generally weaker
financial position. In all of these cases, we are subject to the credit risk
that our borrowers may not pay us in a timely fashion or at all. The credit
risk of all our borrowers is higher than in other developed countries due to
the higher uncertainty in our regulatory, political and economic environment
and difficulties that many of our borrowers face in adapting to instability in
world markets and rapid technological advances taking place across the world.
In fiscal 2001, India experienced a slowdown in overall growth, which affected
the financial performance of corporates in terms of growth in production, sales
and profits. This negatively affected the ability of some corporates to service
their loans taken from the financial system. Unlike in most other developed
countries, we are required to do directed lending to certain sectors specified
by the Reserve Bank of India. For a further discussion of the Reserve Bank of
India regulations applicable to Indian commercial banks, see "Supervision and
Regulation". These sectors generally have greater credit risks than our normal
lending business. Higher credit risk may expose us to potential losses which
would adversely affect our business, our future financial performance and the
price of our equity shares and our ADSs.
Our business is particularly vulnerable to volatility in interest rates.
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.
Income from treasury operations is particularly vulnerable to interest
rate volatility. An increasing interest rate environment is likely to adversely
affect the income from treasury operations for banks in India. Furthermore,
declines in the value of the trading portfolio in such an environment adversely
affect the income statement.
12
In March 2001, the Reserve Bank of India lowered the bank rate and hence,
signaled lower interest rates in the system. The Reserve Bank of India has also
reiterated that it would like markets to be stable while ensuring that adequate
liquidity is supplied for growth. There is no assurance that interest rates
will remain at existing levels and could change depending on the overall
economic environment.
Volatility in interest rates could adversely affect our business, our
future financial performance 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 funding requirements are met through short-term funding
sources, primarily in the form of deposits including inter-bank deposits.
However, a portion of our assets have medium or long-term maturities, creating
a potential for funding mismatches. At year-end fiscal 2001, savings deposits
and non-interest-bearing demand deposits together constituted 27.5% of our
total deposits and 22.2% of our total liabilities. In addition, time deposits
with a residual maturity of less than one year constituted 30.8% of our total
deposits and 25.6% of our total liabilities. At March 31, 2001, loans having
residual maturity of one year or more constituted 11.6% of our total assets. In
our experience, a substantial portion of our customer deposits has been rolled
over upon maturity and has been, over time, a stable source of funding.
However, no assurance can be given that this experience will continue. If a
substantial number of our depositors do not roll over deposited funds upon
maturity, our liquidity position could be adversely affected. This could have a
material adverse effect on our business, our future financial performance and
the price of our equity shares and our ADSs.
We could be subject to volatility in income from our treasury operations.
Non-interest revenue from trading account assets (primarily government of
India securities), securities and foreign exchange transactions represented
37.0% of our net revenue for fiscal 2000 and 13.2% of our net revenue for
fiscal 2001. During fiscal 2001, a portion of our trading assets ceased to have
the inherent characteristics of liquidity, active and frequent buying and
selling and opportunity for a short-term difference in price. Accordingly, in
September 2000, we reclassified trading assets amounting to Rs. 8.6 billion to
securities available for sale and Rs. 10.2 billion to securities held to
maturity. The securities transactions, which primarily reflect capital gains
realized on the sale of available for sale securities, showed a loss of Rs. 384
million (US$ 8 million) in fiscal 2001 compared to a profit of Rs. 75 million
(US$ 2 million) in fiscal 2000 primarily due to a realized loss on our mutual
fund portfolio which was caused by the extreme volatility in Indian stock
markets in the beginning of fiscal 2001.This treasury revenue is vulnerable to
volatility in the market caused by, among other things, changes in interest
rates, foreign currency exchange rates and equity prices. Any increase in
interest rates would have an adverse effect on the value of our fixed income
trading portfolio and our net interest revenue. For a fuller description of the
effect of an increasing interest rate environment, see "-- Our business is
particularly vulnerable to volatility in interest rates". Any decrease in our
income due to volatility in income from treasury operations could have a
material adverse effect on the price of our equity shares and our ADSs.
The conversion of ICICI into a universal bank could impact the price of our
equity shares and our ADSs.
As part of its efforts to transform itself into a universal bank, ICICI is
considering various corporate structuring alternatives including the
possibility of a merger between ICICI and ICICI Bank and the reorganization of
its holdings in its subsidiary companies. In this respect, ICICI has initiated
a dialogue with the government and regulatory agencies, including the Reserve
Bank of India. As of the date of this annual report, no firm proposal for any
such action has been approved by the board of directors or the shareholders of
either ICICI or ICICI Bank. Any corporate action resulting from these
discussions would be subject to the approval of the board of directors and
shareholders of ICICI and ICICI Bank and necessary statutory and regulatory
approvals including from the Reserve Bank of India and the government of India.
At this stage, there can be no certainty that any definitive agreement will be
reached or that such agreement will be approved by the relevant regulatory
agencies. In the event that ICICI Bank and ICICI were to merge, the businesses
currently being conducted by ICICI would become subject for the first time to a
number of banking regulations under Indian law, including directed lending,
maintenance of a statutory reserve ratio and higher effective income tax rates.
These regulatory changes will impact the profitability of the combined
businesses in any new universal bank. The combined universal bank will have a
different mix of assets and funding sources than the two separate companies.
The impact of the statutory reserve ratio, which requires that a significant
13
portion of an Indian bank's liabilities be held in Indian government
securities, may increase market risk in a combined universal bank. The income,
profitability and market risk profile of any merged universal bank may
therefore be adversely affected by the impact of these regulatory requirements.
This may result in lower income in the initial years after conversion. Any
combined universal bank may not be able to maintain the business, growth and
financial performance of the two separate companies and any failure to do so
could adversely affect the price of our equity shares and our ADSs.
If we are unable to succeed in our new business areas, we may not be able to
execute our growth strategy.
We have launched several Internet banking products for our retail and
corporate customers including online bill payments and online account opening.
We have also entered the Indian credit card market and started offering mobile
phone banking services. The ICICI group also provides online brokering
services. We provide online integration between the customer's depositary share
account and securities brokerage account, which are with ICICI group, and bank
account, which is with us. We have recently launched personal loans for our
"Power Pay" corporate payroll account customers and have entered into a
marketing agreement with ICICI Prudential Life Insurance Company Limited to
distribute their life insurance products. We intend to continue to explore new
business opportunities in both retail and corporate banking. We cannot assure
you that we have accurately estimated the relevant demand for these new banking
products or that we will be able to master the skills and management
information systems necessary to successfully manage our new products and
services. Our inability to grow in new business areas could adversely affect
our future financial performance and the price of our equity shares and our
ADSs.
The success of our Internet banking strategy will depend, in part, on the
development of the new and evolving market for Internet banking in India.
We have offered Internet banking services to our customers since October
1997, although there are currently low volumes of such transactions being
conducted in India. At March 31, 2001, we had approximately 550,000 Internet
accounts. The demand and market acceptance for Internet banking are subject to
a high level of uncertainty and are substantially dependent upon the adoption
of the Internet for general commerce and financial services transactions in
India. The International Data Corporation predicted in 1999 that the number of
Internet users in India will grow from approximately 0.8 million in 1999 to 4.5
million in 2002 and 12.3 million by 2005. At present, there are 1,800,000
Internet subscribers in India.
Many of our existing customers and potential customers have only a very
limited experience with the Internet as a communications medium. In order to
realize significant revenue from our Infinity services, we will have to
persuade our customers to conduct banking and financial transactions through
the Internet. In addition, the cost to Indian consumers of obtaining the
hardware, software and communications links necessary to connect to the
Internet is too high to enable many people in India to afford to use these
services at this time. Although relevant legislation has been introduced by the
government of India, critical issues concerning the commercial use of the
Internet, such as security, legal recognition of electronic records, validity
of contracts entered into online and the validity of digital signatures, remain
unresolved and may inhibit growth. If Internet banking does not continue to
grow or grows slower than expected, we will not be able to meet our projected
earnings and growth strategy related to our Internet banking business.
The success of our Internet banking strategy will depend, in part, on the
development of adequate infrastructure for the Internet in India.
The Internet may not be accepted as a viable commercial market place in
India for a number of reasons, including inadequate development of the
necessary network infrastructure. There can be no assurance that the Internet
infrastructure in India will be able to support the demands of its 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 related to our Internet banking business.
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
Indian banking sector have increased competition. This liberalization process
has led to increased access for our customers to alternative sources of funds,
14
such as domestic and foreign commercial banks and the domestic and
international capital markets. Our corporate and retail lending business will
continue to face competition from Indian and foreign commercial banks and
non-banking finance companies. In addition, we will face increasing competition
for deposits from other banks, non-banking entities like mutual funds and
non-banking finance companies. 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 also
depend upon our ability to compete effectively with these entities, including
the public sector banks, which may have significantly greater resources than
us. Our business could also be affected by the increasing use of technology by
our competitors. Competition may also increase significantly with greater
deregulation of the Indian banking industry. 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
and our future financial performance.
If we are not able to manage our rapid growth, our business could be disrupted
and the price of our equity shares and our ADSs could go down.
Since our inception in 1994, we have experienced rapid growth. Our asset
growth rate has been significantly higher than the Indian GDP growth rate over
the last six fiscal years. Our balance sheet size has grown at an annual
compounded rate of 87.4% during this period. Our growth, particularly after the
acquisition of Bank of Madura by us in March 2001, is expected to place
significant demands on our management and other resources and will require us
to continue to develop and improve our operational, credit, financial and other
internal risk controls. At March 31, 2001, after the acquisition of Bank of
Madura by us, we were the largest private sector bank in India based on assets
and net worth. Our inability to manage our growth effectively could have a
material adverse effect on our business, our future financial performance and
the price of our equity shares and our ADSs.
If we are not able to integrate our recent acquisitions or any future
acquisitions, our business could be disrupted and the price of our equity
shares and our ADSs could go down.
Effective March 10, 2001, we acquired Bank of Madura Limited, an old
private sector bank. This is the first merger of an old private sector bank
with a new private sector bank in India. For a discussion of old and new
private sector banks, see "Overview of the Financial Sector - Commercial Banks
- Private Sector Banks". Employee integration and technology and branch
integration are major challenges for us, some or all of which 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 acquisitions may involve a
number of risks, including deterioration of asset quality, diversion of our
management's 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
and the price of our equity shares and our ADSs.
We are subject to the significant influence of ICICI and could be subject to
the significant influence or control of other shareholders.
Although ICICI owns 46.0% of our outstanding equity shares, its voting
power is limited due to Indian regulations that require that holders of 10.0%
or more of a bank's outstanding equity shares may only vote 10.0% of the
outstanding equity shares. Due to this voting restriction and the fact that no
other shareholder owns 10.0% or more of our outstanding equity shares, ICICI
currently effectively controls 16.6% of the voting power of our outstanding
equity shares. For a more complete description of this voting restriction, see
"Relationship with the ICICI Group -- Capital, Dividend and Voting
Limitations".
Under the terms of our organizational documents, ICICI is entitled to
appoint one third of the members of our board of directors, including the
Executive Chairman and Managing Director of our board. ICICI is also permitted
to vote on the appointment of the remaining members of our board. ICICI has
appointed two directors to our current ten-member board. Accordingly, ICICI may
be able to exercise effective control over our board and over matters subject
to a shareholder vote.
15
Additionally, because of the limited voting power of ICICI, it is possible
that a consortium of shareholders that acquires a portion of our outstanding
equity shares could effectively control us. If such shareholders decide to
significantly alter our business plan and change or terminate our relationship
with the ICICI group, it could have an adverse effect on the price of our
equity shares and our ADSs. Under the current regulations, the approval of the
Reserve Bank of India is required before we can register the transfer of shares
for an individual or group which acquires 5.0% or more of our total paid up
capital.
We work closely with ICICI and conflicts of interest with ICICI or the
deterioration of our relationship with ICICI could adversely affect our
business.
We offer products and services which largely complement the product and
services offered by ICICI and other ICICI group members. We seek to take
advantage of the customer relationships of the ICICI group. Because both ICICI
and we are offering some similar financial products and services, there may be
conflicts of interest between ICICI and us that could adversely affect our
business and the price of our equity shares and our ADSs. In addition, we
ceased to be a subsidiary of ICICI as of March 22, 2001 and were accounted for
under the equity method of accounting as of April 1, 2000. There is a risk that
ICICI may make business decisions which are to its advantage or the advantage
of other group companies at our expense. For example, ICICI may choose to enter
or increase its presence in certain markets in which we operate.
The recent divestment of a partial stake in ICICI Bank by ICICI and any future
dilution of ownership interest in ICICI Bank by ICICI could cause our business
to suffer and the price of our equity shares and our ADSs to go down.
In May 1994, when ICICI obtained its commercial banking license to
establish ICICI Bank, the Reserve Bank of India imposed a condition that ICICI
reduce its ownership interest in ICICI Bank in stages, first to not more than
75.0% and ultimately to no more than 40.0%. ICICI has been in discussions with
the Reserve Bank of India to determine whether and to what extent it may be
required to sell or reduce its interest in ICICI Bank. During fiscal 2001, the
Reserve Bank of India reiterated its requirement of a reduction of ICICI's
holding in ICICI Bank to 40.0% and advised ICICI to draw up a firm plan for
dilution of its stake.
Effective March 10, 2001, ICICI Bank acquired Bank of Madura, an old
private sector bank, 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 us to 46.4% 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 40.0% over a period of time. As a result of the
foregoing, 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,
the beginning of the fiscal year in which ICICI's ownership in ICICI Bank was
deemed to be temporary. During the first five months (April to August) of
fiscal 2002, ICICI sold further equity shares of our Bank in the Indian
secondary markets to institutional investors and at August 31, 2001, it held
46.0% of our equity shares.
We expect that there will be no change in the ICICI group's long-term
strategy of operating as a virtual universal bank offering a comprehensive
range of financial products and services to wholesale and retail segments. As
part of its efforts to transform itself into a universal bank, ICICI is
considering various corporate structuring alternatives including the
possibility of a merger between ICICI and ICICI Bank and the reorganization of
its holdings in its subsidiary companies. In this respect, ICICI has initiated
a dialogue with the government and regulatory agencies, including the Reserve
Bank of India. As of the date of this annual report, no firm proposal for any
such action has been approved by the board of directors or the shareholders of
either ICICI or ICICI Bank. See"-The conversion of ICICI into a universal bank
could impact the price of our equity shares and our ADSs". In the event, ICICI
is unable to convert into a universal bank due to regulatory or other reasons,
ICICI would be required to dilute their stake in ICICI Bank to 40.0%. In such
an event, we expect that there would be no change in the ICICI group's
long-term strategy of operating as a virtual universal bank offering a
comprehensive range of financial products and services to wholesale and retail
segments. However, there can be no assurance that any further dilution of
ICICI's stake in ICICI Bank will not adversely affect our business, our future
financial performance and the price of our equity shares and our ADSs.
16
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 in which the
Reserve Bank of India extensively supervises and regulates banks. Our business
could be directly affected by any changes in policies for banks in respect of
directed lending and reserve requirements. In addition, banks are generally
subject to changes in Indian law, as well as to changes in regulation and
governmental policies, income tax laws and accounting principles. We cannot
assure you that laws and regulations governing the banking sector will not
change in the future or that any changes will not adversely affect our
business, our future financial performance and the price of our equity shares
and our ADSs.
Significant security breaches and fraud 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 such 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 of security measures could have a material
adverse effect on our business and our future financial performance.
Our business operations are highly 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 or outsiders.
We could be exposed to higher risk in the event of sudden changes in the Indian
financial markets.
We are a relatively small participant in the Indian banking industry. Our
limited capital base severely restricts our ability to absorb sudden changes in
the financial markets such as tightening of monetary policy, increases in
interest rates and significant reductions in deposits. The Indian economy is
prone to these sudden changes as a result of its political and economic
situation. Therefore, any sudden change in the Indian economy could have a
material adverse effect on our business and our future financial performance
and may restrict our ability to grow our business as anticipated.
If we are unable to adapt to the 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 or customer
requirements, our business and our future financial performance could be
materially adversely affected.
Any deterioration in the financial condition of ICICI could adversely impact
our business.
We fund our business operations independently of ICICI and our business
strategy and the execution of that strategy is independent from the business
and strategy of ICICI. However, any deterioration in ICICI's financial
condition may adversely impact the ICICI brand name and, indirectly, our
reputation and affect the confidence of our customers in us. A reduction in
consumer confidence could affect our ability to raise deposits from and make
loans to customers and adversely impact our business and our future financial
performance.
17
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 exercises its right to vote the equity
shares represented by the ADSs as directed by our board of directors. If you
wish, you may withdraw the equity shares underlying the ADSs and seek to vote
the equity shares you obtain upon 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 may be subject to materially adverse tax consequences if we are a
passive foreign investment company.
Based upon proposed Treasury regulations, which are proposed to be
effective for taxable years after December 31, 1994, we do not expect to be
considered a passive foreign investment company. 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. We have based our expectation that we are 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 our income
and our assets from time to time. 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 our income and assets will vary over time, there can be no
assurance that we will not be considered a passive foreign investment company
for any fiscal year. Furthermore, changes to our corporate structure (including
a merger between ICICI and us in connection with the conversion of ICICI into a
universal bank) could cause us to be considered a passive foreign investment
company. If we are a passive foreign investment company at any time that you
own ADSs and you are a US person, you may be subject to materially adverse US
tax consequences. See "Taxation -- United States Taxation -- 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 are 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 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 government approval is required.
ADSs 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.
If approval is required, 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 prices
of the 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
18
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".
Conditions in the Indian securities market may affect the price or liquidity of
the equity shares and the ADSs.
The Indian securities markets are smaller and more volatile than
securities markets in more developed economies. The Indian stock exchanges have
in the past experienced substantial fluctuations in the prices of listed
securities and the price of our stock has been especially volatile. For the
historical prices of our equity shares, see "Market Price Information". 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, formerly known as the Bombay
Stock Exchange or the BSE, was closed for three days in March 1995 following
default by a broker. In March 2001, the BSE dropped 667 points or 15.6%. During
this period, the price of our equity shares on the BSE was Rs. 163.50 on
February 20, 2001 and Rs. 162.35 on March 20, 2001, a marginal drop of Rs. 1.15
per equity share. In March 2001, 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 Calcutta Stock Exchange
suffered a payment crisis when several brokers defaulted and the exchange
invoked guarantees provided by various Indian banks. 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 sentiments. Introduction
of rolling settlement in respect of certain securities by stock exchanges has
had a general negative impact on the prices of the securities. Our equity
shares are currently not included under securities whose delivery on the stock
exchanges is required to be settled under rolling settlement. However, we
cannot rule out the possibilities of our equity shares being included under
this category. The recent financial problems faced by the Unit Trust of India,
the largest of the mutual funds in the country also had the effect of
depressing the prices of securities at the stock exchanges. As an aftermath of
the terrorist attacks on the United States, stock exchanges world-wide have
seen the prices of equities and other securities drop. In India also, the share
prices have witnessed steep declines. On September 21, 2001 our stock price on
the BSE was Rs. 74.65 per equity share. Similar problems could happen in the
future and, if they did, they could affect the market price and liquidity of
our equity shares and our ADSs.
Because of our close relationship with ICICI, volatility in the price of
ICICI shares could affect the price of our equity shares and our ADSs.
There is a limited market for the ADSs.
Even though our ADSs are listed on the New York Stock Exchange, we cannot
be certain that any trading market for our ADSs will develop or be sustained.
We cannot guarantee that a market for the ADSs will continue.
Settlement of trades of equity shares on Indian stock exchanges may be subject
to delays.
The equity shares represented by our ADSs are listed on the Kolkata,
Delhi, Madras and Vadodara Stock Exchanges, the BSE and the NSE. Settlement on
these 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 a timely manner.
As a result of Indian government regulation of foreign ownership, the price of
the 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.
19
Your holdings may be diluted by additional issuances of equity by us and any
dilution may adversely affect the market price of our ADSs.
Any future issuances of equity by us will dilute the positions of
investors in our ADSs and could adversely affect the market price of our ADSs.
There is a risk that our continued rapid growth could require us to fund this
growth through additional equity offerings. Our recently approved employee
stock option plan could lead to the issuance of up to 5.0% of our issued equity
shares. From the inception of this stock option plan in February 2000 through
August 31, 2001, we had granted a total of 3,293,200 stock options or 1.5% of
our equity shares at March 31, 2001, of which none have been exercised and
341,425 have vested but have not yet been exercised. The vested portion
represented 0.2% of our equity shares at March 31, 2001. On April 1, 2002,
801,178 additional stock options will vest, representing a further 0.4% of our
equity shares at March 31, 2001. Once vested, each stock option may be
exercised for one equity share.
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 our ADSs may be unable to exercise preemptive rights for our
equity shares underlying our 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 our 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 we issue 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 our 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 our ADSs are
unable to exercise preemptive rights, their proportional interests in us would
be reduced.
Because the equity shares underlying our 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 risks 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 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 30.8% of its value against the US dollar in the last
four years, depreciating from Rs. 36.46 per US$ 1.00 on September 15, 1997 to
Rs. 47.70 per US$ 1.00 on September 14, 2001. In addition, in the past, the
Indian economy has experienced severe foreign exchange shortages. India's
foreign exchange reserves have since increased to US$ 45.4 billion at August
31, 2001
20
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 NSE 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 our 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
economies. 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 economies.
21
RELATIONSHIP WITH THE ICICI GROUP
General
The ICICI group, which includes ICICI and its consolidated subsidiaries,
is a diversified financial services group organized under the laws of India.
ICICI group and its affiliates conduct project financing, commercial banking,
investment banking, venture capital business, information technology business,
Internet-based stock trading and retail banking activities. ICICI is one of the
largest of all Indian financial institutions, banks and finance companies in
terms of assets. ICICI has relationships with a client base of over 2,500
Indian companies, a growing base of about 3.5 million retail bondholders and a
strong pool of experienced and talented professionals. The retail products of
ICICI group and its affiliates include retail deposits, retail bonds, home
mortgage loans and auto loans and other consumer finance products and services,
personal loans, credit cards and insurance. In fiscal 2001, the ICICI group had
consolidated net income of Rs. 6.6 billion (US$ 142 million). At March 31,
2001, the ICICI group had consolidated assets of Rs. 740.4 billion (US$ 15.8
billion) and consolidated stockholders' equity of Rs. 75.9 billion (US$ 1.6
billion).
In May 1994, when ICICI obtained its commercial banking license to
establish ICICI Bank, the Reserve Bank of India imposed a condition that ICICI
reduce its ownership interest in ICICI Bank in stages, first to not more than
75.0% and ultimately to no more than 40.0%. ICICI has been in discussions with
the Reserve Bank of India to determine whether and to what extent it may be
required to sell or reduce its interest in ICICI Bank. During fiscal 2001, the
Reserve Bank of India reiterated its requirement of a reduction of ICICI's
holding in ICICI Bank to 40.0% and advised ICICI to draw up a firm plan for
dilution of its stake.
Effective March 10, 2001, ICICI Bank acquired Bank of Madura, an old
private sector bank, 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 46.4% through sales of 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 40.0% over a period of time. As a result of the
foregoing, 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,
the beginning of the fiscal year in which ICICI's ownership interest in ICICI
Bank was deemed to be temporary. During the first five months (April to August)
of fiscal 2002, ICICI sold additional ICICI Bank equity shares in the Indian
secondary markets to institutional investors. At August 31, 2001, ICICI held
46.0% of our equity shares.
As part of its efforts to transform itself into a universal bank, ICICI is
considering various corporate structuring alternatives including the
possibility of a merger between ICICI and ICICI Bank and the reorganization of
its holdings in its subsidiary companies. In this respect, ICICI has initiated
a dialogue with the government and regulatory agencies, including the Reserve
Bank of India. As of the date of this annual report, no firm proposal for any
such action has been approved by the board of directors or the shareholders of
either ICICI or ICICI Bank. Any corporate action resulting from these
discussions would be subject to approval of the board of directors and
shareholders of ICICI and ICICI Bank and necessary statutory and regulatory
approvals including from the Reserve Bank of India and the government of India.
At this stage, there can be no certainty that any definitive agreement will be
reached or that such agreement will be approved by the relevant regulatory
agencies.
Capital, Dividend and Voting Limitations
Under the conditions of the commercial banking license granted to ICICI in
1994 to establish us, there must be an arms length relationship
organizationally and operationally between ICICI and us. We are also prohibited
from extending any credit to ICICI. We have no agreement with ICICI regarding
any future contribution of capital by ICICI to us for maintenance of our
minimum capital adequacy ratio or with respect to any future issuance of equity
shares by us to ICICI. Any declaration and payment of a dividend by us to any
shareholder, including ICICI, must be recommended by our board of directors and
approved by our shareholders in accordance with applicable Indian law, and if
the dividend is in excess of 25.0% of the par value of our shares, we must
obtain prior approval from the Reserve Bank of India.
22
ICICI has no preemptive or registration rights with respect to our shares
and we have no agreement to issue any equity or debt securities to ICICI.
ICICI owns 46.0% of our equity shares. Under Indian law, no person holding
shares in a banking company can vote more than 10.0% of such bank's outstanding
equity shares. This means that while ICICI owns 46.0% of our equity shares, it
can only vote 10.0% of our equity shares. Due to this voting restriction and
the fact that no other shareholder except Deutsche Bank, as depositary for the
ADS holders holding 13.6% of our underlying equity shares (whose voting rights
are also restricted to 10.0%) owns 10.0% or more of our outstanding equity
shares, ICICI effectively controls 16.6% of the voting power of our outstanding
equity shares.
Our organizational documents permit ICICI to appoint up to one third of
the members of our board, including the Executive Chairman and Managing
Director of our board. Pursuant to this authority, ICICI has appointed two
directors to our ten-member board of directors as at August 31, 2001. ICICI may
also vote on the appointment of remaining members of our board of directors.
Pursuant to our organizational documents, to convene a board meeting, one of
the two ICICI directors on our board of directors must be present unless they
waive this requirement in writing.
Ownership Considerations
We work closely with ICICI and, given its large equity interest in us, we
believe that ICICI has an incentive to help us perform well. There is a
possibility that ICICI may make business decisions which are to its advantage
or the advantage of other group companies at our expense.
The issue of universal banking, which in the Indian context means
combining commercial banks and long-term development financial institutions,
has been discussed at length over the past few years. In its mid-term monetary
and credit policy for fiscal 2000, its monetary and credit policy for fiscal
2001 and universal banking guidelines issued on April 28, 2001, the Reserve
Bank of India announced that it would consider proposals from development
financial institutions, like ICICI, who wish to transform themselves into banks
on a case-by-case basis. As described in greater detail under "-General", as
part of its efforts to transform itself into a universal bank, ICICI is
considering various corporate structuring alternatives including the
possibility of a merger between ICICI and ICICI Bank and the reorganization of
its holdings in its subsidiary companies.
Complementary Product Ranges
Traditionally, regulation in the banking and financial services sector in
India segregated the offering of various products and services between
commercial banks like us and financial institutions like ICICI. In recent
years, some of these restrictions have been relaxed, and there is some overlap
between the product offerings of ICICI and us, as described below. However, we
believe that both of our product ranges remain largely complementary and enable
the ICICI group to attract and retain customers by providing a complete range
of financial products and services.
Corporate Lending
Both ICICI and we offer term loans and guarantees although we generally do
not compete with each other to provide these services. Because ICICI has a
significantly larger balance sheet than us and our funding sources are of a
shorter term than those of ICICI, ICICI typically offers larger loans on a
fixed rate basis with longer maturities, while we offer smaller loans on a
floating rate basis with shorter maturities. We can offer documentary credits
for all purposes while, under current authorization, ICICI can offer
documentary credits only to customers having an available line of foreign
currency credit with them, and only for import of capital goods. ICICI is not
permitted to offer these products for the import of raw materials, which we can
do.
Retail Lending
While ICICI does not offer credit cards, it does, together with its
subsidiary, ICICI Home Finance Company Limited, offer retail asset products
including auto loans and home mortgage loans which are marketed through its
subsidiary, ICICI Personal Financial Services Limited. We offer credit cards,
loans against time deposits and loans against shares for subscriptions to
initial public offerings of Indian companies. We intend to increase our retail
asset base during fiscal 2002 by offering personal loans to our "Power Pay"
corporate payroll account customers.
23
Funding
ICICI is not permitted to offer banking products involving checking
facilities including savings accounts, checking accounts, cash management
services and time deposits of a maturity of less than one year. These products
form our core funding base.
Treasury
Our foreign exchange treasury is a full-fledged authorized dealer while
ICICI is permitted to deal only with regard to its underlying transactions. Our
domestic treasury desk serves its customers independent of the ICICI desk.
Group Operating Strategy
In fiscal 1999, in an effort to improve client service and profitability,
the ICICI group reorganized its corporate structure and created three client
relationship groups-the Major Clients Group, the Growth Clients Group and the
Personal Financial Services Group. These relationship groups have been
successful in building strong client relationships and creating an effective
interface for the entire ICICI group with the Indian corporates, enabling it to
generate enhanced business with these clients.
With a view to further sharpen its customer-centric focus, ICICI has
created a team of dedicated client bankers in May 2001, who can act as a source
of superior value in helping clients meet all strategic objectives and thereby
build lasting relationships. These client bankers- called the Client
Relationship Group-will work together with credit teams-called the Credit
Operations Group-built to capitalize on ICICI's strong framework for credit
appraisal and execution of fund-based transactions. ICICI believes this
framework, as practiced by its Credit Operations Group, creates optimal risk
identification, allocation and mitigation and has been successful in minimizing
residual risk in its business operations. To tap the business opportunities in
public sector units, government and quasi-government agencies including
municipal corporations, ICICI formed a dedicated Government and Institutional
Group in May 2001. This new client coverage structure, created in May 2001,
replaces two client relationship groups formed in fiscal 1999 (i.e., the Major
Clients Group and the Growth Clients Group).
With effect from April 1, 2001, we have four client relationship groups,
namely, the Agriculture Banking Group, the Small and Medium Enterprises Group,
the Transaction Banking Group and the Corporate Banking Group in the place of
the Major Clients Group and the Growth Clients Group. The Corporate Banking
Group has 65 relationship and account managers. The relationship managers of
the Corporate Banking Group identify the business opportunities for all medium
and large sized corporates. The relationship managers provide for a one-point
contact and head the total sales and relationship initiatives for all the
business groups including the Small and Medium Enterprises Group, the
Agriculture Group and the Transaction Banking Group. The account managers
support the relationship managers for day to day interactions in the respective
delivery/monitoring units. The relationship managers are also supported by
product specialization knowledge from various groups who focus on the product
and 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 ICICI group products. The marketing efforts of the relationship managers in
these groups have allowed us to increase our relationships with corporates.
The restructuring of ICICI group and us has enabled us to take advantage
of ICICI's strong relationships with over 2,500 corporations in India to sell
our products and services. These relationships have been particularly effective
in helping us gain access to the larger corporations, as our balance sheet on a
stand-alone basis would not have permitted us to take the large exposures that
may be undertaken by ICICI given its large balance sheet capabilities. As
described in greater detail below, in cases where ICICI and we both provide
credit to the same customer, we appraise the customers' credit requirements
separately and independently. On the basis of our credit analysis, pricing,
portfolio exposure and other factors, we determine whether and to what extent
we take an exposure. Our decision is independent of ICICI's credit approval and
appraisal processes. There have been instances where ICICI has extended credit
to a particular borrower and we have not.
24
We also seek to benefit from ICICI's corporate relationships in growing
our retail business. We sell retail products to the employees of the ICICI
group's corporate customers, including offering corporate customers our payroll
deposit scheme for their employees.
The Personal Financial Services Group manages ICICI's retail business.
ICICI's 3.5 million retail bondholders also present us 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.
Both our and the ICICI group's retail strategy is based on the offering of
multiple products through multiple delivery channels to provide choice and
convenience to customers. Offering the entire range of products and services
through multiple channels also results in greater economies of scale. The
channels are owned by different ICICI group companies. We own the bank branch
channel and Infinity, the Internet banking channel, and ICICI Personal
Financial Services owns the telephone banking call centers. We use the services
of ICICI Personal Financial Services to offer telephone banking to our
customers. For this purpose, we pay them on the basis of actual call volume.
The ICICI centers, which are low-cost stand-alone offices acting as marketing
and service centers, are owned by ICICI. Our credit card back-end processing
operations are managed by ICICI Personal Financial Services. We pay ICICI
Personal Financial Services on a cost plus 10.0% markup basis. See "Business --
Retail Banking -- Credit Cards" and "Note 21 to ICICI Bank's US GAAP Financial
Statements"".
To enable the pooling of talent and a compensation structure aligned to
those of other information technology companies, the group decided to
consolidate the technology teams from all group companies into one information
technology company, ICICI Infotech Services Limited. ICICI Infotech now offers
technology solutions to the entire ICICI group. We outsource our information
technology requirements from ICICI Infotech, for which we pay service charges.
We, however, own hardware and software used by us.
25
BUSINESS
Overview
We are a private sector commercial bank organized under the laws of India
in 1994. We offer a wide range of banking products and services to corporate
and retail customers through a variety of delivery channels. We believe our
emphasis on providing value-added products and quality service which are
responsive to the financial needs of our customers will allow us to continue to
gain market share in our target customer markets. We are an affiliate company
of ICICI Limited, one of the largest of all Indian financial institutions,
banks and finance companies in terms of assets, a well-recognized brand in the
Indian financial sector and the first Indian bank to list its securities on the
New York Stock Exchange. In fiscal 2001, our net income was Rs. 1,308 million
(US$ 28 million). At March 31, 2001, we had assets of Rs. 220 billion (US$ 4.7
billion) and stockholders' equity of Rs. 16.3 billion (US$ 3 million).
Our organization has three key activities: corporate banking, retail
banking and treasury operations. In corporate banking, our primary goal is to
build a strong asset portfolio consisting mainly of working capital and term
loans to large, well-established Indian corporations as well as to select
middle market companies in growth industries. We also seek to provide a wide
variety of fee-based corporate products and services, like documentary credits,
cash management services, cross-border trade services, standby letters of
credit and treasury-based derivative products that help us increase our
non-interest income. In building our corporate banking activities, we have
capitalized on the strong relationships that ICICI enjoys with many of India's
leading corporations. We intend to generate significant growth in revenues
based on increased synergies with ICICI and its group of companies.
Our retail products and services include payroll accounts and other retail
deposit products, online bill payment and remittance facilities, credit cards,
debit cards, smart cards, depositary share accounts, retail loans against time
deposits and loans against shares for subscriptions to initial public
offerings. We have built a base of demand and time deposits with 3.2 million
retail customer accounts at March 31, 2001. 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 510
locations in 237 centers throughout India at March 31, 2001.
Our treasury engages in domestic and foreign exchange operations. It seeks
to manage our balance sheet, including by maintaining required regulatory
reserves. In addition, our treasury seeks to optimize profits from our trading
portfolio by taking advantage of market opportunities using funds acquired from
the inter-bank markets and corporate deposits. Our trading portfolio includes
our regulatory portfolio as there is no restriction on active management of our
regulatory portfolio.
Since our inception in 1994, we have consistently used technology to
differentiate our products and services from those of our competitors. For
example, we were the first bank in India to offer Internet banking. Our
technology-driven products also include electronic commerce-based
business-to-business and business-to-consumer banking solutions, cash
management services and mobile phone banking services. 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.
History
Our legal name is ICICI Bank Limited but we are known commercially as
ICICI Bank. We were incorporated in 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 Towers, Bandra-Kurla Complex, Mumbai 400
051, India, our telephone number is 011-91-22-653-1414 and our web site address
is www.icicibank.com. Our agent for service of process in the US is CT
Corporation System and their address is 111 Eighth Avenue, 13th Floor, New
York, New York, 10011.
We were formed in 1994 as a part of the ICICI group of companies. Our
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, we became a
26
wholly-owned subsidiary of ICICI. We have grown rapidly in size to become a
leading player among the new private sector Indian banks. After our ADS
offering in March 2000, ICICI held 62.2% of our equity shares.
Effective March 10, 2001, ICICI Bank acquired Bank of Madura, a
57-year-old private sector bank, in an all stock merger which was approved by
our 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 us was Rs 3.7 billion (US$ 80 million). The fair
value of the assets acquired by us on that date was Rs. 1.3 billion (US$ 27
million) and the fair value of the liabilities assumed by us was Rs. 39.1
billion (US$ 835 million). This acquisition has given us a larger balance
sheet, extensive geographic reach and over 1.2 million new customer accounts.
This acquisition has been accounted for under the purchase method of
accounting. Accordingly, our income statement for fiscal 2001 includes the
income and expenses of Bank of Madura from March 10, 2001, the effective date
of the merger, to March 31, 2001 and our balance sheet at March 31, 2001
includes the assets and liabilities of Bank of Madura. . The assets acquired
and liabilities assumed were recorded at estimated fair values as determined by
our management based on information currently available and on current
assumptions as to future operations.
In further compliance with the commercial bank licensing condition
stipulated by the Reserve Bank of India regarding dilution of holdings in
commercial banks by promoters, ICICI, which held 62.2% of our equity shares at
March 31, 2000, divested, through sales in the Indian secondary markets to
institutional investors, 8.8% of our equity shares during March 2001. At March
31, 2001, ICICI held 46.4% of our 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. At August 31,
2001, ICICI held 46.0% of our equity shares. In accordance with Section 4 of
the Indian Companies Act, 1956, we ceased to be a subsidiary of ICICI as of
March 22, 2001 and were accounted for under the equity method of accounting
from April 1, 2000. We will however continue to be an important member of the
ICICI group and will continue to work in a synergistic manner, with our `arms
length' relationship appropriately maintained. ICICI Bank has no subsidiaries.
See "Relationship with the ICICI Group - Ownership Considerations" for a
discussion of the regulatory situation in India that governs our relationship
with ICICI.
The issue of universal banking, which in the Indian context means
combining commercial banks and long-term development financial institutions,
has been discussed at length over the past few years. In its monetary and
credit policy for fiscal 2001 and universal banking guidelines issued on April
28, 2001, the Reserve Bank of India announced that it would consider proposals
from development financial institutions, like ICICI, who wish to transform
themselves into banks on a case-by-case basis. As part of its efforts to
transform itself into a universal bank, ICICI is considering various corporate
structuring alternatives including the possibility of a merger between ICICI
and ICICI Bank and the reorganization of its holdings in its subsidiary
companies. In this respect, ICICI has initiated a dialogue with the government
and regulatory agencies, including the Reserve Bank of India. As of the date of
this annual report, no firm proposal for any such action has been approved by
the board of directors or the shareholders of either ICICI or ICICI Bank. Any
corporate action resulting from these discussions would be subject to approval
of the board of directors and shareholders of ICICI and ICICI Bank and
necessary statutory and regulatory approvals including from the Reserve Bank of
India and the government of India. At this stage, there can be no certainty
that any definitive agreement will be reached or that such agreement will be
approved by the relevant regulatory agencies.
Our Strategy
Our objective is to be the leading provider of banking products through
technology driven distribution channels servicing a targeted group of corporate
and retail customers.
To achieve our objective, the key elements of our strategy are to:
o increase our market share in corporate banking;
o increase our share in international banking;
o build a profitable retail franchise;
o apply Internet-related technologies to existing product offerings and
create new business opportunities on the Internet;
27
o use technology to provide a multi-channel distribution network;
o leverage the business potential of Bank of Madura branches;
o fully utilize the advantage of strong linkages already established in
rural areas by Bank of Madura branches for increasing our
micro-credit lendings and achieving our social banking objectives;
o enhance our recurring fee income;
o emphasize conservative risk management practices to enhance our asset
quality; and
o leverage existing corporate clients to extend loans to their
suppliers.
Increase Our Market Share in Corporate Banking
Our corporate lending products and services, consisting principally of
working capital finance and term lending, have grown at a compound annual
growth rate of 48.9% over the past three fiscal years. We expect that
short-term finance will continue to represent a significant growth opportunity
as the economy in India develops. Over the past few years, we have shifted our
focus in favor of financing large, highly rated corporations, although we
continue to seek to identify and gain market share in the new growth sectors of
the Indian economy. Further, in all of our activities, we seek to be flexible
and responsive to our clients needs, while at the same time seeking to maintain
safeguards through conservative risk management practices. Our share in the
Indian banking system's loan asset exposures as at March 31, 2001 was 1.92%,
and our incremental share was 7.9%. Much of this growth was facilitated by
increase in loan assets consequent upon acquisition of Bank of Madura by us.
We believe we can continue to expand our market presence by leveraging
strong corporate relationships of the ICICI group, the effective use of
technology, speedy response times, quality service and the provision of
products and services designed to meet specific customer needs. The ICICI group
enjoys strong financial ties with over 2,500 of India's leading corporations,
mainly through long-term funding relationships. Together with other members of
the ICICI group, we participate in joint marketing teams to provide a
comprehensive range of long and short-term financial products to these
corporate customers. As a result, ICICI group relationships have enabled us to
significantly enhance our market share in short-term funding. We expect to
continue to work closely with the ICICI group to harness synergies in the
marketing of our complementary range of products and rapidly expand our asset
base.
International Banking
The Bank has 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. Given the network
and reach, the Bank is capable of offering correspondent services to its
counterparts in India. Accordingly, the Bank is focussing to capture a
significant share of correspondent banking business from its relationships. The
products offered include letters of credit advising and confirmation, issuance
of stand by letters of credits/guarantees on behalf of its correspondent banks,
payment services for remittances, Indian rupee account and clearing services.
Build a Profitable Retail Franchise
We believe the "ICICI" brand name is well established and one of the most
respected names in the financial services business in India. We believe that
this strength in brand identity, together with the ICICI group's strong
corporate relationships and existing retail investor base, provides us with a
unique opportunity to build a profitable retail franchise in India. At March
31, 2001, we had 3.2 million retail customer accounts and at July 31, 2001 we
had more than four million retail customer accounts. Within India, we have a
target market of 38 million households, consisting principally of professionals
and high net worth individuals as well as select wage and salary earners. This
market is supplemented by about 22 million non-resident Indians, a significant
portion of whom are well educated and affluent and have strong links to family
members in India. We believe our range of retail products will facilitate
further penetration of the Indian retail consumer market.
28
We will continue to attract customers through innovative products such as
"Power Pay", our direct deposit product that allows our corporate customers'
employee salaries to be directly credited to special savings accounts, to
significantly drive the growth in the number of savings accounts maintained
with us.
We will continue to seek to provide our target market with a growing range
of deposit, funds transfer, and retail banking products to meet their growing
financial needs. We will continue to expand our range of retail savings
products tailored to meet the needs of our customer base, such as foreign
currency denominated accounts for non-resident Indians, as well as premium
checking accounts for small businesses.
We believe the lack of strong mass market players in retail assets in
India creates a significant growth opportunity for us. Our retail asset
products at present are limited to credit cards, debit cards, smart cards,
loans against time deposits and loans against shares for subscription to
initial public offerings in India. We intend to increase our retail asset base
during fiscal 2002 by offering personal loans to our "Power Pay" corporate
payroll account customers. We will continue to broaden our range of retail
products and services in an effort to gain market share among our target
customer base.
Having invested significantly in developing an extensive distribution
network, we plan to focus our efforts on delivering value to our customers
through an integrated distribution network. We view customer relationship
management as a discipline as well as a set of discrete software technologies
which will help us focus on automating and improving the business processes
associated with managing customer relationships in the areas of sales,
marketing and customer service and support.
Apply Internet-Related Technologies to Existing Product Offerings and
Create New Business Opportunities on the Internet
We believe that by developing Internet applications for our services, we
can gain significant marketing and distribution advantages over our
competitors. We also believe that through the Internet we can vertically
integrate our product offerings, allowing customers, retailers, distributors,
manufacturers and their suppliers access to our banking system. Lower costs
from effective use of technology coupled with increased scale of operations
should allow us to deliver greater value to our customers.
Accordingly, we were the first bank in India to introduce an Internet
banking service and an Internet-based bills payment system, and even today are
one among very few banks offering this service in India. We pioneered online
business-to-business solutions in India by launching "i-payments", a payments
tool connecting our customers with their suppliers and dealers. We offer online
electronic payment facilities to our corporate customers and their suppliers
and dealers as a closed user group using the Internet as the delivery platform.
These product offerings have resulted in significant cost savings to our
clients, allowing us to develop client loyalty while at the same time better
understanding the needs of our clients. In all of our endeavors, we intend to
use the Internet as a means of enhancing our accessibility and overall customer
convenience and satisfaction.
Use Technology to Provide a Multi-Channel Distribution Network
As we have recently entered the banking sector, we have been able to use
current technology to develop all our systems. We believe that product
differentiation through multiple delivery channels has improved our ability to
attract and retain customers, enabling us to achieve gains in market share.
Accordingly, we have tried to provide products and services, using the
Internet, ATMs and other technology to increase our service and attract and
satisfy customers. Our use of online delivery channels offers added convenience
for our customers while markedly reducing the cost of financial transactions
and the need to have an extensive branch network. Our technology is expected to
allow the customer access to any product through any delivery channel and
thereby give the customer the option of choosing the most convenient channel.
To further expand our ATM network, we have entered into alliances with
petroleum companies, department stores and cyber cafes to provide ATMs at
select high traffic locations. Our goal is to develop a cost efficient, highly
effective distribution network, which ensures quality customer service.
29
Leveraging the Business Potential of Bank of Madura Branches
During fiscal 2001, we added 274 branches and 18 extension counters to our
network of 81 branches and 16 extension counters as at March 31, 2000 taking
the total number of branches to 355 branches and 34 extension counters as at
March 31, 2001. Of these, we acquired 264 branches and 12 extension counters
from Bank of Madura. We intend to tap the substantial business potential of
these branches during fiscal 2002 by refurbishing the interiors of these
branches, offering our wide variety of existing products to the customers of
these branches and also by automating the operations at these branches,
allowing the staff at these branches to have enough time to market our services
to potential customers, resulting in volume growth in our business.
Fully Utilize the Advantages of Strong Linkages Already Established in Rural
Areas by Bank of Madura Branches for Increasing our Micro-Credit Lendings and
Achieving our Social Banking Objectives
Bank of Madura branches acquired by us in rural areas have built up strong
linkages with micro-credit borrowers in their respective areas. With the help
of these micro-credit borrower groups and the ones to be newly cultivated, we
expect to achieve increased micro-credit lending, thereby achieving both
business growth as well as our social banking objectives.
Enhance Our Recurring Fee Income
We will continue to seek to develop value-added products and services in
an effort to enhance our market share and to increase our recurring fee income.
Our fee and commission income has grown at a compounded annual growth rate of
67.4% since fiscal 1998, principally from issuing guarantees, documentary
credits and similar instruments. We believe we were the second largest provider
of cash management services in India and were among the market leaders in
providing trust, retention and escrow account services at March 31, 2001. We
have developed countrywide collection and payment mechanisms for rural and
cooperative banks with limited geographic presence. We continue to seek to
provide funds collection and transfer services to our clients and clients of
the ICICI group. We also offer our customers depositary share accounts and
direct sales of third party mutual funds and have entered into a customer
referral arrangement with ICICI Prudential Life Insurance Company to distribute
their life insurance products. A significant development in fiscal 2001 was our
entry into the ATM acquiring business by joining the VISA Global Network in
November 2000. We earn a fee on transactions executed by customers of other
banks at our ATMs. Our Internet banking services include Money2India, our
online remittance facility for non-resident Indians, which is already
generating fee income. We also offer "i-payments", our business-to-business
electronic commerce solution for corporate customers and electronic payment of
utility bills for retail customers, which are presently free to increase
customer acquisition. We provide all cross-border trade services to our
customers. We believe these and other initiatives will enhance our recurring
fee income in ways that are responsive to the needs of our customers.
Emphasize Conservative Risk Management Practices to Enhance Our Asset Quality
We believe conservative risk management policies, processes and controls
are critical for our long-term success. While we will continue to extend credit
to growth oriented companies with strong financial positions, we expect that
our emphasis on lending primarily to higher rated credits and active management
of older less creditworthy assets should help improve the risk profile of our
loan portfolio. In connection with our credit card business, we have devised an
internal credit scoring model and maintain strict monitoring of repayment
patterns to minimize the risks associated with this business. Once we enter the
auto loan and home mortgage loan market, we intend to apply the same rigor to
credit evaluation standards for these products as we have applied to the credit
evaluation standards for our current loan products.
We expect to build on our established credit risk management procedures,
credit evaluation and rating methodology, credit risk pricing models,
proprietary analytics and monitoring and control mechanisms.
Finally, we believe that our adoption of U.S. GAAP accounting including
its stringent provisioning requirements embodies a more conservative approach
to quantifying loan losses.
30
Leverage Existing Corporate Clients to Extend Loans to their Suppliers
To extend our reach to the growing small and medium enterprises sector
without the accompanying high credit risks which are normally associated with
advances to small and medium enterprises, we set up the Small and Medium
Enterprises Group in May 2001. As its first initiative, this group will focus
on supply chain financing, including the financing of selected suppliers of our
existing corporate clients. Typically, the financing will be in the form of
short-term revolving facilities with overdraft or bill discounting limits and
will be extended only to carefully pre-selected suppliers to be used only for
genuine transactions with our corporate client.
Our Principal Business Activities
Our principal business activities include corporate banking, retail
banking and treasury operations. In corporate banking, we make working capital
loans and term loans to our corporate borrowers, take deposits from corporate
customers and provide a range of fee-based products and services. In retail
banking, we take deposits from retail customers through multiple products and
delivery channels and since January 2000, have begun to offer credit cards in
addition to other retail loan products. The following table sets forth, for the
periods indicated, the share of our corporate and retail banking deposits and
loans in our total business:
At March 31, 2000 At March 31, 2001
------------------------------------------- -----------------------------------------
Corporate Corporate
banking Retail banking Total banking Retail banking Total
--------- -------------- ----- --------- -------------- -----
(in Rs. billion, except percentages)
Gross loans........... 46.2 1.5 47.7 91.4 4.9 96.3
% of total............ 96.7% 3.3% 100.0% 94.9% 5.1% 100.0%
Deposits.............. 68.1 30.5 98.6 63.8 100.5 164.3
% of total............ 69.0% 31.0% 100.0% 38.8% 61.2% 100.0%
Our treasury manages our balance sheet, including by maintaining required
regulatory reserves. In addition, our treasury seeks to optimize profits from
our trading portfolio by taking advantage of market opportunities.
Corporate Banking
General
Our largest activity in terms of gross loans is our corporate banking
operations. At March 31, 2001, corporate banking represented 94.9% of our gross
loans and 38.8% of our deposits. This included the loans and deposits taken
over from the Bank of Madura, which represented 13.6% of our gross loans and
3.2% of our deposits at year-end fiscal 2001.
Our key corporate banking products (including products of the Bank of
Madura) include loan products and fee and commission-based products and
services. Our principal loan products consist of working capital loans,
including cash credit facilities (a revolving floating rate asset-backed
overdraft facility) and bill discounting (a type of receivables financing), and
term loans. Fee and commission-based products and services include documentary
credits and standby letters of credit, forward contracts, interest and currency
swaps, cash management services, trust and retention accounts, cross border
trade services and payment services. Most of these fee and commission-based
products and services provide recurring fees from each customer. 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 corporate banking
products and services through a combination of physical branches, correspondent
banking networks and the Internet.
We seek to differentiate ourselves from our competitors primarily by
capitalizing on the relationships of the ICICI group and through speedy and
efficient client servicing. We seek to achieve this through the effective use
of technology, high quality staff, speedy decision-making and the provision of
structured financial products meeting specific customer needs.
31
We provide our products and services to a wide range of private sector and
public sector commercial and industrial corporations, including some of India's
leading companies as well as growth-oriented, middle market commercial
enterprises, traders and service providers and to the agricultural sector. In
the first few years of our operations, due to our small balance sheet size,
small to medium-sized middle market companies were our target customers. Over
the past year as our balance sheet has grown, we have, consistent with our
strategy of focusing on quality growth opportunities, concentrated on financing
large, highly-rated corporations by taking advantage of the corporate
relationships of the ICICI group. Of our 1,789 corporate customers at March 31,
2001, 547 were also ICICI customers, representing 44.3% of our loan portfolio.
Corporate Loan Products
Our corporate loan products are working capital finance and term loans. We
offer a substantial portion of our corporate loans on a floating rate basis.
For more details on our loan portfolio, see "-- Loan Portfolio".
Working Capital Finance
Under working capital finance, we offer our corporate customers cash
credit facilities and bill discounting. At March 31, 2001, gross working
capital loans outstanding were Rs. 57.3 billion (US$ 1.2 billion), constituting
60.1% 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. 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, we provide a
line of credit up to a pre-established amount based on the borrower's projected
level of inventories, receivables and cash deficits. Within this limit,
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. Cash credit facility is typically given to companies in the
manufacturing, trading and service sectors on a floating interest rate basis.
We earn interest on this facility on a quarterly basis, based on the daily
outstanding amounts. The facility is generally given for a period of up to 18
months, with a review after 12 months. 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 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. Though in the past we have extended
cash credit facilities on our own, with our increased focus on more highly
rated large corporations, we are increasingly participating in multiple bank
and consortium arrangements. For a description of these arrangements, see "--
Loan Portfolio -- Collateral -- Completion, Perfection and Enforcement".
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. For more details on
our credit risk procedures, see "-- Risk Management -- Credit Risk".
In cases where ICICI provides long-term loans for financing projects of
corporations, we seek to provide, or participate in the consortium providing,
working capital loans or the short-term portion of their working requirements.
We appraise the customers' credit requirement separately and independently from
ICICI.
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 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. These dealer financing facilities help us to
strengthen our relationships with our corporate customers and may be expanded
into Internet-based corporate banking services.
32
Term Loans
Term loans are amortizing loans given typically for a period of between
three and seven years for financing core working capital requirements and
normal capital expenditures of small and medium-sized companies. 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 all the fixed assets of the borrower. The security
interest typically includes property, plant and equipment and other tangible
assets of the borrower. We typically provide term loans of smaller size,
generally up to Rs. 200 million (US$ 5 million), considering our liability
profile, and refer larger loans to ICICI.
We had lease finance of Rs. 944 million (US$ 20 million) at March 31,
2001, representing 0.9% of our gross loans. In 1995-1996, we offered lease
financing to a limited number of customers due to certain tax advantages to us
from these transactions. We discontinued all of our lease finance activities in
fiscal 1998 once the Indian tax authorities disputed this tax treatment. For a
discussion of this dispute, see "-- Legal and Regulatory Proceedings". We
acquired a portfolio of hire purchase business, which amounted to Rs. 8 million
(US$ 177,161) at March 31, 2001, from Bank of Madura. We have extended fund
based loans as well as stand by letters of credit facility to corporates
outside India which are joint ventures and/or wholly-owned subsidiaries of
Indian corporates. At March 31, 2001, the balance outstanding in respect of
these loans was Rs. 951 million (US$ 20 million), representing approximately
0.9% of our total gross loan portfolio. At March 31, 2001, gross term loans
outstanding, including the loans described in the previous paragraph, were Rs.
34.1 billion (US$ 728 million), constituting 35.4% of our gross loan portfolio.
Fee and Commission-Based Activities
Our fee and commission-based products and services include documentary
credits, standby letters of credit, forward contracts, interest and currency
swaps, cash management services, trust and retention accounts and payment
services.
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 customers 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 18 months, with review after 12 months. 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. A significant proportion of our documentary credits for capital
equipment are issued on behalf of borrowers who also had taken term loans from
ICICI.
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
generally also take collateral in the form of cash deposits from our borrowers
before each drawdown of the facility.
At March 31, 2001, we had a portfolio of documentary credits of Rs. 12.9
billion (US$ 275 million).
Standby Letters of Credit
We provide standby letter of credit facilities, called guarantees in
India, that can be drawn down any number of times up to the committed amount of
the facility. We issue standby letters of credit on behalf of our borrowers in
favor of corporations and government authorities inviting bids for projects,
guaranteeing the performance of our borrowers. We also issue standby letters of
credit 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 standby letters
33
of credit is generally up to 18 months. This facility is generally secured by
collateral similar to that of documentary credits.
At March 31, 2001, we had a portfolio of standby letters of credit of Rs.
13.5 billion (US$ 288 million).
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 to us 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.
At March 31, 2001, we had a portfolio of outstanding forward contracts of
Rs. 78.2 billion (US$ 1.7 billion) and a portfolio of interest and currency
swaps of Rs. 11.3 billion (US$ 241 million).
Cash Management Services
Under cash management services, we offer our corporate clients custom-made
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. We believe we were the second largest
provider of cash management services in India at March 31, 2001. We also
provide cash management services to ICICI. Our customers including ICICI 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.
The total amount handled under cash management services was Rs. 1,005.0
billion (US$ 21.5 billion) for fiscal 2001, resulting in fee income of Rs. 248
million (US$ 5 million). At March 31, 2001, we had 292 cash management service
customers. ICICI paid us Rs. 30 million (US$ 640,342) for fiscal 2001 for these
services provided to it by us.
Trust and Retention Accounts
We offer trust and retention account facilities to lenders in limited and
non-recourse project finance transactions who typically require the setting up
of 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.
We actively provide these services and use the strengths of ICICI, as a
leading project financier in the country to obtain customers for these
services. We believe that we are the market leader in providing these services
in India, with about 230 accounts. The cash flows managed under this product
during fiscal 2001 were about Rs. 27.0 billion (US$ 576 million).
Payment Services
We offer online electronic payment facilities through our corporate
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, all 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 on the Internet. This product can be customized to
meet the specific requirements of
34
individual customers. We do not charge a fee for this service, as it results in
large low-cost funds for short durations in checking accounts of customers,
that we invest profitably.
At March 31, 2001, there were 389 corporates on our corporate Internet
banking platform. Many of these corporations have come to us as a result of our
relationship with members of the ICICI group. A few of these corporates are
also using the platform for making payment/receiving collections from their
channel partners. Based on these statistics, we believe that, based on ICICI's
corporate relationship base of over 2,500 customers, we have the potential to
grow to service a much larger number of small, medium and large corporate users
over the next few years.
Other Corporate Banking Activities
International Banking Business
We provide a wide range of cross-border banking services from 25 of our
branches spread across the country. Our international business services include
foreign currency loans for imports and exports, documentary credits, standby
letters of credit and collection and funds transfer services. All these
branches are connected directly to the Society for Worldwide Inter-Bank
Financial Telecommunication network (SWIFT), to quickly facilitate
transactions. We also have correspondent arrangements with over 145
international banks covering all major countries with which India has trade
relationships. These arrangements facilitate the execution of cross border
transactions including letters of credit and funds transfers. We also provide
travel-related services to our corporate customers including money changing,
sale and cashing of travelers' checks and foreign currency remittances to
international travel destinations. Our customers pay fees to us for
substantially all of these products and services.
Treasury Products
We 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 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. Our target customers for these products are large
public and private sector companies, provident funds and high net worth
individuals.
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 have developed customized
products and solutions for cooperative banks. Although we do not charge a fee
for these products, they result in large amounts being maintained with us in
non-interest-bearing current accounts that we can invest profitably.
Small and Medium Enterprises Business
To extend our reach to the growing small and medium enterprises sector
without the accompanying high credit risks which are normally associated with
advances to small and medium enterprises, we have set up the Small and Medium
Enterprises Group in May 2001. As its first initiative, this group will focus
on supply chain financing, including the financing of selected suppliers of our
existing corporate clients. Typically, the financing will be in the form of
short-term revolving facilities with overdraft or bill discounting limits and
will be extended only to carefully pre-selected suppliers to be used only for
genuine transactions with our corporate client. Already, our Small and Medium
Enterprises Group has a base of 25 corporate relationships and 600 supplier
relationships. In the next year, besides increasing this base, the group
intends to introduce a portal for small and medium enterprises offering a host
of "lifecycle" products to our small and medium enterprise clients. Other
initiatives include innovative products such as business cards and cash
management products for small and medium enterprises. This group will be
progressively moving to a fee-based revenue model rather than asset-driven
growth.
35
Corporate Loan Pricing
We price our corporate loans over our prime lending rate based on four
factors:
o our internal credit rating of the company;
o the nature of the banking arrangement (either a single bank, multiple bank
or consortium arrangement);
o the collateral available; and
o market conditions.
Our current credit approval process generally requires a minimum credit
rating of A-. For a description of our credit rating system, see "-- Risk
Management -- Credit Risk".
Our Asset-Liability Management Committee 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.
Working capital financing is usually contracted at rates linked to the prime
lending rate for maturities over 365 days. The prime lending rates relevant to
other maturities are used for short-term bill discounting products.
We have three prime lending rates linked to the term of the loan. At March
31, 2001, our prime lending rates per annum were as follows:
Term Prime lending rate
------------------------------------------------- ------------------
Up to 90 days.................................... 9.75%
91 days to 364 days.............................. 11.00
365 days and over................................ 13.50
Under the existing Reserve Bank of India regulations, loan exposures
through corporate debt instruments and bill discounting are not subject to the
prime lending rate regulations. Banks can lend at an interest rate below their
prime lending rates when delivery is through these products. Subsequent to
March 31, 2001, the Reserve Bank of India has 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. This is
expected to place private sector banks at an advantage and they will be able to
compete for the business of blue chip corporates by quoting below their prime
lending rates.
One of our competitive advantages in the corporate banking industry is our
speed of delivery. We are generally able to preliminarily approve credit
requests within two business days since we study the borrower and its credit
rating well in advance of our marketing efforts. The formal credit approval
process, including due diligence, generally takes about three to four weeks to
complete. We believe this is a key factor in giving us a substantive
competitive advantage and enabling us to charge a premium in pricing over many
of our competitors.
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
agro-based industries and small businesses. Out of the 40.0%, we are required
to lend a minimum of 18.0% of our 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 and to specified state financial
corporations and state industrial development corporations.
36
The following table sets forth, for the periods indicated, our priority
sector loans broken down by type of borrower.
% of net
bank credit
at March
At March 31, 31,
---------------------------------------------------------------------------- -----------
1997 1998 1999 2000 2001 2001 2001
----------- ----------- ----------- ----------- ----------- ----------- -----------
(in millions, except percentages)
Small scale industries.... Rs. 1,860 Rs. 2,753 Rs. 3,510 Rs. 5,958 Rs. 5,592 US$ 119 8.6%
Others including small
businesses........... 231 513 1,959 2,662 10,354 221 15.9
Agricultural sector....... 252 501 675 1,520 7,096 151 10.9
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total..................... Rs. 2,343 Rs. 3,767 Rs. 6,144 Rs. 10,140 Rs. 23,042 US$ 491 35.4%
=========== =========== =========== =========== =========== =========== ==========
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 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. These
deposits also satisfy part of our priority sector requirement.
At March 31, 2001, our priority sector loans were Rs. 23.0 billion (US$
491 million), constituting 35.4% of net bank credit. This led to a shortfall of
Rs. 3.0 billion (US$ 64 million) in our priority sector lending. The Reserve
Bank of India requires us to deposit the shortfall in the National Bank for
Agriculture and Rural Development when it makes a demand on us. At March 31,
2001, this bank had taken deposits of only Rs. 870 million (US$ 19 million)
from us. We believe that a large number of Indian commercial banks have had a
shortfall in meeting their priority sector lending requirements.
Export Credit
As part of directed lending, the Reserve Bank of India also requires us to
make loans to exporters at concessional rates of interest. We provide export
credit for pre-shipment and post-shipment requirements of exporter borrowers in
rupees and foreign currencies. At the end of our fiscal year, 12.0% of our 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 our priority sector lending requirement. The Reserve Bank of India
provides export refinancing for an eligible portion of total outstanding export
loans at a 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
March 31, 2001, our export credit was Rs. 6.9 billion (US$ 148 million),
constituting 9.8% of our net bank credit.
Housing Finance
The Reserve Bank of India requires us to lend up to 3.0% of our
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. At March 31, 2001, our housing finance
was Rs. 2.9 billion (US$ 62 million). This basically represents the housing
loans taken over from Bank of Madura.
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 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 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. We are not permitted to pay
interest for periods less than seven days. Also, pursuant to the
37
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 large
private sector companies. Corporate deposits totaled Rs. 63.8 billion (US$ 1.4
billion) at March 31, 2001, constituting 38.8% of our total deposits and 31.3%
of total liabilities at March 31, 2001.
We offer a variety of deposit services to our corporate customers. We take
rupee or foreign currency denominated deposits with fixed or floating interest.
Our deposit products for corporations include:
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 higher cost type of time deposit.
The following table sets forth, for the periods indicated, our corporate
deposits by product.
% of total
At March 31, at March 31,
----------------------------------------------------------------------------- ------------
1997 1998 1999 2000 2001 2001 2001
------------ ----------- ----------- ---------- ------------ ----------- ------------
(in millions, except percentages)
Current accounts-banks....... Rs. 34 Rs. 37 Rs. 74 Rs. 854 Rs. 909 US$ 19 1.4%
Current accounts-others...... 2,990 3,345 5,162 14,090 19,992 427 31.4
Time deposits-banks.......... 945 2,586 13,140 15,335 20,900 446 32.8
Time deposits-others......... 4,036 9,917 25,883 37,434 21,400 457 33.5
Certificates of deposits..... 1,335 3,169 1,330 377 553 12 0.9
----------- ----------- ----------- ---------- ------------ --------- -----
Total........................ Rs. 9,340 Rs. 19,054 Rs. 45,589 Rs. 68,090 Rs. 63,754 US$ 1,361 100.0%
=========== =========== =========== ========== ============ ========= =====
The following table sets forth, for the periods indicated, our corporate
deposits by type of customer.
% of total
At March 31, at March 31,
------------------------------------------------------------------------- ------------
1997 1998 1999 2000 2001 2001 2001
------------ ----------- ----------- ---------- ---------- ----------- ------------
(in millions, except percentages)
Banks....................... Rs. 978 Rs. 2,623 Rs. 13,214 Rs. 16,389 Rs. 21,809 US$ 465 34.2%
Corporations................ 8,063 14,384 28,297 50,212 38,509 822 60.4
Others(1)................... 299 2,047 4,078 1,489 3,436 74 5.4
----------- ----------- ----------- ---------- ---------- --------- -----
Total....................... Rs. 9,340 Rs. 19,054 Rs. 45,589 Rs. 68,090 Rs. 63,754 US$ 1,361 100.0%
=========== =========== =========== ========== ========== ========= =====
----------
(1) Others include government agencies, charitable trusts, cooperatives,
non-profit organizations and universities.
The following table sets forth, for the period indicated, the maturity
profile of our rupee term deposits (including deposits of banks) of Rs. 10
million (US$ 213,447) or more:
At March 31, 2001
----------------------------------------------------
% of total
deposits
----------
(in millions, except percentages)
Less than three months........................................ Rs. 16,499 US$ 352 10.1%
Above three months and less than six months................... 2,169 46 1.3
Above six months and less than twelve months.................. 4,412 94 2.7
More than twelve months....................................... 1,605 34 0.9
------------- ------------ ----
Total deposits of Rs. 10 million and more..................... Rs. 24,685 US$ 526 15.0%
============= ============ ====
38
ICICI is one of our deposit customers. At March 31, 2001, we had Rs. 1.8
billion (US$ 38 million) of current deposits and Rs. 3.1 billion (US$ 66
million) of time deposits from ICICI. We do not pay interest on these current
deposits and we pay interest on these time deposits at rates which we pay all
other time deposit customers.
We market corporate deposits from all our corporate branches, some of our
retail branches and directly from our corporate office. We continue to be
bankers to the market offerings of select companies on account of raising of
equity or debt, buy back of equity and for acquisition of equity on account of
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. This has
resulted in significant growth in our corporate deposits. We also act as
bankers to corporates for their dividend pay out to their shareholders, which
results in mobilizing interest-free, float balances to us. We believe our
management of our corporate deposit customers as well as our ability to offer
competitive rates on large deposits significantly reduces the volatility in our
corporate deposit base.
The growth in corporate deposits has been supplemented by our "anywhere
banking service", which allows multi-locational corporations in India to
receive cash inflows and make payments in various cities by maintaining one
central pooling account.
Our other corporate deposit products are:
o inter-bank call rate-linked floating rate deposits; and
o payout of interest and dividend checks issued to investors and
bondholders by corporations.
Client Coverage
We believe that the Indian market for working capital products is
approximately Rs. 2.9 trillion (US$ 61.9 billion). We are focusing our
corporate marketing efforts on increasing our market share in this segment. We
believe that the ICICI group's existing corporate relationships provides us
with an opportunity to provide working capital products to large companies and
high growth middle market customers and increase our fee income.
In fiscal 1999, in an effort to improve corporate client service and
profitability, the ICICI group reorganized its corporate structure and created
two corporate client relationship groups, the Major Clients Group and the
Growth Clients Group. In fiscal 1999, 2000 and 2001, the Major Clients Group
and the Growth Clients Group were responsible for offering the full range of
the ICICI group's products and services to its clients with an emphasis on
cross-selling and the generation of fee income.
We worked with the Major Clients Group to offer various corporate banking
products and services to the top 150 Indian corporations to further the ICICI
group's objective to function as a universal bank. The Major Clients Group was
made up of a team of client bankers, taken from ICICI, ICICI Securities and
Finance Company Limited and us. The Major Clients Group sought to build on
existing relationships and also focused on bringing into the ICICI group
portfolio new multinational corporations and large profitable public sector
corporations. We had four of our employees working as part of the Major Clients
Group during fiscal 2001.
The Growth Clients Group focused on middle market companies. The Growth
Clients Group was made up of a team of client bankers, from ICICI and us and
geographically dispersed among ICICI's offices across India. Over the past
several years, the middle market segment has grown rapidly, particularly in the
areas of information technology, automobile components, consumer goods and
pharmaceuticals, and traditionally has had less access to financing compared to
our major clients. We expect that continued growth among middle market
companies will result in greater demand in the volume and type of financial
products and services. We believe that rapid growth in the middle market
segment offers us a significant opportunity to provide a wide variety of
lending and fee-based banking products, including a substantial number of
working capital lines of credit. Our internal estimates indicate that there are
over 7,000 middle market companies in India, of which approximately 1,300 are
believed to meet our benchmark credit risk rating of A- or above. The Growth
Clients Group sought to identify and build relationships with these middle
market clients and build upon existing client relationships to facilitate a
broader distribution of our products. The Growth Clients Group initially
targeted approximately 800 of these companies, mainly for our loan and deposit
products. This group also sought to provide other products and services,
including our cash management
39
services. We had 16 of our employees working as a part of the Growth Clients
Group at their various locations during fiscal 2001.
With a view to further sharpen its customer-centric focus, ICICI has
created a team of dedicated client bankers in May 2001, who can act as a source
of superior value in helping clients meet all strategic objectives and thereby
build lasting relationships. These client bankers- called the Client
Relationship Group-will work together with credit teams-called the Credit
Operations Group-built to capitalize on ICICI's strong framework for credit
appraisal and execution of fund-based transactions. ICICI believes this
framework, as practiced by its Credit Operations Group, creates optimal risk
identification, allocation and mitigation and has been successful in minimizing
residual risk in its business operations. To tap the business opportunities in
public sector units, government and quasi-government agencies including
municipal corporations, ICICI formed a dedicated Government and Institutional
Group in May 2001. This new client coverage structure, created in May 2001,
replaces two client relationship groups formed in fiscal 1999 (i.e., the Major
Clients Group and the Growth Clients Group).
With effect from April 1, 2001, we created four new client relationship
groups to take the place of ICICI group's Major Clients Group and Growth
Clients Group, namely, the Agriculture Banking Group, the Small and Medium
Enterprises Group, the Transaction Banking Group and the Corporate Banking
Group.
The Corporate Banking Group has 65 relationship and account managers. The
relationship managers of the Corporate Banking Group identify the business
opportunities for all medium and large sized corporates. The relationship
managers provide for a one-point contact and head the total sales and
relationship initiatives for all the business groups including the Small and
Medium Enterprises Group, the Agriculture Group and the Transaction Banking
Group.
The account managers support the relationship managers for day to day
interactions in the respective delivery/monitoring units. The relationship
managers are also supported by product specialization knowledge from various
groups who focus on the product and 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 ICICI group products.
Like the ICICI group's old client relationship groups, its new client
relationship groups, including the four new client relationship groups at ICICI
Bank, are comprised of relationship managers, who represent the entire ICICI
group and include members of our staff who participate in these client
relationship groups and are responsible for marketing our products and services
as well as the products and services of the ICICI group to corporate customers.
The basic principles of coverage followed by relationship managers include:
o further enhancing the ICICI group's strong customer relationships;
o focusing on a well-defined list of high priority clients;
o responding to clients' needs by marketing those products best suited
to their specific circumstances;
o increasing the ICICI group's share of clients' total banking
requirements;
o serving the client needs effectively and proactively;
o cross-selling the ICICI group's products to improve client
profitability; and
o facilitating a quick roll-out of new products for the ICICI group.
The group has structured the cross-selling process as follows:
o the relationship managers from our company and ICICI make joint
marketing calls to targeted corporations to offer the entire range of
the group's products and services;
o products and services accepted by the targeted customer are then
independently processed and delivered to the customer by the
appropriate ICICI group company; and
40
o fee and interest income accrue to the company that processes and
delivers the products or services. These amounts are collected
directly from the customer.
Cross-selling is also initiated by our branch managers and operating
officers, who interact with the corporate customer on a regular basis for
operating and maintaining its various cash credit accounts. They also visit the
customer's offices, factories or warehouses periodically. Business
opportunities identified are conveyed to our representatives, ICICI group
relationship managers and to other ICICI group companies.
We believe that we have benefited significantly from this joint marketing
relationship. While we had 191 common customers with ICICI at March 31, 2000,
we had 547 common customers at March 31, 2001, representing 44.3% of our loan
portfolio at March 31, 2001. These customers have largely been top tier Indian
corporations and improved the credit quality while significantly increasing the
size of our loan portfolio. We have also been able to increase fee income from
providing cash management services, documentary credits and stand-by letters of
credit and trust and retention account services to many of these clients.
While marketing and relationship functions are undertaken along with
ICICI, the processes of credit appraisal, approval and monitoring are
independent activities done by us. Exposures are governed by the policy
framework prescribed by our board of directors. For a discussion of our credit
approval process, see "-- Risk Management -- Credit Risk".
Delivery Channels
Branch Network
We deliver our corporate banking services primarily through our corporate
banking network, which at March 31, 2001 consisted of 11 branches out of our
total 355 branches (including branches of Bank of Madura) spread across India.
After review of the size of our business and the potential of each of our
branches, we reclassified 14 of our corporate banking branches as retail
branches beginning fiscal 2001. All of our corporate branches are located in
cities among the top 55 cities throughout all of India's states in terms of
gross bank credit. The corporate banking unit at our head office in Mumbai
assists and supervises these branches in the offering of new products,
marketing initiatives and credit administration. In order to provide quality
service to clients, our corporate branches work in close coordination with the
ICICI group's relationship managers.
Correspondent Banking Networks
We have correspondent banking relationships with commercial and
cooperative 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 1,750 locations in India.
Retail Banking
General
Retail banking deposit accounts represented 61.2% of our deposits at March
31, 2001 compared to 31.0% at March 31, 2000. Our rapidly expanding retail
franchise was augmented by the acquisition of Bank of Madura. We intend to
continue to grow our retail deposits for funding purposes since retail deposits
are a good source of low cost, stable funds. We intend to increase our retail
asset base during fiscal 2002 by offering personal loans to our "Power Pay"
corporate payroll account customers.
Retail deposits constituted approximately Rs. 6.7 trillion or 78.4% of
total bank deposits in India at March 31, 2001. Traditional players in the
Indian banking sector include nationalized banks and foreign banks. While the
nationalized banks have a large branch network, we believe that the advantages
arising from this network are largely negated by over-staffing, the high cost
of physical infrastructure and poor customer service. Foreign banks have mainly
concentrated on the high net worth segment. Their expansion has been restricted
by branch licensing requirements that make it difficult for them to expand
their presence. As a recent entrant in the market, we do not have to support
unprofitable branches and can open branches in locations with growth potential
and, more
41
importantly, use technology to enhance the accessibility of our products and
services to customers and to offer a higher level of service than generally
available in the market.
Based on consumer research, we have decided to make the transition from
being mere gatherers of deposits to managers of the entire balance sheet of our
retail customers. We have decided to address all of the five basic financial
needs of our customers, namely transactions, credit, investment vehicles,
investment advice and insurance protection. Banks in India have traditionally
focused on meeting their customers' needs for transactions, credit and
investment vehicles (mainly through deposits). We have decided to develop our
competency to meet each of these needs, either by ourselves or through
strategic alliances with other financial service providers. We intend to
increase product choice by complementing in-house investment products with a
quality-screened selection of third party investment products. We are also in
the process of establishing investment advisory services and have entered into
a customer referral arrangement with ICICI Prudential Life Insurance Company to
distribute their life insurance products. We have adopted a focused approach by
targeting a limited sub-segment of about six million households based on a
variety of parameters including residence in selected urban areas. We believe
that this sub-segment is underserved and represents an extremely attractive
business opportunity for us. Further, we expect our target market to experience
continued growth in line with the growth of the Indian economy. Non-resident
Indians are another important target market segment for us given their relative
affluence and strong links to family members in India.
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
- 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 4.0% 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.
The following table sets forth, for the periods indicated, our retail
deposits.
At March 31,
---------------------------------------------------------------------
1999 2000 2001
------------ ----------------- ------------------------------------
(in millions)
Retail deposits.................... Rs. 15,140 Rs. 30,570 Rs. 100,500 US$ 2,145
The following table sets forth, for the period indicated the number of
retail deposit accounts and the balance outstanding by type of deposit.
At March 31, 2001
-----------------------------------------------------------------------------------
Number of
Balance outstanding % of total accounts % of total
---------------------------- ---------- --------- ----------
(in millions, except percentages and number of accounts)
Current accounts................... Rs. 5,470 US$ 116.76 5.4% 75,452 2.3%
Savings accounts................... 18,786 400.98 18.7 1,657,653 51.4
Time deposits...................... 76,244 1,627.40 75.9 1,494,409 46.3
------------ -------------- ----- --------- -----
Total retail deposits.............. Rs. 100,500 US$ 2,145.14 100.0% 3,227,514 100.0%
============ ============== ===== ========= =====
42
The following table sets forth, for the periods indicated, the amount of
retail deposits outstanding by type of account holder.
At March 31,
---------------------------------------------------------- % of total at
1999 2000 2001 March 31, 2001
------------- ------------- ---------------------------- --------------
(in millions, except percentages)
Individuals............................... Rs. 12,590 Rs. 25,800 Rs. 86,280 US$ 1,841 85.8%
Clubs and associations.................... 610 1,310 2,380 51 2.4
Partnership and proprietorship concerns... 1,120 2,020 4,990 107 4.9
Cooperatives and trusts................... 820 1,440 3,430 73 3.5
Others (1)............................... - - 3,420 73 3.4
------------- ------------- ------------- ------------- -----
Total retail deposits..................... Rs. 15,140 Rs. 30,570 Rs. 100,500 US$ 2,145 100.0%
============= ============= ============= ============= =====
---------
(1) Includes deposits under "Business Multiplier", a high value current
account product (mobilized on account of retail initiatives).
The following table sets forth, for the periods indicated, the amount of
retail deposits outstanding by type of product.
At March 31,
---------------------------------------------------------- % of total at
1999 2000 2001 March 31, 2001
------------- ------------- ---------------------------- --------------
Non-resident Indian deposits........ Rs. 2,805 Rs. 5,380 Rs. 14,240 US$ 304 14.2%
Quantum Optima...................... 2,240 7,160 27,130 579 27.0
Power Pay........................... 780 2,780 9,550 204 9.5
Others(1)........................... 9,315 15,250 49,580 1,058 49.3
------------- ------------- ------------- ------------- -----
Total retail deposits............... Rs. 15,140 Rs. 30,570 Rs. 100,500 US$ 2,145 100.0%
============= ============= ============= ============= =====
---------
(1) Includes all other time deposits and current and savings accounts.
For a description of the Reserve Bank of India regulations applicable to
deposits in India and required deposit insurance, see "Supervision and
Regulation -- Regulations Relating to Deposits" and "-- Insurance of Deposits".
In addition to our conventional deposit products, we offer a variety of
special value-added products and services which enable the customer to maximize
returns as well as convenience.
Power Pay
In September 1996, we introduced "Power Pay", a direct deposit product for
a select group of our corporate customers, to help them streamline their salary
payment systems. At March 31, 2001, over 3,500 corporate clients were using
Power Pay, which allows their employees' salaries to be directly credited to a
special savings account established for this purpose. Direct deposit of
paychecks is unusual in India and provides us with a competitive advantage as
these new payroll account holders often open other accounts with us, including
time deposits and subscribe to our credit card services.
To enhance the attractiveness of Power Pay, we have added several features
to the savings accounts maintained by these employees including:
o automatic overdraft up to 50.0% of monthly salary;
o free remittance facility up to Rs. 25,000;
o depositary share accounts; and
o relaxing the requirement to maintain a quarterly average balance of
Rs. 5,000.
At March 31, 2001, we have over 629,000 "Power Pay" accounts, constituting
19.5% of our total retail deposits. Our share of "Power Pay" accounts opened
during fiscal 2001 as a percentage of new savings accounts opened during fiscal
2001 was 21.0%. We aim to deliver value to corporates and their employees by
offering end-to-end
43
financial solutions from salary processing through strategic alliances,
offering payment services through checks, debit and credit cards as well as on
line bill payment, in-house as well as third party investment vehicles and tax
services which facilitate on line generation and offline filing of tax returns
through our network of branches.
Quantum Optima
Quantum Optima is a savings account product that offers the customer
liquidity as well as high returns. This product provides automatic transfer of
idle balances from savings accounts to time deposits in units of Rs. 5,000,
resulting in higher yields. Whenever there is a shortfall in the customer's
savings accounts, deposits are transferred back from the fixed deposit account,
automatically in units of Rs. 1,000 to meet the shortfall.
Business Multiplier Account
We launched our Business Multiplier current account product in July 2000
to meet the needs of the small business segment. In addition to conventional
banking facilities, this account offers a multi-city checking account facility,
anywhere banking facility, free cash transfer remittance facility, free
Internet banking, cash pick-up and delivery, pick-up of checks and documents
and a sweep facility to automatically transfer any excess balance in their
current account to a time deposit.
bank@campus
In March 2000, we launched a savings account called "bank@campus" targeted
specifically at students. The product was initially launched in Mumbai and by
fiscal 2001, it had been extended to other major student centers across the
country. The target market for this product are students who are pursuing
graduate and post graduate studies in universities and institutes across India.
The product features offered are a debit card, Internet banking, phone banking
and a supplementary credit card. We are also in the process of tying up with
educational institutions to offer payment of fees through our online and
offline channels.
Kid-e-bank
In May 2000, we launched a focused product for children in the age group
of 5-12 years. This product seeks to encourage the habit of savings in the
child at an early age. This is an Internet-enabled account. The kid-e-bank site
not only allows the child to do banking online, but also allows the child to
learn about the history of money, get educational inputs and have access to fun
and entertainment. The site exposes the child to e-commerce transactions at an
early age. This product was initially launched in Mumbai and thereafter
extended to the rest of the country. This product is the first of its kind in
the Indian market.
ICICI Select
To ensure that our high net-worth clients are offered services in line
with their relationship with us, we have introduced ICICI Select, a
priority-banking product. This service is aimed at customers with a
relationship size in excess of Rs.1 million and has been introduced in all
major centers across the country. ICICI Select aims at making banking more
convenient, personalized and effortless and includes an entire range of
benefits, such as a personal relationship manager, special priority banking
zones, enhanced access to financial channels and credit card and debit card
facilities. These clients are also offered financial benefits, including lower
interest rates on loans, free funds transfer and waivers on specific fee
charges.
Bureau de Change
We launched "bureau de change" in April 2001. The objective of this
service is to cater to all travel-related foreign exchange needs, be it
business travel or leisure travel for, among others, "Power Pay" customers,
high net worth individuals and students. This service has been launched in
Mumbai, Pune, Ahmedabad, Bangalore and Hyderabad. As an authorized foreign
exchange dealer, we offer services, such as providing internationally valid
travellers' checks issued by Thomas Cook and American Express in all major
currencies.
44
Internet Banking Services
Infinity
In October 1997, we launched Infinity, India's first Internet banking
service. In September 1999, we introduced an online account opening facility
for non-resident Indians. We believe that the increasing number of Internet
users, the demographic characteristics of those users and the relative
flexibility and convenience of Internet banking provides an opportunity for us
to capitalize on our experience in this area and gain market share in the
retail banking sector.
The number of our Internet banking customers has increased from 110,000 at
March 31, 2000 to approximately 550,000 at March 31, 2001 and 711,690 at August
31, 2001. We believe that the expected increase in Internet usage will
accelerate business-to-business and business-to-consumer transactions, which
will ensure our deposit growth through this channel.
We currently offer the following services to our customers:
o access to online account information;
o transaction tracking;
o instantaneous transfer of funds between accounts of the customer;
o transfer of funds to any other account in our bank;
o placement of time deposits;
o secure e-mail facility for communications with an accounts manager;
and
o cheque book and stop payment requests;
o online generation of income tax return;
o investment in mutual funds and government of India relief bonds;
o online payment of purchases made at select shopping malls; and
o bill payments using ICICI Bank credit cards or by debit to savings
account.
We expect Internet banking services to be a value differentiator and
attract new customers from our target segment.
Online Bill Payment
On August 15, 1999, we became the first Indian company to introduce
utility bill payments through the Internet. We now have tie-ups with leading
telecommunication companies like Mahanagar Telephone Nigam Limited (MTNL),
Bharat Sanchar Nigam Limited (BSNL) Chennai, BSNL Bangalore, Tata Teleservices,
state electricity companies like Maharashtra State Electricity Board (MSEB),
Internet service providers like Videsh Sanchar Nigam Limited (VSNL) and Satyam,
insurance companies like Life Insurance Corporation of India and cellular
operators like BPL Mobile, Tata Cellular and Usha Martin. We have also tied up
with some religious and social institutions like Tirupati Thirumala Devasthanam
and Child Relief and You for online donations. In addition, we have tied up
with shopping malls for online payment, including Satyam, Rediff, Fabmart and
Easybuy music. We are currently offering this service free to our customers
with the intention of building a base of users, 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 deposits with us. In the
future, we expect this facility to be a source of fee income from the companies
and the customers who use the service. We have also introduced a bill receipt
module, which allows the customer to receive the bill online.
45
ICICI Bank Munshi- Personal Finance Manager
ICICI Bank Munshi (I-Munshi) is an Internet-based software program
positioned as a personal finance manager. It is offered as a value add-on to
our customers. It was launched on April 19, 2001.
There are four choices of products available depending on the individual's
requirements, all of which are fee generating products. I-Munshi offers the
following financial services to the retail customer:
o taxation;
o accounting; and
o investment.
The product performs services like calculating tax liability, creating
balance sheet and cash flow statements and maintaining portfolio details. It
also enables the customer to generate his tax returns online and file them
offline at designated ICICI Bank branches.
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 173 locations in India. Neither the customer nor the beneficiary needs
to have an account with us, and the remittance can be tracked on the web from
origin to destination. This facility was launched in October 1999. We charge a
fee for this service except where the customer sends funds to his accounts with
us, or if the beneficiary has a bank account with us.
We have introduced a "Check Lock Box" facility for our non-resident Indian
customers living in the United States. They can send dollar checks drawn on
their bank in the US, to a post office box in the US. The check is then
collected by our US correspondent, Chase Manhattan Bank, and sent for clearing.
On receipt of funds, our account is credited and we then pass on credit to the
customer account in India.
Sawal Jawab -- An Online Information Service
In order to invest in India, non-resident Indians often require
information relating to financial and tax matters. To meet this need, we have
introduced a free information service called "Sawal Jawab". This service allows
non-resident Indians to post any query related to investment opportunities in
India, Indian tax laws, banking and other related issues on the Internet. Our
consultant, who is an expert in the field, replies to these queries and the
reply is posted on our web site.
Web Brokering
ICICI launched web brokering services through its wholly owned subsidiary,
ICICI Web Trade Limited, in April 2000. This service involves the online
integration of a customer's various accounts with the ICICI group, including
depositary share accounts with ICICI, 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-broking customer is required to open a bank account. Web broking has also
enhanced customer retention and provided opportunities to earn fee income by
cross-selling other products like loans against shares for subscriptions to
initial public offerings.
Credit Cards
In January 2000, we launched our credit cards by offering a VISA branded
credit card. At March 31, 2001, we had expanded our credit card operations to
20 cities across the country and had issued 217,023 cards.
We believe that:
o our credit card, business will be one of our core retail
products and will help us attract and retain customers and
generate interest and fee income;
46
o the low penetration of credit cards in India presents us with a
significant business opportunity;
o while foreign banks today dominate the Indian credit card
market, a significant segment of the Indian population prefers
to deal with an Indian financial services provider; and
o our credit cards will facilitate the expansion of our retail
banking activities and the ongoing development of our retail
customer database with information on spending patterns,
repayment patterns and credit histories.
The management of our credit card issuance, billing and other operations
have been outsourced to ICICI Personal Financial Services, a subsidiary of
ICICI. ICICI Personal Financial Services manages these operations on the basis
of guidelines approved by us. A comprehensive credit and operations policy has
been laid down for processing card applications and transactions. Credit
approval is done by ICICI Personal Financial Services employees seconded to us,
on the basis of a variety of factors determined by us including the demographic
profile of the applicant, stability of earnings and the nature of employment.
Physical verification of the applicant's details, such as residence, office
location and the documents submitted by the applicant, is carried out to ensure
that only genuine applications are accepted. Card issue, transaction processing
and customer servicing are also carried out by ICICI Personal Financial
Services.
We have devised an internal credit-scoring model and maintain strict
monitoring of repayment patterns to minimize the risks associated with this
business. There are no credit bureaus in India, but we are working closely with
Visa International to develop our fraud and risk management policies. An
in-house fraud unit has been set up to detect, control and manage frauds. We
have also set up a 24 hour, seven day authorization unit which enables us to
track spending patterns of card holders and trigger alerts. Our Vision Plus
software system has an elaborate delinquency management functionality, which we
believe will enable us to actively follow up on delinquent customers. Portfolio
quality will be maintained with the help of advanced technology to deliver
timely information and analytics.
We are one among a few Indian banks to provide credit card account
information through the Internet. Our cardholders have the convenience of
applying for their card, accessing card-related information, viewing their
statement, checking their balance and making payments online. Another
innovation of our credit cards is the flexibility of the cardholder to set
different spending limits on supplementary cards. This enables customers to
control the spending of their supplementary cardholders.
We offer three credit card products targeted at different customer
segments.
True Blue. Positioned as an entry level offering, the True Blue card is a
value for money card. Targeted at the mass market, the card is competitively
priced with an application fee of Rs. 100 and an annual fee of Rs. 300.
Interest is charged on the amount rolled-over to the next month at 2.95% per
month. The credit limit is a function of the monthly income of the cardholder
and is subject to a maximum limit.
Sterling Silver. This credit card is a family offering with a free
supplementary card, along with comprehensive insurance benefits for both
primary as well as supplementary card members. Targeted at the upwardly mobile
customer, this card is available at an application fee of Rs. 150 and an annual
fee of Rs. 600. Interest is charged on the amount rolled-over to the next month
at 2.5% per month. The credit limit is subject to a maximum limit. During the
course of fiscal 2001, the Sterling Silver card was converted into an
International card.
Solid Gold. The Solid Gold credit card is presently offered at a special
invitation price comprising an application fee of Rs. 300 and an annual fee of
Rs. 1,200. This credit card is also accepted globally and can be used both
within and outside India. Interest is charged on the amount rolled-over to the
next month at 2.5% per month. The credit limit is subject to a maximum limit
based on the cardholder's income. This globally accepted card offers additional
comprehensive travel insurance, as well as a Global One Calling Card, which
enables the holder to make telephone calls while traveling abroad.
Customers do not need to have either a bank account or collateral
securities with us to obtain a credit card. For customers with a bank account
with us, we have the right to offset any delinquencies in the credit card
account against balances in the bank account.
47
Portfolio Investment Scheme (PINS)
We are one of the banks designated by the Reserve Bank of India to issue
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. We
report all such transactions to the Reserve Bank of India as a designated bank.
We also help these investors with regulatory compliance, such as ensuring
delivery based trading and limit monitoring and providing tax calculations.
Debit Cards
We launched an international debit card, branded as ICICINCash, in January
2001. The card was launched in association with VISA International on its
popular VISA Electron signature based platform. Our main aim behind the launch
of debit cards is to provide a greater choice of payment solutions to
customers. It provides customers a safer and 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 of 11 million VISA merchant establishments
and ATMs around the world.
Since its launch in January 2001, the debit cards base has grown to 10,000
at March 31, 2001. ICICI Bank is using a mixture of branch sales and direct
marketing tools to change its existing ATM cardholder base into Debit
cardholders.
Smart Cards
Smart cards, though a relatively new technology, have found a variety of
applications, such as customer loyalty management, access control management
and after sales service management. We have undertaken two smart card pilot
projects - the first at Infosys Campus in Bangalore and the second at Manipal
Academy of Higher Education (MAHE), Manipal. Both these smart card projects
employ the e-purse technology, that is, the smart cards are stored-value cards.
However, in the MAHE project, the smart cards are also used as identification
devices within the campus.
Retail Loan Products
Our retail loans were 5.1% of our gross loans at March 31, 2001. We offer
credit cards, loans against time deposits and loans against shares for
subscriptions to initial public offerings of Indian companies. We intend to
increase our retail asset base during fiscal 2002 by offering personal loans to
our "Power Pay" corporate payroll account customers. For more details on our
loan portfolio, see "-- Loan Portfolio".
Other Fee-Based Products and Services
Mutual Fund Sales
We have entered into arrangements with select mutual funds to distribute
their products through our branches and our web site, for which we earn
up-front and back-end commissions. We believe that due to the growing
popularity of mutual funds in India, this service has the potential to generate
increased fee income and strengthen customer relationships.
Depositary 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. ICICI is a depositary participant of the National
Securities Depository Limited, one of the two depositories in the country. We
have a tie-up with ICICI to offer depositary services to its customers through
our branches. Through this tie-up, we facilitate execution of transactions,
conversion of physical securities into electronic form and dividend
distribution.
48
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
and repayment of these bonds. Relief bonds are sold across all of our branches.
Interest earned on relief bonds is tax free and is hence a good investment
avenue for many high net worth individuals. We propose to cash in on this
potential by effectively distributing relief bonds through our distribution
network and earn fee income in the process.
Life Insurance
The Insurance Regulatory and Development Authority Bill has been passed by
the Indian Parliament. On August 5, 2000, the government of India permitted
banks to enter the insurance sector by formally specifying insurance as a form
of business that could be undertaken by them under the Banking Regulation Act,
1949. Under the Reserve Bank of India guidelines, every bank planning to enter
the insurance sector will have to seek approval from the Reserve Bank of India.
From August 16, 2000, the Insurance Regulatory and Development Authority
started accepting applications for licenses in the domestic life and non-life
insurance sector from the private sector, ending the monopoly of state-owned
insurance companies.
ICICI has signed a memorandum of understanding with Prudential Insurance
plc., UK for entering the life insurance business. Since then ICICI Prudential
Life Insurance Company has been set up. We have entered into a marketing
agreement with ICICI Prudential Life Insurance Company to distribute their life
insurance products. We expect that we will not underwrite any insurance and our
income will be based on fees earned from policies distributed by us.
Distribution Channels
We deliver our retail products and services through a variety of
distribution outlets, ranging from traditional bank branches to ATMs 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. Transactions conducted through electronic channels constituted
53.0% of total transactions by our retail banking customers for the quarter
ending June 30, 2001 compared to just 9.0% for the quarter ending June 30,
2000. The success of our channel migration effort has helped not just in
reducing cost, but also in enhancing customer satisfaction levels by providing
them round the clock transaction and servicing assistance.
The key components of our distribution network are described below.
Branches
At March 31, 2001, we had a network of 355 branches (including 11
corporate branches and 39 small and medium enterprise branches) and 34
extension counters in 237 centers across several Indian states at year-end
fiscal 2001, an increase of 274 branches and 18 extension counters over last
year. This was primarily due to the addition of 264 branches pursuant to the
merger of Bank of Madura with ICICI Bank effective March 10, 2001. Out of the
355 branches at year-end fiscal 2001, 177 branches (153 branches of Bank of
Madura) were present in semi-urban or rural areas in India. Extension counters
are small offices primarily within office buildings or on factory premises,
that provides commercial banking services. We believe that we have achieved the
basic geographical spread of our branch network and now propose to concentrate
on consolidating the branch network in the top eight metropolitan cities of
India. Based on the data on dispersion of households falling within our target
segment, we believe that the eight metropolitan cities of India offer maximum
potential for retail banking. 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. We have centralized our back
office operations at regional processing centers, which is expected to reduce
the number of employees required at the branch office, enabling us to create a
more efficient branch network. For a description of our regional processing
centers, see "-- Risk Management -- Quantitative and Qualitative Disclosures
About Market Risk -- Operational Controls and Procedures in Regional Processing
Centers".
49
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. The majority 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, for the period indicated, the number of
branches broken down by area.
At March 31, 2001
------------------------------------
Number of branches % of total
------------------ ----------
Metropolitan/urban................ 178 50.2%
Semi-urban/rural.................. 177 49.8
------------------------------------
Total............................. 355 100.0%
------------------------------------
Automated Teller Machines (ATMs)
We have the largest network of ATMs in the country. Of the 510 ATMs we
operated at March 31, 2001, 145 were located at our branches and extension
counters. The remaining 365 were located at the offices of select corporate
clients, large residential developments, airports and on major roads in
metropolitan cities. At March 31, 2001, we had 1,303,182 ATM cardholders.
Currently, we fund the acquisition of new ATMs. This is different from fiscal
2000 where a substantial portion of the ATMs was leased from ICICI.
In fiscal 2002, we plan to set up more ATMs in the semi urban and rural
areas. These ATMs will typically be installed in former Bank of Madura
branches. We also plan to add more functionalities to our ATM network.
Our ATMs also acquire VISA/VISA Plus/VISA Electron transactions. The
transaction volumes on our network has grown substantially, with an average of
150,000 transactions per day, out of which VISA transactions are around 1,500
per day.
By the end of fiscal 2002, we intend to expand our ATM network to about
800 ATMs. The capital expenditure required to complete this expansion project
is approximately Rs. 2 million per new ATM.
Internet
We believe that many of our corporate and retail customers demand Internet
banking services as a convenient and cost effective means of conducting
financial transactions. We offer online banking services through our web site.
Market Potential of the Internet in India. In India, the delivery of
banking products has traditionally been through large physical branch networks.
Rapid developments in telecommunications and the Internet are helping banks
augment their physical channels. Internet banking is relatively new in India
and we believe that the market for Internet banking services is underdeveloped.
High costs of Internet access and an inadequate telecommunications
infrastructure inhibited the growth of the Internet in India. With the
liberalization of the telecommunications sector and the entry of private
Internet service providers, the quality of infrastructure has improved. The
International Data Corporation predicted in 1999 that the number of Internet
users in India will grow from approximately 0.8 million in 1999 to 4.5 million
in 2002 and 12.3 million by 2005. At present, there are 1,800,000 Internet
subscribers in India.
At December 31, 2001, there were 5 million personal computers in India,
most of which were in the corporate segment. High telecommunications charges
and high Internet access fees charged by service providers make Internet access
from homes expensive. Although the penetration of personal computers is not
widespread in India, other means of Internet access are gradually being
developed. Cyber cafes providing Internet access to the public are opening up
in many parts of the country and have the potential to be an important
distribution channel in the future since customers can access the Internet by
paying only for actual Internet usage. Also, India has about 37 million homes
having access to cable television. The introduction of set-top boxes, which
enable Internet access through
50
cable television, is expected to increase the number of people having access to
the Internet and to promote its reach in India. We expect that in India the
increase in Internet usage will be driven by cyber-cafes and cable television.
We use online banner advertising with other Internet service providers and
leading Indian Internet sites like samachar.com, rediff.com, and
indiatimes.com.
Call Centers
Call centers currently provide telephone-banking services to customers
through our physical call centers situated at Bangalore, Chandigarh, Hyderabad,
Jaipur, Kolkata, Mumbai and New Delhi . In addition to the above, our call
center services are available in 30 more locations. At these locations, there
is no physical call center, but a router is present which diverts all incoming
calls from that location to one of the physical call centers.
The process of centralizing all inbound calls to the Mumbai call center
has been initiated and 90.0% of the calls are now being handled at the
centralized call center in Mumbai that functions 24 hours a day and 365 days a
year. The call centers are managed by ICICI Personal Financial Services. We pay
ICICI Personal Financial Services on the basis of the call volume.
At March 31, 2001, 180,450 customers had registered for telephone banking
services. The call centers receive approximately 23,000 contacts (letters,
calls and emails) per day.
Sales Network
The Reserve Bank of India has prohibited banks from using external agents
to sell liability products. Hence we have developed our own sales force by
employing sales personnel on a contract basis. We continue to use direct
marketing agents for our retail asset products. Though our cross selling
efforts are executed primarily through our bank branches, we have developed a
network of brokers and sub-brokers to market our third-party products.
Mobile Phone Banking
We launched mobile phone banking in Mumbai and New Delhi in March 2000. In
fiscal 2001, we extended this service to Coimbatore, Goa, Hyderabad, Kochi,
Nagpur, Nashik, Pune and a host of other cities. This will enable our savings
account and credit card customers to view their account details on their mobile
phone. In June 2000, we introduced wireless application protocol based
technology to provide our customers with greater functionality.
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
using funds acquired from the inter-bank markets and corporate deposits. Our
trading portfolio includes our regulatory portfolio, as there is no restriction
on active management of our regulatory portfolio.
Effective March 10, 2001, we acquired Bank of Madura through an all stock
merger. The acquisition has been accounted for under the purchase method of
accounting and accordingly the investment portfolio of Bank of Madura was
acquired by us at fair value. These investments have been classified into three
categories based upon management's intention at the time of acquisition:
securities held to maturity, trading account securities and securities
available for sale.
General
Due to regulatory requirements, a substantial portion of our trading
portfolio consists of government of India securities. At March 31, 2001,
government of India securities represented 75.1% of our trading portfolio while
the remainder included domestic debt and equity securities and foreign currency
assets.
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
51
that we actively trade to optimize the yield and benefit from price movements
to increase our trading income from this portfolio.
Under the Reserve Bank of India's cash reserve ratio requirements, as
revised with effect from May 19, 2001,we are required to maintain 7.5% 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 6.0% on the remaining
eligible balance. In calculating the cash reserve ratio requirement, we exclude
the following liabilities from demand and time liabilities:
o inter-bank liabilities;
o liabilities to primary dealers;
o deposits from non-resident Indians, both repatriable and
non-repatriable deposits;
o foreign currency deposits from non-resident Indians; and
o refinancing from the Reserve Bank of India and other institutions
permitted to offer refinancing to banks.
For further discussion of these regulatory reserves, see "Supervision and
Regulation -- Legal Reserve Requirements".
As part of our treasury activities, we maintain proprietary trading
portfolios in domestic debt and equity securities and in foreign currencies. We
have a limited equity portfolio because the Reserve Bank of India restricts our
investment in equity securities to 5.0% of the total outstanding domestic loan
portfolio as on March 31 of the previous year.
Our treasury engages in domestic and foreign exchange operations from a
centralized trading floor in Mumbai. We believe that our dealing room is one of
the best in India in terms of technological capability and skills. The
infrastructure includes the latest voice systems and electronic dealing
terminals with access to real time market information feeds. We are upgrading
our decision support systems.
The treasury has access to the ICICI group's research teams that regularly
track the debt, equity and currency markets. This helps us to respond quickly
to capitalize on market opportunities.
The treasury consists of two parts, domestic treasury and foreign exchange
treasury. At March 31, 2001, our domestic treasury represented 87.8% of our
treasury assets and our foreign exchange treasury represented 12.2% of our
treasury assets.
Domestic Treasury
Our domestic treasury manages our liquidity and regulatory reserves with
an objective of optimizing yield on our investment portfolio. It undertakes
transactions in both fixed income securities and equity securities. Our trading
portfolio consists mainly of fixed income securities. At March 31, 2001, fixed
income securities were 99.3% of our trading portfolio.
Our investment policy, approved by our board of directors, was instituted
in June 1994 and is updated periodically, the latest revision being effected
from April 26, 2001. This investment policy sets out the broad guidelines for
transactions in securities and incorporates the various regulatory
requirements. These guidelines include several checks on risk, including a
duration limit, holding period limits and stop-loss limits. Our investment
policy vests the Investment Committee, dealers and other officers with
different levels of authority for investment decisions. For a more complete
description of our investment policy, see "-- Risk Management -- Quantitative
and Qualitative Disclosures About Market Risk -- Market Risk Management
Procedures".
Liquidity management involves maintaining 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 domestic treasury maintains a balance between
interest-earning liquid assets and cash to optimize earnings.
52
Reserve management involves maintaining statutory reserves, including the
cash reserve ratio and the statutory liquidity ratio.
Our securities are classified into three categories, securities held to
maturity, available for sale securities and trading securities. Trading
securities constitute about 20-25.0% of our portfolio. The following table sets
forth, for the periods indicated, certain information related to our trading
portfolio.
At March 31,
-------------------------------------------------------------
1999 2000 2001
----------- ----------- ---------------------------
(in millions)
Government of India securities.............. Rs. 14,449 Rs. 26,903 Rs. 14,055 US$ 300
Equity securities........................... 198 90 - -
Debentures.................................. - - 1,808 39
Bonds....................................... - - 2,348 50
Revaluation gains on derivative and foreign
exchange contracts.......................... - 309 127 3
Mutual funds units.......................... - 779 - -
Commercial paper and certificates of deposit 750 147 387 8
----------- ----------- ----------- ----------
Total....................................... Rs. 15,397 Rs. 28,228 Rs. 18,725 US$ 400
=========== =========== =========== ==========
The following table sets forth, for the periods indicated, certain
information related to interest and dividends on trading securities, net gain
from the sale of these securities and unrealized gain/(loss) on these
securities.
Year ended March 31,
-------------------------------------------------------------
1999 2000 2001
----------- ----------- ---------------------------
(in millions)
Interest and dividends...................... Rs. 2,247 Rs. 3,073 Rs. 2,833 US$ 61
Gain on sale of trading securities.......... 111 936 769 16
Unrealized gain/(loss) on trading securities 23 (79) (167) (4)
----------- ----------- -------------- ----------
Total....................................... Rs. 2,381 Rs. 3,930 Rs. 3,435 US$ 73
=========== =========== ============== ==========
In addition to trading securities, we also hold available for sale
securities, primarily corporate debt securities. The following tables set
forth, for the periods indicated, certain information related to our available
for sale securities.
At March 31,
---------------------------------------------------------------------------------------------------
1999 2000
------------------------------------------------ ------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Amortized unrealized unrealized
cost gain loss Fair value cost gain loss Fair value
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
(in millions)
Corporate debt securities Rs. 2,860 Rs -- Rs. -- Rs. 2,860 Rs. 2,540 Rs. 53 Rs. (19) Rs. 2,574
Government of India
securities............ 775 50 -- 825 914 89 -- 1,003
Total debt securities... 3,635 50 -- 3,685 3,454 142 (19) 3,577
Mutual fund securities.. 266 12 -- 278 1,146 -- (14) 1,132
--------- ------- -------- ---------- --------- -------- --------- ---------
Total................... Rs. 3,901 Rs. 62 Rs. -- Rs. 3,963 Rs. 4,600 Rs. 142 Rs. (33) Rs. 4,709
========= ======= ======== ========== ========= ======== ========= =========
53
At March 31, 2001
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gain loss Fair value
---------- ---------- ----------- ---------------------
(in millions)
Corporate debt securities Rs. 6,057 Rs. 210 Rs. (27) Rs. 6,240 US$ 133
Government of India
securities............ 15,765 302 (7) 16,061 343
---------- ------- --------- ---------- ---------
Total debt securities... 21,822 512 (34) 22,301 476
Mutual fund securities.. 2,513 4 (142) 2,375 51
---------- ------- --------- ---------- ---------
Others.................. 111 111 2
---------- ------- --------- ---------- ---------
Total................... Rs. 24,446 Rs. 516 Rs. (176) Rs. 24,787 US$ 529
========== ======= ========= ========== =========
The following table sets forth, for the period indicated, an analysis of
the maturity profile of our investments in corporate debt securities classified
as available for sale securities and the yields thereon.
At March 31, 2001
------------------------------------------------------------------------------------------
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. 1,849 10.01% Rs. 3,876 11.69% Rs. 452 12.18% Rs. 63 13.19%
Government of India
securities............ Rs. 5,971 11.40% Rs. 7,095 9.96% Rs. 2,798 11.86% Rs. 197 11.42%
--------- ----- --------- ----- --------- ----- -------- ------
Total interest-earning
securities............ Rs. 7,820 11.07% Rs. 10,971 10.57% Rs. 3,250 11.90% Rs. 260 11.85%
========= ===== ========== ===== ========= ===== ======== =====
Total amortized cost..... Rs. 7,798 Rs. 10,580 Rs. 3,184 Rs. 260
Total market value....... 7,820 10,971 3,250 260
Foreign Exchange Treasury
Our foreign exchange treasury manages our foreign currency exposures,
offers foreign exchange and risk hedging derivative products to our customers
and engages in proprietary trading of currencies.
The foreign exchange treasury tracks balances on a real time basis to
optimize the yield on funds across all currencies, using foreign exchange swaps
and short-term deposits with correspondent banks.
We deal in 18 major foreign currencies and we take deposits from
non-resident Indians in three 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 18 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.
54
Proprietary Trading in Currencies
We are active in the proprietary trading of currencies and are among the
few Indian banks to be approved by the Reserve Bank of India to initiate cross
currency positions abroad. Our trading is focused on US dollar, the Euro, the
Japanese yen and the UK pound sterling. The average monthly inter-bank volumes
for fiscal 2001 was US$ 4.2 billion, up from US$ 3.3 billion in fiscal 2000.
The following table sets forth, for the periods indicated, our growth in
trading volume in various segments of our foreign exchange operations.
Year ended March 31,
----------------------------------------------------------------
1999 2000 2001
----------- ----------- -----------------------------
(in billions, except number of currencies and nostro accounts)
Trading volume:
Inter-bank................................... Rs. 898.7 Rs. 1,402.7 Rs. 2,349.6 US$ 50.1
Merchants.................................... 57.4 129.8 294.7 6.3
----------- ----------- ----------- -----------
Total trading volume............................ Rs. 956.1 Rs. 1,532.5 Rs. 2,643.3 US$ 56.4
=========== =========== =========== ===========
Size of foreign currency book.................. Rs. 86.6 Rs. 190.8(1) Rs. 187.6 US$ 4.0
Number of currencies............................ 15 15 18
Number of nostro accounts....................... 20 22 56
---------
(1) Includes Rs. 7.6 billion (US$ 175 million) of proceeds raised from our ADS
offering in March 2000.
Funding
Our funding operations are designed to ensure both stability of funding
and effective liquidity management. The primary source of funding is deposits
raised from retail customers, which were 61.2% of total deposits at March 31,
2001. Corporate customers are the other source of deposits and represented
38.8% of total deposits at March 31, 2001. We expect retail deposits, which
provide a stable source of funds, to account for a still greater share of
deposits in the future as a result of our improved market presence. We
constantly monitor our funding strategy with a view to minimizing funding costs
and matching maturities with our loan portfolio.
Total Deposits
The following table sets forth, for the periods indicated, our average
outstanding deposits based on daily balances and the percentage composition by
each category of deposits. The average cost (interest expense divided by
average of daily balances) for each category of deposits is provided in the
footnotes.
Year ended March 31,
------------------------------------------------------------------------------
1999 2000 2001
------------------------- ------------------------ ------------------------
Amount % of total Amount % of total Amount % of total
---------- ---------- ----------- ---------- ----------- ----------
(in millions except percentages)
Non-interest-bearing demand deposits Rs. 3,539 9.0% Rs. 7,428 11.0% Rs. 12,505 13.4%
Savings deposits(1)................... 1,569 4.0 3,530 5.3 8,598 9.2
Time deposits(2)...................... 34,347 87.0 56,351 83.7 72,411 77.4
---------- ----- ---------- ----- ----------- -----
Total................................. Rs. 39,455 100.0% Rs. 67,309 100.0% Rs. 93,514 100.0%
========== ===== ========== ===== =========== =====
---------
(1) With an average cost of 3.44% in fiscal 1999, 3.34% in fiscal 2000 and
2.83% in fiscal 2001.
(2) With an average cost of 10.64% in fiscal 1999, 10.06% in fiscal 2000 and
9.69% in fiscal 2001.
For a breakdown of our corporate deposits, see "-- Corporate Banking --
Corporate Deposits", and for a breakdown of our retail deposits, see " --
Retail Banking -- Deposits".
55
Short-Term Borrowings
The following table sets forth for the periods indicated, certain
information related to our short-term rupee borrowings from banks, primary
dealers and financial institutions, excluding deposits.
Year ended March 31,
------------------------------------------------------
1999 2000 2001
---------------- --------------- ---------------
(in millions, except percentages)
Period end balance(1)......................... Rs. 325 Rs. 4,109 Rs. 9,507
Average balance during the period(2).......... 2,193 5,264 8,268
Maximum month-end balance..................... 3,968 9,710 10,293
Average interest rate during the period(3).... 10.31% 11.84% 10.97%
Average interest at period end(4)............. 10.64 7.37 9.35
---------
(1) Short-term borrowings include trading liabilities, such as borrowings in
the call market and repurchase agreements.
(2) Average of daily balances outstanding.
(3) Represents the ratio of interest expense on short-term borrowings to the
average of daily balances of short-term borrowings.
(4) Represents the weighted average rate of the short-term borrowings
outstanding at fiscal year-end.
Other Sources of Funds
We also obtain funds from the issuance of subordinated debt securities. In
May 1998, we issued Rs. 1.0 billion of subordinated debt due August 2003, in
January 1999, we issued Rs. 680 million of subordinated debt due April 2006 and
in July 2001, we issued an additional Rs. 2.3 billion (US$ 49 million) of
subordinated debt due April 2007. This debt is classified as Tier 2 capital in
calculating our 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. For a discussion of our capital adequacy ratios, see "Operating and
Financial Review and Prospects -- Capital".
Loan Portfolio
At March 31, 2001, our gross loan portfolio, which includes our holdings
of corporate debt instruments and preferred stock, was Rs. 96.3 billion (US$
2.1 billion) and represented approximately 1,500 loans outstanding. Corporate
debt instruments and preferred stock amounted to Rs. 23.6 billion (US$ 504
million) at March 31, 2001, or 24.5% of our gross loans. Very little trading
exists in these corporate debt securities, but we believe that as the secondary
debt markets in India become more active, lenders will be able to more easily
sell these corporate debt securities, thereby allowing for better management of
mismatches in the maturity of assets and liabilities and providing additional
liquidity. Almost all of our loans are to Indian borrowers.
The following table sets forth, for the periods indicated, our gross loan
portfolio classified by product group.
At March 31,
----------------------------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ------------------------
(in millions)
Working capital................... Rs. 6,705 Rs. 9,256 Rs. 17,508 Rs. 31,576 Rs. 57,316 US$ 1,223
Term loans(1)..................... 1,477 3,344 9,859 14,635 34,051 727
Retail loans...................... 380 590 1,110 1,553 4,909 105
---------- ---------- ---------- ---------- ---------- ----------
Gross loans....................... Rs. 8,562 Rs. 13,190 Rs. 28,477 Rs. 47,764 Rs. 96,276 US$ 2,055
========== ========== ========== ========== ========== ==========
Of which:
Corporate debt instruments and
preferred stock.............. Rs. 153 Rs. 1,424 Rs. 6,762 Rs. 10,532 Rs. 23,624 US$ 504
56
---------
(1) Includes corporate debt instruments, preferred stock and lease finance
products. We had lease finance of Rs. 944 million (US$ 20 million) at
March 31, 2001. In fiscal 1996, we offered lease financing to a limited
number of customers due to certain tax advantages to us from these
transactions. We discontinued all of our lease finance activities in
fiscal 1998 once the Indian tax authorities disputed this tax treatment.
For a discussion of this dispute, see "-- Legal and Regulatory
Proceedings". We acquired a portfolio of hire purchase business,
representing Rs. 8 million (US$ 170,758) at March 31, 2001, from Bank of
Madura. We have extended fund based loans as well as stand by letters of
credit facility to corporates outside India which are joint ventures
and/or wholly-owned subsidiaries of Indian corporates. At March 31, 2001,
the balance outstanding in respect of these loans was Rs. 951 million (US$
20 million) which represented approximately 0.9% of our total gross loan
portfolio.
Collateral -- Completion, Perfection and Enforcement
Our loan portfolio consists predominantly of working capital loans. These
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. 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. This registration amounts to a
constructive public notice to other business entities. At March 31, 2001, 67.4%
of our gross loans were secured. In general, our loans are over-collateralized.
In India, there are no regulations stipulating any loan-to-collateral limits.
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 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.
We recognize that our ability to realize the full value of our 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.
Most of our corporate borrowers having large working capital requirements
borrow from more than one bank either under a consortium arrangement or under a
multiple banking arrangement. Under a consortium arrangement, the financing
banks formally decide on the credit proposal of the company and decide how the
funding should be distributed among the consortium banks. A lead bank, usually
the bank providing the largest share of the overall credit, is appointed under
a consortium lending arrangement. The lead bank coordinates credit appraisals,
execution of joint documents, regular review meetings and security inspections.
Under a consortium arrangement, typically the security is in the form of a
first lien on current assets, which is shared on a proportionate basis among
the participating banks. Theoretically, a member can exit from a consortium,
with its share taken either by an existing member or by induction of a new
member in the consortium. However, in the case of a impaired loan, this exit
route is generally not available since the other members of the consortium are
not likely to take up additional credit that is impaired. Further, a member is
generally not allowed to take recovery action independent of the consortium in
the case of a impaired loan. Hence, recovery from impaired companies that are
under a consortium arrangement may be delayed.
Under a multiple banking arrangement, each bank stipulates its own terms
and obtains distinct and identifiable collateral. Individual documents are also
obtained and requisite liens created. Unlike a consortium arrangement lending,
in a multiple bank or sole bank lending, we can independently pursue recovery
of past due amounts either through full cash recovery, a negotiated settlement
or a legal suit. At March 31, 2001, loans with consortium
57
arrangements accounted for 34.2% of our gross impaired loans, loans with
multiple bank arrangements accounted for 21.6% of our gross impaired loans and
sole bank lending accounted for 44.2% of our gross impaired loans.
Loan Concentration
Pursuant to the guidelines of the Reserve Bank of India, our credit
exposure to individual borrowers must not exceed 20.0% of our capital funds
calculated under Indian GAAP (effective April 1, 2000). In its monetary and
credit policy for fiscal 2002, the Reserve Bank of India has reduced the
exposure ceiling from 20% to 15% with effect from April 1, 2003.
Our exposure to a group of companies under the same management control
must not exceed 50.0% of our 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 60.0% of our capital funds (40%
with effect from March 31, 2002 and 50% for infrastructure products). Pursuant
to the Reserve Bank of India guidelines, an exposure is calculated as the sum
of 100.0% of the committed funded amount or the outstanding funded amount,
whichever is higher, and 50.0% of the committed non-funded amount or the
outstanding non-funded amount, whichever is higher. Our loan exposures to
individual and group borrowers have been generally within the percentages
prescribed by the Reserve Bank of India based on the capital funds calculated
under Indian GAAP. In exceptional cases, where we have exceeded these
percentages, we have obtained the approval of the Reserve Bank of India as
required.
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. Our risk management department monitors
all major sectors of the economy and specifically follows industries in which
we have credit exposures. We 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.
The following table sets forth, for the periods indicated, our gross loans
outstanding by the borrower's industry or economic activity and as a percentage
of our gross loans.
At March 31,
-----------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------------- ----------------- ----------------- ----------------- ---------------------------
(In millions, except percentages)
Agriculture.............. Rs. 252 3.0% Rs. 501 3.8% Rs. 675 2.4% Rs. 1,520 3.2% Rs. 2,984 US$ 64 3.1%
Auto including trucks.... - - 600 4.5 1,006 3.5 1,680 3.5 2,111 45 2.2
Cement................... 60 0.7 170 1.3 540 1.9 1,124 2.3 2,394 51 2.5
Chemicals, drugs and
Pharmaceuticals.......... 490 5.7 1,092 8.3 2,420 8.5 5,772 12.0 11,032 235 11.5(1)
Computer software........ - - 230 1.7 460 1.6 823 1.7 1,368 29 1.4
Construction(2).......... 510 6.0 770 5.8 740 2.6 882 1.8 1,396 30 1.5
Electricity.............. 470 5.5 540 4.1 1,488 5.2 2,784 5.8 7,752 165 8.1
Finance.................. 890 10.4 780 5.9 1,949 6.9 6,113 12.8 9,375 200 9.7
Iron and steel........... 380 4.4 460 3.5 620 2.2 703 1.4 1,118 24 1.2
Other metals and metal 220 2.6
products................. 330 2.5 1,370 4.8 1,269 2.7 1,439 31 1.5
Light manufacturing...... 1,280 14.9 1,300 9.9 2,800 9.8 4,895 10.3 6,781 145 7.0
Other personal loans..... 380 4.4 590 4.5 1,110 3.9 1,553 3.3 6,691 143 7.0
Paper and paper products. 150 1.8 240 1.8 373 1.3 745 1.6 1,118 24 1.2
Textiles................. 860 10.0 1,170 8.9 1,405 4.9 1,600 3.4 3,605 77 3.7
Transport................ 230 2.7 360 2.7 159 0.6 1,686 3.6 4,363 93 4.5
Other industries(3)...... 2,390 27.9 4,057 30.8 11,362 39.9 14,615 30.6 32,748 699 34.0
--------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -------- -----
Gross loans.............. Rs. 8,562 100.0% Rs. 13,190 100.0% Rs. 28,477 100.0% Rs. 47,764 100.0% Rs. 96,276 US$2,055 100.0%
========= ===== ========== ===== ========== ===== ========== ===== ========== ======== =====
---------
(1) Includes lendings to petroleum and petrochemicals sectors of 6.9% in
fiscal 2001.
(2) Includes engineering, procurement and construction projects and building
construction.
(3) Includes over 40 different industries with no industry constituting more
than 3.0%.
At March 31, 2001, no single industry accounted for more than 15.0% of our
gross loan portfolio.
In fiscal 1998 and 1999, there was an increase in the proportion of assets
in the chemicals, drugs and pharmaceuticals and other metals and metal products
sectors, while there was a decrease in the proportion of assets in the
construction, iron and steel, and textiles sectors.
58
In fiscal 2000, there was an increase in the proportion of our assets in
the finance, chemicals, transport, agriculture and light manufacturing sectors
while there was a decrease in the proportion of our assets in the construction,
textiles, iron and steel, other metals and metal products sectors.
In fiscal 2001, there was an increase in the proportion of our assets in
the cement, electricity and transport sectors while there was a decrease in the
proportion of our assets in the auto including trucks, chemicals, drugs and
pharmaceuticals, finance, other metal and metal products and light
manufacturing sectors.
Our 10 largest loan exposures at March 31, 2001 totaled approximately Rs.
21.6 billion (US$ 461 million) and represented 22.4% of our total gross loan
portfolio. The largest group of companies under the same management control
accounted for approximately 2.7% of our portfolio.
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".
Impact of Economic Environment
The Indian industrial sector has been subject to increasing competitive
pressures, and Indian corporations have had to respond to these pressures
through a process of restructuring and repositioning. This restructuring
process is taking place in several industries, primarily in sectors where many
small, unprofitable manufacturing facilities have existed, principally the iron
and steel and textiles industries. This has led to a decline in the operating
performance of Indian corporations and the impairment of related loan assets in
the financial system, including some of our assets. In fiscal 2001, gross
impaired loans increased primarily due to our acquisition of Bank of Madura. At
March 31, 2001, Bank of Madura contributed Rs. 2.2 billion (US$ 47 million) or
41.7% of our gross impaired loans.
At March 31, 2001, our gross impaired loans as a percentage of gross loan
assets was 5.5% (of which 0.9% represents restructured loans and 4.6%
represents other impaired loans) and our gross impaired loans net of valuation
allowances as a percentage of net loan assets was 2.6%. We have made total
valuation allowances for 54.1% of our gross impaired loans on which we have
made valuation allowances. These allowances are based on the expected
realization of cash flows from these assets. We cannot, however, assure you
that our provisions will be adequate to cover any further increase in the
amount of impaired loans or any further deterioration in our impaired loan
portfolio. We had not made valuation allowances on 0.3% of our gross impaired
loans at March 31, 2001 based on the fact that the discounted cash flows from
these borrowers were sufficient to cover the entire exposure of these loans. At
March 31, 2001, we had 5,238 impaired loans outstanding of which the top 10
represented 32.0% of all impaired loans and 1.8 % of our gross loan portfolio.
The following tables set forth, for the periods indicated, certain details
of our gross impaired portfolio.
At March 31,
--------------------------------------------------------------------------------- % of total
1997 1998 1999 2000 2001 March 31, 2001
------------------------------------------------------------------------------------------------
(in millions, except percentages)
Impaired working capital Rs. 66 Rs. 55 Rs. 1,158 Rs. 1,127 Rs. 3,700 US$ 7 69.9%
Impaired term loans 121 46 236 61 1,242 26 23.5
Impaired lease loans -- -- 144 185 227 5 4.3
Impaired corporate debt
instruments(1) -- -- 75 45 121 3 2.3
------------------------------------------------------------------------------------------------
Gross impaired loans Rs. 187 Rs. 604 Rs. 1,613 Rs. 1,418 Rs. 5,290 US$ 113 100.0%
================================================================================================
Gross impaired loans
without valuation
allowances(2) Rs. -- Rs. 26 Rs. 466 Rs. 163 Rs. 14 US$ --
Gross impaired loans with
valuation allowances(3) 187 578 1,147 1,255 5,276 113
Total valuation allowances 187 425 880 748 2,862 61
Impaired loans net of
valuation allowances -- 179 733 670 2,428 52
Gross loan assets 8,562 13,190 28,477 47,764 96,276 2,055
Net loan assets 8,375 12,765 27,597 47,016 93,030 1,986
(1) Includes debentures, preferred stock and bonds.
59
(2) Includes impaired loans on which we have not made a valuation allowance.
(3) Includes impaired loans on which we have made a valuation allowance.
60
At March 31,
-----------------------------------------------------
1997 1998 1999 2000 2001
------ ----- ------ ------ ------
(in percentages)
Gross impaired loans as a percentage of gross loan assets...... 2.2% 4.6% 5.7% 3.0% 5.5%
Gross impaired loans with valuation allowances as a percentage 2.2
of gross loan assets........................................ 4.4 4.0 2.6 5.5
Impaired loans net of valuation allowances as a percentage of -
net loan assets............................................. 1.4 2.7 1.4 2.6
Total valuation allowances as a percentage of impaired loans
with valuation allowances................................... 100.0 73.5 76.7 59.6 54.1
Recognition of Impaired Loans
We identify loans as impaired and place them on a non-accrual basis once
we determine that interest or principal is over due beyond 180 days (typically
two payment periods) or that the payment of interest or principal is doubtful.
We may consider the payment of interest or principal to be doubtful if the
borrower has ceased operations or has incurred cash losses and the probability
of revival is uncertain or the borrower's industry is under stress. We provide
for loan losses based on our assessment of the possibility of recovery of such
loans based principally on the realizable value of collateral and the
discounted value of future cash flows.
With effect from fiscal 2004, banks have to classify an asset as impaired
when principal or interest has remained overdue for more than 90 days.
We do not recognize interest on impaired loans or credit interest to our
income account unless it is collected. Any interest accrued and not received on
impaired loans is reversed and charged against current earnings. We return
impaired loans to accrual status when all contractual principal and interest
amounts are reasonably assured of repayment and, in the case of term loans,
there is a sustained period of repayment performance in accordance with the
contractual terms for at least one year.
Our impaired loans, net of allowances for loan losses increased by Rs. 1.8
billion (US$ 38 million) in fiscal 2001 to Rs. 2.4 billion (US$ 52 million) at
March 31, 2001. Net impaired loans were 2.6% of our total net loan assets at
March 31, 2001 compared to 1.4% at March 31, 2000. Impaired loans as a
percentage of net loans increased in fiscal 2001 primarily due to the impaired
loans acquired from Bank of Madura.
Analysis of Impaired Loans by Directed Lending Sector
When lending under Indian directed lending requirements, we follow the
same credit risk assessment and credit approval processes as in all our
lending. In view of the possibility of higher incidence of asset impairment in
directed lending relative to non-directed lending, we maintain the option of
fulfilling our priority sector obligations by making deposits with Indian
development banks since these yield a better risk adjusted return on capital,
though the nominal returns are much lower than in making loans.
61
The following table sets forth, for the periods indicated, our gross loans and
our gross impaired loans by segment and our gross impaired loans as a
percentage of our gross loans in the same segment.
At March 31,
----------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000
------------------------ ------------------------- --------------------------- --------------------------
Gross Impaired Gross Impaired Gross Impaired Gross Impaired
Loans Loans % Loans Loans % Loans Loans % Loans Loans %
--------- -------- --- ---------- -------- --- ---------- --------- ---- ---------- --------- ---
(in millions, except percentages)
Directed
Lending:
Agriculture.. Rs. 252 Rs. 10 4.0% Rs. 501 Rs. 33 6.6% Rs. 675 Rs. 96 14.2% Rs. 1,520 Rs. 90 5.9%
Small scale
industries... 1,860 37 2.0 2,753 170 6.2 3,510 209 6.0 5,958 154 2.6
Other........... 1,708 19 1.1 2,419 44 1.8 4,500 100 2.2 2,662 112 4.2
--------- -------- --- ---------- -------- --- ---------- --------- ---- ---------- --------- ---
Total
directed
lending...... 3,820 66 1.7 5,673 247 4.4 8,685 405 4.7 10,140 356 3.5
Non-direct
lending...... 4,742 121 2.6 7,517 357 4.7 19,792 1,208 6.1 37,624 1,062 2.8
--------- -------- --- ---------- -------- --- ---------- --------- ---- ---------- --------- ---
Total........... Rs. 8,562 Rs. 187 2.2% Rs. 13,190 Rs. 604 4.6% Rs. 28,477 Rs. 1,613 5.7% Rs. 47,764 Rs. 1,418 3.0%
========= ======== === ========== ======== === ========== ========= ==== ========== ========= ===
Allowance for
loan losses.. Rs. (187) Rs. (425) Rs. (880) Rs. (748)
-------- -------- ---------- ---------
Net impaired
loans........ -- Rs. 179 Rs. 733 Rs. 670
======== ======== ========== =========
(financial data -- continued)
At March 31,
----------------------------------
2001
----------------------------------
Gross
Loans Impaired Loans %
---------- -------- ------- ----
Directed
Lending:
Agriculture.. Rs. 7,096 Rs. 246 US$ 5 3.5%
Small scale
industries... 5,592 1530 33 27.4
Other........... 10,354 228 5 2.2
---------- -------- ------- ----
Total
directed
lending...... 23,042 2004 43 8.7
Non-direct
lending...... 73,234 3285 70 4.5
---------- -------- ------- ----
Total........... Rs. 96,276 Rs. 5290 US$ 113 5.5%
========== ======== ======= ====
Allowance for
loan losses.. 2862 US$ 61
-------- -------
Net impaired
loans........ 2428 US$ 52
======== =======
At March 31, 2001, impaired loans in the directed lending sector as a
percentage of gross loans was 8.7% and impaired loans in the other sectors as a
percentage of gross loans was 4.5%. At March 31, 2001, impaired loans in the
directed lending sector increased to 8.7% from 3.5% at March 31, 2000 primarily
due to our acquisition of Bank of Madura, which had a higher concentration of
impaired loans in the directed lending sector.
Analysis of Impaired Loans by Product
The following tables set forth, for the periods indicated, our impaired
loans by product, and as a percentage of our impaired loans.
At March 31,
-----------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001
---------------- ---------------- ----------------- ----------------- --------------------------
(in millions, except percentages)
Working capital loans:
Cash credits/demand loans.. Rs. 66 35.3% Rs. 537 88.9% Rs. 1,130 70.1% Rs. 1,085 76.6% Rs. 3,441 US$ 73 65.0%
Bill discounting........... -- -- 21 3.5 28 1.7 42 2.9 259 6 4.9
Term loans................. 121 64.7 46 7.6 236 14.7 61 4.3 1,242 26 23.5
Lease finance.............. -- -- -- -- 144 8.8 185 13.0 227 5 4.3
Corporate debt instruments. -- -- -- -- 75 4.7 45 3.2 121 3 2.3
-------- ----- -------- ----- --------- ----- --------- ----- ---------- ------- -----
Total impaired loans....... Rs. 187 100.0% Rs. 604 100.0% Rs. 1,613 100.0% Rs. 1,418 100.0% Rs. 5,290 US$ 113 100.0%
======== ===== ======== ===== ========= ===== ========= ===== ========== ======= =====
Allowance for loan losses.. Rs. (187) Rs. (425) Rs. (880) Rs. (748) Rs. (2,862) US$ (61)
-------- -------- --------- --------- ---------- -------
Net impaired loans......... -- Rs. 179 Rs. 733 Rs. 670 Rs. 2,428 US$ 52
======== ======== ========= ========= ========== =======
62
Although lease finance represented 0.9% of our gross loans at March 31,
2001, it represented 4.3% of our gross impaired loans. In fiscal 1996, we
offered lease financing to a limited number of small and medium-sized companies
because we gained certain tax advantages from these transactions. We
discontinued these activities in 1998 after the Indian tax authorities disputed
this tax treatment. For a discussion of this dispute, see "-- Legal and
Regulatory Proceedings". Due to the small size of these borrowers and their
concentration in industry sectors that have experienced a slowdown, such as the
textiles sector, we believe that our gross impaired loans are greater for this
type of exposure compared to others.
Analysis of Impaired Loans by Industry Sector
The following table sets forth, for the periods indicated, our impaired
loans by borrowers' industry or economic activity and as a percentage of our
loans in the respective industry or economic activity sector.
At March 31,
----------------------------------------------------------------------------------------
1997 1998 1999
-------------------------- ---------------------------- ----------------------------
Gross Impaired Gross Impaired Gross Impaired
loans loans % loans loans % loans loans %
--------- -------- ----- ---------- --------- ------ ---------- --------- -----
(in millions, except percentages)
Agriculture......................... Rs. 252 Rs. 10 4.0% Rs. 501 Rs. 33 6.6% Rs. 675 Rs. 96 14.2%
Auto including trucks -- -- -- 600 -- -- 1,006 -- --
Cement.............................. 60 -- -- 170 -- -- 540 -- --
Chemicals,
drugs and pharmaceuticals......... 490 -- -- 1,092 58 5.3 2,420 79 3.3
Computer software................... -- -- -- 230 -- -- 460 -- --
Construction........................ 510 -- -- 770 24 3.1 740 24 3.2
Electricity......................... 470 -- -- 540 -- -- 1,488 -- --
Finance............................. 890 -- -- 780 -- -- 1,949 61 3.1
Iron and steel...................... 380 -- -- 460 56 12.2 620 268 43.2
Other metals and metal products..... 220 -- -- 330 -- -- 1,370 -- --
Light manufacturing................. 1,280 148 11.6 1,300 94 7.2 2,800 400 14.3
Other personal loans................ 380 -- -- 590 -- -- 1,110 -- --
Paper and paper products........... 150 -- -- 240 -- -- 373 -- --
Textiles............................ 860 -- -- 1,170 62 5.3 1,405 313 22.3
Transport........................... 230 -- -- 360 -- -- 159 -- --
Other industries.................... 2,390 29 1.2 4,057 277 6.8 11,362 372 3.3
--------- -------- ---- ---------- -------- ---- ---------- --------- ----
Total............................... Rs. 8,562 Rs. 187 2.2% Rs. 13,190 Rs. 604 4.6% Rs. 28,477 Rs. 1,613 5.7%
========= ======== ==== ========== ======== ==== ========== ========= ====
Allowance for loan losses........... Rs. (187) Rs. (425) Rs. (880)
-------- -------- ---------
Net impaired loans.................. Rs. -- Rs. 179 Rs. 733
======== ======== =========
At March 31, 2000 At March 31, 2001
------------------------------ -------------------------------------------
Impaired
Gross Loans loans % Gross Loans Impaired loans %
----------- ---------- ----- ----------- ----------------------- -----
(in millions, except percentages)
Agriculture.................... Rs. 1,520 Rs. 90 5.9% Rs. 2,984 Rs. 246 US$ 5.2 8.2%
Auto including trucks.......... 1,680 -- -- 2,111 27 0.6 1.3
Cement......................... 1,124 -- -- 2,394 -- -- --
Chemicals, drugs and
pharmaceuticals............. 5,772 80 1.4 11,032 247 5.3 2.2
Computer software.............. 823 1 0.1 1,368 -- -- --
Construction................... 882 -- -- 1,396 92 2.0 6.6
Electricity.................... 2,784 -- -- 7,752 -- -- --
Finance........................ 6,113 53 0.9 9,375 755 16.1 8.1
Iron and steel................. 703 194 27.6 1,118 175 3.7 15.6
Other metals and metal products 1,269 -- -- 1,439 112 2.4 7.8
Light manufacturing............ 4,895 423 8.6 6,781 839 17.9 12.4
Other personal loans........... 1,553 -- -- 6,691 85 1.8 1.3
Paper and paper products....... 745 -- -- 1,118 119 2.5 10.7
Textiles....................... 1,600 222 13.9 3,605 679 14.5 18.8
Transport...................... 1,686 -- -- 4,363 23 0.5 0.5
Other industries............... 14,615 355 2.4 32,749 1,891 40.5 5.8
----------- ---------- ---- ----------- ---------- --------- ----
63
Total.......................... Rs. 47,764 Rs. 1,418 3.0% Rs. 96,276 Rs. 5,290 US$ 113.0 5.5%
=========== ========== ==== =========== ========== ========= ====
Allowance for loan losses...... Rs. (748) Rs. (2,862) US$ (61)
---------- ---------- ---------
Net impaired loans............. Rs. 670 Rs. 2,428 US$ 52
========== ========== =========
Our gross impaired loans as a percentage of gross loans in the respective
industries were the highest in the textiles, paper and paper products, iron and
steel, and light manufacturing industries.
Textiles: Over the last few years, the output of cotton was affected due
to erratic monsoons. Further, the South-east Asian economic crisis and anti
dumping duties levied by the European Union had adversely impacted the sector.
The majority of our loans to small entities in this sector have been classified
as impaired, and the balance of our exposure is primarily to large economically
sized plants. Our total exposure to this sector increased to Rs. 3.6 billion at
March 31, 2001 from Rs. 1.6 billion at March 31, 2000 due to additional funding
provided to larger better-rated companies and also due to the acquisition of
Bank of Madura by us. At March 31, 2001, we had classified 18.8% of our gross
loans in this sector as impaired compared to 13.9% at March 31, 2000. This
increase was primarily due to the high concentration of Bank of Madura impaired
loans in this sector.
Paper and Paper Products: The increase in impaired loans in this sector is
primary due to the acquisition of the impaired loan portfolio of Bank of
Madura. At March 31, 2001, the Bank of Madura portfolio consisted of Rs.105
million (US$ 2.2 million) of impaired loans in this sector. Their exposure was
mainly to small and mid size paper mills. In the present market environment,
the size of the facilities determines the operating profit margin in the paper
industry and the smaller and mid size companies were pushed out of the market.
At March 31, 2001, we had classified 10.7% of our gross loan in this sector as
impaired.
Iron and Steel: Over the last few years, a sharp reduction in
international steel prices to historic lows has had a significant impact on the
companies in this sector. In addition, a substantial reduction in import
tariffs over the last three years led to price competition from overseas,
significantly reducing domestic prices. The majority of our loans to small
steel plants and small re-rolling mills have already been classified as
impaired, and the balance of loans in this sector is primarily to economically
sized plants with advanced technology. At March 31, 2001, we had classified
15.6% of our gross loans in this sector as impaired, compared to 27.6% as at
March 31, 2000.
Light Manufacturing: The light manufacturing industry category includes
manufacturers of electronic equipment, electrical cables, fasteners, watches
and other light manufacturing items. At March 31, 2001, of the impaired loans
in the light manufacturing sector, 34.7% were to four companies engaged in the
manufacture of equipment, 14.3% were to two manufacturers of electronic
equipment, 12.2% was to a manufacturer of cables and 8.3% was to a manufacturer
of fasteners. Thus, eight companies accounted for more than 69.0% of our total
impaired loans to this sector. The paucity of new projects being set up during
the last three years has led to the depressed performance of companies engaged
in the manufacture of equipment. The increase in our exposure to this sector at
March 31, 2001 compared to at March 31, 2000 has been mainly to the large sized
companies with a diversified product range. At March 31, 2001, we had
classified 12.4% of our gross loans in this sector as impaired.
Top Ten Impaired Loans
At March 31, 2001, we had 5,238 impaired loans outstanding, of which the
top 10 represented 32.0% of our gross impaired loans, 69.6% of our net impaired
loans and 1.8% of our gross loan portfolio. Three of our top 10 impaired loans
have been restructured. We are currently working out detailed restructuring
packages for one borrower in conjunction with other term lenders and other
working capital consortium members. One borrower has made an application for
relief to the Board for Industrial and Financial Reconstruction.
64
The following table sets forth, for the period indicated, certain
information regarding our 10 largest impaired loans
At March 31, 2001
--------------------------------------------------------------------------------------------------
Principal
outstanding Currently
Type of Gross net of Servicing All
banking principal allowance for Interest
Industry arrangement outstanding loan losses(1) Collateral(2)(3) Payments(4)
--------------- ----------- ----------- -------------- --------------- -------------
(in millions)
Borrower A.... Plastics Consortium Rs. 279 Rs. 122 Rs. 347 No
Borrower B.... Petro chemicals Consortium 246 155 34 Yes
Borrower C.... Textiles Consortium 222 161 244 Yes
Borrower D.... Steel Consortium 170 104 205 No
Borrower E.... Textiles Sole 164 65 154 No
Borrower F.... Light
manufacturing Consortium 158 102 87 Yes
Borrower G.... Finance Multiple 129 71 130 Yes
Borrower H.... Chemical Consortium 113 70 120 Yes
Borrower I.... Sugar Multiple 107 66 98 Yes
Borrower J.... Light
Manufacturing Multiple 103 -- 27 No
---------- ------------ -----------
Total......... Rs. 1,691 Rs. 916 Rs. 1,446
========== ============ ===========
---------
(1) The net realizable value of these loans on a present value basis is
determined by discounting the estimated cash flow over the expected period
of repayment by the rate implicit in the loan. Under US GAAP, the net
present value of a impaired loan includes the net present value, to the
extent realizable, of the underlying collateral, if any.
(2) Collateral value is that reflected on the borrower's books, or that
determined by third party appraisers to be realizable, whichever is lower
or available. We have collateral in the form of first charge on current
assets.
(3) Out of the above 10 cases, collection in the cases of borrower A, E, G and
J are collateral dependent. In all other cases, we are primarily dependent
on recovery through cash flows, collateral being of secondary importance.
(4) Since we also classify loans as impaired once we determine that the
payment of interest or principal is doubtful, and since such
classification occurs even before the borrower stops paying interest and
principal, certain of our impaired loans are currently servicing all
interest payments.
Five of our top 10 impaired loans were to borrowers where we acted
together with other banks or as part of a consortium of banks with our share of
exposure being a maximum of 12.0% of the total exposure of all banks to these
borrowers.
Interest Foregone
Interest forgone is the interest due on impaired loans that has not been
accrued in our books of accounts. The following table sets forth, for the
periods indicated, the amount of interest foregone.
Interest foregone
(in millions)
--------------------
Fiscal 1997................................................Rs. 6 US$ --
Fiscal 1998................................................ 81 2
Fiscal 1999................................................ 93 2
Fiscal 2000................................................ 124 3
Fiscal 2001................................................ 495 11
Restructuring of Impaired Loans
Our impaired loans are restructured on a case-by-case basis after our
management has determined that restructuring is the best means of realizing
repayment of the loan. These loans continue to be on a non-accrual basis and
will be reclassified as performing loans only after sustained performance under
the loan's renegotiated terms for at least a period of one year.
65
The following table sets forth, for the periods indicated, our impaired
loans that have been restructured through rescheduling of principal repayments
and deferral or waiver of interest.
At March 31,
------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- -------- -------- -------------------
(in millions, except percentages)
Gross restructured loans........ -- -- Rs. 38 Rs. 43 Rs. 890 US$ 19
Allowance for loan losses....... -- -- (22) (25) (423) (9)
Net restructured loans.......... -- -- 16 18 467 10
Gross restructured loans as a
percentage of gross impaired
loans........................ -- -- 2.4% 3.0% 16.8%
Net restructured loans as a
percentage of net impaired
loans........................ -- -- 2.2% 2.7% 19.2%
We are currently working out restructuring packages for five borrowers
along with other term lenders and working capital consortium members in the
case of our impaired loans under a consortium arrangement, and one borrower who
is under sole banking arrangements. The large increase in restructured loans at
year-end fiscal 2001 compared to year-end fiscal 2000 was principally on
account of our acquisition of nine restructured loan accounts aggregating Rs.
306 million (US$ 6.5 million) from Bank of Madura and the restructuring of four
of our loan accounts in fiscal 2001with an aggregate outstanding balance of Rs.
539 million (US$ 11.5 million), of which two loan accounts with an aggregate
outstanding balance of Rs.187 million (US$ 4.0 million) were classified as
impaired as at March 31, 1999.
The following table sets forth, at the date indicated, the status of our
efforts in working out restructuring packages for impaired loans:
At March 31, 2001
---------------------------------------------
Principal
Gross outstanding net of
Number of principal allowances for loan
borrowers outstanding losses
--------- ----------- -------------------
(in millions, except numbers)
Loans under consortium arrangements(1)............... 4 Rs. 382 Rs. 245
Loans under sole banking arrangements(1)............. 1 35 19
Loans to borrowers who have applied for relief
to the Board for Industrial and Financial
Reconstruction..................................... 1 45 6
--- ---------- -----------
Total................................................ 6 Rs. 462 Rs. 270
=== ========== ===========
---------
(1) None of these borrowers has applied for relief to the Board of Industrial
and Financial Reconstruction.
Impaired Loan Strategy
The recovery and settlement of impaired loans is of high priority to us.
In fiscal 1999, we set up a Special Asset Management Group, consisting of seven
members, for finding early solutions and pursuing recovery in impaired loans.
Effective April 2000, the group is headed by one of our Senior Executive Vice
Presidents, with over 31 years of experience in the banking sector. He is
assisted by one Senior Vice President/Vice President and other officers, with
specific focus on recovery of impaired loans. This team is assisted by
representatives at branches having a higher concentration of impaired loans.
The branch managers at the branches having impaired loans are also actively
involved in supporting the efforts of the Special Asset Management Group. This
group is highly focused and has specific targets in terms of recovery of
impaired loans. This group works closely with the Special Asset Management
Group established in ICICI to work on restructuring and settlement packages for
common customers and to adapt successful recovery strategies of ICICI. The
group also uses the services of outside legal experts, accountants and
specialized agencies for due diligence, valuation and legal advice to expedite
early settlements.
66
Methods for resolving impaired loans include the following:
o negotiated or compromise settlements on a one-time settlement basis;
o encouraging the financial restructuring of troubled but viable
corporations;
o encouraging the consolidation of troubled borrowers in fragmented
industries with stronger industry participants; and
o early enforcement of collateral through judicial means.
We closely monitor migration of the credit ratings of our borrowers to
enable proactive remedial measures to prevent loans from becoming impaired. We
frequently review the industry outlook and analyze the impact of changes in the
regulatory and fiscal environment, helping us to contain our impaired loans.
Our quarterly review systems help us to monitor the health of accounts and to
take prompt remedial measures.
Our current approval process generally requires a minimum credit rating by
us of A(minus). However, prior to our organizational restructuring in April
1999, our minimum credit rating for credit approval was BBB. At present, some
of our loans are rated BBB or below since we closely monitor the credit rating
of our borrowers and downgrade the credit rating as soon as they show any signs
of deterioration.
Allowance for Loan Losses
The following table sets forth, for the periods indicated, movements in
our allowance for loan losses.
At March 31,
-----------------------------------------------------------------
1997 1998 1999 2000 2001
--------- -------- -------- --------- -----------------------
(in millions)
Allowance for loan losses at the
beginning of the period............. Rs. -- Rs. 187 Rs. 425 Rs. 880 Rs. 748 US$ 16
Add:
Bank of Madura........................ -- -- -- -- 1,572 34
Provisions for loan losses:...........
Working capital....................... 66 256 349 470 1,108 24
Term loans............................ 121 104 17 9 69 1
Leasing finance....................... -- -- 144 24 17 --
Marketable corporate debt instruments. -- -- 30 -- 73 2
Release of provision as a result of
cash collection..................... -- -- -- (76) (185) (4)
--------- -------- -------- --------- --------- ---------
Total provisions for loan Losses...... 187 547 965 1,307 3,402 73
--------- -------- -------- --------- --------- ---------
Less:.................................
Write-offs............................ -- (122) (85) (559) (512) (11)
--------- -------- -------- --------- --------- ---------
Allowances for loan losses at the end
of the period....................... Rs. 187 Rs. 425 Rs. 880 Rs. 748 Rs. 2,890(1) US$ 62
========= ======== ======== ========= ========= =========
---------
(1) Includes impairment of Rs. 28 million ( US$ 597,652) on credit card
outstandings.
We conduct a comprehensive analysis of our entire loan portfolio on a
quarterly 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 our 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 our past history of loan losses and value of
underlying collateral. For further discussions of our allowances for loan
losses, see "Operating and Financial Review and Prospects -- Result of
Operations -- Provisions for Loan Losses".
Under our US GAAP analysis of the provisions for impaired loans, we are
required to take into account the time delay in our ability to foreclose upon
and sell collateral. The net present value of a impaired loan includes the net
present value of the underlying collateral, if any. As a result, even though we
are generally over-collateralized, additional allowances are required under US
GAAP over the Reserve Bank of India regulations because US GAAP takes into
account the time value of money.
67
Risk Management
As a financial intermediary, we are exposed to various risks that are
related to our lending and trading businesses, deposit taking activities and
our operating environment. Our aim in risk management is to ensure that we
understand, measure and monitor the various risks that arise and that our
organization adheres strictly to the policies and procedures which are
established to address these risks.
We are exposed to three broad categories of risk: credit risk, market risk
and operational and legal risk.
--------------------------- -------------------------------
Managing Director and Chief Audit and Risk Committee of the
Executive Officer Board of Directors
--------------------------- -------------------------------
| |
| |
----------------------------------------------------
|
|
-----------------------------------
Senior Executive Vice President and
Head, Risk Management Department
-----------------------------------
|
|
-----------------------------|----------------------
| | |
| | |
----------------- ----------------- ----------------------
Credit Risk Group Market Risk Group Operational Risk Group
----------------- ----------------- ----------------------
In October 1999, our risk management function was reorganized and
integrated into a single Risk Management Department separate from our three
business units. The Risk Management Department works in close association with
the business units to implement the various risk management strategies. Our
Risk Management Department is completely independent of all business
operations. This department identifies, assesses, monitors and manages all our
principal risks in accordance with well-defined policies and procedures. The
Risk Management Department consists of 27 experienced bankers and analysts and
is led by a Senior Executive Vice President reporting directly to our Managing
Director and Chief Executive Officer and the Audit and Risk Committee of our
board of directors. The organizational structure of our Risk Management
Department is shown in the above chart.
Credit Risk
Credit risk primarily arises in our lending operations from the failure of
any party, principally our borrowers, 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. Our standardized credit approval process includes
a well-established procedure of credit evaluation and approval. We measure,
monitor and manage credit risk for each borrower. We have a comprehensive
system for tracking the rating profile of our loan portfolio and are now
working on a comprehensive portfolio risk evaluation mechanism.
Credit Risk Assessment Procedures for Corporate Loans
In order to assess the credit risk associated with any financing proposal,
we assess a variety of risks relating to the borrower and the relevant
industry. If the borrower is undergoing a major expansion project that requires
them to
68
obtain project finance from a financial institution in addition to working
capital loans from us, we also assess the risks relating to the project.
We evaluate borrower risk 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.
We evaluate industry risk 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, we assign a
credit rating to the borrower. We have 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. We use studies on the historical default
patterns of loans in order to predict defaults. We determine the desired credit
risk spread over our cost of funds by considering the borrower's credit rating
and the default pattern corresponding to the credit rating. Our credit approval
process generally requires a benchmark minimum credit rating of A-. During
fiscal 2001, we completed the process of re-rating all our existing exposures
according to our new credit rating model.
We study industry sectors and published reports from online databases,
including the Center for Monitoring the Indian Economy and Internet Securities
(a Euromoney group company), and review our large exposures by industry and by
corporate client. We identify, through these internal studies, the growing
industry sectors to which we should increase our exposure and the stagnating
sectors to which we should decrease our exposure. These ongoing studies and
reviews also enable us to regularly adjust a borrower's credit rating in
response to changes in that borrower's risk and the risk associated with that
borrower's industry.
Working capital loans are generally approved for a period of 18 months. At
the end of 12 months, we review the loan arrangement and the credit rating of
the borrower and take a decision on continuation of the arrangement and the
changes in the loan covenants as may be necessary. We intend to review the
credit rating of borrowers with higher credit risks more frequently.
Credit Approval Procedures for Corporate Loans
Our corporate banking approval process is dictated by our credit policy
approved by our board of directors. This policy sets out our maximum credit
exposures to individual companies, groups of companies and industries.
We have established a strong framework for the appraisal and execution of
working capital and term loan finance transactions. Pursuant to our
organizational restructuring that was implemented on April 1, 1999, our credit
appraisal and approval processes have been centralized. We evaluate commercial,
financial, marketing and management factors relating to the borrower and the
sponsor's financial strength and experience. We make use of databases of
approximately 3,000 Indian companies that contain historical financial and
operating information on these companies. We also extensively use industry
analysis reports and interact with external rating agencies to track business
cycles in specific sectors and industries, the impact of emerging fiscal,
regulatory and other environmental factors and the financial performance of
Indian companies. Once this review is completed, an appraisal note is prepared
for credit approval purposes. A structured appraisal format is used to ensure a
uniform standard across the organization. Quantitative tools like inter-firm
comparisons, sensitivity analysis and analysis of demand-supply gap
69
patterns are used to analyze the performance of the borrower. As part of the
appraisal process, we generate a risk matrix, which identifies each of the
risks, mitigating factors and residual risks associated with the proposal.
Credit Approval Authority for Corporate Loans
We have established seven distinct levels of credit approval authorities
for our corporate banking activities: the head of Operations, the head of
Corporate Banking, the Executive Committee, the Management Committee, the
Investment Committee, the Committee of Directors and our board of directors.
The following table sets forth the composition of the committees and
approval authority of the committees and the authorized officers.
Authorized executives and
committees Members Approval authority
----------------------------------- --------------------------------------- -------------------------------------
Board of Directors................. All the members on our board of All approvals (in practice, generally
directors above the prescribed authority of
the Committee of Directors)
Committee of Directors............. Managing Director and Chief Executive All approvals to companies up to Rs.
Officer and six other directors 1,000 million (US$ 21 million)
Investment Committee............... Executive Director-Wholesale Banking, All approvals for subscribing to
heads of Corporate Banking, Risk debentures, preferred stock, bonds
Management and Treasury and the and commercial paper
Chief Financial Officer
Management Committee .............. Managing Director and Chief Executive All approvals up to Rs. 300 million
Officer, Executive (US$ 6 million)
Director-Wholesale Banking,
Executive Director-Retail Banking
and heads of Corporate Banking and
Risk Management
Executive Committee................ Heads of Corporate Banking, All approvals for borrowers rated
Operations, Risk Management and 'BBB' and above up to Rs. 150
Retail Banking million (US$ 3million)
Head of Corporate Banking.......... All ad hoc/additional approvals in
existing accounts, with a credit
rating of 'BBB' and above up to 10%
of the existing sanctioned limits,
subject to a maximum of Rs. 20
million (US$ 426,900)
Head of Operations................. All ad hoc/additional approvals in
existing accounts, handled by the
Special Asset Management Group, up
to 10% of the existing sanctioned
limits, subject to a maximum of
Rs. 10 million (US$ 213,450)
The branch managers of corporate banking branches are not individually
authorized to approve new loans. They are however authorized to approve
temporary accommodation (repayable within a month) to existing customers. Also,
in respect of existing loans, such temporary accommodation is restricted to
20.0 % of the fund-based limits approved to such borrowers or up to Rs. 10
million (US$ 213, 450) in each case, whichever is lower.
70
Disbursement Procedures for Corporate Loans
After credit approval, we disburse the loans though our corporate
branches. Our corporate office sends credit approval letters to the branches
stating the covenants governing the approval. Based on the credit approval
letter received from the corporate office, branches issue a credit arrangement
letter to the borrower outlining the terms of the facility, sponsors'
obligations, conditions precedent to disbursement and undertakings from and
covenants on the borrower. After the borrower accepts the terms, the loan
agreement and other documents are executed. The borrower account is then made
operational in the case of a working capital facility and disbursements are
made to the borrower in the case of other loan facilities. Our cash credit
facilities operate as revolving asset backed overdraft facilities. We determine
the amount that can be drawn by the borrower on the basis of monthly cash flow
statements or statements of current assets provided by the borrower and the
stipulated current asset cover margins.
Credit Monitoring Procedures for Corporate Loans
We have established detailed procedures for the monitoring of our credit
exposures. Our aim in credit monitoring is to:
o ensure compliance with the terms and conditions of the credit
approval;
o review performance of our borrowers against projections;
o detect early warning signals and take appropriate corrective actions;
and
o observe the performance of the borrowers.
With a view to achieve the above, we have laid out operating procedures
for our branches and the frequency of credit monitoring activities to be
undertaken. Our branches prepare various credit monitoring reports at periodic
intervals. Any irregularity in the account is reported to the appropriate
credit approval authority on a monthly basis. The performance of the borrowers
is monitored through quarterly information reports. Monthly cash flow
statements are obtained wherever considered necessary. We monitor the
performance of companies by comparing the published results against the
projections. We undertake stock inspections and stock audits on a regular
basis.
Credit Approval Procedures for Credit Cards
The target group for credit cards are our Power Pay account holders and
ICICI's retail bondholders where relationships are already established and
customer details are already available to us.
We believe that the improper verification of identity and applicant
information and payment delinquencies is the main source of credit risk in the
credit card business.
We use the services of external agencies for verification of applicant
information and for collection of past due amounts. Detailed credit
applications have been devised for aggregating information on a prospective
customer, such as the person's place of work and residence.
Credit checks are undertaken before the credit card applicants are
approved. These credit checks contain a list of the delinquent customers of
ICICI and a few non-banking finance companies. Copies of a prospective
customer's income tax return and paychecks are also obtained to determine the
income and tax status of the prospective customer. There are no credit bureaus
in India, but we have implemented our own internal credit-scoring model. We
have set individual credit limits based on the monthly salary of the credit
card holder.
Credit Approval Procedures for Other Retail Loans
Since substantially all of our retail loans are fully collateralized with
either cash (in the case of loans against time deposits) or liquid equity
securities (in the case of loans against shares for subscriptions to initial
public offerings), we have not yet devised any credit risk procedures for these
loans.
71
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the value of a financial
instrument as a result of changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect
market risk sensitive instruments. Market risk is attributed to all market risk
sensitive financial instruments, including securities, loans, deposits,
borrowings and derivative instruments. Our exposure to market risk is a
function of our asset and liability management activities, our proprietary
trading activities, and our role as a financial intermediary. The objective of
market risk management is to avoid excessive exposure of our earnings and
equity to loss and to reduce the volatility inherent in financial instruments.
Market Risk Management Procedures
Our board of directors reviews and approves the policies for the
management of market risks and has delegated the responsibility for market risk
management to the Asset Liability Management Committee. Our Managing Director
and Chief Executive Officer chairs the Asset Liability Management Committee.
Our Chief Financial Officer, executives of various business units and the Risk
Management Department are the members of the committee. The committee generally
meets on a monthly basis and reviews our interest rate and liquidity gap
position, formulates a view on interest rates, sets deposit and benchmark
lending rates and reviews the business profile and its impact on asset
liability management. Emergency meetings of the committee are convened to
respond to developments in the markets and economy. The committee also sets
market risk limits for our trading activities. The committee reports to the
Audit and Risk Committee of our board of directors on a quarterly basis.
We have established a mid-office independent of treasury, which monitors
the risks in our treasury operations and ensures adherence to various risk
control limits on a daily basis. The mid-office at regular intervals submits
reports to the head of the Risk Management Department and the Managing Director
and Chief Executive Officer on the extent of our market risk exposure.
We have established risk control limits, including holding period limits
and stop loss limits. Additionally, in the case of foreign exchange trading, we
have set up loss limits for each half-year period (April-September and
October-March). These limits are monitored on a daily basis. We have also
implemented a value at risk model for measuring market risk of our foreign
exchange as well as government securities trading positions.
Our exposure to market risk arises mainly from interest rate risk, equity
risk, exchange rate risk and liquidity risk. We discuss, in the following
paragraphs, each of these sources of risk and the methods we have adopted to
manage them.
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 debt securities is negatively
impacted by an increase in interest rates while our loan portfolio benefits
from a rise in interest rates.
We measure our exposure to fluctuations in interest rates primarily by way
of gap analysis, providing us 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 us an indication of the
extent to which we are exposed to the risk of potential changes in the margins
on new or re-priced assets and liabilities.
Our core business is deposit taking and lending, in both rupees and
foreign currencies, as permitted by the Reserve Bank of India. As the rupee
market differs significantly from the international credit asset markets, our
gap positions in these markets are different.
In the Indian market, our liabilities are mostly at fixed rates of
interest for fixed periods. However, we have a mix of floating and fixed
interest rate assets. We have term-based prime lending rates. We quote interest
rates for our short-term working capital loan products as a markup over the
relevant prime lending rate, effectively making
72
these floating rate loans. Our corporate loan portfolio consists principally of
working capital loans, which are on a floating rate basis.
Our foreign currency liabilities, which are primarily deposits from
non-resident Indians, are at fixed rates. A large portion of our foreign
currency loans is on a floating rate basis. On account of this obvious
repricing mismatch, we have entered into interest rate swaps (we pay a floating
rate and receive a fixed rate). Foreign currency liabilities, net of foreign
currency loans, enable us to raise rupee liquidity quickly by way of currency
swaps, which help us to address any liquidity risk.
The following table sets forth for both our loan portfolio and our trading
portfolio, for the period indicated, our asset-liability gap position.
At March 31, 2001(1)-(7)
--------------------------------------------------------------------------------------------------------
Greater than Greater
Total one year and than
within one up to five five
0-28 days 29-90 days 91-180 days 6-12 months one year years years Total
--------- ---------- ----------- ----------- ---------- ------------ ------- -----------
(in millions)
Loans, net........... Rs. 8,533 Rs. 54,429 Rs. 6,697 Rs. 4,020 Rs. 73,679 Rs. 15,945 Rs. 3,406 Rs. 93,030
Securities........... 3 642 5,101 2,076 7,821 13,889 14,019 35,730
Fixed assets......... 6 10 15 23 54 122 3,883 4,059
Trading assets....... 100 954 545 2,029 3,627 5,346 9,752 18,725
Cash and cash
equivalents........ 22,785 3,637 5,990 1,717 34,129 1,546 9,221 44,896
Other assets(6)...... -- -- -- 12,869 12,869 4,470 6,229 23,568
---------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
Total assets......... Rs. 31,426 Rs. 59,672 Rs. 18,347 Rs. 22,734 Rs. 132,180 Rs. 41,318 Rs. 46,510 Rs. 220,008
========== ========== =========== =========== =========== ========== =========== ===========
Stockholders'
equity............. Rs. -- Rs. -- Rs. -- Rs. -- Rs. -- Rs. -- Rs. 16,307 Rs. 16,307
Debt(6).............. 250 -- -- -- 250 2,171 -- 2,421
Deposits............. 27,467 23,340 33,247 36,137 120,191 14,009 30,054 164,254
Other liabilities(6). 4,949 1,344 1,273 12,987 20,553 1,819 14,654 37,026
---------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
Total liabilities.... Rs. 32,667 Rs. 24,683 Rs. 34,520 Rs. 49,124 Rs. 140,994 Rs. 17,999 Rs. 61,015 Rs. 220,008
========== ========== =========== =========== =========== ========== =========== ===========
Total gap............ Rs. (1,241) Rs. 34,989 Rs. (16,173) Rs. (26,390) Rs. (8,814) Rs. 23,319 Rs. (14,505)
========== ========== =========== =========== =========== ========== ===========
---------
(1) Assets and liabilities are classified into the applicable categories,
based on residual maturity or re-pricing date whichever is earlier.
Classification methodologies have been based on the Asset Liability
Management Guidelines issued by the Reserve Bank of India, which were
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 and fixed assets.
(3) Impaired loans are classified in the "greater than five years" category.
(4) Based on past trends and the Asset Liability Management Guidelines issued
by the Reserve Bank of India, the entire amount of non-interest-bearing
non-maturity deposit accounts have been classified in the "greater than
five years" category.
(5) Based on past trends and the Asset Liability Management Guidelines issued
by the Reserve Bank of India, 75.0% of interest-bearing non-maturity
deposit accounts have been classified in the "91-180 days" category and
25.0%. in the "greater than five years" category.
(6) The categorization for these items is different from that reported in the
financial statements.
(7) Cash and cash equivalents include balances with the Reserve Bank of India
required by its cash reserve ratio requirement. These balances are held in
the form of overnight cash deposits but we classify the interest sensitive
portion of these balances under the "91-180 days" category and the
remainder in the "greater than five years" category.
73
Price Risk (Loan Portfolio)
The following table sets forth, for the period indicated, the impact of
changes in interest rates on net interest revenue for fiscal 2002, assuming a
parallel shift in yield curve at year-end fiscal 2001.
At March 31, 2001
------------------------------------------
Change in interest rates (in basis points)
------------------------------------------
(100) (50) 50 100
-------- ------- -------- --------
(in millions, except percentages)
Rupee portfolio.....................Rs. 31 Rs. 15 Rs. (15) Rs. (31)
Foreign currency portfolio.......... (26) (13) 13 26
-------- ------- -------- --------
Total...............................Rs. 5 Rs. 2 Rs. (2) Rs. (5)
======== ======= ======== ========
Profit/(loss) as a % of net income.. 0.4% 0.2% (0.2%) (0.4%)
Based on our asset and liability position at March 31, 2001, the
sensitivity model shows that net interest revenue from the loan portfolio for
fiscal 2002 would fall by Rs. 5 million (US$ 107,000) if interest rates
increased by 100 basis points during fiscal 2002. Conversely, the sensitivity
model shows that if interest rates decreased by 100 basis points, net interest
revenue for fiscal 2002 would rise by Rs. 5 million (US$ 107,000). Rs. 5
million was 0.4% of our net income for fiscal 2001.
Sensitivity analysis, which is based upon a one-day picture of our asset
and liability position, is used for risk management purposes only and the model
assumes that during the course of the year we make no other changes in our
portfolio. Actual changes in net interest revenue will vary from the model.
The interest rate sensitivities shown above are for exposures in different
markets where interest rate movements may not be perfectly correlated. Thus,
the individual sensitivity figures need to be viewed in isolation and not as a
net figure.
Price Risk (Trading Portfolio)
Trading activities are undertaken primarily to optimize the income from
our regulatory fixed income portfolio and secondarily to enhance our earnings
through profitable trading for our own account. A substantial proportion of our
trading portfolio (75.1%) consisted of investments in government of India
securities at March 31, 2001. We are required by law to invest 25.0% of our
demand and time liabilities in specified securities, including government of
India securities. Duration limits, holding period limits and stop-loss limits
are used by us to manage risks for debt security positions in our trading book.
The following table sets forth, for the period indicated, the impact of
changes in interest rates on a tax adjusted basis on the value of our rupee
fixed income trading portfolio as a percentage of net income, assuming a
parallel shift in yield curve at year-end fiscal 2001.
At March 31, 2001
------------------------------------------------------
Change in interest rates (in basis points)
------------------------------------------------------
Portfolio
Size (100) (50) 50 100
---------- -------- -------- -------- --------
(in millions except percentages)
Government of India securities(1). Rs. 14,055 Rs. 343 Rs. 168 Rs. (162) Rs. (318)
Corporate bonds................... 4,543 103 52 (45) (92)
---------- -------- -------- -------- --------
Total............................. Rs. 18,598 Rs. 446 Rs. 220 Rs. (207) Rs. (410)
========== ======== ======== ======== ========
Profit/(loss) as % of net income.. 34.2% 16.9% (15.9%) 31.4%)
---------
(1) For the purpose of analysis, certain quasi-government corporate securities
are included as government of India securities.
74
At March 31, 2001, the total value of our rupee fixed income portfolio was
Rs. 18.6 billion (US$ 397 million). Based on our asset and liability position
at March 31, 2001, the sensitivity model shows that the value of the trading
portfolio would fall, on a tax adjusted basis, by Rs. 410 million (US$ 9
million) or 31.4% of our net income for fiscal 2001. Conversely, if interest
rates fell by 100 basis points, under the model, the value of this portfolio
would rise, on a tax adjusted basis, by Rs. 446 million (US$ 10 million). The
sensitivity of the value of our trading portfolio to changes in interest rates
is largely due to the government of India securities we are required to hold
under the Reserve Bank of India's statutory liquidity ratio requirement.
Moreover, any decrease in the value of the trading portfolio will be reflected
in our income statement.
As noted above, sensitivity analysis, which is based upon a one day
picture of our asset and liability position, is used for risk management
purposes only and the model assumes that during the course of the year we make
no other changes in our portfolio. Actual changes in the value of the fixed
income portfolio will vary from the model.
Equity Risk
Our equity positions include both equity securities and units of mutual
funds. We only invest in equity securities in book-entry form, which decreases
our settlement and liquidity risk. Our total exposure to these investments was
nil at March 31, 2001 and Rs. 869 million at March 31, 2000. Position limits,
stop-loss limits and holding period limits are used by us to manage risks for
equity positions in the trading book. The Reserve Bank of India requires that
the net exposure to the capital markets by way of investments in equity
securities, equity oriented mutual funds, financing to share brokers - both
fund and non-fund based - and loans against the security of equity shares
should not exceed 5.0% of the total advances in a fiscal year.
Exchange Rate Risk
We offer foreign currency hedge instruments, such as interest rate swaps
and forwards, to our clients which are primarily banks and highly rated
corporate customers. We actively use cross currency swaps and forwards to hedge
ourselves against exchange risks arising out of these transactions. Our trading
activities in the foreign currency markets expose us to exchange rate risks. We
mitigate this risk by setting counterparty limits, stipulating stop-loss limits
by deal and limits on the loss of the entire foreign exchange trading floor,
implementing an internal value at risk model for all trading positions and
engaging in exception reporting.
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 our 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 for
us to be able, even under adverse conditions, to meet all our liability
repayments on time 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. We also borrow in the short-term
inter-bank market. Loan maturities and sale of investments also provide
liquidity.
We use the majority of funds raised by us to extend loans or purchase
securities. Generally, deposits are of shorter average maturity than loans or
investments.
We maintain a substantial portfolio of liquid high quality securities that
may be sold on an immediate basis to meet the liquidity needs. We also have the
option to manage our liquidity by borrowing in the inter-bank market on a
short-term basis. While generally this market provides an adequate amount of
liquidity, the interest rates at which funds are available can sometimes be
volatile. We prepare regular maturity gap analyses to review our liquidity
position.
75
The Reserve Bank of India issued a directive on asset liability management
in February 1999. Starting from April 1, 1999, we were required to submit gap
analysis on a quarterly basis to the Reserve Bank of India. Effective April 1,
2000, our liquidity gap (if negative) must not exceed 20.0% of outflows in the
0-28 day time category.
Operational and Legal Risk
The inspection department of Bank of Madura at Chennai now reports to our
Methods and Inspection department at Chennai. The inspection of all branches of
Bank of Madura is being conducted by this department, with the help of 13
inspecting officials and seven administrative staff members for follow up and
rectification of irregularities. As soon as the software at Bank of Madura
branches gets migrated into the software used in our branches, we propose to
revise their audit checklist and reporting and rating formats so as to align
them with those being currently used by us. The inspection department at
Chennai also has a four-member information security audit team which conducts
regular systems audit at the branches. Inspection at Bank of Madura branches
has been conducted with the help of an audit tool software loaded onto the
laptop computers of the inspecting officials. The branches with a credit
portfolio of above Rs. 100 million are also subjected to concurrent audit.
Due to our vast geographical spread enhanced by the acquisition of Bank of
Madura and our operations being largely transaction oriented, we are exposed to
many types of operational risks. Operational risks are risks arising from
non-adherence to systems and procedures or from frauds resulting in financial
or reputation loss. The Methods and Inspection department is part of our
operational risk group and the head of the Methods and Inspection department
reports to the head of the Risk Management department. It inspects branches and
conducts revenue and concurrent audits based on an inspection calendar drawn up
each year. The primary objective of the inspection function is to ascertain and
ensure that the business activities are carried out in accordance with our
policies, systems and procedures. The Audit and Risk Committee of our board of
directors reviews the inspection function each quarter. Any weakness noticed in
either systems or procedures is addressed appropriately. The Reserve Bank of
India requires us to have a process of concurrent audits at our branches
handling large volumes, to cover a minimum of 50.0% of our business volumes. We
have instituted systems to conduct concurrent audits, using reputed chartered
accountancy firms, to cover about 75.0% of our business.
We have also introduced snap audits which will entail a quick review of
the implementation of various procedures in key areas at the branches. These
audits are intended to rectify any procedural irregularities, especially in
newly opened branches and new activities.
We are subject to inspections conducted by the Reserve Bank of India under
the Banking Regulation Act. The Reserve Bank of India has adopted the global
practice of subjecting banks to examination on the basis of the CAMELS model, a
model that assigns confidential ratings to banks based on their capital
adequacy, asset quality, management, earnings, liquidity and systems and
controls. We also have independent statutory audits conducted on a quarterly
basis by auditors appointed by our shareholders.
We have re-engineered the audit process to make it more risk-oriented. We
have assigned each operating group to a particular level of perceived
operational risk. This then determines a level of capital to be allocated for
unexpected losses from that operating group. Aggregation of these allocations
across operating groups enables us to arrive at a capital allocation for
operational risks. We have, on the basis of preliminary studies, decided to
allocate capital to the extent of 0.1% of our stockholders' equity effective
April 1, 2000 for operational risks. This capital allocation is not required by
Indian regulations. We believe that we are among the first banks in India to
have this capital allocation for operational risks.
There is regular monitoring of complaints at the branches to improve
customer service. We intend to centralize our complaint tracking mechanisms.
We consider legal risk as a part of operational risk. The uncertainty of
the enforceability of the obligations of our customers and counterparties,
including the foreclosure on collateral, creates legal risk. Changes in law and
regulation could also adversely affect us. Legal risk is higher in new areas of
business where the law is often untested in the courts. For example, critical
legal issues in the area of Internet banking are unresolved in India as well as
other jurisdictions to which we would like to offer our products and services
using the Internet. However, legislation has already been introduced in India
in this area. Legal risk in other jurisdictions is also increased by the
international reach of Internet delivery.
76
We seek to minimize legal risk by using stringent legal documentation,
employing procedures designed to ensure that transactions are properly
authorized and consulting legal advisers. Our internal auditors scrutinize all
loan documents to ensure that these are correctly drawn up to withstand
scrutiny in court.
We have formulated a new product policy that requires the operating groups
to test run their new products a certain number of times before launching them
and to prepare detailed product profiles and requires each new product to be
thoroughly evaluated by the Operational Risk Management Committee.
An independent Operations Department has been created to oversee our
operations, branches and regional processing centers. All operational units
report to the Head of Operations for operational matters.
Operational Controls and Procedures in Branches
We have operating manuals detailing the procedures for the processing of
various banking transactions and the operation of our main application
software, Finacle. Amendments to these manuals are implemented through
circulars sent to all offices.
When taking a deposit from a new customer, we require 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 our records, and specimen signatures are scanned and stored in the system
for online verification. We enter into a relationship with our customer only
after the customer is properly introduced to us. 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.
We have 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. Our operating system validates the check number and balance before
permitting withdrawals. Cash transactions over Rs. 1 million (US$ 21,350) are
subject to special scrutiny to avoid money laundering.
We have given importance to computer security. A comprehensive computer
security manual has been provided to all offices. There is a system room in
each office where the server is located. Access to the server room is
regulated. Our banking software, Finacle, has multiple security features to
protect the integrity of application and data. There are user access rights and
terminal-based security features.
Operational Controls and Procedures for Internet Banking
The opening of a bank account online by a new customer is a two-step
process. First, the customer fills out an online application, giving his
personal details. Based on this preliminary information, we allot the customer
a user ID and password. Second, the customer must send to us further
documentation to prove the customer's identity, including a copy of the
customer's passport, a photograph and specimen signature of the customer and a
voided personal check so that we can contact his existing bank, if required.
After the customer completes these formalities satisfactorily, we give him full
access to his account online. For a description of the security features of our
technology related to Internet banking, see " Technology".
Operational Controls and Procedures in Regional Processing Centers
To improve customer service at our physical locations, we handle
transaction processing centrally by taking away such operations from branches.
The centralization is being done both at the corporate office and on a regional
basis. We started this process in September 1999 when we implemented the
quasi-centralization of branch operations in important cities where we have
more than one branch. We have centralized operations at regional processing
centers in Mumbai, New Delhi, Chennai, Bangalore, Hyderabad, Pune, Ahmedabad,
Kolkata and Coimbatore. 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.
77
In Mumbai, we have 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 and credit card transaction processing.
Centralized processing has been extended to the issuance of personalized check
books, back office activities of non-resident Indian accounts, opening of new
bank accounts 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
Management believes that we have the highest level of automation in
trading operations in India. We use technology to monitor risk limits and
exposures on a near real-time basis. Our 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.
Domestic Treasury. Our front office consists of dealers in fixed income
securities, equity securities and inter-bank money markets. The 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.
Our middle office plays the role of a risk manager, reporting to the Risk
Management Department, with an emphasis on market risk. The major functions of
the middle office are to monitor counterparty limits, evaluate the
mark-to-market impact on various positions taken by dealers and monitor market
risk exposure of the investment portfolio.
Our back office undertakes the settlement of funds and securities. The
back office exercises controls for minimizing operational risks, including deal
confirmations with counterparties, verifies authenticity of counterparty checks
and securities, ensures receipt of contract notes from brokers, monitors
receipt of interest and principal amounts on due dates, ensures transfer of
title in the case of purchases of securities, reconciles actual security
holdings with the holdings pursuant to the records, and reports any
irregularity or shortcoming observed.
Foreign Exchange Treasury. The major achievement of our foreign exchange
treasury was its successful launch and implementation of a new web-based
product for online conclusion of foreign exchange transactions for both our
customers as well as branches acting on behalf of our customers. "FX Online"
provides real time exchange rates for corporates customers who cannot only view
the exchange rates but also put through the transactions. This is a totally
automated online system, which has rates quoted on pre-set margins, with a
facility for manual intervention if required.
The inter-bank foreign exchange 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 immediately by the
dealers for processing. The entire process from deal origination to settlement
and reconciliation takes place via straight through processing. The processing
ensures adequate checks at critical stages. Our foreign exchange dealings are
carried out within the guidelines and directives outlined by the Risk
Management Department. Trade strategies are discussed frequently and decisions
are taken based on the market forecasts, information and liquidity
considerations. Dealers are assigned specific currencies for dealing to ensure
focused attention. Trading operations are conducted in conformity with the code
of conduct prescribed by internal and regulatory guidelines.
Our middle office is responsible for monitoring risk inherent to our
operations. The middle office monitors counterparty limits, positions taken by
dealers and adherence to various market risk limits set by the Risk Management
Department.
Our back office procedures were put in place to ensure speedy processing,
confirmation, accounting, confirmation matching, deal settlements and cash
balance monitoring. Our back office systems are designed to minimize settlement
risk. The matching and checking of counterparty confirmation of deals is fully
automated.
78
Technology
With our focus on the application of technology to our business
operations, particularly with respect to the Internet and electronic commerce
solutions, we believe we are well positioned to continue to gain market share
in our target market. We believe technology is the primary source of
competitive advantage in the Indian banking sector. Our focus on technology
emphasizes:
Electronic and online channels to:
o Reach new target customers;
o Enhance existing customer relationships;
o Offer easy access to our products and services; and
o Reduce distribution costs.
Application of information systems to:
o Effectively market to our target customers;
o Monitor and control risks; and
o Identify, assess and capitalize on market opportunities.
Technology Organization
Our technology initiatives are undertaken in conjunction with ICICI
Infotech Services Limited, the technology arm of the ICICI group and an ISO
9001 certified company. ICICI Infotech is divided into business groups, which
include retail banking technology, corporate banking technology, infrastructure
(comprising network management and technology operations), software development
and web technology.
Electronic and Online Channels
At March 31, 2001, 89 branches and 34 extension counters were completely
automated to ensure prompt and efficient delivery of products and services. We
use the branch banking software, Finacle, which is flexible and scalable and
integrates well with our electronic delivery channels.
Our ATMs are from NCR and Diebold, the world's leading vendors. These ATMs
work with our main banking software system, Finacle, and are proposed to be
integrated with the recently launched credit card system. At March 31, 2001, we
had 510 ATMs across the country.
Our telephone banking call centers use an Interactive Voice Response
System (IVRS). The call centers are based on the latest technology, providing
an integrated customer database that allows the call agents to get a complete
overview of the customer's relationship with other ICICI group companies and
us. The database enables customer segmentation and assists the call agent in
identifying cross-selling opportunities. We are implementing a technology
architecture which enables a customer to access any product from any channel.
We believe that the Internet in India will help accelerate our customer
acquisition rate through our Internet banking service. We expect the Internet
to emerge as a key service delivery channel in the future.
We continually seek to complement our delivery channels and product
offerings with strategic alliances.
79
Application of Information Systems
Treasury and Trade Finance Operations
We believe we have one of the most technologically sophisticated treasury
operations in India. We use technology to monitor risk limits and exposures on
a real time basis. We have invested significantly to acquire advanced systems
from IBM, Reuters and TIBCO and connectivity to the SWIFT network.
Banking Application Software
We have installed an advanced banking system which addresses our corporate
banking as well as retail banking requirements. It is robust, flexible and
scalable and allows us to effectively and efficiently serve our growing
customer base.
High-Speed Electronic Communications Infrastructure
We have installed a nationwide data communications network linking all our
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. We also use a sophisticated data
center in Mumbai for centralized data base management, data storage and
retrieval.
Security Features of Our Technology
We depend heavily on our technological base to provide our customers with
high-quality service. Security is critical due to the diversity of product
delivery platforms and the inherently sensitive nature of banking transactions.
We use well laid out processes including access control, complex passwords and
dual authentication. For our Internet banking service, we use 128 bit
encryption, secure socket layer technology, digital certificates, multiple
firewalls and isolation of web servers.
Recognition for Technology Usage
We have received various awards for our innovative use of technology. Bank
Technology News International, in their November 1997 issue, listed us as among
the 43 True Internet Banks outside the United States. The Financial Times,
London and UUNET, UK have consistently rated our web site as a "highly
commended" for the last three years. In 1998, we also received the Computer
Society of India -- Tata Consultancy Services National Award for best
information technology usage. In March 2000, Forbes Global ranked our web site
as one of the top 15 banking sites in the world.
Quoting our Internet based Corporate Infinity as a product having a wide
range of functionality, including a customized "share ticker", the Asian
Banker's Journal awarded our Corporate Infinity product the top position among
all banks with similar products in Asia in 2000, along with the Bank of the
Philippine Islands' Expresslink and Overseas Union Bank's Business Internet
Banking.
Competition
We face strong competition in all our principal areas of business from
Indian public sector banks, private sector banks, foreign banks and mutual
funds. We believe that our principal competitive advantage over our competitors
arises from our use of technology, our innovative products and services and our
highly motivated and experienced staff. In addition, ICICI has long-standing
customer relationships which we continue to leverage to cross-sell our products
and services. Because of these factors, we believe that we have a strong
competitive position in the Indian financial services market.
Corporate Banking
Our principal competition in corporate lending 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 very competitively.
Supported by their large retail deposit bases, public sector banks have over
80.0% of the market share
80
for working capital financing. 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 build a quality loan portfolio
without compromising our minimum lending rates, 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.
Foreign banks have traditionally served Indian corporates with
cross-border trade finance, fee-based services and other short-term financing
products. We effectively compete with foreign banks in cross-border trade
finance as a result of our strong correspondent banking relationships with over
105 international banks, our SWIFT- enabled corporate branches and 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,
the ICICI group's strong corporate relationships and our ability to use
technology to provide innovative, value-added products and services provide us
with a competitive edge.
Retail Banking
In the retail banking market, we face strong competition from commercial
banks and mutual funds. Indian commercial banks attract the majority of retail
bank deposits, historically the preferred retail savings product in India. We
have leveraged the ICICI group's corporate relationships to gain individual
customer accounts through payroll management products such as Power Pay and
will continue to pursue a multi-channel distribution strategy utilizing
physical branches, ATMs, telephone banking call centers and the Internet to
reach our customers.
With access to the latest technology and the benefit of strategies
developed in mature and highly competitive overseas markets, several foreign
banks have recently started to target middle and upper middle class retail
customers, particularly salary earners. These banks have installed ATM networks
and introduced utility bill payment schemes, mortgages and personal loans.
We also face competition from foreign banks and some new private sector
banks in the areas of retail deposits and credit cards. Citibank launched a
savings bank product to attract the middle income group. Other new private
sector banks have been launching international debit cards and other innovative
deposit schemes. There could be an increase in the consolidation of private
sector banks that seek to exploit synergies of branch networks and technologies
and realize economies of scale.
Mutual funds have emerged as another source of competition to us from 2000
wherein the government of India waived the tax on dividends received from
mutual funds. This change has made mutual fund offerings a viable alternative
to bank deposits.
General
The following table gives a comparison pursuant to Indian GAAP of the
relative levels of deposits and loans of leading foreign banks and new private
sector banks in India.
81
At March 31,
--------------------------------------------------------------------
1999 2000 1999 2000
------------- ------------- ------------- --------------
Deposits Loans(1)
------------------------------- --------------------------------
(in billions)
Total commercial banks................. Rs. 7,711.3 Rs. 9,003.1 Rs. 4,513.5 Rs. 4,622.8
Total foreign banks.................... 474.6 493.2 386.8 463.3
Of which leading banks are:
Citibank NA......................... Rs. 94.4 Rs. 102.0 Rs. 59.4 Rs. 75.4
ANZ Grindlays Bank.................. 86.9 84.8 57.7 62.2
Hong Kong and Shanghai Banking
Corporation...................... 63.9 87.5 40.9 62.7
Standard Chartered Bank............. 53.5 50.1 44.4 55.1
Bank of America..................... 35.0 25.1 43.5 38.8
Deutsche Bank....................... 21.3 21.7 23.9 27.1
ABN Amro Bank....................... 18.8 34.2 25.9 52.4
Total new private sector banks......... Rs. 308.1 Rs. 466.8 Rs. 211.1 Rs. 311.0
Of which leading banks are:
ICICI Bank.......................... Rs. 60.7 Rs. 98.7 Rs. 34.4 Rs. 52.6
IndusInd Bank....................... 50.2 65.5 32.3 42.9
Global Trust Bank................... 41.0 62.0 30.2 44.0
HDFC Bank........................... 29.2 84.3 24.4 58.8
Centurion Bank...................... 21.4 38.7 18.3 29.1
----------
(1) Loans include advances and investments in non-statutory liquidity ratio
securities.
Data is not available for most of the other banks as at March 31, 2001.
Source: Reserve Bank of India publications.
Employees
At March 31, 2001, we had 4,491 employees, an increase from 1,344
employees at March 31, 2000 and 891 employees at March 31, 1999. Of the 4,491
employees at March 31, 2001, 1,785 were professionals, holding degrees in
management, accountancy, engineering, law, computer science, economics and
banking.
We consider our relations with our employees to be good. Our human
resource practices are open and transparent.
We have taken over 2,716 employees of Bank of Madura consequent to our
acquisition in March 2001.The employees of Bank of Madura in the grade of
clerks and sub-staffs are unionized. Similarly, the officers of Bank of Madura
have an officers association. We have a cordial relationship with this Union
and this officers association. We were able to realign 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 our officers. Similarly, the
service conditions of the clerical and sub-staff employees are being reworked
as suitable to the changing environment.
To encourage commitment to results and productivity, our board of
directors had approved an employee stock option scheme, which was approved by
our shareholders at an extraordinary general meeting on February 21, 2000. For
further details on this scheme, see "Management -- Employee Stock Option
Scheme".
In addition to basic compensation, employees are eligible to receive loans
from us at subsidized rates and to participate in our provident fund and other
employee benefit plans. The provident fund, to which both we and our employees
contribute a defined amount, is a savings scheme, required by government
regulation, under which we at present are required to pay to employees a
minimum 9.5% annual return. If such return is not generated internally by the
fund, we are liable for the difference. Our provident fund has generated
sufficient funds internally to meet the 9.5% annual return requirement since
inception of the funds. We have also set up a superannuation fund to which we
82
contribute defined amounts. In addition, we contribute specified amounts to a
gratuity fund set up pursuant to Indian statutory requirements.
In accordance with our corporate policy, all our employees, other than
those who are executive directors, retire at the age of 58 years or 60 years
depending on the date of commencement of their service with us.
Properties
Our registered office is located at Landmark, Race Course Circle, Vadodara
390 007, Gujarat, India. Our corporate headquarters are located at ICICI
Towers, Bandra-Kurla Complex, Mumbai 400 051, Maharashtra, India.
We had a principal office network consisting of 355 branches, 34 extension
counters and 510 ATMs at March 31, 2001. These facilities are located
throughout India. 40 of these facilities are located on properties owned by us,
while the remaining facilities are located on leased properties. The net book
value of all our owned properties at March 31, 2001 was Rs. 1.4 billion (US$ 31
million), which includes 205 apartments and two residential facilities for our
employees.
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 March 31, 2001, we had been assessed an aggregate of Rs. 1.5 billion
(US$ 32 million) in income tax, interest tax and sales tax demands by the
government of India's tax authorities for past years ended March 31, 2001 which
has been paid in full to the tax authorities. We have appealed the tax demands
for Rs. 707 million (US$ 15 million), which represents the disputed amount. We
believe that we have a good chance of success in these appeals for the
following reasons:
o A major portion of the disputed tax demands consists of treatment of
depreciation claim on leased assets. In accordance with the expert
opinion obtained by us, the tax treatment adopted by us is in
conformity with industry practice and in our view, the demand by the
Indian tax authorities cannot be substantiated. Moreover, these tax
demands are recoverable from lessees of assets under various lease
agreements. Accordingly, we have not provided for or disclosed this
tax demand as a contingent liability.
o The Indian appellate authorities have ruled in our favor in respect
of the deductibility of software expenses. The Indian tax
authorities, however, have appealed against this ruling that is
pending adjudication before a higher appellate authority.
o We have treated interest accrued on securities at the time of their
purchase as revenue expenditure in accordance with standard
accounting practices and the Reserve Bank of India guidelines. The
Indian tax authorities have, however, treated such interest as
capital expenditure.
83
SELECTED FINANCIAL AND OPERATING DATA
Our selected financial and other data for and at year-end fiscal 1997,
1998, 1999, 2000 and 2001 have been derived from our financial statements
prepared in accordance with US GAAP. These financial statements have been
audited by KPMG, independent accountants. You should read the following data
with the more detailed information contained in "Operating and Financial Review
and Prospects" and our financial statements. Historical results do not
necessarily predict the results in the future.
Year ended March 31,
-----------------------------------------------------------------------------
1997 1998 1999 2000 2001 2001(1)
---------- --------- ---------- ---------- ---------- ---------
(in millions, except per common share data)
Selected income statement data:
Interest revenue......................... Rs. 1,843 Rs. 2,579 Rs. 5,390 Rs. 8,434 Rs. 12,406 US$ 265
Interest expense......................... (1,170) (1,854) (4,244) (6,656) (8,408) (180)
---------- --------- ---------- ---------- ---------- ---------
Net interest revenue..................... 673 725 1,146 1,778 3,998 85
Provision for loan losses................ (187) (360) (540) (427) (1,082) (23)
---------- --------- ---------- ---------- ---------- ---------
Net interest revenue after provisions
for loan losses....................... 486 365 606 1,351 2,916 62
Non-interest revenue, net................ 317 591 866 1,759 1,754 37
Net revenue.............................. 803 956 1,472 3,110 4,670 99
Non-interest expense..................... (406) (554) (799) (1,329) (3,104) (66)
---------- --------- ---------- ---------- ---------- ---------
Income before taxes...................... 397 402 673 1,781 1,566 33
Income tax expense....................... (155) (104) (170) (379) (258) (5)
---------- --------- ---------- ---------- ---------- ---------
Net income............................... Rs. 242 Rs. 298 Rs. 503 Rs. 1,402 Rs. 1,308 US$ 28
========== ========= ========== ========== ========== =========
Per common share data:
Net income - basic....................... Rs. 1.61 Rs. 1.84 Rs. 3.05 Rs. 8.49 Rs. 6.60 US$ 0.13
Net income - diluted..................... 1.61 1.84 3.05 8.49 Rs. 6.60 0.13
Dividends................................ 1.00 1.00 1.20 1.51 2.00 -
Book value............................... 11.67 14.98 17.15 57.86 74.00 1.58
Common shares outstanding at end of
period (in millions of common shares). 150 165 165 196.82 220.36
Weighted average common shares
outstanding - basic (in millions of
common shares)........................ 150 162 165 165.09 198.24
Weighted average common shares
outstanding - diluted (in millions of
common shares)........................ 150 162 165 165.11 198.24
---------
(1) Rupee amounts for fiscal 2001 have been translated into US dollars using
the noon buying rate in effect on March 30, 2001 of Rs. 46.85 = US$1.00.
84
At March 31,
---------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2001(1)
----------- ----------- ----------- ------------ ----------- ----------
(in millions)
Selected balance sheet data:
Total assets...................... Rs. 19,766 Rs. 35,278 Rs. 76,265 Rs. 130,386 Rs. 220,008 US $ 4,696
Cash and cash equivalents(2)...... 4,099 8,728 19,928 36,361 47,306 1,010
Trading account assets............ 3 7,387 15,822 28,228 18,725 400
Loans, net(3)..................... 8,374 12,765 27,597 46,986 93,030 1,986
Securities available for sale..... 3,816 1,476 3,963 4,709 24,787 529
Securities held to maturity....... -- - - - 10,944 234
Impaired loans, net............... -- 179 733 670 2,428 52
Total liabilities................. 18,016 32,807 73,435 118,999 203,701 4,348
Long-term debt(4)................. 89 129 1,764 2,476 2,421 52
Deposits.......................... 13,476 26,290 60,729 98,660 164,254 3,506
Stockholders' equity.............. 1,750 2,471 2,830 11,387 16,307 348
Period average(5):
Total assets...................... 15,958 26,661 53,325 87,264 137,033 2,925
Interest-earning assets........... 11,730 19,467 42,521 68,982 105,697 2,256
Loans, net(3)..................... 7,224 9,498 18,546 31,148 57,889 1,236
Total liabilities................. 14,270 24,351 50,657 83,967 123,186 2,629
Interest-bearing liabilities...... 9,484 17,185 41,212 66,897 90,993 1,942
Long-term debt.................... 76 109 1,127 1,752 1,716 37
Total deposits.................... 9,923 18,539 39,455 67,309 93,514 1,996
Of which:
Interest-bearing deposits....... 7,753 15,140 35,916 59,881 81,009 1,729
Stockholders' equity.............. 1,688 2,310 2,668 3,297 13,847 296
At or for the year ended March 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
(in percentages)
Profitability:
Net income as a percentage of:
Average total assets................................ 1.52% 1.12% 0.94% 1.61% 0.95%
Average stockholders' equity........................ 14.34 12.90 18.85 42.52 9.45
Dividend payout ratio(6)............................. 61.98 59.89 43.30 19.60 37.13
Spread(7)............................................ 3.37 2.46 2.38 2.28 2.50
Net interest margin(8)............................... 5.74 3.72 2.70 2.58 3.78
Cost-to-income ratio(9).............................. 41.01 42.10 39.71 37.57 53.96
Cost-to-average assets ratio(10)..................... 2.54 2.08 1.50 1.52 2.27
Capital:
Total capital adequacy ratio(11)..................... 13.04 13.48 11.06 19.64 11.57
Tier 1 capital adequacy ratio(11).................... 12.71 13.38 7.32 17.42 10.42
Tier 2 capital adequacy ratio(11).................... 0.33 0.10 3.74 2.22 1.15
Average stockholders' equity as a percentage of
average total assets.............................. 10.58 8.66 5.00 3.78 10.10
Asset quality:
Gross impaired loans as a percentage of gross loans.. 2.18 4.58 5.66 2.97 5.52
Net impaired loans as a percentage of net loans...... -- 1.40 2.66 1.43 2.61
Net impaired loans as a percentage of total assets... -- 0.51 0.96 0.51 1.10
Allowance for loan losses as a percentage of gross
impaired loans.................................... 100.00 70.36 54.56 52.75 54.10
Allowance for loan losses as a percentage of gross
total loans....................................... 2.18 3.22 3.09 1.57 2.98
---------
85
(1) Rupee amounts for fiscal 2001 have been translated into US dollars using
the noon buying rate in effect on March 30, 2001 of Rs. 46.85 = US$ 1.00.
(2) Includes interest bearing deposit with banks.
(3) Net of allowance for loan losses in respect of impaired loans.
(4) Includes current portion of long term debt.
(5) Average balances are the daily average outstanding amounts.
(6) Represents the ratio of total dividends payable on common stock, including
the dividend distribution tax, as a percentage of net income.
(7) Represents 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 revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest- bearing liabilities.
(8) Represents the ratio of net interest revenue 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.
(9) Represents the ratio of non-interest expense to the sum of net interest
revenue and non-interest revenue.
(10) Represents the ratio of non-interest expense to average total assets.
(11) Our capital adequacy is computed in accordance with the Reserve Bank of
India guidelines. The computation is based on our financial statements
prepared in accordance with Indian GAAP. Our total capital adequacy ratio
computed under the applicable Reserve Bank of India guidelines and based
on our financial statements prepared in accordance with US GAAP was 11.69%
at March 31, 2001. Using the same basis of computation, our Tier 1 capital
adequacy ratio was 10.60% and our Tier 2 capital adequacy ratio was 1.09%
at March 31, 2001. See "Operating and Financial Review and Prospects --
Financial Condition -- Capital".
(12) Figures for fiscal 2000 have been regrouped and reclassified. Please see
the notes to our financial statements for a more-detailed description.
Average Balance Sheet
The average balance is the daily average of balances outstanding. The
amortized portion of loan origination fees (net of loan origination costs) is
included in interest revenue on loans, representing an adjustment to the yield.
The average yield on average interest-earning assets is the ratio of interest
revenue 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. We have not recalculated
tax-exempt income on a tax-equivalent basis because we believe the effect of
doing so would not be significant. The following tables set forth, for the
periods indicated, the average balances of our assets and liabilities
outstanding, which are major components of interest revenue, interest expense
and net interest margin.
86
Year ended March 31, 2000 Year ended March 31, 2001
------------------------------------ -------------------------------------
Interest Interest
Average revenue/ Average Average revenue/ Average
balance expense yield/cost balance expense yield/cost
---------- ---------- ---------- ----------- ---------- ----------
(in millions, except percentages)
Assets:
Interest-earning assets:
Cash, cash equivalents and trading
assets(1)........................... Rs. 31,817 Rs. 3,184 10.01% Rs. 31,278 Rs. 2,978 9.52%
Securities, available for sale(2)...... 6,017 684 11.37 11,889 1,217 10.24
Securities, held to maturity........... -- -- -- 4,641 543 11.70
Loans, net............................. 31,148 4,437 14.24 57,889 7,419 12.82
Other interest income(3)............... -- 129 -- -- 249 --
---------- ---------- ----- ----------- ---------- -----
Total interest-earning assets.......... 68,982 8,434 12.23 105,697 12,406 11.74
Non-interest-earning assets:
Cash and cash equivalents(4)........... 7,273 16,131
Acceptances............................ 7,356 10,727
Property and equipment................. 1,777 2,290
Other assets........................... 1,876 2,188
Total non-earning assets............... 18,282 31,336
---------- -----------
Total assets........................... Rs. 87,264 Rs. 8,434 Rs. 137,033 Rs. 12,406
========== ========== =========== ==========
Liabilities:
Interest-bearing liabilities:
Savings account deposits............... Rs. 3,530 Rs. 118 3.34% Rs. 8,598 Rs. 244 2.83%
Time deposits.......................... 56,351 5,671 10.06 72,411 7,017 9.69
Long-term debt......................... 1,752 244 13.93 1,716 240 13.99
Trading account and other liabilities.. 5,264 623 11.84 8,268 907 10.97
---------- ---------- ----- ----------- ---------- -----
Total interest-bearing liabilities..... 66,897 6,656 9.95 90,993 8,408 9.24
========== ========== ===== =========== ========== =====
Non-interest-bearing liabilities:
Non-interest-bearing deposits.......... 7,428 12,505
Other liabilities...................... 9,642 19,688
---------- -----------
Total non-interest-bearing liabilities. 17,070 32,193
---------- -----------
Total liabilities...................... Rs. 83,967 Rs. 6,656 Rs. 123,186 Rs. 8,408
---------- ========== ----------- ==========
Stockholders' equity................... Rs. 3,297 Rs. 13,847
---------- -----------
Total liabilities and stockholders'
equity.............................. Rs. 87,264 Rs. 137,033
========== ===========
87
Year ended March 31, 1998 Year ended March 31, 1999
------------------------------------ -------------------------------------
Interest Interest
Average revenue/ Average Average revenue/ Average
balance expense yield/cost balance expense yield/cost
---------- ---------- ---------- ----------- ---------- ----------
(in millions, except percentages)
Assets:
Interest-earning assets:
Cash, cash equivalents and trading
assets(1)............................ Rs. 8,637 Rs. 913 10.57% Rs. 21,143 Rs. 2,297 10.86%
Securities(2)........................... 1,332 148 11.11 2,832 305 10.77
Loans, net.............................. 9,498 1,499 15.78 18,546 2,707 14.60
Other interest income(3)................ -- 19 -- -- 81 --
---------- ---------- ---------- ---------- -----
Total interest-earning assets........... 19,467 2,579 13.25 42,521 5,390 12.68
---------- ----------
Non-interest-earning assets:
Cash and cash equivalents(4)............ 2,776 4,345
Acceptances............................. 2,575 4,388
Property and equipment.................. 910 1,704
Other assets............................ 933 367
Total non-earning assets................ 7,194 10,084
---------- ---------- ---------- ----------
Total assets............................ Rs. 26,661 Rs. 2,579 Rs. 53,325 Rs. 5,390
========== ========== ========== ==========
Liabilities:
Interest-bearing liabilities:
Savings account deposits............... Rs. 815 Rs. 28 3.44% Rs. 1,569 Rs. 54 3.44%
Time deposits.......................... 14,325 1,590 11.10 34,347 3,653 10.64
Long-term debt......................... 109 16 14.68 1,127 155 13.75
Trading account and other liabilities.. 1,936 220 11.36 4,169 382 9.16
---------- ---------- ---------- ---------- -----
Total interest-bearing liabilities..... 17,185 1,854 10.79 41,212 4,244 10.30
---------- ---------- ========== ========== =====
Non-interest-bearing liabilities:
Non-interest-bearing deposits.......... 3,399 3,539
Other liabilities...................... 3,767 5,906
---------- ----------
Total non-interest-bearing liabilities. 7,166 9,445
---------- ---------- ----------
Total liabilities...................... Rs. 24,351 Rs. 1,854 Rs. 50,657 Rs. 4,244
---------- ========== ---------- ==========
Stockholders' equity................... Rs. 2,310 Rs. 2,668
---------- ----------
Total liabilities and stockholders'
equity.............................. Rs. 26,661 Rs. 53,325
========== ==========
1997
--------------------------------------------
Interest
Average revenue/ Average
balance expense yield/cost
----------- ---------- ----------
(in millions, except percentages)
Assets:.................................
Interest-earning assets:
Cash, cash equivalents and trading
assets(1)............................. Rs. 1,159 Rs. 81 6.99%
Securities(2)........................... 3,347 421 12.58
Loans, net.............................. 7,224 1,341 18.56
Other interest income(3)................ -- -- --
---------- ----------
Total interest-earning assets........... 11,730 1,843 15.71
---------- ----------
Non-interest-earning assets:
Cash and cash equivalents(4)............ 1,287
Acceptances............................. 2,507
Property and equipment.................. 212
Other assets............................ 222
Total non-earning assets................ 4,228
---------- ----------
Total assets............................ Rs. 15,958 Rs. 1,843
========== ==========
Liabilities:
Interest-bearing liabilities:
Savings account deposits................ Rs. 304 Rs. 10 3.29%
Time deposits........................... 7,449 962 12.91
88
1997
--------------------------------------------
Interest
Average revenue/ Average
balance expense yield/cost
----------- ---------- ----------
(in millions, except percentages)
Long-term debt....................... 76 13 17.11
Trading account and other liabilities 1,655 185 11.18
---------- ----------
Total interest-bearing Liabilities... 9,484 1,170 12.34
---------- ----------
Non-interest-bearing liabilities:
Non-interest-bearing deposits........ 2,170
Other liabilities.................... 2,616
----------
Total non-interest-bearing liabilities 4,786
---------- ----------
Total liabilities.................... Rs. 14,270 Rs. 1,170
---------- ==========
Stockholders' equity................. Rs. 1,688
----------
Total liabilities and stockholders'
equity............................. Rs. 15,958
==========
---------
(1) Includes government of India securities in trading book, inter-bank
deposits and lending, commercial paper, certificate of deposits and equity
securities.
(2) Includes corporate debt securities, government of India securities held as
available for sale and mutual fund units.
(3) Includes interest income earned on balances maintained with the Reserve
Bank of India pursuant to the cash reserve ratio requirement, which is 8%
of our demand and time liabilities as at March 31, 2001, excluding certain
specified liabilities. See "Supervision and Regulation -- Legal Reserve
Requirements -- Cash Reserve Ratio". Up to fiscal 1997, no interest was
payable by the Reserve Bank of India on these balances. The Reserve Bank
of India pays interest of 4.0% per annum on balances in excess of 3.0% of
our demand and time liabilities.
(4) Includes balances maintained with the Reserve Bank of India pursuant to
the cash reserve ratio requirement.
Analysis of changes in Interest Revenue and Interest Expense Volume and Rate
Analysis
The following table sets forth, for the periods indicated, the changes in
the components of our net interest revenue.
Fiscal 1998 vs. Fiscal 1997 Fiscal 1999 vs. Fiscal 1998
--------------------------------------- ---------------------------------------
Increase (decrease)(1) due to Increase (decrease)(1) due to
--------------------------------------- ---------------------------------------
Change in Change in
Net Average Change in Net Average Change in
Change Volume Average Rate Change Volume Average Rate
---------- ----------- ------------ ---------- ---------- ------------
(in millions)
Interest revenue:
Cash, cash equivalents and
trading assets.............. Rs. 832 Rs. 790 Rs. 42 Rs. 1,384 Rs. 1,359 Rs. 25
Securities.................... (273) (224) (49) 157 162 (5)
Loans, net.................... 158 359 (201) 1,208 1,321 (113)
Other interest income......... 19 19 -- 62 62 --
---------- --------- --------- ---------- --------- ----------
Total interest revenue........ Rs. 736 Rs. 944 Rs. (208) Rs. 2,811 Rs. 2,904 Rs. (93)
========== ========= ========= ========== ========= ==========
Interest expense:
Savings account deposits...... Rs. 18 Rs. 18 Rs. -- Rs. 26 Rs. 26 Rs. --
Time deposits................. 628 763 (135) 2,063 2,129 (66)
Long-term debt................ 3 5 (2) 139 140 (1)
Trading account and other
liabilities................. 35 32 3 162 205 (43)
---------- --------- --------- ---------- --------- ----------
Total interest expense........ Rs. 684 Rs. 818 Rs. (134) Rs. 2,390 Rs. 2,500 Rs. (110)
========== ========= ========= ========== ========= ==========
Net interest Revenue.......... Rs. 52 Rs. 126 Rs. (74) Rs. 421 Rs. 404 Rs. 17
========== ========= ========= ========== ========= ==========
89
Fiscal 2000 vs. Fiscal 1999 Fiscal 2001 vs. Fiscal 2000
--------------------------------------- ---------------------------------------
Increase (decrease)(1) due to Increase (decrease)(1) due to
--------------------------------------- ---------------------------------------
Change in Change in
Net Average Change in Net Average Change in
Change Volume Average Rate Change Volume Average Rate
--------- ---------- ------------ ---------- ---------- ------------
(in millions)
Interest revenue:
Cash, cash equivalents and
trading assets.............. Rs. 887 Rs. 1,068 Rs. (181) Rs. (206) Rs. (51) Rs. (155)
Securities, available for
sale........................ 379 362 17 533 601 (68)
Securities, held to
maturity.................... -- -- -- 543 543 --
Loans, net.................... 1,730 1,795 (65) 2,982 3,427 (445)
Other interest income......... 48 48 -- 120 120 --
--------- ---------- --------- ---------- ---------- ---------
Total interest
revenue..................... Rs. 3,044 Rs. 3,273 Rs. (229) Rs. 3,972 Rs. 4,640 Rs. (668)
========= ========== ========= ========== ========== =========
Interest expense:
Savings account deposits...... Rs. 64 Rs. 66 Rs. (2) Rs. 126 Rs. 144 Rs. (18)
Time deposits................. 2,018 2,214 (196) 1,346 1,556 (210)
Long-term debt................ 89 87 2 (4) (5) 1
Trading account and other
liabilities................. 241 130 111 284 330 (46)
--------- ---------- --------- ---------- ---------- ---------
Total interest expense........ Rs. 2,412 Rs. 2,497 Rs. (85) Rs. 1,752 Rs. 2,025 Rs. (273)
========= ========== ========= ========== ========== =========
Net interest Revenue.......... Rs. 632 Rs. 776 Rs. (144) Rs. 2,220 Rs. 2,615 Rs. (395)
========= ========== ========= ========== ========== =========
---------
(1) The changes in net interest revenue 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.
Yields, Spreads and Margins
The following table sets forth, for the periods indicated, the yields,
spreads and interest margins on our interest-earning assets.
Year ended March 31,
---------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- --------- ---------- ------------
(in millions, except percentages)
Interest revenue..................................... Rs. 1,843 Rs. 2,579 Rs. 5,390 Rs. 8,434 Rs. 12,406
Average interest-earning assets...................... 11,730 19,467 42,521 68,982 105,697
Interest expense..................................... 1,170 1,854 4,244 6,656 8,408
Average interest-bearing liabilities................. 9,484 17,185 41,212 66,897 90,993
Average total assets................................. 15,958 26,661 53,325 87,264 137,033
Average interest-earning assets as a percentage of
average total assets.............................. 73.5% 73.0% 79.7% 79.0% 77.1%
Average interest-bearing liabilities as a percentage
of average total assets........................... 59.4 64.5 77.3 76.7 66.4
Average interest-earning assets as a percentage of
average interest-bearing liabilities.............. 123.7 113.3 103.2 103.1 116.2
Yield................................................ 15.71 13.25 12.68 12.23 11.74
Cost of funds........................................ 12.34 10.79 10.30 9.95 9.24
Spread(1)............................................ 3.37 2.46 2.38 2.28 2.50
Net interest margin(2)............................... 5.74 3.72 2.70 2.58 3.78
------------
(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 revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
90
(2) Net interest margin is the ratio of net interest revenue 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.
91
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 audited financial
statements. The following discussion is based on our audited financial
statements, 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.
Indian Economy
Overall GDP growth in the Indian economy declined continuously over the
last three years. Growth slowed down to 5.2% in fiscal 2001 from 6.4% in fiscal
2000 and 6.6% in fiscal 1999. Lower growth in fiscal 2001 was primarily due to
lower growth in agricultural sector and industrial sector particularly
manufacturing and electricity. Growth in 2000 was affected by a slowdown in the
agricultural sector. However, growth in industrial production which had slowed
to 4.1% in fiscal 1999 from 6.6% in fiscal 1998, recovered to 6.7% in fiscal
2000. Growth between fiscal 1997 and 1999 was affected by a slow down in the
global economy stemming from the economic crisis in Asia, Russia and elsewhere.
Agricultural growth was negative for the last two years with production
falling by 6.5% in fiscal 2001 on top of a decline of 0.7% in fiscal 2000. This
is the first time in the last 10 years that there were two successive years of
negative growth rates in agricultural production. Growth in industrial
production in India slowed to 5.1% in fiscal 2001 from 6.7% in fiscal 2000
primarily due to lower growth rates experienced by both the manufacturing and
electricity sectors. Manufacturing grew by 5.4% in fiscal 2001 compared to 7.1%
in fiscal 2000 while electricity production increased by 4.0% in fiscal
2001compared to 7.3% in fiscal 2000. There was a higher growth rate in fiscal
2001 compared to fiscal 2000 only in the consumer goods segment while lower
growth rates were experienced by capital goods, basic goods and intermediate
goods in fiscal 2001. Industrial production slowed again in fiscal 1999 to 4.1%
from 6.6% in fiscal 1998 and 6.1% in fiscal 1997.
Average inflation, as measured by the wholesale price index, remained
below 7.0% in each of fiscal 1997, 1998, 1999 and 2000. Inflation was 7.2% in
fiscal 2001 mainly due to an increase of 28.5% in prices of fuel products. The
price increase in primary and manufactured products was 2.9% and 3.3%,
respectively. Therefore, inflation during fiscal 2001 was a cost-push driven
phenomenon with the hardening of global crude oil prices feeding directly into
domestic prices. In the first three months of fiscal 2002, average inflation
was lower at 5.5% compared to 6.5% during the same period of last year.
The rupee came under some pressure in the first half of fiscal 2001 due to
the increased demand for dollars arising out of oil imports and the slowing
down of capital flows. External sector developments during fiscal 2001 were
significantly influenced by the global environment and the uncertainty
surrounding equity markets affected portfolio flows. With pressure mounting on
the balance of payments during the first half of fiscal 2001, the State Bank of
India came out successfully with the India Millennium Deposits in the total
amount of US$ 5.5 billion, which brought about a turnaround in the balance of
payments position. The India Millennium Deposits was a scheme launched by the
State Bank of India for non-resident Indians and overseas corporate bodies in
October 2000 for a tenure of five years to raise foreign currency to alleviate
the balance of payments position. Foreign exchange reserves were US$ 42.3
billion at March 30, 2001 and rose to US$ 43.8 billion at August 3, 2001.
Industrial growth in April-May 2001 was 2.6% compared to 6.2% in April-May
2000. The overall growth in industry during fiscal 2002 will affect the
performance of the banking sector as it will affect the level of credit
disbursed by banks. If industrial growth does not pick up, it could affect the
overall growth prospects of our business, including our ability to grow, the
quality of our assets and our ability to implement our strategy.
92
Regional Hostilities and Terrorist Attacks
India has from time to time experienced social and civil unrest and
hostilities with neighboring countries. In recent years, there have been
military confrontations between India and Pakistan in the Kashmir region.
Currently, there are tensions involving Afghanistan, a neighbor of Pakistan.
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. This is important
in the current context, as the terrorist attacks in the US in September 2001
have affected the markets all over the world. The possible prolonged battle
against terrorism by the US could lengthen these regional hostilities and
tensions thereby affecting the Indian economy as well as our business 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 have increased by 17.9% in fiscal 1999, 13.9% in fiscal 2000
and 17.7% in fiscal 2001. In fiscal 1999, the government-controlled State Bank
of India, the largest commercial bank in India, issued bonds, totaling Rs.
179.5 billion (US$ 4.1 billion), to non-resident Indians living abroad. These
bonds increased the level of deposits in fiscal 2001 because they counted as
deposits. In fiscal 2000, growth in deposits slowed down as there was a shift
in household preference from deposits to mutual funds with lower interest rates
in general. In fiscal 2001, bank deposits increased mainly as a result of the
India Millennium Deposits raised by the State Bank of India to augment overall
foreign exchange reserves of the country. In fiscal 2001, approximately Rs.
256.6 billion of the India Millennium Deposits were included in the total
deposits of all commercial banks. Excluding these deposits, bank deposits would
have risen by only 14.9%.
According to the Reserve Bank of India's data, bank credit increased at a
slower rate than total bank deposits in recent years, except in fiscal 2000.
Bank credit grew by 9.6% in fiscal 1997, 16.4% in fiscal 1998, 13.8% in fiscal
1999, 18.2% in fiscal 2000 and 16.7% in fiscal 2001. These growth rates
reflected the trend in growth in industrial production during these years. In
fiscal 2000, a recovery in industrial growth pushed up the increase in credit
growth rate. Banks in India also invest in commercial paper, medium and
long-term bonds and, to a limited extent, in equity securities. Including these
investments, the total growth in bank credit was 12.3% in fiscal 1997, 18.1% in
fiscal 1998 and 16.4% in fiscal 1999. In fiscal 2000, growth was 17.9% as a
result of improved growth in industrial production. However, in fiscal 2001,
growth was lower at 15.1%, reflecting industrial slowdown.
In the first quarter of fiscal 2002, deposits have increased by 5.2%
compared to 5.0% in the same period of last year. Bank credit on the other hand
rose by only 1.4% compared to 5.5% last year, reflecting low industrial growth.
Including also credit substitutes, bank credit has fallen by 0.5% in the first
quarter of fiscal 2002 compared to a rise of 4.3% in the same period of last
year.
In the last four 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. 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.
93
Average deposit rate Average prime
Fiscal year for over one year term (range) lending rate (range)
------------------------ ----------------------------- --------------------
1997 ................... 11.0-12.0% 14.5-15.0%
1998 ................... 10.5-11.0 14.0
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 (through June 29).. 8.0-9.5 11.0-12.0
---------
Source: Reserve Bank of India: Handbook of Statistics on Indian Economy, 2000,
Annual Report 1999-2000 and Weekly Statistical Supplements.
In line with the general market trends illustrated in the above table, our
average deposit rate for deposits with a maturity of greater than one year
decreased to 8.0% in fiscal 2001 from 12.0% -14.5% in fiscal 1997. Our average
prime lending rate range decreased to 13.5% in fiscal 2001 from 17.0%-18.5% in
fiscal 1997. As of June 30, 2001, our deposit rate for deposits with a term of
more than one year was 9.25% and our average prime lending rate for loans with
a term of more than one year was 13.5%. Competing banks on an average have
their prime lending rate at about 12.5%.
The issue of universal banking, which in the Indian context means
combining commercial banks and long-term development financial institutions,
has been discussed at length over the past few years. In its monetary and
credit policy for fiscal 2001 and universal banking guidelines issued on April
28, 2001, the Reserve Bank of India announced that it would consider proposals
from development financial institutions, like ICICI, who wish to transform
themselves into banks on a case-by-case basis. As part of its efforts to
transform itself into a universal bank, ICICI is considering various corporate
structuring alternatives including the possibility of a merger between ICICI
and ICICI Bank and the reorganization of its holdings in its subsidiary
companies. In this respect, ICICI has initiated a dialogue with the government
and regulatory agencies, including the Reserve Bank of India. As of the date of
this annual report, no firm proposal for any such action has been approved by
the board of directors or the shareholders of either ICICI or ICICI Bank. Any
corporate action resulting from these discussions would be subject to approval
of the board of directors, shareholders and the relevant corporate bodies and
necessary statutory and regulatory approvals including from the Reserve Bank of
India and the government of India. At this stage, there can be no certainty
that any definitive agreement will be reached or that such agreement will be
approved by the relevant regulatory agencies. In the event that ICICI Bank and
ICICI were to merge, the businesses currently being conducted by ICICI would
become subject for the first time to a number of banking regulations under
Indian law, including directed lending, maintenance of a statutory reserve
ratio and higher effective income tax rates. These regulatory changes will
impact the profitability of the combined businesses in any new universal bank.
The combined universal bank will have a different mix of assets and funding
sources than the two separate companies. The impact of the statutory reserve
ratio, which requires that a significant portion of an Indian bank's
liabilities be held in Indian government securities, may increase market risk
in a combined universal bank. The income, profitability and market risk profile
of any merged universal bank may therefore be adversely affected by the impact
of these regulatory requirements. This may result in lower income in the
initial years after conversion. Any combined universal bank may not be able to
maintain the business, growth and financial performance of the two separate
companies and any failure to do so could adversely affect the price of our
equity shares and our ADSs.
Results of Operations
In spite of a slowdown in the economy between 1999 and 2001 and stress on
certain core sectors of industry such as iron and steel and textiles, we were
able to add to our assets and liabilities at a rapid pace since we were a
relatively new entrant in the commercial banking sector and we were able to
acquire new customers from public sector banks. Also in fiscal 2001, growth
through the acquisition of Bank of Madura, an old private sector bank, helped
us to expand our deposits and asset base. We cannot guarantee that we will be
able to continue to achieve the same growth rates as those achieved in the last
three fiscal years.
Effective March 10, 2001, Bank of Madura was acquired by us in an all
stock merger. This acquisition was accounted for by us under the purchase
method of accounting. Accordingly, the balance sheet at March 31, 2001 includes
the assets and liabilities of Bank of Madura and the income statement for
fiscal 2001 includes the income
94
and expenses of Bank of Madura from March 10, 2001. As a result, our balance
sheet at year-end fiscal 2001 was significantly affected and our income
statement for fiscal 2001 was not significantly affected by the acquisition of
Bank of Madura by us. Therefore, our balance sheet at year-end fiscal 2001 is
not comparable to our balance sheet at year-end fiscal 2000. In the all stock
merger, the shareholders of Bank of Madura received two of our equity shares
for every share of Bank of Madura. After the merger, we became the largest
private sector bank in India with assets of Rs. 220.0 billion (US$ 4.7 billion)
and total deposits of Rs. 164.3 billion (US$ 3.5 billion) at March 31, 2001
compared to assets of Rs. 130.4 billion (US$ 2.8 billion) and total deposits of
Rs. 98.7 billion (US$ 2.1 billion) at March 31, 2000. At March 31, 2001, the
merged entity had a customer base of approximately 3.2 million and a network of
389 branches and extension counter and 510 ATMs spread across 237 cities in
India. At March 31, 2000, we had a customer base of 0.6 million and network of
97 branches and extension counters and a 175 ATMs spread across 47 cities in
India.
We ceased to be a subsidiary of ICICI as of March 22, 2001 and were
accounted for under the equity method of accounting as of April 1, 2000, the
beginning of the fiscal year in which the majority ownership of ICICI in ICICI
Bank was deemed to be temporary, as a result of the following transactions :
(a) Due to the all stock merger of Bank of Madura with us effective March 10,
2001, the ownership interest of ICICI in us was reduced from 62.2% to 55.6%,
and (b) during March 2001, ICICI reduced its interest in us to 46.4% 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 40.0% over a period of
time. During the first five months (April to August) of fiscal 2002, ICICI sold
further equity shares of our Bank in the Indian secondary markets to
institutional investors. At August 31, 2001, ICICI held 46.0% of our equity
shares. From April 1, 2000, we were accounted for in ICICI's consolidated
financial statements under the equity method of accounting.
We analyze our financial performance in terms of interest revenue earned
from cash, cash equivalents, trading account assets (i.e., interest-earning
liquid assets maintained by our domestic treasury for meeting reserve
requirements), loans and securities as offset by interest expense incurred from
deposits, long-term debt and trading account liabilities. We analyze our
average cost of deposits, yield on loans and returns from our trading portfolio
and portfolio of available for sale securities on a regular basis. Along with
these measures, we also focus on the gross impaired loans, allowance for loan
losses, non-interest revenue and non-interest expense to study our
profitability. We discuss below these measures of financial performance.
Net Interest Revenue
Fiscal 2001 compared to Fiscal 2000
Net interest revenue increased 124.9% in fiscal 2001 compared to fiscal
2000 reflecting mainly the following factors:
o an increase of 53.2% in the average volume of interest-earning
assets, and
o an increase of 120 basis points in the net interest margin to 3.78%
in fiscal 2001 from 2.58% in fiscal 2000 and an increase of 22 basis
points in our spread to 2.50% in fiscal 2001 from 2.28% in fiscal
2000.
The increase in our average volume of interest-earning assets was
primarily due to a rise in our loans to higher rated corporate clients. During
fiscal 2001, we continued to focus on this segment in close co-ordination with
the group marketing arms of ICICI, namely the Major Clients Group and Growth
Clients Group. During fiscal 2001, our net interest margin and our spread
increased despite a decline in the yield on interest-earning assets as compared
to fiscal 2000. This occurred as the decline in yield on assets was more than
offset by the decline in cost of interest bearing liabilities.
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue (which reflects interest revenue from
cash, cash equivalents and trading account assets, securities, loans and other
assets minus interest expense on deposits, long-term debt and trading account
and other liabilities). For further information on assets and liabilities,
changes in interest revenue and interest expense volume and rate analysis,
yields, spreads and margins for these periods, see "Selected Financial and
Operating Data".
95
Year ended March 31,
-----------------------------------------------
2001/2000
2000 2001 2001 % change
---------- ----------- -------- ---------
(in millions, except percentages)
Interest revenue
Cash, cash equivalents and trading
account assets......................... Rs. 3,184 Rs. 2,978 US$ 64 (6.5)%
Securities - available for sale......... 684 1,217 26 77.9
Securities - held to maturity........... -- 543 12 -
Loans................................... 4,437 7,419 158 67.2
Others.................................. 129 249 5 93.0
---------- ----------- --------
Total interest revenue.................. Rs. 8,434 Rs. 12,406 US$ 265 47.1
---------- ----------- --------
Interest expense
Savings account deposits................ Rs. 118 Rs. 244 US$ 5 106.8
Time deposits........................... 5,671 7,017 150 23.7
Long-term debt.......................... 244 240 5 (1.6)
Trading account and other liabilities... 623 907 20 45.6
---------- ----------- --------
Total interest expense.................. Rs. 6,656 Rs. 8,408 US$ 180 26.3
---------- ----------- --------
Net interest revenue.................... Rs. 1,778 Rs. 3,998 US$ 85 124.9
========== =========== ========
Interest revenue increased 47.1% in fiscal 2001 compared to fiscal 2000
reflecting an increase in the average volume of interest-earning assets,
principally loans, offset by a decline in the gross yield on interest-earning
assets. The average volume of loans increased by Rs. 26.7 billion (US$ 570
million) or 85.9% to Rs. 57.9 billion (US$ 1.2 billion) in fiscal 2001 compared
to fiscal 2000. Our loan growth was due to an increase in our working capital
loans and credit substitutes primarily to higher rated, large corporate clients
acquired through our joint marketing efforts with ICICI through the Major
Clients Group and the Growth Clients Group. For a further discussion of our
joint marketing efforts, see "Business - Corporate Banking - Client Coverage".
The decline in yield on interest-earning assets was primarily due to a 142
basis points decline in yield on loans to 12.82% in fiscal 2001 from 14.24% in
fiscal 2000 and a decline in yield on securities by 72 basis points to 10.65%
in fiscal 2001 from 11.37% in fiscal 2000. This decrease in yield on loans was
mainly due to an increased volume of loans to higher rated clients which loans,
consistent with market conditions, typically earn lower yields due to the lower
credit risk associated with these borrowers. Our continued focus on top rated
corporates to lower the risk profile of our portfolio resulted in approximately
94.0% of our incremental approvals to assets rated `A' and above. Our yield was
also impacted by our impaired loans on which we do not accrue interest.
The average volume of cash, cash equivalents and trading account assets
decreased by Rs. 539 million (US$ 12 million) or 1.7% in fiscal 2001 compared
to fiscal 2000 primarily due to a reclassification of securities from trading
assets to available for sale and held to maturity during fiscal 2001 and a
decrease in the stipulated reserve requirements of the Reserve Bank of India.
Our trading portfolio primarily consists of government of India securities
which are held to meet our statutory liquidity reserve requirements. For
further discussion of regulatory requirements applicable to our business, see
"Supervision and Regulation - Legal Reserve Requirements". The yield on cash,
cash equivalents and trading account assets decreased 49 basis points in fiscal
2001. This was primarily caused by a general downtrend in the interest rates in
the economy. Also, to bring down the risk due to changes in interest rates, we
brought down the average duration of the portfolio, which in turn resulted in a
reduction in the yield.
During the first quarter of fiscal 2001, investments were primarily kept
in short-term assets, such as treasury bills and commercial papers. due to
volatility in the foreign exchange markets, which could have impacted the
interest rates in the securities market, resulting in a lower yield.
The average volume of our securities portfolio, consisting of available
for sale and held to maturity securities, increased 174.7% to Rs. 16.5 billion
(US$ 353 million) in fiscal 2001 from Rs. 6.0 billion (US$ 128 million) in
fiscal 2000. The yield on these securities decreased to 10.65% in fiscal 2001
from 11.37% in fiscal 2000 primarily due to our purchase of lower yielding
securities during fiscal 2001 in view the softening of interest rates in the
Indian economy.
96
The average volume of our interest-bearing liabilities increased primarily
due to an increase in time deposits which were 79.6% of average
interest-bearing liabilities in fiscal 2001. The average volume of time
deposits increased by Rs. 16.0 billion (US$ 342 million) or 28.5% to Rs. 72.4
billion (US$ 1.5 billion) in fiscal 2001 from Rs. 56.4 billion (US$ 1.2
billion) in fiscal 2000 primarily due to an increase in retail time deposits.
The growth in our retail deposits was driven by our increased focus on the
retail segment. Corporate time deposits decreased in fiscal 2001 to Rs. 42.3
billion (US$ 903 million) from Rs. 52.8 billion (US$ 1.1 billion) in fiscal
2000 registering a decline of 19.9%. This is in line with our policy to bring
about stability by increasing our retail time deposits and decreasing our
corporate time deposits, which are more volatile in nature.
The average cost of interest-bearing liabilities declined primarily due to
the decrease in the average cost of time deposits. The share of retail deposits
increased significantly during fiscal 2001 as compared to fiscal 2000. As our
retail deposits typically carry lower interest rates compared to our corporate
deposits of similar maturity, this increase in retail deposits as a percentage
of total deposits resulted in the average cost of time deposits decreasing 37
basis points to 9.69% in fiscal 2001 from 10.06% in fiscal 2000. Also, the
general softening of interest rates in the economy helped to reduce the cost of
deposits and trading account liabilities.
The average volume of trading account liabilities, consisting of
borrowings from the inter-bank money market and short-term borrowings from
institutions, increased 57.1% in fiscal 2001 to Rs. 8.3 billion (US$ 177
million) from Rs. 5.3 billion (US$ 113 million) in fiscal 2000 primarily due to
the overall growth in our business. The cost of trading account liabilities
decreased to 10.97% in fiscal 2001 from 11.84% in fiscal 2000 in line with the
lower market rates prevalent in fiscal 2001.
Fiscal 2000 compared to Fiscal 1999
Net interest revenue increased 55.1% in fiscal 2000 compared to fiscal
1999 reflecting mainly the following factors:
o an increase of 62.2% in the average volume of interest-earning
assets, offset by
o a decrease of 12 basis points in the net interest margin to 2.58% in
fiscal 2000 from 2.70% in fiscal 1999 and a decrease of 10 basis
points in our spread to 2.28% in fiscal 2000 from 2.38% in fiscal
1999.
The increase in our average volume of interest-earning assets was
primarily due to a rise in our loans to higher rated corporate clients
resulting from our joint marketing efforts with ICICI through the Major Clients
Group. During this period, our net interest margin decreased primarily due to
this shift towards loans to higher rated clients, which loans, consistent with
market conditions typically, earn lower yields due to the lower credit risk
associated with these borrowers, and an 85 basis point decline in yield on
cash, cash equivalents and trading account assets.
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue (which reflects interest revenue from
cash, cash equivalents and trading account assets, securities, loans and other
assets minus interest expense on deposits, long-term debt and trading account
and other liabilities). For further information on assets and liabilities,
changes in interest revenue and interest expense volume and rate analysis,
yields, spreads and margins for these periods, see "Selected Financial and
Operating Data".
Year ended March 31,
---------------------------------------------
2000/1999
1999 2000 % change
---------- ----------- ----------
(in millions, except percentages)
Interest revenue
Cash, cash equivalents and trading
Account assets.............................. Rs. 2,297 Rs. 3,184 38.6%
Securities................................... 305 684 124.3
Loans........................................ 2,707 4,437 63.9
Others....................................... 81 129 59.3
---------- -----------
Total interest revenue....................... Rs. 5,390 Rs. 8,434 56.5
---------- -----------
97
Interest expense
Savings account deposits..................... Rs. 54 Rs. 118 118.5
Time deposits................................ 3,653 5,671 55.2
Long-term debt............................... 155 244 57.4
Trading account and other liabilities........ 382 623 63.1
---------- -----------
Total interest expense....................... Rs. 4,244 Rs. 6,656 56.8
---------- ------------
Net interest revenue......................... Rs. 1,146 Rs. 1,778 55.1
========= ===========
Interest revenue increased 56.5% in fiscal 2000 compared to fiscal 1999
reflecting an increase in the average volume of interest-earning assets,
principally loans, offset by a decline in the gross yield on interest earning
assets. The average volume of loans increased by Rs. 12.6 billion (US$ 269
million) or 67.9% to Rs. 31.1 billion (US$ 664 million) in fiscal 2000 compared
to fiscal 1999. Our loan growth was due to an increase in our working capital
loans primarily to higher rated, larger corporate clients acquired through our
joint marketing efforts with ICICI through the Major Clients Group. The decline
in yield on interest-earning assets was primarily due to a 85 basis points
decline in yield on cash, cash equivalents and trading account assets to 10.01%
in fiscal 2000 from 10.86% in fiscal 1999 and a decline in yield on loans by 36
basis points to 14.24% in fiscal 2000 from 14.60% in fiscal 1999. This decrease
reflected a general decline in interest rates during this period as well as an
increased volume of loans to higher rated clients which loans, consistent with
market conditions, typically earn lower yields due to the lower credit risk
associated with these borrowers. Our yield was also impacted by our impaired
loans on which we do not accrue interest.
The average volume of cash, cash equivalents and trading account assets
increased by Rs. 10.7 billion (US$ 228 million) or 50.5% in fiscal 2000
compared to fiscal 1999 primarily due to increased reserve requirements
resulting from a 66.7% increase in average deposits in fiscal 2000. Our trading
portfolio primarily consists of government of India securities which are
primarily held to meet our statutory liquidity reserve requirements. The yield
on cash, cash equivalents and trading account assets decreased 85 basis points
in fiscal 2000. This decrease was primarily caused by reduced opportunities to
swap rupee funds into US dollars at forward rates as attractive as those
prevalent in fiscal 1999.
The average volume of our securities portfolio increased 112.5% to Rs. 6.0
billion (US$ 128 million) in fiscal 2000 from Rs. 2.8 billion (US$ 60 million)
in fiscal 1999. The yield on these available for sale securities increased to
11.37% in fiscal 2000 from 10.77% in fiscal 1999 primarily due to the higher
level of dividend income earned from investments in mutual funds. Our
investment in mutual funds increased to Rs. 1.9 billion (US$ 41 million) at
March 31, 2000 from Rs. 278 million (US$ 5.9 million) at March 31, 1999
primarily because we took advantage of the buoyant Indian equity capital
markets. Dividend income increased to Rs. 326 million (US$ 7 million) in fiscal
2000 from Rs. 57 million (US$ 1 million) in fiscal 1999.
The average volume of our interest-bearing liabilities increased primarily
due to an increase in time deposits which were 84.2% of average
interest-bearing liabilities in fiscal 2000. The average volume of time
deposits increased by Rs. 22.0 billion (US$ 470 million) or 64.1% to Rs. 56.4
billion (US$ 1.2 billion) in fiscal 2000 from Rs. 34.3 billion (US$ 732
million) in fiscal 1999 primarily due to an increase in corporate time
deposits. The growth in our corporate deposits was driven by our provision of
daily quotes of interest rates for deposits in excess of Rs. 10 million, a
service not provided by most of our competitors during this period.
The increase in the average volume of interest-bearing liabilities was
also driven by a general increase in retail deposits. We were able to increase
deposit taking from retail customers by offering products targeted at new
segments of customers, including "Power Pay", a direct deposit product designed
to streamline the salary payment systems of our corporate customers. The share
of new "Power Pay" accounts in all new savings accounts in fiscal 2000 was 40%.
New "Power Pay" customers generally tended to also open time deposit accounts
leading to a further increase in time deposits. Our focus on retail deposit
taking resulted in the 102% growth in our retail deposits in fiscal 2000
compared to 49.3% growth in our corporate deposits in the same period.
The average cost of interest-bearing liabilities declined primarily due to
the decrease in the average cost of time deposits offset, in part, by the
increase in cost of trading account and other liabilities. As our retail
deposits typically carry lower interest rates compared to our corporate
deposits, the increase in retail deposits as a percentage of total deposits
over the past year resulted in the average cost of time deposits decreasing 58
basis points to 10.06% in fiscal 2000 from 10.64% in fiscal 1999.
98
The average volume of trading account liabilities, consisting of
borrowings from the inter-bank money market and short-term borrowings from
institutions, increased 26.3% in fiscal 2000 to Rs. 5.3 billion (US$ 113
million) from Rs. 4.2 billion (US$ 90 million) in fiscal 1999 primarily due to
the overall growth in our business. The cost of trading account liabilities
increased to 11.84% in fiscal 2000 from 9.16% in fiscal 1999 primarily due to
our conversion in fiscal 2000 of foreign currency liabilities into rupee funds
through swap transactions to take advantage of domestic market trading
opportunities. The cost of these swap transactions was accounted for as an
interest expense and included in interest expense on trading account
liabilities.
Provisions for Loan Losses
The following table sets forth, for the periods indicated, certain
information regarding our impaired loans.
At March 31,
--------------------------------------------------------------------------------------
2000/1999% 2001/2000 %
1999 2000 change 2001 2001 change
------------ ----------- ---------- ----------- --------- -----------
(in millions, except percentages)
Gross impaired loans....... Rs. 1,613 Rs. 1,418 (12.0)% Rs. 5,290 US$ 113 273.0%
Allowance for loan losses (1) 880 748 (15.0) 2,862 61 283.0
Net impaired loans......... 733 670 (9.0) 2,428 52 262.0
Gross impaired loans as a
percentage of gross loans 5.66% 2.97% 5.52%
Net impaired loans as a
percentage of net loans.. 2.66 1.43 2.60
Allowances for loan losses
as a percentage of gross
impaired loans............. 54.56 52.75 54.10
Allowances for loan losses
as a percentage of gross
total loans................ 3.09 1.57 2.98
---------
(1) Included in allowance for loan losses.
The following table sets forth, for the periods indicated, certain
information regarding our provisions for loan losses.
Year ended March 31,
------------------------------------------------------------
1999 2000 2001 2001
----------- ----------- ---------- -----------
(in millions, except percentages)
Provisions for loan losses..................... Rs. 540 Rs. 427 Rs. 1,082 US$ 23
Provisions for loan losses as a percentage of
net loans.................................... 1.96% 0.91% 1.16%
Provisions for loan losses as a percentage of
total assets................................. 0.71 0.33 0.49
For information on changes in the allowance for loan losses, see
"Business--Impaired Loans--Allowance for Loan Losses".
Our loan portfolio is composed largely of short-term working capital loans
where we have a security interest and first lien on all the current assets of
the borrower, typically inventory and accounts receivable. We typically lend
between 60.0% and 80.0% of the appraised value of collateral to ensure that our
loans are sufficiently over-collateralized. However, the recoveries from
impaired loans are subject to delays that may last several years, due to the
long legal collection process in India. For a further discussion of enforcement
of collateral interests in India, see "Business - Loan Portfolio - Collateral -
Completion, Perfection and Enforcement". As a result, we make an allowance for
the loans based on the time value of money or the present value of expected
realizations of collateral, which takes into account the delay we will
experience before recovering our principal. The time to recovery,
99
expected future cash flows and realizable value for collateral value are
periodically reviewed in estimating the allowance.
We make an allowance for loan losses resulting from an impaired loan by
comparing the net present value of the expected cash flows from the loan
discounted at the effective interest rate of the loan and our carrying value of
the loan. We believe that our process for ascertaining our allowance for loan
losses captures the expected losses on our entire loan portfolio. There can,
however, be no guarantee that impaired loans will not increase and that the
current allowance for loan losses will be sufficient. For further discussion of
our treatment of impaired loans, see "Business - Loan Portfolio - Recognition
of Impaired Loans".
Changes in our provisions and our allowance for loan losses as a whole
reflect economic trends in the key manufacturing, middle market corporate
segments in which many of our customers operate. The manufacturing sector was
adversely impacted between fiscal 1998 and fiscal 2001 primarily due to a
slowdown in the Indian economy, a downturn in global commodity prices,
particularly in the steel and textiles sub-sectors, and a rapid reduction in
import duties which adversely impacted the performance of borrowers in these
sectors. The impact was, in particular, more on the middle market corporate
segment due to their lower resilience to external factors which, because of our
small balance sheet in our first few years of operation were our target
customers. As a result of these adverse economic factors during fiscal 1999 and
2000, some of our loans to these borrowers became impaired.
Gross impaired loans increased by 273.0% at year-end fiscal 2001 to Rs.
5.3 billion (US$ 113 million) compared to Rs. 1.4 billion (US$ 30 million) at
year-end fiscal 2000 primarily due to the acquisition of impaired loans of Bank
of Madura in the amount of Rs. 2.2 billion and additional accruals from our mid
corporate sector. This sector as detailed elsewhere is most vulnerable to
fluctuations in the economy. Gross impaired loans as a percentage of gross
loans increased to 5.50% at year-end fiscal 2001 from 2.97% at year-end fiscal
2000. As a percentage of net loans, net impaired loans increased to 2.60% at
year-end fiscal 2001 from 1.4% at year-end fiscal 2000. Provisions for loan
losses at year-end fiscal 2001 increased 283.0% to Rs. 2.9 billion (US$ 62
million) from Rs. 748 million (US$ 16 million) at year-end fiscal 2000.
Provision for loan losses on loans acquired from Bank of Madura amounted to Rs.
1.6 billion (US $ 34 million) at year-end fiscal 2001.The coverage ratio for
gross impaired loans increased to 54.10% at fiscal 2001 from 52.75 % at fiscal
2000.
Management believes that several loans which became impaired in fiscal
1998, 1999, 2000 and 2001 are essentially loans to inherently viable companies.
Many of these borrowers are still making interest payments. If the Indian
economy shows signs of revival, management expects loan losses in many of these
loans to be lower due to the viability of these companies and our belief that
they will eventually begin making all required payments. These loans were
classified as impaired as a result of continued stress on cash flows of these
borrowers, primarily due to the slowdown in the Indian economy, the global
downtrend in commodity prices coupled with the rapid reduction in domestic
trade barriers over the past few years. In some cases, the impaired loans are
to operating companies generating positive, albeit reduced, cash flows because
they are operating at levels below their overall capacities. In some cases, in
management's view the future cash flows, discounted at the contracted rate of
the loan, adequately cover our current outstanding principal and require no
allowance for loan losses and, as a result no provisions have been made for
these loans. Many of these borrowers are making current interest payments. They
have been classified as impaired in view of the stressed cash flow of the
borrower, the borrower's relatively weak position in its industry or, in the
case of some of the borrowers, a delay in making interest payments. In all
cases of impaired loans where no provision has been made, management believes
that it has a strong collateral position. We are monitoring the situation of
these loans and borrowers carefully and will make allowances if our view of the
situation changes. We have also reached negotiated settlements with some of our
borrowers where we expect to recover the majority of the gross principal
outstanding. At March 31, 2001, we had one impaired loan having a gross
principal outstanding of Rs. 14 million (US$ 0.3 million) for which no
allowance for loan losses has been made, as compared to nine loans having a
gross principal outstanding of Rs. 163 million (US$ 3 million) at March 31,
2000. Provisions for loan losses as a percentage of total assets increased to
0.49% in fiscal 2001 from 0.33% in fiscal 2000.
We typically calculate our allowance for loan losses on a loan-for-loan
basis. Credit card receivables are collectively evaluated for impairment based
on the profile of days past due, classified into various time categories.
Provisions are based as a fixed percentage of these pre-defined time
categories. We intend to review this policy annually based on our historical
delinquency and loan loss experience.
100
Non-Interest Revenue
Fiscal 2001 compared to Fiscal 2000
The following table sets forth, for the periods indicated, the principal
components of our non-interest revenue.
Year ended March 31,
--------------------------------------------------------
2001/2000
2000 2001 2001 % change
--------- --------- --------- ---------
(in millions, except percentages)
Fees and commissions (1).................. Rs. 607 Rs. 1,125 US$ 24 85.3%
Trading account revenue(2)................ 857 602 13 (29.8)
Securities transactions(3) ............... 75 (384) (8) (612.0)
Foreign exchange transactions(4) ......... 220 397 8 80.5
Other revenue............................. - 14 - -
--------- --------- ---------
Total non-interest revenue, net........... Rs. 1,759 Rs. 1,754 US$ 37 (0.3)
========= ========= =========
---------
(1) Primarily from fee-based income on services such as the issue of
documentary credits, the issue of guarantees, cash management services and
remittances.
(2) Primarily reflects income from trading in government of India securities.
(3) Primarily reflects capital gains realized on the sale of available for
sale securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
Non-interest revenue declined marginally by 0.3% in fiscal 2001 compared
to fiscal 2000. In fiscal 2001, our fee and commission income and income from
foreign exchange transactions increased, which was offset by a decrease in our
trading account revenue and losses on our securities transactions.
The increase in our fee income is principally on account of additional
corporate clients acquired by us during fiscal 2001. The income from foreign
exchange transactions increased primarily due to the gain on remittance of ADR
proceeds to India. Trading account revenue decreased in fiscal 2001 primarily
due to the mark to market impact on trading account assets. Our securities
transactions, which primarily reflect capital gain realized on the sale of
available for sale securities, showed a loss primarily due to realized loss on
our mutual fund units portfolio which was caused by the extreme volatility in
Indian stock markets in the beginning of fiscal 2001.
The following table sets forth, for the periods indicated, the principal
components of our fees and commissions.
Year ended March 31,
--------------------------------------------------------------
2001/2000
2000 2001 2001 % change
------- --------- ------- ---------
(in millions, except percentages)
Remittances......................... Rs. 51 Rs. 68 US$ 2 33.3%
Cash management services............ 123 248 5 101.6
Commissions:
Bills.............................. 89 132 3 48.3
Guarantees........................ 114 169 4 48.2
Documentary credit................ 118 153 3 29.7
Investment transactions. ......... 31 58 1 87.1
Foreign exchange transactions. ... 10 30 1 200.0
Depositary share accounts......... 14 50 1 257.1
Others............................ 57 217 4 280.7
------- --------- -------
Total commissions................... 433 809 17 86.8
------- --------- -------
Total fees and commissions ......... Rs. 607 Rs. 1,125 US$ 24 85.3
======= ========= =======
Fees and commissions increased 85.3% in fiscal 2001 primarily due to the
increase in income from cash management services and commissions on bills and
guarantees. In addition to these increases, our income from depositary share
account services and commissions on investment and foreign exchange
transactions also increased in fiscal 2001. We continued our focus on cash
management services as one of the key areas of fee income
101
generation. Our increased marketing efforts through the Growth Clients Group
and the Major Clients Group helped us to increase the turnover and commission
on cash management services, guarantees, documentary credits and bills. The
amount handled under cash management services also increased significantly to
Rs. 1,005.0 billion (US$ 21 billion) in fiscal 2001 from Rs. 656.2 billion (US$
14 billion) in fiscal 2000. As a result, income from cash management services
increased 101.6% to Rs. 248 million (US$ 5 million) in fiscal 2001 compared to
fiscal 2000. Commissions increased 86.8% to Rs. 809 million (US$ 17 million) in
fiscal 2001 from Rs. 433 million (US$ 9 million) in fiscal 2000. Our guarantees
increased 77.6% to Rs. 13.5 billion (US$ 288 million) at March 31, 2001 from
Rs. 7.6 billion (US$ 162 million) at year-end fiscal 2000 and our acceptances
primarily consisting of documentary credits, increased 52.0% to Rs. 12.9
billion (US$ 275 million) at year-end fiscal 2001 from Rs. 8.5 billion (US$ 181
million) at year-end fiscal 2000. As a result, in fiscal 2001, commissions on
guarantees increased 48.2% and commissions on documentary credits increased
29.7%. Commissions on bills also increased 48.3% in fiscal 2001 compared to
fiscal 2000. Our commission from depositary share account services increased by
257.1% in fiscal 2001 compared to fiscal 2000. The number of depositary share
accounts with us increased to 91,000 in fiscal 2001 from 60,000 in fiscal 2000.
Our commission income on investment and foreign exchange transactions increased
in fiscal 2001 by Rs. 47 million (US$ 1 million) compared to fiscal 2000
primarily due to an increase in volume and value of transactions.
Trading account revenue, resulting largely from sales of government of
India securities, decreased to Rs. 602 million (US$ 13 million) in fiscal 2001
from Rs. 857 million (US$ 18 million) in fiscal 2000 primarily due to the mark
to market impact on trading account assets. During fiscal 2001, a portion of
our trading assets ceased to have the inherent characteristics of liquidity,
active and frequent buying and selling and opportunity for a short-term
difference in price. Accordingly, in September 2000, we reclassified trading
assets amounting to Rs. 8.6 billion (US$ 184 million) to securities available
for sale and Rs. 10.2 billion (US$ 218 million) to securities held to maturity.
Our securities transactions, which primarily reflect capital gains realized on
the sale of available for sale securities, showed a loss of Rs. 384 million
(US$ 8 million) compared to a profit of Rs. 75 million (US$ 2 million) in
fiscal 2000 primarily due to a realized loss on our mutual fund portfolio which
was caused by the extreme volatility in Indian stock markets in the beginning
of fiscal 2001.
Our income from foreign exchange transactions increased 80.5% to Rs. 397
million (US$ 8 million) in fiscal 2001 compared to fiscal 2000 primarily due to
the gain realized on the remittance of the proceeds from our ADS offering in
March 2000 to India.
Fiscal 2000 compared to Fiscal 1999
The following table sets forth, for the periods indicated, the principal
components of our non-interest revenue.
Year ended March 31,
---------------------------------------------------------
2000/1999
1999 2000 % change
------------ ----------- ----------
(in millions, except percentages)
Fees and commissions (1).................. Rs. 370 Rs. 607 64.1%
Trading account revenue(2)................ 134 857 539.6
Securities transactions(3) ............... 21 75 257.1
Foreign exchange transactions(4) ......... 341 220 (35.5)
Other revenue............................. - - -
------------ -----------
Total non-interest revenue, net........... Rs. 866 Rs. 1,759 103.1
============ ===========
---------
(1) Primarily from fee-based income on services such as the issue of
documentary credits, the issue of guarantees, cash management services and
remittances.
(2) Primarily reflects income from trading in government of India securities.
(3) Primarily reflects capital gains realized on the sale of available for
sale securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
102
Non-interest revenue increased 103.1% in fiscal 2000 to Rs. 1.8 billion
(US$ 38 million) from Rs. 866 million (US$ 18 million) in fiscal 1999,
primarily due to an increase in trading account revenue and fees and
commissions. The increase in trading account revenue was primarily due to the
significantly higher level of trading opportunities in fiscal 2000 compared to
fiscal 1999. These types of market opportunities may not be available in every
period.
The following table sets forth, for the periods indicated, the principal
components of our fees and commissions.
Year ended March 31,
--------------------------------------------------------
2000/1999
1999 2000 % change
----------- ------------ ----------
(in millions, except percentages)
Remittances.............................. Rs. 38 Rs. 51 34.2%
Cash management services................. 53 123 132.1
Commissions:
Bills.................................. 68 89 30.9
Guarantees............................. 75 114 52.0
Documentary credit..................... 73 118 61.6
Others................................. 63 112 77.8
----------- ------------
Total commissions........................ 279 433 55.2
----------- ------------
Total fees and commissions .............. Rs. 370 Rs. 607 64.1
=========== ============
Fees and commissions increased 64.1% in fiscal 2000 primarily due to the
increase in income from cash management services and commissions on documentary
credits and guarantees. Increased marketing efforts through the Growth Clients
Group and the Major Clients Group helped us to increase cash management
services, guarantees, documentary credits and bills. The amount handled under
cash management services also increased significantly to Rs. 656.2 billion in
fiscal 2000 from Rs. 389.4 billion in fiscal 1999. As a result, income from
cash management services increased 132.1% to Rs. 123 million in fiscal 2000
compared to fiscal 1999. Commissions increased 55.2% to Rs. 433 million in
fiscal 2000 from Rs. 279 million in fiscal 1999. Our guarantees increased 63.3%
to Rs. 7.6 billion at March 31, 2000 from Rs. 4.6 billion at year-end fiscal
1999 and our acceptances primarily consisting of documentary credits, increased
52.0% to Rs. 8.5 billion at year end fiscal 2000 from Rs. 5.6 billion at
year-end fiscal 1999. As a result, in fiscal 2000, commissions on guarantees
increased 52.0% and commissions on documentary credits increased 61.6%.
Commissions on bills also increased 30.9% in fiscal 2000 compared to fiscal
1999.
Trading account revenue resulting largely from sales of government of
India securities, increased to Rs. 857 million in fiscal 2000 from Rs. 134
million in fiscal 1999 primarily due to the significantly higher level of
trading opportunities. We took advantage of the decline in the yield on debt
securities and sold higher yielding debt securities from our portfolio.
Although our equity investments are limited by Reserve Bank of India
requirements, we nonetheless were able to benefit from a buoyant equity capital
market. As a result, in fiscal 2000 the gain on sale of trading securities was
Rs. 936 million. In light of the increases in rupee interest rates in fiscal
2001, which will adversely affect the value of our rupee fixed income trading
portfolio, management does not expect these extraordinary results to be
repeated in fiscal 2001.
Our income from foreign exchange transactions declined 35.5% to Rs. 220
million in fiscal 2000 compared to fiscal 1999 primarily due to the decline in
spread on corporate transactions on account of competition and the restricted
trading opportunities in this period since exchange rates remained steady.
103
Non-Interest Expense
Fiscal 2001 compared to Fiscal 2000
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
Year ended March 31,
-------------------------------------------------------
2001/2000
2000 2001 2001 % change
--------- ---------- ------ ----------
(in millions, except percentages)
Employee expense:
Salaries..................................... Rs. 257 Rs. 412 US$ 9 60.3%
Employee benefits............................ 59 95 2 61.0
--------- --------- ------
Total employee expense......................... 316 507 11 60.4
Occupancy expense:
Premises...................................... 57 170 3 198.2
Rentals, taxes and electricity................ 180 361 8 100.6
Computer and office equipment................. 283 640 14 126.2
--------- --------- ------
Total occupancy expense........................ 520 1,171 25 125.2
--------- --------- ------
Administration and other expenses:
Advertisement and publicity.................. 39 143 3 266.7
Communications expense....................... 69 206 4 198.6
Printing and stationery...................... 82 242 5 195.1
Direct selling agents' expenses.............. 10 179 4 1,690.0
Bank charges................................. 33 85 2 157.6
Other........................................ 260 571 12 119.6
--------- --------- ------
Total administration and other expense......... 493 1,426 30 189.2
--------- --------- ------
Total non-interest expense..................... Rs. 1,329 Rs. 3,104 US$ 66 133.6
========= ========= ======
Non-interest expense increased 133.6% in fiscal 2001 to Rs. 3.1 billion
(US$ 66 million) from Rs. 1.3 billion (US$ 28 million) in fiscal 2000 primarily
due to a significant increase in occupancy expenses and administration and
other expenses. Non-interest expense as a percentage of average total assets
increased to 2.27% in fiscal 2001 from 1.52% in fiscal 2000.
Administration and other expenses increased 189.2% in fiscal 2001 compared
to fiscal 2000. Expenses on advertisement and publicity increased 266.7% in
fiscal 2001 compared to fiscal 2000 for the promotion of our products. Other
operating expenses, including postage, telephone and stationery, also increased
in line with the general growth in our business volumes and our increased focus
on the retail segment, which typically entails higher operational costs. During
fiscal 2001, our customer base increased to 3.2 million from 0.6 million in
fiscal 2000 largely due to over 1.2 million customers of Bank of Madura
acquired by us through our acquisition in March 2001. We undertook several
initiatives on the retail front such as an expansion of our credit card
business, the launch of debit cards, the setting up of 34 additional call
centers and 9 regional processing centers. We also undertook two Smart Card
pilot projects during fiscal 2001. As we focused on increasing our retail
deposits and expanding our credit card operations, we retained the services of
direct selling agents in fiscal 2001, resulting in higher expenses towards
commissions, which are based on the number of acceptable accounts mobilized.
The increase in bank charges is on account of correspondent bank charges paid
for handling a larger volume of cash management services business.
Occupancy expense increased 125.2% in fiscal 2001 compared to fiscal 2000,
primarily due to additional rental payments resulting from the expansion of our
ATM and branch network as well as our credit card operations and the setting up
of additional call centers, data centers and regional processing centers. The
number of our ATMs increased to 510 at March 31, 2001 from 175 at March 31,
2000 primarily due to our aim of increasing electronic delivery channels for
the convenience of customers. During fiscal 2001, there was an increase of
126.2% in computer and office equipment expenses primarily due to the
depreciation on credit card assets, technology equipment including servers,
personal computers, ATMs and VSATs.
104
Employee expense increased 60.4% in fiscal 2001 due to a 234.1% increase
in the number of employees to 4,491 at March 31, 2001 from 1,344 at March 31,
2000 and an increase in salary levels in fiscal 2001 as compared to fiscal
2000. The increase in number of employees was primarily due to the inclusion of
2,716 employees of Bank of Madura taken over by us during fiscal 2001. The
employee expense at March 31, 2001 included expenses of these employees only
for the period from March 10, 2001, the effective date of the merger.
Fiscal 2000 compared to Fiscal 1999
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
Year ended March 31,
-------------------------------------------
2000/1999
1999 2000 % change
--------- --------- ---------
(in millions, except percentages)
Employee expense:
Salaries..................................... Rs. 172 Rs. 257 49.4%
Employee benefits............................ 32 59 84.4
--------- ---------
Total employee expense......................... 204 316 54.9
Occupancy expense:
Premises...................................... 49 57 16.3
Rentals, taxes and electricity................ 114 180 57.9
Computer and office equipment................. 183 283 54.6
--------- ---------
Total occupancy expense........................ 346 520 50.3
--------- ---------
Administration and other expenses:
Advertisement and publicity.................. 34 39 14.7
Communications expense....................... 43 69 60.5
Other........................................ 172 385 123.8
--------- ---------
Total administration and other expense......... 249 493 98.0
--------- ---------
Total non-interest expense..................... Rs. 799 Rs. 1,329 66.3
========= =========
Non-interest expense increased 66.3% in fiscal 2000 to Rs. 1.3 billion
from Rs. 799 million in fiscal 1999 primarily due to a significant increase in
administration and other expenses. Non-interest expense as a percentage of
average total assets increased to 1.52% in fiscal 2000 from 1.50% in fiscal
1999.
Administration and other expenses increased 98.0% in fiscal 2000 compared
to fiscal 1999 primarily due to one-time increase in expenses from the issuance
of new ATM cards to all our existing customers due to the networking of all our
ATMs to Switch which enabled all of our customers to access their accounts
online at any of our ATM machines throughout India. As we focused on increasing
our retail deposits, we engaged the services of direct selling agents in fiscal
2000 resulting in higher expenses. The agents were paid commissions based on
the number of acceptable accounts mobilized.
Employee expense increased 54.9% in fiscal 2000 due to a 50.8% increase in
the number of employees to 1,344 at March 31, 2000 from 891 at March 31, 1999
as we expanded our branch network to 97 branches and extension counters at
March 31, 2000 from 64 branches and extension counters at March 31, 1999.
Occupancy expense increased 50.3% in fiscal 2000 compared to fiscal 1999,
primarily due to additional rental payments resulting from the expansion of our
branch network and a 54.6% increase in computer and office equipment expenses
due to the depreciation on technology equipment including servers, personal
computers, ATMs, VSATs and BANCS2000.
Income Tax Expense
Income tax expense decreased 31.9% in fiscal 2001 to Rs. 258 million (US$
6 million) from Rs. 379 million (US$ 8 million) in fiscal 2000 primarily due to
the lower level of income in fiscal 2001. Our effective tax rate was 16.5% in
fiscal 2001 compared to 21.3% in fiscal 2000 primarily due to a higher
proportion of tax-exempt income in the total income in fiscal 2001. Our
effective tax rate was lower than the marginal tax rate of 39.55% applicable to
companies generally in India in fiscal 2001 primarily due to the tax-exempt
income from certain investments of our treasury department including bonds of
certain public sector corporations and mutual funds units. The government
105
of India, in order to facilitate access to competitive funding for certain
public sector companies, allows these companies to issue bonds, the interest on
which is tax-exempt to the bondholder. Further, the existing taxation laws
provide that any dividends received on equity shares, preference shares and
mutual fund units are tax exempt to the holder of the mutual fund units.
Income tax expense increased 122.9% in fiscal 2000 to Rs. 379 million from
Rs. 170 million in fiscal 1999 primarily due to the higher level of income in
fiscal 2000. Our effective tax rate was 21.3% in fiscal 2000 compared to 25.3%
in fiscal 1999 primarily due to a substantial increase in tax-exempt income in
fiscal 2000.
Financial Condition
Assets
The following tables set forth, for the periods indicated, the principal
components of our assets.
At March 31,
-------------------------------------------------------------------
2001/2000 %
2000 2001 (1) 2001 change
------------ -------------- ----------- -----------
(in millions, except percentages)
Cash and cash equivalents.................... Rs. 34,313 Rs. 44,896 US$ 958 30.8%
Interest bearing deposits with banks......... 2,048 2,410 51 17.7
Trading account assets (2)................... 28,228 18,725 400 (33.7)
Securities- Available for sale(3)............ 4,709 24,787 529 426.4
Securities- Held to maturity................. - 10,944 234 -
Loans, net................................... 46,986 93,030 1,986 98.0
Acceptances(4)............................... 8,490 12,869 275 51.6
Property and equipment....................... 2,097 4,059 86 93.6
Intangible assets............................ - 2,641 56 -
Other assets (5)............................. 3,515 5,647 121 60.7
------------ -------------- -----------
Total assets................................. Rs. 130,386 Rs. 220,008 US$ 4,696 68.7
============ ============== ===========
At March 31,
-------------------------------------------------------
1999 2000 2000/1999 % change
------------ -------------- ------------------
(in millions, except percentages)
Cash and cash equivalents.................... Rs. 19,928 Rs. 36,326 82.3%
Trading account assets (2)................... 15,822 28,228 78.4
Securities(3)................................ 3,963 4,709 18.8
Loans, net................................... 27,597 46,986 70.3
Acceptances(4)............................... 5,587 8,490 52.0
Property and equipment....................... 1,761 2,097 19.1
Other assets (5)............................. 1,607 3,550 120.9
Total assets................................. Rs. 76,265 Rs. 130,386 71.0
---------
(1) Includes assets acquired on acquisition of Bank of Madura at March 10,
2001. For details, see Note 2 to our US GAAP financial statements.
(2) Primarily includes government of India securities.
(3) Includes corporate debt securities, government of India securities and
mutual fund units.
(4) Includes only documentary credits that are non-funded facilities.
(5) Includes deferred tax asset, interest accrued, staff loans, deposits in
leased premises and pre-paid expenses.
(6) Figures for fiscal 2000 have been regrouped and reclassified. Please see
our notes to the financial statements for a more detailed description.
106
Our total assets increased 68.7% at March 31, 2001 compared to at March 31,
2000. Net loans increased 98.0% in fiscal 2001 compared to at March 31, 2000.
The growth was in corporate lending as working capital loans increased 81.5%
and term loans, including credit substitutes and lease finance, increased
132.7%. Our loan growth was driven primarily by additional loans to clients in
the top rated category as well as our acquisition of the net loan portfolio of
Bank of Madura in the amount of Rs. 17.8 billion (US$ 380 million). During
fiscal 2001, we continued our focus on doing business with the large higher
rated clients which resulted in approximately 94.0% of incremental approvals to
assets rated `A' and above. Our loan growth was driven by additional clients
referred to us by ICICI as we increased our focus on doing business with more
higher rated clients that were serviced by the ICICI group's Major Clients
Group and our acquisition of the loan portfolio of Bank of Madura in the amount
of Rs. 14.8 billion (US$ 315 million) at year-end fiscal 2001. Loans
denominated in foreign currency were 5.1% of our total loans at March 31, 2001.
The decline in trading accounts assets is due to transfer of securities to
other categories. In fiscal 2001, the Bank transferred certain securities
amounting to Rs. 8.6 billion (US$ 184 million) and Rs. 10.2 billion (US$ 218
million) from `trading account assets' to `securities, available for sale' and
to `securities, held to maturity' respectively at fair value on the date of
transfer. But for this transfer, the cash and cash equivalents and trading
account assets have increased primarily due to our acquisition of these assets
of Bank of Madura in the amount of Rs. 10.0 billion (US$ 213 million) as well
as increased reserve requirements resulting from a 66.5% increase in deposits
in fiscal 2001. Securities available for sale increased 426.4% in fiscal 2001
compared to fiscal 2000 primarily due to the reclassification of securities
from trading account assets and our acquisition of the securities portfolio of
Bank of Madura in the amount of Rs. 11.5 billion (US$ 243 million) at year-end
fiscal 2001. Our marketing strategy helped us in increasing our acceptances by
51.6% to Rs. 12.9 billion (US$ 275 million) at March 31, 2001 from Rs. 8.5
billion (US$ 181 million) at March 31, 2000. Property and equipment increased
93.6% in fiscal 2001 compared to fiscal 2000 primarily due to our acquisition
of the property and equipment of Bank of Madura in the amount of Rs. 693
million (US$ 15 million) at year-end fiscal 2001, significant investments in
technology and investments in ATM and credit card assets. Intangibles
represented principally the goodwill amount arising in the acquisition of Bank
of Madura.
Our total assets increased 71.0% at March 31, 2000 compared to at March
31, 1999. Net loans increased 70.3% in fiscal 2000 compared to at March 31,
1999. The growth was in corporate lending as working capital loans increased
80.4% and term loans increased 39.1%. Loans denominated in foreign currency
were less than 5.0% of our total loans at March 31, 2000. The growth in cash
and cash equivalents and in trading account assets was principally due to
increased reserve requirements resulting from a 62.5% increase in deposits in
fiscal 2000. Securities increased 18.8% in fiscal 2000 primarily due to
increased investments in mutual fund units as a result of buoyant equity
capital markets. Our marketing strategy helped us in increasing our acceptances
by 52.0% to Rs. 8.5 billion at March 31, 2000 from Rs. 5.6 billion at March 31,
1999.
107
Liabilities and Stockholders' Equity
The following tables set forth, for the periods indicated, the principal
components of our liabilities and stockholders' equity.
At March 31,
-------------------------------------------------------------------
2001/2000
2000 2001 (1) 2001 % change
-------------- ------------- ------------ ---------
(in millions, except percentages)
Deposits............................ Rs. 98,660 Rs. 164,254 US$ 3,506 66.5%
Trading account liabilities(2)...... 1,922 6,495 139 237.9
Current portion of long-term debt... 771 250 5 (67.6)
Short term borrowings(3)............ 2,187 3,012 64 37.7
Acceptances......................... 8,490 12,869 275 51.6
Other liabilities................... 5,264 14,650 313 178.3
Long-term debt...................... 1,705 2,171 46 27.3
-------------- ------------- ------------
Total liabilities................... 118,999 203,701 4,348 71.2
-------------- ------------- ------------
Stockholders' equity................ 11,387 16,307 348 43.2
-------------- ------------- ------------
Total............................... Rs. 130,386 Rs. 220,008 US$ 4,696 68.7
============== ============= ============
At March 31,
---------------------------------------------------
2000/1999
1999 2000 % change
-------------- ------------- ---------
(in millions, except percentages)
Deposits............................ Rs. 60,729 Rs. 98,660 62.5%
Trading account liabilities(2)...... 418 1,922 360.1
Acceptances......................... 5,587 8,490 52.0
Long-term debt...................... 1,764 2,476 40.4
Other liabilities (3)............... 4,937 7,451 50.9
-------------- -------------
Total liabilities................... 73,435 118,999 62.0
-------------- -------------
Stockholders' equity................ 2,830 11,387 302.4
-------------- -------------
Total............................... Rs. 76,265 Rs. 130,386 71.0
============== =============
---------
(1) Includes liabilities acquired on acquisition of Bank of Madura at March
10, 2001. For details, see Note 2 to our US GAAP financial statements.
(2) Trading account liabilities are inter-bank borrowings and short-term
borrowings from other institutions.
(2) Includes refinancing received from the Reserve Bank of India against our
export credit, interest accrued but not due on deposits and bills payable.
108
The following tables set forth, for the periods indicated, the components
of our total deposits.
At March 31,
---------------------------------------------------------------------
2001/2000
2000 2001 2001 % change
-------------- --------------- --------------- ----------
(in millions, except percentages)
Interest-bearing deposits:
Savings deposits................. Rs. 5,332 Rs. 18,786 US$ 401 252.3%
Time deposits.................... 77,453 119,097 2,542 53.8
Total interest-bearing deposits..... 82,785 137,883 2,943 66.6
Non-interest-bearing deposits:
Demand deposits ................. 15,875 26,371 563 66.1
-------------- --------------- --------------- -----
Total deposits...................... Rs. 98,660 Rs. 164,254 US$ 3,506 66.5
============== =============== ===============
At March 31,
-----------------------------------------------------
2000/1999
1999 2000 % change
-------------- --------------- ---------
(in millions, except percentages)
Interest-bearing deposits:
Savings deposits................. Rs. 2,271 Rs. 5,332 134.8%
Time deposits.................... 52,692 77,453 47.0
Total interest-bearing deposits..... 54,963 82,785 50.6
Non-interest-bearing deposits:
Demand deposits ................. 5,766 15,875 175.3
-------------- ---------------
Total deposits...................... Rs. 60,729 Rs. 98,660 62.5
============== ===============
Our total deposits increased 66.5% in fiscal 2001 compared to at March 31,
2000. This increase is attributable to the deposits acquired through the
acquisition of Bank of Madura by us in the amount of Rs. 35.3 billion (US$ 753
million) as well as deposits obtained through our increased focus on retail
customers by offering various products, such as credit cards, debit cards, and
the sale of mutual fund and third party products. This focus on the retail
segment was reflected in the 227.4% growth in our retail deposits in fiscal
2001 compared to a negative growth of 5.8% in our more volatile corporate
deposits in the same period. Our savings account deposits increased 252.3% in
fiscal 2001 primarily due to our continued focus on building a strong retail
depositor base as well as savings deposits acquired through the acquisition of
Bank of Madura by us in the amount of Rs. 5.7 billion (US$ 122 million). Our
time deposits increased 53.8% in fiscal 2001. Our non-interest-bearing deposits
increased 66.1% due to our specific focus on this segment, particularly through
the development and marketing of our key corporate deposit products (described
in "Business - Corporate Banking - Corporate Deposits") as it significantly
reduces our cost of funds. The trading account liabilities which represents
call borrowings in inter-bank market and from other institutions increased by
Rs. 4.6 billion (US$ 98 million) in fiscal 2001 over fiscal 2000. Our
short-term borrowings, which represent refinance from Reserve Bank of India
primarily against our export credit, increased by Rs. 825 million (US$ 18
million). Our other liabilities increased by Rs. 9.4 billion (US$ 201 million)
primarily due to an increase of Rs. 2.4 billion (US$ 51 million) in bills
payable and an increase of Rs. 4.0 billion (US$ 85 million) in outward clearing
suspense.
Our total deposits increased 62.5% in fiscal 2000 compared to at March 31,
1999. Some of this increase is attributable to our increased focus on deposit
taking from retail customers by offering products targeted at different
segments of customers, such as customers of "Power Pay", a direct deposit
product designed to streamline the salary payment systems of our corporate
customers. This focus on retail deposits taking was reflected in the 102%
growth in our retail deposits in fiscal 2000 compared to 49.3% growth in our
corporate deposits in the same period. Our savings account deposits increased
135% in fiscal 2000 as we continued our focus on building a strong retail
depositor base. Our time deposits increased 47.0% in fiscal 2000. Our
non-interest-bearing deposits increased 175.3% due to our specific focus on
this segment particularly through the development and marketing of our key
corporate deposit products as it significantly reduces our cost of funds.
109
Foreign Exchange and Derivative Contracts
We enter into foreign exchange forward contracts, swap agreements and
other derivative products, which enable customers to transfer, modify or reduce
their foreign exchange and interest rate risks. Our foreign exchange contracts
arise out of forward foreign exchange transactions with corporate and
non-corporate customers and inter-bank foreign exchange transactions. We earn
profit by way of an exchange margin as a mark-up over the exchange rate offer
on customer transactions. We earn profit on inter-bank foreign exchange
transactions by way of differences between the purchase rate and the sale rate.
This income is booked as income from foreign exchange transactions.
All our outstanding derivative contracts represent currency and interest
rate swaps for our corporate customers. The income earned by us on all such
transactions is booked as trading account revenue.
The following table sets forth, for the periods indicated, the notional
amount of our derivative contracts.
Notional principal amounts Balance sheet credit exposure(1)
------------------------------------------ -----------------------------------------
At March 31, At March 31,
------------------------------------------ -----------------------------------------
1999 2000 2001 1999 2000 2001
------------ ---------- ------------- ------------ ----------- -------------
(in millions)
Interest rate products:
Swap agreements............... - Rs. 900 Rs. 11,380 - - Rs. 12
------------ ---------- ------------- ------------ ----------- -------------
Total interest rate products - Rs. 900 Rs. 11,380 - - Rs. 12
============ ========== ============= ============ =========== =============
Foreign exchange products:
Forward contracts........... Rs. 36,705 Rs. 62,892 Rs. 78,249 Rs. 425 Rs. 309 Rs. 120
Swap agreements............. 2,962 7,658 8,710 - - -
------------ ---------- ------------- ------------ ----------- -------------
Total foreign exchange
Products.................. Rs. 39,667 Rs. 70,550 Rs. 86,959 Rs. 425 Rs. 309 Rs. 120
============ ========== ============= ============ =========== =============
---------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products at the indicated periods.
Capital
We are 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. For a detailed description of the Reserve Bank of India's capital
adequacy guidelines, see "Supervision and Regulation--Capital Adequacy
Requirements". We are required to maintain a minimum ratio of total capital to
risk adjusted assets as determined by a specified formula of 9.0%, at least
half of which must be Tier 1 capital, generally stockholders' equity.
The following tables set forth, for the periods indicated, our 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
our financial statements prepared in accordance with Indian GAAP.
At March 31
-------------------------------------------------------
2001/2000
2000 2001 2001 % change
----------- ----------- ---------- ---------
(in millions, except percentages)
Tier 1 capital.......................Rs. 11,251 Rs. 13,024 US$ 278 15.8%
Tier 2 capital....................... 1,437 1,450 31 0.9
----------- ----------- ----------
Total capital........................Rs. 12,688 Rs. 14,474 US$ 309 14.1
=========== =========== ==========
On-balance sheet risk assets......... 51,611 101,982 2,177 97.6
Off-balance sheet risk assets........ 12,979 23,070 492 77.7
----------- ----------- ----------
Total risk assets....................Rs. 64,590 Rs. 125,052 US$ 2,669 93.6
=========== =========== ==========
Tier 1 capital adequacy ratio........ 17.4% 10.4%
Tier 2 capital adequacy ratio........ 2.2 1.2
----------- -----------
Total capital adequacy ratio......... 19.6% 11.6%
=========== ===========
110
At March 31
-----------------------------------------
2000/1999
1999 2000 % change
----------- ----------- ---------
(in millions, except percentages)
Tier 1 capital...................... Rs. 3,035 Rs. 11,251 270.7%
Tier 2 capital...................... 1,549 1,437 (7.2)
----------- -----------
Total capital....................... Rs. 4,584 Rs. 12,688 176.8
=========== ===========
On-balance sheet risk assets........ 33,646 51,611 53.4
Off-balance sheet risk assets....... 7,803 12,979 66.3
----------- -----------
Total risk assets................... Rs. 41,449 Rs. 64,590 55.8
=========== ===========
Tier 1 capital adequacy ratio....... 7.3% 17.4%
Tier 2 capital adequacy ratio....... 3.7 2.2
----------- -----------
Total capital adequacy ratio........ 11.0% 19.6%
=========== ===========
Our total capital adequacy ratio computed under the applicable Reserve
Bank of India guidelines and based on our financial statements prepared in
accordance with Indian GAAP was 11.57% at March 31, 2001. Using the same basis
of computation, our Tier 1 capital adequacy ratio was 10.4% and our Tier 2
capital adequacy ratio was 1.2% at March 31, 2001.
Our total capital adequacy ratio computed under the applicable Reserve
Bank of India guidelines and based on our financial statements prepared in
accordance with US GAAP was 11.69% at March 31, 2001. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 10.60% and our Tier 2
capital adequacy ratio was 1.09% at March 31, 2001.
Our total capital adequacy ratio computed under the applicable Reserve
Bank of India guidelines and based on our financial statements prepared in
accordance with US GAAP was 19.12% at year-end fiscal 2000. Using the same
basis of computation, our Tier 1 capital adequacy ratio was 17.19% and our Tier
2 capital adequacy ratio was 1.93% at year-end fiscal 2000.
Capital Expenditures
The following table sets forth, for the periods indicated, the details of
our capital expenditures.
Year ended March 31,
----------------------------------------------------------------
1999 2000 2001 2001
------------- ------------- ------------- -------------
(in millions)
Premises:
Owned.................................... Rs. 221 Rs. 132 Rs. 294 US$ 6
Leasehold................................ 27 30 289 6
------------- ------------- ------------- -------------
Total premises........................... 248 162 583 12
Computers and accessories................ 115 248 783 17
Other.................................... 124 197 633 14
------------- ------------- ------------- -------------
Total capital expenditures............... Rs. 487 Rs. 607 Rs. 1,999 US$ 43
============= ============= ============= =============
Capital expenditures increased 229.3% in fiscal 2001 compared to fiscal
2000 primarily due to a 215.7% increase in expenditure on computers and
accessories, a 259.9% increase in capital expenditure on premises and a 221.3%
increase in other capital expenditures, including furniture, air-conditioning
and office equipment. The increase is primarily attributable to assets acquired
through the acquisition of Bank of Madura, a rapid increase in the number of
ATM locations, assets purchased for new branches opened in fiscal 2001 and
expenditures relating to renovations to some of our existing offices.
Capital expenditures increased 24.6% in fiscal 2000 compared to fiscal
1999 primarily due to a 115.7% increase in computers and accessories capital
expenditures and a 58.9% increase in other capital expenditures, including
furniture, air-conditioning and office equipment purchased for new branches
opened in this period and expenditures relating to renovations to our existing
offices to better serve our increased number of customers. Premises capital
expenditures decreased in fiscal 2000 by 34.7% largely as a result of the
absence of the capital expenditures incurred in fiscal 1999 for residential
premises for staff members.
111
We plan to spend approximately Rs. 1.9 billion (US$ 41 million) in capital
expenditures during fiscal 2002 for the setting up of additional branches and
other delivery channels. The proposed capital expenditure includes expenses on
computers and accessories and other office equipment.
Future Impact of New Accounting Standards
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instrument and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, is effective for ICICI
Bank as of April 1, 2001. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. Derivatives that are not designated as part of a hedging
relationship must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, the effective portion of the
hedge's change in fair value is either (1) offset against the change in fair
value of the hedged asset, liability or firm commitment through income or (2)
held in equity until the hedged item is recognized in income. The ineffective
portion of a hedge's change in fair value is immediately recognized in income.
Adoption of these new accounting standards will result in cumulative after-tax
reductions in earnings on a US GAAP basis of approximately Rs. 25 million (US$
533,618) in the first quarter of fiscal 2002. The adoption will also impact
assets and liabilities recorded on the balance sheet on a US GAAP basis. A
majority of the derivatives entered into by ICICI Bank will not qualify as
hedges under SFAS 133 therefore the same will have to be marked to market and
the difference between the market value and the face value will be accounted
for in earnings.
In September 2000, the Financial Accounting Standard Board (FASB) issued
SFAS No. 140, "Accounting for transfers and servicing of Financial Assets and
Extinguishments of liabilities", which revises the criteria for accounting for
securitizations and other transfers of financials asset and collateral, and
introduces new disclosures. SFAS No. 140 replaces SFAS No. 125, which was
issued in June 1996. The enhanced disclosure requirements are effective for
year-end 2001. The other provisions of SFAS No. 140 apply prospectively to
fiscal years ending subsequent to March 31, 2001. Earlier or retroactive
application is not permitted. The effect of SFAS No. 140 on ICICI Bank is not
expected to be material.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. We are required
to adopt the provisions of Statement 141 immediately, and Statement 142
effective March 15, 2002. Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired in a purchase
business combination completed after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Statement 141 will require, upon
adoption of Statement 142, that we evaluate our existing intangible assets and
goodwill that were acquired in a prior purchase business combination, and to
make any necessary reclassifications in order to conform with the new criteria
in Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, we will be required to reassess the useful lives and residual
values of all intangible assets acquired in purchase business combinations, and
make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible asset
is identified as having an indefinite useful life, we will be required to test
the intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of
a change in accounting principle in the first interim period. In connection
with the transitional goodwill impairment evaluation, Statement 142 will
require us to perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. To accomplish this we must
identify our reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption. We
will then have up to six months from the date of adoption to determine the fair
value of each reporting
112
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and we must perform the
second step of the transitional impairment test. In the second step, we must
compare the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with Statement 141 to its carrying amount both of
which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in our statement of
earnings. And finally, any unamortized negative goodwill existing at the date
Statement 142 is adopted must be written off as the cumulative effect of a
change in accounting principle. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on our financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
113
MANAGEMENT
Directors and Executive Officers
Our board of directors, which consists of 10 members, is responsible for
the management of our business. Our organizational documents provide for at
least three and no more than 12 directors. We may, subject to the provisions of
our 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 a majority of 75.0% of the present and voting shareholders.
The composition of our board of directors reflects the principal
shareholdings held by ICICI, the requirements of the Indian Banking Regulation
Act and the public ownership in India. Under the terms of our organizational
documents, ICICI is entitled to appoint one-third of the total number of
directors of our board. ICICI is also permitted to vote on the appointment of
the remaining members of our board of directors. ICICI has nominated two
directors to our board. Pursuant to our organizational documents, to convene a
board meeting, one of the two ICICI directors on our board of directors must be
present unless they waive this requirement in writing. The Banking Regulation
Act requires that not less than 51% of the board members have special knowledge
or practical experience in areas relevant to banking including accounting,
finance, agriculture, banking and small scale industry. Accordingly, all our
directors are professionals with special knowledge of accountancy, banking,
economics, administration and management. Of these, one director has expertise
in the area of agriculture and another director has experience in small scale
industries, as required by the Banking Regulation Act. In addition, under the
Banking Regulation Act, the Reserve Bank of India may require us to convene a
meeting of our shareholders for the purposes of appointing new directors to our
board of directors.
Our organizational documents also provide that we may execute trust deeds
securing our debentures under which the trustee or trustees may appoint a
director, known as a debenture director. The debenture director is not subject
to retirement by rotation and may only be removed as provided in the relevant
trust deed. There is no debenture director on our board of directors.
Our organizational documents further provide that ICICI may appoint one of
their nominated directors to act as the Executive Chairman and Managing
Director of our board for terms not exceeding five years at a time. The board
of directors has powers to appoint one of the directors to be the Executive
Chairman or Managing Director, if ICICI has not appointed one of its nominee
directors. The board of directors has proposed Mr. K. V. Kamath to be the
non-executive Chairman of our board of directors, subject to approval of the
Reserve Bank of India. Application to the Reserve Bank of India seeking
approval for this appointment has been submitted. We are awaiting this
approval. Mr. H. N. Sinor has been appointed our Managing Director and Chief
Executive Officer by the shareholders with effect from June 1, 1998 for a
period of five years.
At least two-thirds of the total number of directors, excluding the
debenture director and the directors nominated by ICICI, 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. None of our directors other than the Chairman or executive
directors shall hold office continuously for a period exceeding eight years.
Our board of directors at August 31, 2001 had the following members:
Name, Designation and Profession Date of appointment Other appointments
-------------------------------- ------------------- -----------------------------------------------
Mr. Kundapur Vaman Kamath April 17, 1996 Chairman
Profession: Managing Director ICICI Infotech Services Limited
and Chief Executive Officer of ICICI Lombard General Insurance Company Limited
ICICI ICICI Personal Financial Services Limited
ICICI Prudential Life Insurance Company Limited
ICICI Securities and Finance Company Limited
ICICI Venture Funds Management Company Limited
ICICI Web Trade Limited
Prudential ICICI Asset Management Company Limited
Vice-Chairman
Indian School of Business
114
Director
Bangalore International Airport Limited
Indian Institute of Management, Ahmedabad
National Development Bank, Sri Lanka
Visa International Asia-Pacific Regional Board,
Singapore
Director - Board of Governance
Indian Institute of Information Technology,
Bangalore
Member
Confederation of Indian Industry
Member - Advisory Board
NCR Financial Solutions Group Limited, London
Member - Board of Governors
Karnataka Regional Engineering College, Mangalore
Member - Board of Management
Manipal Academy of Higher Education
Member - Court of Governors
Administrative Staff College of India
Member - Governing Board
Enterpreneurship Development Institute of India
National Institute of Bank Management
Ms. Lalita Dileep Gupte September 12, 1994 Chairperson
ICICI Capital Services Limited
Profession: Joint Managing ICICI Home Finance Company Limited
Director and Chief Operating
Officer - International Director
Business of
ICICI ICICI Infotech Inc.
ICICI Infotech Services Limited
ICICI Lombard General Insurance Company Limited
ICICI Personal Financial Services Limited
ICICI Prudential Life Insurance Company Limited
ICICI Securities and Finance Company Limited
ICICI Venture Funds Management Company Limited
ICICI Web Trade Limited
National Stock Exchange of India Limited
Prudential ICICI Asset Management Company Limited
Member - Board of Governors
Indian Council for Research on International
Economic Relations
Dr. Satish Chandra Jha May 2, 1997 Member-- Governing Board
The Delhi Stock Exchange Association Limited
Profession: Development
Economist Director
Phillips India Limited
SREI International Finance Limited
Walchand Capital Limited
Mr. Raghunathan Rajamani December 2, 1994 Director
CanBank Computer Services Limited
Profession: Retired ICICI Knowledge Park
Government Official
Trustee
Sundaram Mutual Fund
Mr. Bhupendranath V. Bhargava September 12, 1994 Chairman
India Index Services and Products Limited
Profession: Chairman,
Credit Rating Information Director
Services of India Limited BPL Communications Limited
115
Cosmo Films Limited
Feedback First Urban Infrastructure Fund Limited
Grasim Industries Limited
HEG Limited
J. K. Corporation Limited
Raymond Limited
Supreme Industries Limited
Trustee
Amarnath Vidya Ashram
Sri Shanmukhananda Fine Arts and Sangeetha Sabha
Mr. Uday Madhav Chitale August 21, 1997 Director
Crossdomain Solutions Private Limited
Profession: Partner, D2K Technologies Private Limited
M.P Chitale & Company DFK Consulting Services (India) Private Limited
(Chartered Accountants) Indian Council for Dispute Resolution
Seahorse Industries Limited
Member - Governing Council
Maharashtra Chamber of Commerce and Industry
Partner
M.P Chitale & Associates
Chairman - Executive Committee
Shishu Vihar Mandal
Mr. Somesh R Sathe January 29, 1998 Managing Director
ESSP Meditek Private Limited
Profession: Managing Director, Sukeshan Equipments Private Limited
Arbes Tools Private Limited
Mr. H. N. Sinor August 21, 1997 Member - Managing Committee
Indian Banks Association
Profession: Managing Director
and Chief Executive Officer Member - Governing Board
Narsee Monjee Institute of Management Studies
The Maharaja Sayajirao University
Member - Advisory Group Committee
Reserve Bank of India
Member - National Payments Council
Reserve Bank of India
Vice President - Governing Council
Indian Institute of Bankers
Ms. Chanda D. Kochhar April 1, 2001 -
Profession: Executive Director
- Retail Banking
Dr. Nachiket Mor April 1, 2001 Chairman
Fixed Income Money Market and Derivatives
Association of
Profession: Executive Director India
- Wholesale Banking
Member - Technical Advisory Committee
Reserve Bank of India
Member - Advisory Group on Derivatives
Securities and Exchange Board of India
116
Our executive officers at August 31, 2001 were as follows:
Total
Years of remuneration Shareholdings Stock options
work in fiscal as on March in fiscal
Name Age Position experience 2001(1) 31, 2001 2001 (2)
---------------------- --- -------------------- ---------- ------------- ------------- -------------
Mr. H.N. Sinor 56 Managing Director 35 Rs. 4,417,800 1,100 56,250
and Chief Executive
Officer
Ms. Chanda D. Kochhar 39 Executive Director 17 (3) 1,000 -
- Retail Banking
Dr. Nachiket Mor 37 Executive Director 14 (3) - -
- Wholesale Banking
Mr. M. N. Gopinath 52 Senior Executive 31 2,432,716 1,200 25,000
Vice President
Mr. Alladi Ashok 50 Senior Executive 29 2,316,630 - 25,000
Vice President
Mr. G. Venkatakrishnan 50 Senior Executive 27 2,039,258 - 25,000
Vice President and
Chief Financial
Officer
Mr. M. N. Shenoi 43 Senior Executive 22 1,694,167 1,000 25,000
Vice President
Mr. R. B. Nirantar 46 Senior Executive 22 1,542,131 100 25,000
Vice President
Mr. A. Hari Prasad 46 Senior Executive 24 1,591,633 100 25,000
Vice President
Mr. Bhashyam Seshan 45 Company Secretary 23 1,053,554 1,200 10,000
---------
(1) Including bonuses as described under "-Compensation and Benefits to
Directors and Officers- Bonus."
(2) See "-Compensation and Benefits to Directors and Officers- Employee Stock
Option Scheme" for a description of the terms of these stock options.
(3) Ms. Chanda Kochhar and Dr. Nachiket Mor were employees of ICICI during
fiscal 2001. Ms. Kochhar's total remuneration in fiscal 2001 was Rs.
4,416,375 and Dr. Mor's total remuneration in fiscal 2001 was Rs.
4,208,904. These amounts were paid by ICICI. As of April 1, 2001, Ms.
Kochhar and Dr. Mor are employees of ICICI Bank. Accordingly, their
remuneration for fiscal 2002 and all future periods will be paid by ICICI
Bank.
Mr. H. N. Sinor holds Bachelor's degrees in Commerce and Law. Mr. Sinor
started his career with the Central Bank of India of India in September 1965
and moved to the Union Bank of India in 1969. He worked in various positions
gaining experience in working capital finance, branch banking, resources and
corporate planning. Mr. Sinor returned to Central Bank of India as its
Executive Director in December 1996. Mr. Sinor joined us on July 1, 1997 and
our board on August 21, 1997 and was appointed our Managing Director and Chief
Executive Officer with effect from June 1, 1998.
Ms. Chanda D. Kochhar holds a Masters Degree in Management Studies from
the Jamnalal Bajaj Institute of Management Studies, Mumbai 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 Project Appraisal Department and during her tenure with ICICI was
in charge of various departments. Ms. Chanda Kochhar was a Senior General
Manager of ICICI and was in charge of retail business of ICICI prior to joining
us. As of April 1, 2001, she was appointed to our board of directors as an
executive director and heads our 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
117
ICICI in 1987. He has specialized knowledge in project finance, corporate
planning and treasury. Dr. Mor was a Senior General Manager of ICICI and was in
charge of treasury and social initiatives of ICICI prior to joining us. As of
April 1, 2001, he was appointed to our board of directors as an executive
director and heads our wholesale banking business.
Mr. M. N. Gopinath holds a Bachelor's degree in Commerce, a Master's
degree in Business Administration and is a Certified Associate of the Indian
Institute of Bankers, Mumbai. He joined the Bank of India in 1970. In his 25
years with Bank of India, he has worked at various offices in India and in the
US. He has gained experience in credit, international banking, training, branch
management, operations, treasury, leasing and housing finance. He was
transferred by the Bank of India to its merchant banking subsidiary, BOI
Finance Limited, as General Manager. Mr. Gopinath joined us in 1995 and is the
Senior Executive Vice President heading banking operations.
Mr. Alladi Ashok has a Bachelor of Science degree. He started his career
with the State Bank of India in 1972. He worked in different branches of State
Bank of India both in India and in US. He has handled various responsibilities
including working capital financing, credit administration, branch management,
foreign exchange and treasury. He joined us in 1996 and is the Senior Executive
Vice President heading our Risk Management Department.
Mr. G. Venkatakrishnan holds a Master's degree in Science and a post
graduate diploma in bank management. He is a graduate member of Cost and Works
Accountants of India and a Certified Associate of the Indian Institute of
Bankers, Mumbai. He began his career as an officer with the State Bank of India
in 1974. He has held various positions and worked in areas including
international banking, auditing, compliance and balance sheet management. Mr.
Venkatakrishnan joined us in 1997 and is the Senior Executive Vice President
and Chief Financial Officer.
Mr. Mohan N Shenoi holds a Bachelor's degree in Business Management. He is
a certified associate of the Indian Institute of Bankers. He also holds a Post
Graduate Diploma in Bank Management. He began his career as an officer with the
Corporation Bank in 1978, was posted to various offices of the Corporation Bank
and gained exposure in general banking, treasury, investments and merchant
banking. He joined us in 1994 and is the Senior Executive Vice President and
heads sales and marketing in our retail banking business.
Mr. R. B. Nirantar has a Bachelor's degree in Commerce, a diploma in
Industrial Relations and Personnel Management and is a Certified Associate of
the Indian Institute of Bankers. He also holds a degree in General Law. He
joined the Union Bank of India in 1974. He joined us in 1994 and is Senior
Executive Vice President and heads our Human Resources Development department.
Mr. A. Hari Prasad holds a Master's degree in Arts. He is a certified
associate of the Indian Institute of Bankers. He also holds a Post Graduate
Degree in Bank Management from NIBM. He began his career as an officer with the
State Bank of India in 1977, was posted to various offices of the State Bank of
India and gained exposure in credit management. He joined us in 1995 and is the
Senior Executive Vice President and heading our Corporate Banking Department.
Mr. Bhashyam Seshan has a Bachelor's degree in Commerce. He is an
Associate Member of the Institute of Company Secretaries of India. He started
his career with State Bank of Travancore in 1978 and joined us in 1994. He is
our Company Secretary.
Corporate Governance
Our corporate governance policies recognize the accountability of the
board and the importance of making the board transparent to all our
constituents, including employees, customers, investors and the regulatory
authorities, and to demonstrate that the shareholders are the ultimate
beneficiaries of our economic activities. We have taken a series of steps
including the setting up of board sub-committees to oversee the functions of
executive management. All important board committees consist mainly of
non-executive directors. These board committees meet regularly.
Our 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:
118
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, our executive management gives detailed reports on our performance
on a quarterly basis.
The board functions either as a full board or through committees. The
meetings are generally chaired by Mr. K. V. Kamath. The following committees
have been formed to focus on specific issues.
Audit and Risk Committee
The Audit and Risk Committee consists of seven directors, all of which are
independent directors. The current members are Mr. Uday M. Chitale, Ms. Lalita
D. Gupte, Mr. R. Rajamani, Mr. B. V. Bhargava, Dr. Satish C. Jha, Ms. Chanda D.
Kochhar and Dr. Nachiket Mor. It provides direction to and oversees the audit
and risk management function, reviews the financial accounts, interacts with
statutory auditors and reviews matters of special interest. The meetings are
generally chaired by Mr. Uday M. Chitale who is an independent, non-executive
director and a Chartered Accountant by profession.
Committee of Directors
The Committee of Directors consists of seven directors, including the
Managing Director and Chief Executive Officer. The current members are Mr. K.
V. Kamath, Ms. Lalita D. Gupte, Mr. B. V. Bhargava, Mr. Uday M. Chitale, Mr. H.
N. Sinor, Ms. Chanda D. Kochhar and Dr. Nachiket Mor. This Committee has
delegated financial powers and approves loan proposals and expenditures within
the broad parameters of the delegated authority. The meetings are generally
chaired by Mr. K. V. Kamath.
Compensation Committee
The Compensation Committee consists of four directors including the
Managing Director and Chief Executive Officer. The current members are Ms.
Lalita D. Gupte, Mr. Somesh R. Sathe, Mr. Uday M. Chitale and Mr. H. N. Sinor.
The functions of the committee include considering and recommending to the
board the amount of compensation payable to the executive directors, fees
payable to other directors and framing the guidelines and management of the
employee stock option scheme. The meetings are generally chaired by Ms. Lalita
D. Gupte.
Nomination Committee
The Nomination Committee consists of four directors including the Managing
Director and Chief Executive Officer. The current members are Mr. K. V. Kamath,
Mr. R. Rajamani, Mr. B. V. Bhargava and Mr. H. N. Sinor. The functions of this
committee include the submission of recommendations to the board to fill
vacancies on the board or in senior management positions. The meetings are
generally chaired by Mr. K. V. Kamath.
Share Transfer Committee
The Share Transfer Committee consists of four directors including the
Managing Director and Chief Executive Officer. The current members are Ms.
Lalita D. Gupte, Mr. H. N. Sinor, Ms. Chanda D. Kochhar and Dr. Nachiket Mor.
This committee reviews and approves transfers of our equity shares and
debentures. The meetings are generally chaired by Mr. Uday M. Chitale.
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Shareholders' Grievance Committee
The Shareholders' Grievance Committee consists of four directors including
the Managing Director and Chief Executive Officer. The current members are Ms.
Lalita D. Gupte, Mr. B. V. Bhargava, Mr. Uday M. Chitale and Mr. H. N. Sinor.
This committee looks into the redressal of shareholder and investor complaints,
such as the transfer of shares, the non-receipt of balance sheets and the
non-receipt of dividends. The meetings are generally chaired by Mr. Uday M.
Chitale.
Steering Committee
The Steering Committee consists of seven directors including the Managing
Director and Chief Executive Officer. The current members are Ms. Lalita D.
Gupte, Mr. B. V. Bhargava, Mr. Uday M. Chitale, Mr. Somesh R. Sathe, H. N.
Sinor, Ms. Chanda D. Kochhar and Dr. Nachiket Mor. This committee provides
guidance on the integration of Bank of Madura into ICICI Bank. The meetings are
generally chaired by Mr. B. V. Bhargava.
Compensation and Benefits to Directors and Officers
Under our organizational documents, each director, except directors
nominated by ICICI and the Managing Director and Chief Executive Officer, is
entitled to remuneration for attending each meeting of the board or of a board
committee. The amount of remuneration is set by the board from time to time in
accordance with limitations prescribed by the Indian Companies Act or the
government of India. Remuneration for attending a board meeting is Rs. 5,000
(US$ 107) and for a committee meeting Rs. 2,000 (US$ 43). We reimburse
directors for travel and related expenses in connection with board and
committee meetings and with related matters. If a director is required to
perform services for us beyond attending meetings, we 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.
At its meeting held on March 23, 2001, the board of directors decided to
revise the salary paid to the Managing Director and Chief Executive Officer,
effective April 1, 2001. This was approved at the annual meeting of the
shareholders on June 11, 2001. The board or the compensation committee may in
its exclusive discretion fix the salary payable within the range of Rs. 150,000
to Rs. 300,000 (US$ 3,202 to US$ 6,403) per month, exclusive of committed bonus
and special achievement bonus.
The total compensation paid by us to our directors and our executive
officers in fiscal 2001 was Rs. 23 million (US$ 500,000).
Bonus
Each year, our board of directors awards bonuses to our employees
including the Managing Director and Chief Executive Officer on the basis of
performance and seniority. The performance of each employee is judged by a
management appraisal system. The aggregate amount paid towards bonuses to all
eligible employees in fiscal 2001 was Rs. 140 million (US$ 3 million).
Employee Stock Option Scheme (ESOS)
On January 24, 2000, our board approved an employee stock option scheme to
attract, encourage and retain high performing employees. Our 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 our issued equity
shares as on March 31, 2000 can be allocated to employee stock options. The
stock options will entitle our eligible employees and directors, and eligible
employees and directors of our subsidiary and holding companies to apply for
equity shares. We do not have any subsidiaries and we ceased to be a subsidiary
of any holding company during the current fiscal year so only our eligible
employees and directors could apply for equity shares. Eligible employees
include those that are assistant managers or higher.
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ESOS 2000
During fiscal 2000, a total of 1,788,000 stock options were granted to 426
employees and directors of ICICI Bank and ICICI. Of these, 75,000 stock options
allocated to non-executive directors were forfeited upon such non-executive
directors refusing to accept the stock options on the basis of good corporate
governance principles. Each stock option is exercisable for one equity share.
On a fully-diluted basis, these stock options constituted 0.9% of our issued
share capital as of March 31, 2000. These stock options have an exercise price
of Rs. 171.90 (US$ 4) per equity share, which was the closing price on the BSE
on February 21, 2000. These stock options vest in installments over a period of
three years with 20.0% of the options vesting at the end of the first year,
30.0% at the end of the second year and 50.0% at the end of the third year.
These options can be exercised within 10 years from the date of their grant or
five years from the date of vesting, whichever is later. In respect of options
granted on February 21, 2000, 20.0% of the options have vested. Of the 426
eligible employees, 42 resigned during fiscal 2001 and the 77,875 options
granted to them were extinguished. One person retired during fiscal 2001, and
the 18,000 options granted to him were vested in full. On April 1, 2001, the
323,425 options granted to the remaining 383 eligible employees vested,
representing 20.0% of the 1,617,125 outstanding options. On April 1, 2001, a
total of 341,425 options vested. As on the date of this Report, none of the
eligible employees had exercised their options and hence there has been no
dilution of earnings per share as of that date. In the second and third years
ended April 1, 2002 and 2003, 30.0% and 50.0% of the outstanding options,
respectively, will vest.
ESOS 2001
For fiscal 2001, we granted 1,580,200 stock options to 519 of our
employees and our Managing Director and Chief Executive Officer. Each stock
option is exercisable for one equity share. On a fully-diluted basis, these
stock options constituted 0.8% of our issued share capital as of March 31,
2000. These stock options were granted on April 26, 2001 and have an exercise
price of Rs. 170.00 (US$ 3.60) per equity share, which was the closing price of
the NSE on the date of grant. These stock options vest in installments over a
period of three years as described under "ESOS 2001", commencing April 1, 2002.
Our Managing Director and Chief Executive Officer was granted 56,250 options
and other executive officers were each granted between 10,000 and 25,000
options under this scheme. See the column entitled "Stock option in fiscal
2001" in the executive officer table above. No individual employee or director
was granted options equal to or in excess of 1.0% of our issued share capital
on the date of the grant.
Total 3,293,200 options granted under ESOS 2000 and ESOS 2001 represented
1.5% of our issued share capital as of March 31, 2001. Under these schemes, up
to 5.0% of our issued share capital as of March 31, 2000 can be allocated to
employee stock options.
Loans
Our bank has internal rules and regulations to grant loans to employees to
acquire certain assets such as property, vehicles and other consumer durables.
These loans are made at interest rates ranging from 3.5% to 11.0% per annum and
are repayable over fixed periods of time. The loans are generally secured by
the assets acquired by the employees. We have given loans to our employees for
purchasing our shares in the offering made by ICICI in June 1997 at the public
offering price. Bank of Madura has also given loans to employees for purchasing
preferential shares in the offering made by Bank of Madura in August 1995. At
March 31, 2001, there were Rs. 813 million (US$ 17.4 million) loans outstanding
to employees of ICICI Bank and Bank of Madura. Pursuant to the Banking
Regulation Act, our non-executive directors are not eligible for any loans. At
March 31, 2001, there was no outstanding loan to our directors.
Gratuity
Under Indian law, we are required to pay a gratuity to employees who after
at least five years of continuous service have resigned or retired. Our bank
has set up a gratuity fund administered by the Life Insurance Corporation of
India. In accordance with our gratuity fund's rules, actuarial valuation of
gratuity liability is made based on certain assumptions regarding rate of
interest, salary growth, mortality and staff turnover. The total corpus of the
fund at March 31, 2001 was Rs. 25 million (US$ 530,000).
In respect of employees from Bank of Madura, there is a separate gratuity
fund. This fund is managed by in-house trustees. The investments of the fund
are made according to rules prescribed by the government of India. The
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accounts of the fund are audited by independent auditors. The corpus of the
fund at March 31, 2001 was Rs. 310 million (US$ 6.6 million).
Superannuation Fund
We contribute 15.0% of the total annual salary of each employee to a
superannuation fund, which is administered by the Life Insurance Corporation of
India. Our 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%. The total corpus of the
fund at March 31, 2001 was Rs. 62 million (US$ 1.3 million). We also give a
cash option to our employees, allowing them to receive the amount contributed
by us in their monthly salary during their employment with us.
Provident Fund
We are statutorily required to maintain a provident fund as a part of our
retirement benefits to our employees. Each employee contributes 12.0% of his or
her salary and we contribute an equal amount to the fund. This fund is managed
by in-house trustees. The investments of the fund are made according to rules
prescribed by the government of India. The accounts of the fund are audited by
independent auditors. The corpus of the fund at March 31, 2001 was Rs. 144
million (US$ 3.0 million). We contributed Rs. 23 million (US$ 500,000) to the
provident fund in fiscal 2001.
In respect of employees inducted from Bank of Madura, there is a separate
fund and this fund is managed by in-house trustees. Each employee contributes
10% of his or her salary and we contribute an equal amount to the fund. The
investments of the fund are made according to rules prescribed by the
government of India. The accounts of the fund are audited by independent
auditors. The corpus of the fund at March 31, 2001 wasRs. 568 million (US$ 12.1
million). We contributed Rs. 25 million (US$ 530,000) to the provident fund in
fiscal 2001.
Pension Fund
Out of the total Bank of Madura employees, 1,162 employees are pension optees
and 1,499 employees are provident fund optees. For a provident fund optee, our
contribution of 10% of his or her salary is credited to the ICICI Bank Limited
Employees Provident Fund account and for a pension optee, our contribution of
10% of his or her salary is credited to the ICICI Bank Employees 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 pension
optees are entitled to a monthly pension from the day after their retirement.
We also give a cash option to our employees, allowing them to receive the
present value of one-third of their monthly pension. 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 March 31, 2001 was Rs. 796
million (US$ 17.0 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 our directors or officers.
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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 2001.
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;
and
o other specialized financial institutions, and state-level
financial institutions.
Until the early 1990s, the Indian financial system was strictly
controlled. Interest rates were administered, formal and informal parameters
governed the 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 reform process has now entered into its second phase. 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 which have played
a key role in the reform process. We then present a brief discussion on the
impact of the liberalization process on long-term lending institutions and
commercial banks. 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 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 Reserve Bank
of India's role as the regulatory and supervisory authority of India's
financial system and its impact on us, see "Supervision and Regulation".
Commercial Banks
Commercial banks in India have traditionally focused only on meeting the
short-term financial needs of industry, trade and agriculture. At March 31,
2001, there were 296 scheduled commercial banks in the country, with a network
of 65,908 branches serving approximately Rs. 9.5 trillion in deposit accounts.
Scheduled commercial banks are banks which 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. Commercial banks have a presence
throughout India, with nearly 71.4% 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.
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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 46,181 branches, and account for
76.0% of the outstanding gross bank credit and 78.3% 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 2001, the State Bank of India and its seven associate banks had
13,494 branches. They accounted for 24.7% of aggregate deposits and 29.4% 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 March 31, 2001 with 14,431 branches, accounting for
4.0% of aggregate deposits and 2.8% 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. With the merger of Times Bank Limited into HDFC Bank Limited in
February 2000, there are only eight "new" private sector banks at present. 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 us effective March 10, 2001.
At year-end fiscal 2001, private sector banks accounted for approximately
12.3% of aggregate deposits and 12.8% of gross bank credit outstanding of the
scheduled commercial banks. Their network of 5,117 branches accounted for 7.8%
of the total branch network of scheduled commercial banks in the country.
Foreign Banks
At year-end fiscal 2001, there were 42 foreign banks with 179 branches
operating in India. Foreign banks accounted for 5.3% of aggregate deposits and
8.1% of outstanding gross bank credit of scheduled commercial banks at year-end
fiscal 2001. 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. This has led to increased
foreign banking activity. During fiscal 2001, Standard Chartered Bank, a
foreign bank operating in India, acquired Grindlays, another foreign bank in
India, from ANZ Banking Group. 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 also offer products such as automobile finance, home loans, credit cards
and household consumer finance.
Cooperative Banks
Cooperative banks cater to the financial 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 light of the recent liquidity and
insolvency problems in some cooperative banks, 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. In the
monetary and credit policy for fiscal 2002, the Reserve Bank of India has
proposed to set
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up a new supervisory body exclusively to oversee cooperative banks, which could
take over the entire inspection and supervisory functions in relation to
scheduled and non-scheduled urban cooperative banks.
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 ICICI Limited,
the Industrial Development Bank of India, the IFCI Limited and the Industrial
Investment Bank of India.
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 has required them to expand
the scope of their business activities. Their new activities include:
o fee-based activities like investment banking and advisory
services; and
o short-term lending activity including issuing corporate finance
and working capital loans.
In addition, there are three other investment institutions at the national
level, Life Insurance Corporation of India, General Insurance Corporation of
India and its subsidiaries and Unit Trust of India, which also provide
long-term financial assistance to the industrial sector.
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 and
Finance Company Limited is a non-bank finance company, which does 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 to small and
medium-sized companies such as bills discounting, and fee-based services such
as investment banking and underwriting.
Over the last 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 to investing in
the housing sector by the government in recent years, the scope of this
business has grown substantially. Housing Development Finance Corporation
Limited is a premier institution providing housing finance in India. In
addition, institutions like Life Insurance Corporation of India, ICICI and
several commercial banks have also established housing finance subsidiaries.
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.
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,
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Export Import Bank of India, the 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.
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.
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.
All of these factors are leading to a gradual disappearance of the
traditional boundaries between banks and long-term lending institutions.
Long-term lending institutions now compete directly with banks in several areas
of business. At the same time, since 1992, the long-term lending institutions'
access to subsidized domestic sources of long-term funds has diminished and
they now primarily depend upon market borrowings. They do not have complete
access to retail savings and demand deposits and have certain restrictions on
the short maturity funds that they are able to raise from the market.
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 severely 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 procedures, were
implemented by the government of India. The major recommendations that were
implemented included the following:
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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 7.5% currently;
o special tribunals were created to resolve bad debt problems;
o almost all 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 1999,
aggregate recapitalization amounted to Rs. 204.5 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.
Working Group on Role of Banks and Financial Institutions
In December 1997, the Reserve Bank of India created a working group under
the chairmanship of S. H. Khan to harmonize the role and operations of
long-term lending institutions and banks. In its report submitted in April
1998, the Khan Working Group recommended that banks and long-term lending
institutions progressively move towards universal banking and encouraged the
development of a regulatory framework for this purpose.
Based on the recommendations of the Khan Working Group and the Narasimham
Committee II, the Reserve Bank of India, in January 1999, issued a discussion
paper entitled "Harmonizing the Role and Operations of Development Financial
Institutions and Banks". The paper described the future of the financial
system:
o the provision of diversified services both by banks and long-term
lending institutions should continue, subject to appropriate
regulation by the Reserve Bank of India;
o ultimately there should be only banks and restructured non-bank
finance companies;
o the special role of long-term lending institutions being noted, a
transitional path was envisioned for them to become either
full-fledged non-bank finance companies or banks. This transitory
arrangement should be worked out in consultation with the Reserve
Bank of India;
o if a long-term lending institution chooses to provide commercial
banking services directly, permission to create a 100.0% owned
banking subsidiary would be considered by the Reserve Bank of India;
o any conglomerate in which a bank is present should be subject to
supervision and regulation on a consolidated basis; and
o supervisory functions should be isolated and brought under a
consistent supervisory framework. Ownership of financial
intermediaries should be transferred from the Reserve Bank of India
to the government of India. This would help ensure that the Reserve
Bank of India focused on its supervisory and regulatory functions.
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Guidelines on approach to Universal Banking
Pursuant to the recommendations of the Narasimham Committee I and the Khan
Working Group on banks and financial institutions, the Reserve Bank of India,
in the mid-term monetary and credit policy for fiscal 2000, announced that
financial institutions have an option to transform into a bank subject to
compliance with the prudential norms as applicable to banks. If a financial
institution chooses to exercise the option available to it and formally decides
to convert itself into a universal bank, it may formulate a plan for the
transition path and strategy for smooth conversion into a universal bank over a
specified time frame. In this direction, on April 28, 2001, the Reserve Bank of
India issued guidelines on several operational and regulatory issues which are
required to be addressed in evolving the path for transition of a financial
institution to a universal bank. The salient features of the guidelines include
the following.
o Reserve requirements. Following conversion into a universal bank, a
financial institution must comply with the cash reserve ratio and
statutory liquidity ratio requirements under the provisions of the
Reserve Bank of India Act, 1934, and the Banking Regulation Act.
o Priority sector lending. Following conversion of a financial
institution into a universal bank, the obligation to lend to the
priority sector up to a prescribed percentage of net bank credit will
apply;
o Permissible activities. Any activity currently undertaken by a
financial institution but not permissible for a bank under the
provisions of the Banking Regulation Act, 1949, may have to be
stopped or divested after the conversion of a financial institution
into a universal bank;
o Nature of subsidiaries. If any of the existing subsidiaries of a
financial institution is engaged in an activity not permitted under
the provisions of the Banking Regulation Act, then following
conversion of the financial institution into a universal bank, such
subsidiary or activity must be separated from the operations of the
universal bank since the provisions of the Banking Regulation Act
permit a bank to have subsidiaries only for specified activities;
o Restriction on investments. A financial 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, must divest such excess holding to comply with the
provisions of the Banking Regulation Act;
Recent Structural Reforms
Legislative Framework for Recovery of Debts due to Banks
Following the recommendations of the Narasimham Committee, the Recovery of
Debts due to Banks and Financial Institutions Act, 1993 was enacted. The
purpose of this legislation is to provide for the establishment of a tribunal
for speedy resolution of litigation and recovery of debts owed to banks or
financial institutions. This 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. The government of India's Ministry of Finance
in India's budget for fiscal 2002 announced measures for the setting up of more
debt recovery tribunals and the eventual repeal of the Sick Industrial
Companies (Special Provision) Act, 1985.
As part of its effort to continue bank reform, the Reserve Bank of India
announced a series of measures in the monetary and credit policy statements
aimed at deregulating and strengthening the financial system.
Credit Policy for Fiscal 2001
In the monetary and credit policy for fiscal 2001, the Reserve Bank of
India introduced the following structural reform measures in the banking
sector:
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o requirement of a minimum of 85.0% daily maintenance of cash reserve
ratio balances by banks was reduced to 65.0%;
o financial institutions were given greater flexibility to fix interest
rates on term deposits; and
o a broad approach towards "universal banking" was outlined. A
development finance institution intending to transform itself into a
bank would need to prepare a transition path in order to fully comply
with the regulatory requirements of a bank. The institution concerned
may consult the Reserve Bank of India for such transition
arrangements. The Reserve Bank of India would consider such requests
on a case-by-case basis.
The mid-term review of monetary and credit policy for fiscal 2001
introduced the following major changes in the banking and financial
sector:
o all India Financial Institutions have been allowed to issue
commercial papers with a minimum maturity of 15 days and a
maximum maturity of one year;
o non-bank institutions will be gradually phased out of the
call/notice money market;
o general provision on standard assets of banks will be made
eligible for inclusion in Tier 2 capital; and
o the "past-due" concept, that allowed a grace period of 30 days
in the norms for income recognition, asset classification and
provisioning will be dispensed with effective March 31, 2001.
Credit Policy for Fiscal 2002
In the monetary and credit policy for fiscal 2002, the Reserve Bank of
India recommended the following major changes applicable to the banking and
financial sector :
o with effect from March 31, 2004, loans are to be classified as
impaired by banks when interest payment or principal repayment is
overdue for more than 90 days.
o banks are allowed to maintain a minimum of 50.0% of their cash
reserve requirements in the first week of the reporting cycle and
65.0% in the following week;
o part of the refinancing available from the Reserve Bank of India has
been linked to a floating rate system.
o lending below the prime lending rate by banks has been allowed.
o the minimum term for corporate term deposits of Rs.1.5 million and
above has been reduced to seven days from 15 days.
o the interest rate on cash reserve balances maintained with the
Reserve Bank of India has been raised to 6.0% from the current level
of 4.0%.
o inter-bank term liabilities of a term from 15 days up to 1 year have
been freed from the computation of the minimum 3% cash reserve
requirement.
o the exposure ceiling will be computed uniformly in relation to total
capital as defined under International Capital Adequacy Standards
effective March 31, 2002. Total capital will now include both Tier-1
and Tier-2 capital;
o non-fund-based exposures will be reckoned at 100.0% in computing
risk-weighted assets effective April 1, 2003; and
o the ceiling on exposure for a single borrower will be brought down to
15.0% from 20.0% and the group exposure ceiling will be brought down
to 40.0% from 50.0% effective March 31, 2002.
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The ceiling on foreign currency non-resident (borrowing) deposits has been
revised downwards by 50 basis points to LIBOR/swap rates for corresponding
maturities.
o Scheduled commercial banks shall be provided export credit refinance
up to 15.0% of the outstanding export credit eligible for refinancing
with effect from May 5, 2001.
Banks' Investment 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
are in conformity with international best practices, and were effective from
September 30, 2000.The salient features of the guidelines are given below:
o The entire investment portfolio is 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 Investments classified under held to maturity need not be marked to
market, and will be carried at acquisition cost.
o These investments will include (a) recapitalization bonds, (b) investments
in subsidiaries and joint ventures and (c) investments in debentures
deemed as advance. Held to maturity will also include any other investment
identified for inclusion in this category subject to the condition that
such investments will not exceed 25.0% of the total investment excluding
recapitalization bonds and debentures.
o Banks, which had already marked to market more than 75% of their statutory
liquidity reserve portfolio, have the option to reclassify their
investments under this category up to the permissible level.
o Profit on the sale of investments in the held to maturity category should
be taken in the income statement before being appropriated to the capital
reserve account. Loss on any sale should be recognized in the income
statement.
o Market price of the scrip available from the stock exchange, the price of
securities in general ledger transactions or the Reserve Bank of India
price list will serve as the "market value" for investments in available
for sale and held for trading securities.
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 like 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 should be 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; 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 allowed.
o The Reserve Bank of India will no longer announce the yield to maturity
rates for unquoted government of India securities for the purpose of
valuation of investments by banks.
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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. A new set of regulatory measures were
announced by the Reserve Bank of India in January 1998. Effective from April 1,
2001, the Reserve Bank of India stipulated a cap of 14.0% on interest rates on
the deposits raised from the public by the non-bank finance companies.
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. These include requiring
non-bank finance companies to register and to have minimum net owned funds of
Rs. 2.5 million. 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 beginning in April
1999, 15.0% of public deposits must be maintained.
The focus of supervision has now shifted to non-bank finance companies
accepting public deposits. This is because these companies will be subject to
deposit regulations and standards. 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, 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 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 for all new non-bank
finance companies. In India's budget for fiscal 2002, the procedures for
foreign direct investment in non-bank finance companies were substantially
liberalized. The list of non-bank finance company activities eligible for
foreign equity investment was increased to 18 with the addition of micro-credit
and rural credit.
Regulations Review Authority
In March 1999, the Reserve Bank of India set up a Regulations Review
Authority to provide an opportunity to the public at large to seek
justification for and suggest deletion or modification of any regulation,
circular or return issued, or required by the Reserve Bank of India. This
authority is neither a forum for grievance redressal nor a policy-making forum.
This authority will, however, convey its views on an application to the
relevant department of the Reserve Bank of India. Based on the recommendations
of this authority, some of the existing regulations may come under review over
time.
Insurance
The R. N. Malhotra Committee was set up in April 1993 to recommend reforms
in the insurance industry. This committee submitted its report on January 7,
1994 and its major recommendations were as follows:
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o the entry of the private sector in the insurance industry should be
allowed;
o India's two insurance corporations, the Life Insurance Corporation of
India and General Insurance Corporation of India should be
privatized, with the government retaining a 50.0% stake;
o the licensing system for surveyors should be abolished;
o the tariff regime in general insurance must continue;
o contributions to pension schemes must be exempt from tax;
o settlement of claims must be expedited; and
o high priority should be given to activating the regulatory apparatus.
As a first step towards implementation of the recommendations of the
Malhotra Committee on Reforms in the Insurance Sector, the 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 approved the Insurance Regulatory and
Development Authority Bill, 1999. This bill has opened up the Indian insurance
sector for foreign and private investors. This bill 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 to carry out the
business of life insurance or general insurance or Rs. 2.0 billion to carry out
exclusively the business of reinsurance. An Insurance Regulatory and
Development Authority has been set up to regulate, promote and ensure orderly
growth of the insurance industry.
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 objective of the guidelines is to allow only
financially strong banks and financial institutions to enter the insurance
business. These guidelines permit banks and financial institutions to enter the
business of underwriting insurance through joint ventures if they meet the
stipulated criteria relating to their net worth, capital adequacy ratio,
profitability track record and level of impaired loans and the performance of
their existing subsidiary companies. These guidelines specify the maximum
percentage of the paid up capital and of the net worth of the bank or financial
institution that can be invested in the joint venture. To keep the risks
associated with each of the businesses distinct, the guidelines envisage an
"arms length" relationship between the bank or financial institution and the
insurance company. Banks that do not satisfy these criteria will be allowed as
strategic investors without risk participation up to 10% of their net worth or
Rs. 500 million, whichever is lower. Approval from the Reserve Bank of India is
mandatory in all cases. Foreign equity participation of up to 26.0 % is allowed
in the insurance sector subject to the issuance of a necessary license by the
Insurance Regulatory and Development Authority.
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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 banks.
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.
We, being licensed as a banking company, are regulated and supervised by
the Reserve Bank of India. The Reserve Bank of India requires us to furnish
statements, information and certain details relating to our business. It has
issued guidelines for commercial banks on recognition of income, assets,
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 the 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 us by the Reserve Bank of
India, we are required to have at least 25.0% of our 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 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
We are 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, requires us 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.
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 weighted risk assets), hybrid debt capital instruments
(which combine certain features of both equity and debt securities) and
subordinated debt and redeemable cumulative non-convertible preferred equity
with an initial maturity of not less than five years. 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. A bank's investment in Tier 2 bonds issued by other banks is
subject to a ceiling of 10.0% of the bank's total capital. Tier 2 capital
cannot exceed Tier 1 capital. The Banking Regulation Act does not allow banks
established on or after January 15, 1937 to issue preferred equity.
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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. 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. Starting March 31, 2000,
investment in government and approved securities will also be assigned a risk
weight for fluctuation in prices. In respect of financial institutions and
banks, 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 March 1994, the Reserve Bank of India issued formal guidelines on
income recognition, asset classification, provisioning standards and valuation
of investments applicable to long-term lending institutions, which are revised
from time to time. Similar guidelines are also applicable to ICICI Bank. 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--Risk
Management--Impaired Loan Portfolio."
The principal features of these Reserve Bank of India guidelines, which
have been implemented with respect to our loans, debentures, lease assets, hire
purchases and bills are set forth below.
Impaired Assets
An impaired asset is an asset in respect of which any amount of interest
or principal is overdue for more than two quarters. In particular, loans are
not classified as impaired until the borrower has missed two interest payments
(180 days) or two principal payments (180 days). With effect from fiscal 2004,
banks have 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.
Assets Classification
In line with the Reserve Bank of India circular on
restructured/rescheduled assets issued on March 30, 2001 for banks, and the
earlier guidelines on asset classification, assets are classified as described
below:
o Standard Assets. Assets that do not have any problems or do not carry
more than normal risk attached to the business. In case of standard
assets which are restructured or rescheduled, they shall continue to
be classified under standard assets for a period of one year.
o Sub-Standard Assets. Assets that are non-performing assets for a
period not exceeding 18 months, or have been renegotiated or
rescheduled after the project to which they relate has achieved cash
break-even. A sub-standard asset that is restructured or rescheduled
shall continue to be placed in the sub-standard asset category for a
period of one year.
o Doubtful Assets. Assets that are non-performing assets for more than
18 months, or carry potential threats to recoveries on account of
erosion in the value of security and other factors such as fraud.
o Loss Assets. Assets on which losses have been identified but the
amount has not been written off wholly or partially or assets that
are considered uncollectible.
Renegotiated or rescheduled loans will be eligible to be upgraded only
after satisfactory performance during a period of one year from the first due
date of interest of principal pursuant to the rescheduled terms.
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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.
While the provisions as indicated above are mandatory, a higher provision
in a loan amount would be required if the auditors considered it necessary.
The Reserve Bank of India has also issued guidelines for classification
and valuation of investments.
Regulations relating to Making Loans
The provisions of the Banking Regulation Act govern making 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 the board of
directors. The prime lending rate is the minimum rate of interest
charged by banks on advances of over Rs. 200,000. Separate prime
lending rates can be fixed for short-term and long-term credit. Each
bank should also indicate the maximum spread over the prime lending
rate for all credit exposures other than consumer credit. The
interest charged by banks on advances up to Rs. 200,000 to any one
entity (other than most personal banking loans) must not exceed the
prime lending rate. Banks are also given freedom to quote below the
prime lending rate in respect of creditworthy borrowers and
exposures. Interest rates in certain categories of advances are
regulated by the Reserve Bank of India.
The Reserve Bank of India, however, does not require interest rates to be
linked to the bank's prime lending rate in respect of the following categories:
o loans covered by refinance scheme of financial institutions;
o interest rates on bank lending to intermediary agencies including
housing finance intermediary agencies;
o bill discounting by banks; and
o advances or overdrafts against domestic and non-resident deposits.
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.
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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. For loans
over Rs. 25,000, penalty interest cannot exceed 2.0%.
There are guidelines on loans against equity shares in respect of amount,
margin and purpose.
Directed Lending
Priority Sector Lending
The Reserve Bank of India requires commercial banks like us to lend a
certain percentage of our net bank credit to specific sectors (the priority
sectors), such as agriculture, small-scale industry, small businesses and
export companies. 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.
Any shortfall in the amount required to be lent to the priority sectors
may be required to be deposited with developmental banks like National Bank for
Agriculture and 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 our 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 National Housing Bank and housing development institutions recognized
by the government of India.
Export Credit
The Reserve Bank of India also requires us 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 our net bank credit is required to be in the form of export credit. We
provide export credit for pre-shipment and post-shipment requirements of
exporter borrowers in rupees and foreign currencies.
Regulations relating to Bridge Loans
Banks may consider approval of bridge loan or interim finance for a
maximum period of four months against commitment made by financial institutions
or other banks only in cases where the lending institution faces temporary
liquidity constraint. These loans are subject to the following conditions
specified by the Reserve Bank of India.
o The bank extending bridge loan or interim finance must obtain prior
approval of other banks and financial institutions, which have
approved the term loans; and
o The approving bank must obtain a commitment from other banks and
financial institutions that the latter would directly remit the
amount of term loan to it at the time of disbursement.
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 long-term lending institutions and banks 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:
o Internationally, exposure ceilings are computed in relation to total
capital as defined under capital adequacy standards (Tier 1 and Tier
2 capital). Taking into account the best international practices, the
Reserve Bank of India adopted the concept of capital funds as defined
under capital adequacy standards for determining the exposure ceiling
uniformly both by domestic and foreign banks, effective from March
31, 2002.
o In line with international best practices, the Reserve Bank of India
decided that non-fund based exposures should be calculated at 100.0%
and in addition, banks should include forward contracts in
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foreign exchange and other derivative products like currency swaps
and options, at their replacement cost value in determining
individual or group borrower exposure ceilings, effective from April
1, 2003.
o As the concept of capital funds has been broadened to represent total
capital (Tier 1 and Tier2), the Reserve Bank of India adjusted the
exposure ceiling for single borrower from 20.0% to 15.0% effective
from March 31, 2002. Similarly, the group exposure limits will be
adjusted effective from March 31, 2002 to 40.0% of capital funds. In
case of financing for infrastructure projects, the limit is
extendable by another 10.0%, i.e., up to 50.0%.
Exposure is the aggregate of:
o all approved fund-based limits;
o investments in shares, debentures and commercial paper of companies
and public sector undertakings; and
o 50.0% of approved non-fund-based limits, underwriting and similar
commitments.
Capital funds include paid-up capital and free reserves excluding
revaluation reserves pursuant to accounts audited and published under Indian
GAAP.
Our loan exposures to individual borrowers and borrower groups are within
the above limits, except in some cases where we have obtained the approval of
Reserve Bank of India for exceeding the above limits.
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. We have fixed a ceiling
of 15.0% on our exposure to any one industry and monitor our exposures
accordingly. Where financial fundamentals and sponsors' backing are strong, our
exposures have exceeded these limits. However, these exposures are within the
individual and borrower group limits specified by the Reserve Bank of India.
Capital Market Exposure Limits
Pursuant to the Reserve Bank of India guidelines, the exposure of banks to
the capital market by way of investments in shares, convertible debentures and
units of equity oriented mutual funds within the overall exposure to sensitive
sectors, should not exceed 5.0 % of the outstanding domestic credit (excluding
inter-bank lending and advances outside India) at March 31 of the previous
fiscal year. 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 will be computed in relation to the total advances (including
commercial paper) at March 31 of the previous fiscal year.
Regulations relating to Investments
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 a bank's lending to individual
borrowers and borrower groups apply in respect of these investments. The
Reserve Bank of India requires that the net incremental investment by banks in
equity securities in a fiscal year cannot exceed 5.0% of the incremental
deposits in the previous fiscal year. Investments in debentures convertible
into equity and equity related mutual funds are included in this 5.0% limit. 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. We have complied with this requirement.
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.
137
Limit on Transactions through Individual Brokers
The guidelines issued by the Reserve Bank of India require banks to
empanel brokers for transactions in securities. The 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.
Valuation of Investments
Pursuant to the Reserve Bank of India guidelines, all investments are to
be classified under government of India securities, other approved securities,
shares, bonds and debentures, subsidiaries and joint ventures and others.
Further, for the purpose of valuation, they are to be categorized as held to
maturity, available for sale and held for trading.
Held to maturity securities are not marked to market and are carried at
acquisition cost or at 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 category is aggregated. Net appreciation
in each basket, if any, that is not realized is ignored, while net depreciation
is provided for.
Depreciation or appreciation for each basket within the trading category
is aggregated. Net depreciation or appreciation in each basket, if any, is
taken in the income statement.
Regulations relating to Deposits
The Reserve Bank of India has permitted banks to independently determine
rates of interest offered on fixed deposits. However, no bank is permitted to
pay interest on current account deposits. Further, banks can pay interest of
4.0% per annum on savings deposits. In respect of savings and time deposits
accepted from employees, we are permitted by the Reserve Bank of India to pay
an additional interest of 1.0% over the interest payable on deposits from the
public.
Domestic time deposits can have a minimum maturity of 15 days (seven days
in respect of deposits over Rs. 1,500,000 with effect from April 19, 2001) and
maximum maturity of 10 years. Time deposits from non-resident Indians
denominated in foreign currency can have a minimum maturity of one year and
maximum maturity of three years. Rupee time deposits from non-resident Indians
can have a minimum maturity of six months and maximum maturity of three years.
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 and above; and
o Interest 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.
Deposit Insurance
Demand and time deposits of up to Rs. 100,000 (US$ 2,100) 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.
138
Regulations relating to knowing the Customer
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 requires an introduction by:
o 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
o a well known person in the local area where the prospective customer
is residing.
If the prospective customer does not have an introducer, documents of the
prospective customer, like his identity card, passport or details of bank
accounts with other banks, are required to be submitted.
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. In April 2000, the Reserve Bank of India in its
credit and monetary policy announced the new cash reserve ratio to be
maintained by scheduled commercial banks of 8.0% which was raised to 8.5% in
July 2000. This was part of the measures introduced to contain the sudden
depreciation of the rupee against the US dollar. This depreciation of the rupee
was due to excess demand conditions in the foreign exchange market arising out
of large payments for crude oil imports and a slowdown in capital inflows. It
was subsequently reduced to the level of 7.5% on May 19, 2001.
The following liabilities are not considered in the calculation of the cash
reserve ratio:
o inter-bank liabilities;
o liabilities to primary dealers;
o repatriable and non-repatriable deposits from non-resident Indians;
o foreign currency deposits from non-resident Indians; 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 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 65.0% of the required cash reserve
ratio on any particular day except the last business day of the fortnight. On
the last business day of the fortnight, no restrictions apply. In the monetary
and credit policy for fiscal 2002, the Reserve Bank of India has reduced the
daily maintenance requirement of 65.0% to 50.0% for the first seven days of the
fortnight, while continuing with the minimum requirement of 65.0% for the rest
of the fortnight.
Ever since the Reserve Bank of India introduced the financial sector
reforms, the goal has been to reduce the cash reserve ratio. It has been
indicated by the Reserve Bank of India that the ratio would ultimately be
reduced to the statutory minimum of 3.0%. In July 2000, the Reserve Bank of
India raised the cash reserve ratio by 0.5percentage points to 8.5%. However,
it was subsequently brought down in two stages to 7.5% in February and May
2001.
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
139
percentage of this liquidity ratio is fixed by the Reserve Bank of India from
time to time. Currently, the Reserve Bank of India requires banking companies
to maintain a liquidity ratio of 25.0%.
Regulations on Asset Liability Management
At present, Reserve Bank of India 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 had 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 has been made
mandatory with effect from April 1, 2000.
Foreign Currency Dealership
The Reserve Bank of India has granted us a full-fledged authorized
dealers' license to deal in foreign exchange through our designated branches.
Under this license, we have 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 our normal functions authorized under our
organizational documents.
Our foreign exchange operations are subject to the guidelines specified by
the Reserve Bank of India in the exchange control manual. As an authorized
dealer, we are required to enroll as a member of the Foreign Exchange Dealers
Association of India, which prescribes the ground rules relating to foreign
exchange business in India.
Authorized dealers like us are required to determine our limits on open
positions and maturity gaps in accordance with Reserve Bank of India guidelines
and these limits are approved by the Reserve Bank of India. At present, the
limit for our over-night open positions is Rs. 1,650 million. Further, we are
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 Foreign Exchange Regulation Act. All branches
should monitor all non-resident accounts to prevent money laundering. These
transactions will be regulated by the Foreign Exchange Management Act and the
Prevention of Money Laundering Act, once they are put in force.
140
Requirements of the Banking Regulation Act
Prohibited Business
The Banking Regulation Act specifies the business activities in which a
bank may engage. Business activities other than the specified activities are
prohibited to be undertaken by a bank.
Reserve Fund
Any bank incorporated in India is required to create a reserve fund to
which not less than 25.0% of the profits of each year before dividends must be
transferred. 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.
Restrictions on Payment of Dividends
The Banking Regulation Act requires that a bank shall pay dividends on its
shares only after all its capitalized expenses (including preliminary expenses,
organization expenses, share 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. We have obtained approval to write off, over a period of three years
including fiscal 2000, our issue expenses incurred in respect of our ADS
program for preparing our 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 par value of a company's shares or for an interim
dividend payment.
The government of India may, on recommendation of the Reserve Bank of
India, exempt a bank from requirements relating to its reserve fund and the
restrictions on dividend payment.
Restriction on Share Capital and Voting Rights
Banks can issue only ordinary shares. Banks incorporated before January
15, 1937 can also issue preferential 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.
Restriction on Transfer of Shares
Reserve Bank of India approval is required to obtain its approval before
we can register the transfer of shares for an individual or group which
acquires 5.0% or more of our total paid up capital.
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, the 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;
141
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. We have been 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 us, has to be placed before our board of
directors. On approval by our board of directors, we are required to submit the
report on actions taken by us to the Reserve Bank of India. The Reserve Bank of
India also discusses the report with our management team including our chief
executive officer.
The Reserve Bank of India also conducts on-site supervision of our
selected branches with respect to their general operations and foreign exchange
related transactions.
Penalties
The Reserve Bank of India can impose penalties on banks and its employees
in case of infringement of regulations under the Banking Regulation Act. The
penalty can be a fixed amount or be related to the amount involved in any
contravention of the regulations. The penalty may also include imprisonment.
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
Our obligations relating to maintaining secrecy arise out of common law
principles governing our relationship with our customers. We 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 we need to disclose information in our interest; and
o where disclosure is made with the express or implied consent of the
customer.
We are required to comply with the above in furnishing any information to
any parties. We are 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.
Appointment and Remuneration of our Chairman, Managing Director and Other
Directors
We require prior approval of the Reserve Bank of India to appoint our
chairman and managing director and any other directors and to fix their
remuneration. The Reserve Bank of India is empowered to remove such an
appointee on the grounds of public interest, interest of depositors or to
ensure the proper management of the bank. Further, the Reserve Bank of India
may order meetings of the bank's board of directors to discuss any matter in
relation to the bank, appoint observers to such meetings and in general may
make such changes to the management as it may deem necessary and can also order
the convening of a general meeting of the company to elect new directors.
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 and to promote the development of,
and to regulate, the Indian securities market. We are subject to Securities and
Exchange Board of India regulations for our capital issuances, as well as our
underwriting, custodial, depositary participant, investment banking, registrar
and transfer agents, broking and debenture trusteeship
142
activities. These regulations provide for our registration with the Securities
and Exchange Board of India for each of these activities, functions and
responsibilities. We are required to adhere to a code of conduct applicable for
these activities.
143
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 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 IMF, 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 permits most transactions
involving foreign exchange except those prohibited or restricted by 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 for
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 (other than a sale on a stock exchange or in connection with an offer
made under the takeover regulations) by a non-resident of India to a resident
of India as well as for renunciation of rights to a resident of India.
Investors who seek to sell in India any equity shares withdrawn from the
depositary facility and to convert the rupee proceeds from such sale into
foreign currency and repatriate such foreign currency from India will, subject
to the foregoing, have to obtain Reserve Bank of India approval for each such
transaction.
The Reserve Bank of India has recently issued certain notifications after
the announcement of India's budget for fiscal 2002 for the liberalization of
the capital account. Once specific guidelines are issued by the regulatory
authorities, in contrast to prior regulations, an ADS holder who surrenders an
ADS and receives shares may be able to redeposit those shares in the depositary
facility in exchange for ADSs. Also, an investor who has purchased shares in
the Indian market may deposit them in the ADS program and receive ADSs from the
overseas depositary. 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 shares that can be
deposited or redeposited as of any time cannot exceed the cumulative aggregate
number of equity shares withdrawn from the depositary facility as of such time.
Indian companies have been permitted to sponsor ADS/GDR issues with an overseas
depositary against shares held by a shareholder, who wish to use this option
subject to compliance with Foreign Currency Convertible Bonds and Ordinary
Shares (through Depository Receipt Mechanism) Scheme, 1993 and guidelines
issued by the government.
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MARKET PRICE INFORMATION
Equity Shares
Our outstanding equity shares are listed and traded on the Kolkata, Delhi,
Madras and Vadodara Stock Exchanges, the BSE and the NSE. The equity shares
were first listed on the Vadodara Stock Exchange in 1997. 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 the
equity shares on the NSE; and
o the reported high and low closing prices for the equity shares,
translated into U.S. dollars, based on the noon buying rate on the
last business day of each period presented.
Price per Price per
Equity share(1) Equity share
----------------------- ------------------------
High Low High Low
---------- ---------- ---------- ----------
Annual prices:
Fiscal 1998........................... Rs. 54.50 Rs. 35.00 US$ 1.38 US$ 0.89
Fiscal 1999........................... 65.00 20.75 1.53 0.49
Fiscal 2000........................... 275.00 22.70 6.30 0.52
Fiscal 2001........................... 279.65 189.70 5.97 4.05
Quarterly prices:
Fiscal 1999:
First Quarter......................... 65.00 32.00 1.53 0.75
Second Quarter........................ 44.00 32.10 1.04 0.76
Third Quarter......................... 35.00 21.55 0.82 0.51
Fourth Quarter........................ 33.60 20.75 0.79 0.49
Fiscal 2000:
First Quarter......................... 38.60 22.70 0.89 0.52
Second Quarter........................ 45.45 32.00 1.04 0.73
Third Quarter......................... 75.00 32.15 1.72 0.74
Fourth Quarter........................ 275.00 66.00 6.30 1.51
Fiscal 2001:
First Quarter......................... 279.65 189.70 6.26 4.25
Second Quarter........................ 234.00 133.00 5.10 2.90
Third Quarter......................... 182.00 103.60 3.89 2.22
Fourth Quarter........................ 220.00 145.80 4.70 3.11
Fiscal 2002:
First Quarter......................... 193.50 124.60 4.11 2.65
Second Quarter (through August 31) 140.00 104.50 2.97 2.22
Monthly prices:
March 2001............................ 220.00 192.20 4.70 4.10
April 2001............................ 193.50 155.10 4.13 3.31
May 2001.............................. 163.00 138.25 3.47 2.94
June 2001............................. 148.50 124.60 3.15 2.65
July 2001............................. 140.00 104.50 2.97 2.21
August 2001........................... 109.90 103.40 2.33 2.19
---------
(1) Data from the NSE. The prices quoted on the BSE and other stock exchanges
may be different.
On August 31, 2001, the closing price of equity shares on the NSE was Rs.
106.05 equivalent to US$ 2.20 per equity shares (US$ 4.40 per ADS on an imputed
basis) translated at the noon buying rate of Rs. 47.17 per US$ 1.00 on August
31, 2001.
145
At August 31, 2001, there were approximately 115,409 holders of record of
our equity shares, of which 19 had registered addresses in the United States
and held an aggregate of approximately 5,650 equity shares.
During the past three years, there was no suspension in the trading of our
equity shares by any of the stock exchanges on which our equity shares are
listed.
ADSs
Our ADSs, each representing two equity shares, were originally issued in
March 2000 in a public offering and were listed and traded on the New York
Stock Exchange under the symbol IBN. The equity shares underlying the ADSs have
been listed on the Kolkata, Delhi, Madras and Vadodara Stock Exchanges, the BSE
and the NSE.
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
ADSs traded under the symbol IBN.
Price per ADS
--------------------------------
High Low
-------------- --------------
Fourth Quarter (from March 28, 2000)..........US$ 15.38 US$ 14.38
Fiscal 2001:
First Quarter................................. 18.75 11.75
Second Quarter................................ 15.12 7.37
Third Quarter................................. 9.00 4.62
Fourth Quarter................................ 9.50 6.00
Fiscal 2002:
First Quarter................................. 7.50 5.30
Second Quarter (through August 31, 2001)...... 5.72 4.60
Monthly prices :
March 2001.................................... 8.50 6.00
April 2001.................................... 7.50 6.69
May 2001...................................... 6.80 6.15
June 2001..................................... 6.35 5.30
July 2001..................................... 5.72 4.60
August 2001................................... 5.59 4.73
At August 31, 2001, there were approximately five holders of record of our
ADSs, all of which had registered addresses in the United States and held an
aggregate of approximately 15,434,540 ADSs, representing 7% of the equity
shares.
146
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 permits most transactions involving
foreign exchange except those prohibited or restricted by the Reserve Bank of
India. The Foreign Exchange Management Act 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 to
regulate the various kinds of capital account transactions, including certain
aspects of the purchase and issuance of shares of Indian companies.
The Reserve Bank of India has recently issued a notification under the
provisions of the Foreign Exchange Management Act relaxing the requirement of
prior approval for an Indian company making an ADS issue provided that the
issuer is eligible to issue ADSs pursuant to guidelines issued by the Ministry
of Finance and has the necessary approval from the Foreign Investment Promotion
Board.
Under the foreign investment rules, there are four applicable restrictions
on foreign ownership:
o Under the foreign direct investment route, foreign investors may own
equity shares of ICICI Bank only with the approval of the Foreign
Investment Promotion Board; this approval is granted on a
case-by-case basis except, as discussed immediately below, where the
investment is by acquisition of ADSs or GDRs;
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 route, foreign institutional
investors, subject to registration with the Securities and Exchange
Board of India and the Reserve Bank of India, non-resident Indians
and overseas corporate bodies may be permitted to own in the
aggregate up to 49.0% of ICICI Bank's equity shares; no single
foreign institutional investor may own more than 10.0% of ICICI
Bank's equity shares (or 24.0% subject to the approval of ICICI
Bank's shareholders, which has not yet occurred).
o Non-resident Indians and corporate bodies predominantly owned by
non-resident Indians may own up to 10.0% of ICICI Bank's equity
shares; no single non-resident Indian or corporate body predominantly
owned by non-resident Indians may own more than 5.0% of ICICI Bank's
total equity shares.
We obtained the approval of the Foreign Investment Promotion Board for our
ADS offering in March 2000 which was a foreign direct investment. Under the
current guidelines issued by the Indian government, foreign direct investment
up to 49.0% from all sources is permitted in the banking sector on the
automatic route subject to conformity with guidelines issued by the Reserve
Bank of India from time to time. The investments through the portfolio
investment route in the secondary market in India by foreign institutional
investors, non-resident Indians and overseas corporate bodies and investments
through the foreign direct investment route are distinct. As of March 31, 2001,
foreign investors owned approximately 32.7% of ICICI Bank's equity in total, of
which 14.4% 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 our ADS
offering, we obtained the approval of the Department of Company Affairs and the
relevant stock exchanges.
Equity shares which have been withdrawn from the depositary facility and
transferred on our register of shareholders to a person other than the
depositary or its nominee may be voted by that person. However, you may
147
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, including the 10-49.0%
portfolio investment limitations, and the 5-24.0% non-resident Indian
limitation. The application of these limitations, however, is not clear.
Secondary purchases of securities of Indian companies in India by foreign
direct investors or investments by non-resident Indians, persons of Indian
origin, 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 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 us exceeds 15.0% of our total equity (under the Takeover
Code).
If you wish to sell the equity shares withdrawn from the depositary
facility, you will be required to receive the prior approval of the Reserve
Bank of India, unless the sale is on a stock exchange or in connection with an
offer under the Takeover Code.
148
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of our equity shares, at March 31, 2001.
Percentage of
total equity Number of
shares equity
outstanding shares held
------------- -----------
ICICI(1)................................................................ 47.0% 103,542,449
Unit Trust of India..................................................... 2.4 5,336,499
Other Indian institutional investors and corporate bodies............... 1.9 4,102,317
Individual domestic investors(2)........................................ 6.3 13,847,387
Foreign institutional investors, foreign banks, overseas corporate bodies
and non-resident Indians excluding Deutsche Bank, as depositary....... 17.3 38,242,248
Deutsche Bank, as depositary............................................ 14.4 31,747,980
Shares allocable to the former shareholders of Bank of Madura Limited... 10.7 23,539,800
----- -----------
100.0% 220,358,680
===== ===========
---------
(1) Under the Indian Banking Regulation Act, no person holding shares in a
banking company can vote more than 10.0% of the outstanding equity shares.
This means that while ICICI owned 47.0% (46.4% as per the records of
ICICI, as some of the equity shares sold by them at the end of March 2001,
were not received before March 31, 2001 for registration of our transfer)
of our equity shares at March 31, 2001, it can only vote 10.0% of our
equity shares. Similarly, Deutsche Bank (as depositary), which owns 13.6%
of our equity shares, can only vote 10.0% of our equity shares. Due to
this voting restriction and the fact that no other shareholder owns 10.0%
or more of our outstanding equity shares, ICICI and Deutsche Bank
effectively controls 16.6% each of the voting power of our outstanding
equity shares.
(2) Executive officers and directors as a group held less than 0.01% of our
equity shares at March 31, 2001.
149
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 company profits for the fiscal year in which the dividend is declared or
out of undistributed profits of prior fiscal years. We have paid dividends
consistently every year since fiscal 1996, the second year of our operations.
The following table sets forth, for the periods indicated, the dividend
per equity share and the total amount of dividends paid on the equity shares,
both exclusive of dividend tax.
Dividend per Total amount of
equity share dividends paid
------------ ---------------
(in millions)
-------------------------------
For fiscal year
1997 ................................... Rs. 1.00 Rs. 150
1998 ................................... 1.00 162
1999 ................................... 1.20 198
2000 ................................... 1.50 247
2001 ................................... 2.00 414
Until fiscal 1997, investors were required to pay tax on dividend income.
From fiscal 1998, dividend income was made tax-exempt. However, all companies
were required to pay a 10% tax on distributed profits. From fiscal 1999, this
tax rate rose to 11% because of a 10% surcharge imposed on all taxes by the
government. The government of India's budget for fiscal 2001 raised this tax to
22.0% (including surcharge) for dividend distribution subsequent to May 2000.
Effective June 1, 2001, the tax rate for dividend distribution was changed to
10.2%.
Future dividends will depend upon our revenues, cash flow, financial
condition and other factors. As an owner of ADSs, you will be entitled to
receive dividends payable in respect of the equity shares represented by such
ADSs except for fiscal 2000 as stated in prospectus to the recent ADS Issue.
The equity shares represented by ADSs rank pari passu with existing equity
shares. At present, we have equity shares issued in India and equity shares
represented by ADSs.
As per the present guidelines in India, 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.
Before paying any dividend on our shares, we are 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, we are required to
transfer at least 20.0% of the balance of profits of each year to a reserve
fund. The government of India may, however, on recommendation of the Reserve
Bank of India, exempt us from such requirement. We require prior approval from
the Reserve Bank of India to pay a dividend of more than 25.0% of the par value
of our shares. We also require prior approval from the Reserve Bank of India to
pay an interim dividend.
We have no agreement with ICICI regarding the payment of dividends by us
to ICICI or the contribution of capital by ICICI to us for maintenance of our
minimum capital adequacy ratio. Any declaration or payment of a dividend by us
to ICICI would have to be approved by our board of directors and shareholders,
and if the dividend is in excess of 25.0% of the par value of our shares, we
would have to obtain prior approval from the Reserve Bank of India. Pursuant to
the Banking Regulation Act, ICICI, though holding more than 10.0% of our share
capital, has voting power equal to only 10.0% of our outstanding equity shares.
For a description of the tax consequences of dividends paid to our
shareholders, see "Taxation -- Indian Tax -- Taxation of Distributions".
150
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, including the special tax regime for ADSs contained in
Section 115AC, which has recently 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 Indian 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 Indian 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 115 AC regime.
Recent Amendments to the Section 115 AC regime
The Finance Act for the year 2001 effected certain amendments to the
Indian Income Tax Act and specifically Section 115 AC. Section 115 AC was
entirely replaced by a new section. Under the new section, the term 'Global
Depository Receipts' is used in place of the word 'share' as under the previous
Section. The term GDR would include ADRs. The amendments extend the
concessional tax rate to GDRs issued against: (i) a fresh issue of underlying
shares; (ii) a dis-investment by the Government; (iii) on re-conversion of
shares into ADRs/GDRs; (iv) the shares of a listed Indian company on
dis-investment of the shares held by the listed holding company.
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 within the four years preceding that year been in India
for a period or periods amounting in all to 365 days or more, is in India for
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 case of 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 Distributions
Dividend distributed will not be subject to tax in the hands of the
shareholders. Consequently, withholding tax on dividends paid to shareholders
does not apply. However, if dividends are declared, the company is required to
pay a 10.20% tax (inclusive of the applicable surcharge) on distributable
profits
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 or equity shares outside India by a non-resident
investor to another non-resident investor does not give rise to Indian capital
gains tax.
Subject to any relief under any relevant double taxation treaty, a gain
arising on the sale of an equity share to a resident of India or where the sale
is made inside India will generally give rise to a liability for Indian capital
151
gains tax. Such tax is required to be withheld at source. Where the equity
share has been held for more than 12 months (measured from the date of advice
of redemption of the ADS by the Depositary), the rate of tax is 10.2%. Where
the equity share has been held for 12 months or less, the rate of tax varies
and will be subject to tax at normal rates of income-tax applicable to
non-residents under the provisions of the Indian Income Tax Act, subject to a
maximum of 48.0% 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 Depositary upon redemption of
ADRs, the provisions of the Avoidance of Double Taxation Agreement 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.
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 ADS 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 ADS being
redeemed. The holding period of an equity share received upon redemption of an
ADS 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 rights are deemed by the Indian tax authorities to be situated
within India, as our 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. Similarly, a sale of equity shares 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 may
apply to the ADSs and underlying equity shares.
Service Tax
Brokerage or commissions paid to stockbrokers in connection with the sale
or purchase of shares is subject to a service tax of 5.0%. 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 ADSs that are generally
applicable to US investors. For these purposes, you are an US investor if you
are:
o a citizen or resident of the United States under US federal income
tax laws;
152
o a corporation organized under the laws of the United States or of any
political subdivision of the United States; or
o 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 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:
o insurance companies;
o tax-exempt entities;
o dealers in securities;
o financial institutions;
o persons who own the 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;
o persons whose functional currency is not the US dollar; or
o persons who own, actually or constructively, 10.0% or more of our
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 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, other than certain pro rata
distributions of common shares or rights to acquire common shares or ADSs, will
generally constitute foreign source dividend 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,
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.
Taxation of Capital Gains
Subject to the discussion under "Passive Foreign Investment Company Rules"
below, you will recognize capital gain or loss for U.S. federal income tax
purposes on the sale or exchange of ADSs 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 U.S. 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.
Passive Foreign Investment Company Rules
Based upon proposed Treasury regulations, which are proposed to be
effective for taxable years after December 31, 1994, we do not expect to be
considered a passive foreign investment company. In general, a foreign
153
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. We have based the expectation that we are
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
our 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 our income and assets will vary over time, there can be no
assurance that we will not be considered a passive foreign investment company
for any fiscal year. Furthermore, changes to our corporate structure (including
a merger between ICICI and us in connection with the conversion of ICICI into a
universal bank) could cause us to be considered a passive foreign investment
company.
If we are 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 shares
or ADSs, including, under certain circumstances, a disposition pursuant to an
otherwise tax-free reorganization, gain reorganized by you would be allocated
ratably over your holding period for the ADS or ordinary share. The amounts
allocated to the taxable year of the sale or other exchange and to any year
before we 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 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 ordinary
shares in excess of 125 per cent of the average of the annual distributions on
ADSs or ordinary 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 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.
Special rules apply to determine the foreign tax credit with respect to
withholding taxes imposed on distributions on shares in a passive foreign
investment company. If you own shares or ADSs during any year in which we are a
passive foreign investment company, you must file Internal Revenue Service Form
8621.
154
USE OF PROCEEDS
Pursuant to our Registration Statement on form F-1 (File No. 333-30132),
which was declared effective by the Securities and Exchange commission on March
28, 2000, we registered US$175 million of our equity shares, par value Rs. 10
per share, each represented by 0.5 ADSs, and offered and sold 15,909,090 ADSs,
each representing two equity shares, at the public offering price of US$ 11.00
per ADS or aggregating US$ 174,999,990. We received net proceeds of US$
166,949,990 from the sale of these ADSs, after deducting the underwriting
discount and actual offering expenses of US$ 8,050,000. The joint global
coordinators of this offering were Merrill Lynch (Singapore) Pte. Ltd. and
Morgan Stanley & Co. International Limited.
From March 28, 2000 to March 31, 2001, we had used net offering proceeds
of US$ 166,949,990 for our normal banking businesses. This use of proceeds was
in line with the use of proceeds described in our registration statement.
PRESENTATION OF FINANCIAL INFORMATION
We have prepared our historical financial statements in accordance with
Indian generally accepted accounting principles. Starting in fiscal 2000, we
published in our annual shareholders' report our 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 we have indicated otherwise. Our fiscal year
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. The 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 acquisition of
Bank of Madura by us effective March 10, 2001 has been accounted for under the
purchase method of accounting. Accordingly, our income statement for fiscal
2001includes the income and expenses of Bank of Madura from March 10, 2001, the
effective date of the acquisition, to March 31, 2001, and our balance sheet at
March 31, 2001 includes the assets and liabilities of Bank of Madura. The
assets acquired and liabilities assumed were recorded at estimated fair values
as determined by our management based on information currently available and on
current assumptions as to future operations.
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, 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 30, 2001. 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 30, 2001 was Rs. 46.85 per US$1.00. The exchange
rates used for convenience translations differ from the actual rates used in
the preparation of our financial statements.
ADDITIONAL INFORMATION
Memorandum and Articles of Association
Objects and Purposes
Pursuant to Clause III. A. 1 of our Memorandum of Association, our main
objective is to carry on the business of banking in any part of India or
outside India.
Directors' Powers
Our 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.
155
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
ICICI Bank 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.
Incorporation by Reference
We incorporate by reference the information disclosed under "Description
of Equity Shares" in our Registration Statement on Form F-1 (File No.
333-30132).
156
INDEX TO US GAAP FINANCIAL STATEMENTS
ICICI Bank Limited
Financial statements
for the year ended March 31, 2001
Contents Page
Independent Auditors' Report F-2
Balance Sheets as at March 31, 2000 and 2001 F-3
Statements of Income for the years ended March 31, 1999, 2000 and 2001 F-4
Statement of Changes in Stockholders' Equity and Other Comprehensive
Income for the years ended March 31, 1999, 2000 and 2001 F-5
Statement of Cash Flows for the years ended March 31, 1999, 2000 and 2001 F-6
Notes to Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the board of directors and stockholders of ICICI Bank Limited
We have audited the accompanying balance sheets of ICICI Bank Limited as of
March 31, 2001 and 2000 and the related statements of income, changes in
stockholders' equity and other comprehensive income and cash flows for each of
the years in the three-year period ended March 31, 2001. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of ICICI Bank Limited as of March
31, 2001 and 2000, and the results of its operations and its cash flows for
each of the years in the three-year period ended March 31, 2001, in conformity
with accounting principles generally accepted in the United States.
The United States dollar amounts are presented in the accompanying financial
statements solely for the convenience of the readers and have been translated
to United States dollars on the basis disclosed in note 1.3.1.
/S/ KPMG
KPMG
Mumbai, India
April 25, 2001
F-2
ICICI Bank Limited
Balance Sheets
as at March 31, 2000 and 2001
Convenience
translation into
US$
At March 31, At March 31, At March 31,
2000 2001 2001(1)
-------------- --------------- -----------------
(in millions) (unaudited)
-------------------------------------------------
Rs. Rs. US$
Assets
Cash and cash equivalents................................................ 34,313 44,896 958
Interest-bearing deposits with banks..................................... 2,048 2,410 51
Trading account assets................................................... 28,228 18,725 400
Securities:
Available for sale (amortized cost Rs. 4,600 million and
Rs. 24,446 million at March 31, 2000 and 2001 respectively).......... 4,709 24,787 529
Held to Maturity (fair value Rs. Nil and Rs. 11,524 million at
March 31, 2000 and 2001 respectively)................................ - 10,944 234
Loans (net of allowance for loan losses and unearned income)............. 46,986 93,030 1,986
Customers' liability on acceptances...................................... 8,490 12,869 275
Property and equipment, net.............................................. 2,097 4,059 86
Intangible assets........................................................ - 2,641 56
Other assets............................................................. 3,515 5,647 121
------- ------- -----
Total assets............................................................. 130,386 220,008 4,696
======= ======= =====
Liabilities
Interest bearing deposits................................................ 82,785 137,883 2,943
Non interest bearing deposits............................................ 15,875 26,371 563
------- ------- -----
Total deposits........................................................... 98,660 164,254 3,506
Trading account liabilities.............................................. 1,922 6,495 139
Current portion of long term debt........................................ 771 250 5
Short-term borrowings.................................................... 2,187 3,012 64
Bank acceptances outstanding............................................. 8,490 12,869 275
Other liabilities........................................................ 5,264 14,650 313
Long-term debt........................................................... 1,705 2,171 46
------- ------- -----
Total liabilities........................................................ 118,999 203,701 4,348
------- ------- -----
Commitments and contingencies (Note 20)
Stockholders' equity:
Common stock (Rs. 10 par value, Authorized shares: 300 million
Issued shares March 31, 2000: 196,818,880 shares and March 31,
2001: 220,358,680 shares )............................................... 1,968 2,203 47
Additional paid-in capital............................................... 7,435 10,927 234
Retained earnings........................................................ 1,940 2,974 63
Deferred compensation.................................................... (39) (20) (1)
Accumulated other comprehensive income................................... 83 223 5
------- ------- -----
Total stockholders' equity............................................... 11,387 16,307 348
------- ------- -----
Total liabilities and stockholders' equity............................... 130,386 220,008 4,696
======= ======= =====
See accompanying notes to financial statements.
(1) Exchange Rate: Rs. 46.85 = US$ 1.00 at March 30, 2001
F-3
ICICI Bank Limited
Statements of Income
for the years ended March 31, 1999, 2000 and 2001
Convenience
translation
into US$
Years ended March 31, Year ended
March 31,
1999 2000 2001 2001(1)
------------ --------- --------- ------------
(in millions, except per share data)
------------------------------------------------------
(unaudited)
-------------
Rs. Rs. Rs. US$
Interest income
Interest and fees on loans................................... 2,707 4,437 7,419 158
Interest and dividends on securities available for sale...... 305 684 1,217 26
Interest and dividends on securities held to maturity........ - - 543 12
Interest and dividends on trading account assets............. 2,247 3,073 2,833 61
Other interest income........................................ 131 240 394 8
----- ----- ----- ----
Total interest income........................................ 5,390 8,434 12,406 265
----- ----- ----- ----
Interest expense
Interest on deposits......................................... 3,707 5,789 7,261 155
Interest on long term debt................................... 155 244 240 5
Interest on trading account liabilities...................... 256 542 784 17
Other interest expense....................................... 126 81 123 3
----- ----- ----- ----
Total interest expense....................................... 4,244 6,656 8,408 180
----- ----- ----- ----
Net interest income.......................................... 1,146 1,778 3,998 85
Provision for loan losses.................................... (540) (427) (1,082) (23)
----- ----- ----- ----
Net interest income after provision for loan losses.......... 606 1,351 2,916 62
----- ----- ----- ----
Non interest income
Fees and commissions......................................... 370 607 1,125 24
Trading account revenue...................................... 134 857 602 13
Securities transactions...................................... 21 75 (384) (8)
Foreign exchange transactions................................ 341 220 397 8
Other revenue................................................ - - 14 -
----- ----- ----- ----
Total non interest income.................................... 866 1,759 1,754 37
----- ----- ----- ----
Non interest expense
Salaries and employee benefits............................... 204 316 507 11
Occupancy.................................................... 346 520 1,171 25
Advertising and publicity.................................... 34 39 143 3
Administration and other expense............................. 215 454 1,283 27
----- ----- ----- ----
Total non interest expense................................... 799 1,329 3,104 66
----- ----- ----- ----
Income before income taxes................................... 673 1,781 1,566 33
Income taxes................................................. 170 379 258 5
----- ----- ----- ----
Net income................................................... 503 1,402 1,308 28
===== ===== ===== ====
Per share data
Basic.................................................... 3.05 8.49 6.60 0.13
Diluted.................................................. 3.05 8.49 6.60 0.13
Weighted average number of common shares (in millions)
Basic.................................................... 165.00 165.09 198.24 198.24
Diluted.................................................. 165.00 165.11 198.24 198.24
See accompanying notes to financial statements.
(1) Exchange Rate: Rs. 46.85 = US$ 1.00 at March 30, 2001
F-4
ICICI Bank Limited
Statements of changes in stockholders' equity and other comprehensive income
for the years ended March 31, 1999, 2000 and 2001
(in Rs. millions, except number of shares)
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Comprehensive Total
Common stock Paid-In Retained Deferred Income, net of Stockholders'
Shares Amount Capital Earnings Compensation tax Equity
----------- ------- ---------- -------- ------------ -------------- ------------
Balance as of March 31, 1998 ......... 165,000,700 1,650 375 431 - 15 2,471
-----------------------------------------------------------------------------------------------------------------------------------
Common stock issued .................. - - - - - - -
Comprehensive income
Net income ........................ - - - 503 - - 503
Unrealized gain on
securities, net ................. - - - - - 34 34
-----------
Comprehensive income............... - - - - - - 537
Cash dividend declared
(1 per common share) .............. - - - (178) - - (178)
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 1999 ......... 165,000,700 1,650 375 756 - 49 2,830
-----------------------------------------------------------------------------------------------------------------------------------
Common stock issued .................. 31,818,180 318 7,020 - - - 7,338
Compensation related to
employee stock option plan ......... - - 40 - (40) - -
Amortization of deferred
compensation ....................... - - - - 1 - 1
Comprehensive income
Net income ......................... - - - 1,402 - - 1,402
Unrealized gain on securities, net.. - - - - - 34 34
-----------
Comprehensive income ............... - - - - - - 1,436
Dividend declared (1.2 per common
share) ............................. - - - (218) - - (218)
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2000 ......... 196,818,880 1,968 7,435 1,940 (39) 83 11,387
-----------------------------------------------------------------------------------------------------------------------------------
Common stock issued .................. 23,539,800 235 3,502 - - - 3,737
Compensation related to employee
stock option plan .................. - - (10) - 10 - -
Amortization of deferred
compensation ....................... - - - - 9 - 9
Comprehensive income
Net income ......................... - - - 1,308 - 1,308
Unrealized gain on securities, net.. - - - - - 140 140
-----------
Comprehensive income ............... - - - - - - 1,448
Dividend declared (1.5 per common
share) ............................. - - - (274) - - (274)
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001 ......... 220,358,680 2,203 10,927 2,974 (20) 223 16,307
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001
(US$ (1)) (unaudited) ............ 47 234 63 (1) 5 348
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
(1) Exchange Rate: Rs. 46.85 = US$ 1.00 at March 30, 2001
F-5
ICICI Bank Limited
Statement of Cash Flows
for the years ended March 31, 1999, 2000 and 2001
Convenience
translation
into US$
Years ended March 31, Year ended
March 31,
1999 2000 2001 2001(1)
------ ------- ------ -----------
(in millions, except per share data)
-------------------------------------------------------
(unaudited)
-------------------------------------------------------
Rs. Rs. Rs. US$
Operating activities
Net income................................................... 503 1,402 1,308 28
Adjustments to reconcile net income to net cash (used in) /
provided by operating activities:
Provision for loan losses.................................... 540 427 1,082 23
Depreciation................................................. 173 201 352 7
Amortization ................................................ (10) 173 253 5
Loss on sale of property and equipment....................... - 1 2 -
Deferred income taxes........................................ (130) 113 (442) (9)
(Gain) / loss on securities transactions..................... (44) 4 366 8
Trading account assets....................................... (8,412) (12,509) (6,091) (130)
Other assets................................................. (914) (1,943) 37 1
Other liabilities............................................ 2,278 1,661 7,490 160
Trading account liabilities.................................. (2,860) 1,503 4,585 98
------ ----- ----- --
Net cash (used in) / provided by operating activities........ (8,876) (8,967) 8,942 191
------ ----- ----- --
Investing activities
Changes in interest bearing deposits with banks.............. - (2,048) 1,129 24
Securities, Held to maturity
Purchases........................................... - - (1,174) (25)
Securities, available for sale
Purchases........................................... (3,610) (10,714) (15,050) (321)
Proceeds from sales................................. 1,103 10,020 11,517 246
Origination of loans, net.................................... (15,373) (19,843) (29,288) (625)
Purchases of property and equipment.......................... (487) (528) (1,292) (28)
Sales of property and equipment.............................. 1 2 1 -
Cash equivalents acquired net of purchase acquisitions....... - - 5,649 121
------ ----- ----- --
Net cash used in investing activities........................ (18,366) (23,111) (28,508) (608)
------ ----- ----- --
See accompanying notes to financial statements.
(1) Exchange Rate: Rs. 46.85 = US$ 1.00 at March 30, 2001
F-6
ICICI Bank Limited
Statement of Cash Flows
for the years ended March 31, 1999, 2000 and 2001
Convenience
translation
into US$
Years ended March 31, Year ended
March 31,
1999 2000 2001 2001(1)
------------------ ---------------- ------ ------------
(in millions, except per share data)
----------------------------------------------------------------
(unaudited)
----------------------------------------------------------------
Rs. Rs. Rs. US$
Financing activities
Increase in deposits, net.............................. 34,439 37,931 30,368 648
Issuances of long term debt............................ 1,636 710 -
Repayment of long term debt ........................... - - (771) (16)
Issuances of short term borrowings, net................ 1,485 702 826 18
Issuance of common stock, net.......................... - 7,338 - -
Cash dividends paid.................................... (178) (218) (274) (6)
-------- ---------------- ---------------- ------------
Net cash provided by financing activities.............. 37,382 46,463 30,149 644
-------- ---------------- ---------------- ------------
Net increase/(decrease) in cash and cash equivalents... 10,140 14,385 10,583 226
Cash and cash equivalents at beginning of year......... 9,788 19,928 34,313 732
-------- ---------------- ---------------- ------------
Cash and cash equivalents at end of the year .......... 19,928 34,313 44,896 958
======== ================ ================ ============
Non cash items:
Non-cash investing and financing activities were as follows: (in millions)
Year ended
Years ended March 31, March 31,
1999 2000 2001 2001
--------- --------- ------------ --------------
Rs. Rs. Rs. US$
Acquisitions
Fair value of net assets acquired, excluding cash and
cash equivalents............................................ - - (4,381) 28
Shares issued............................................... - - 23,539,800
Transfer to held to maturity from trading account assets.... - - 10,178 217
Transfer to available for sale from trading account assets.. - - 8,575 183
Change in unrealized gain /loss on securities available
for sale, net............................................... 34 34 140 3
Foreclosed assets........................................... 96 - - -
Cash paid during the year for:
Interest expense............................................ 4,196 6,569 8,209 175
Income taxes................................................ 231 247 460 10
See accompanying notes to financial statements.
(1) Exchange Rate: Rs. 46.85 = US$ 1.00 at March 30, 2001
F-7
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
1 Significant accounting policies
1.1 Overview
1.1.1 ICICI Bank Limited ("ICICI Bank" or "the Bank"), incorporated in
Vadodara, India provides a wide range of banking and financial
services including commercial lending, trade finance and treasury
products. ICICI Bank is a banking company governed by the Banking
Regulations Act, 1949. ICICI Bank does not have any majority owned
subsidiaries or investments where its shareholding exceeds 20% of the
voting stock of the investee.
1.1.2 As more fully explained in note 2, effective March 10, 2001, ICICI
Bank acquired and merged Bank of Madura into itself in an all-stock
deal accounted for under the purchase method. These financial
statements include the assets and liabilities acquired at fair value
and the results of the acquired entity from the effective date.
Further, ICICI Limited, a majority shareholder, has divested a part
of its shareholding to outside investors in March 2001. Consequently,
the Bank is no more a "consolidated" or "majority owned" subsidiary
of ICICI Limited.
1.2 Basis of preparation
1.2.1 The accounting and reporting policies of ICICI Bank used in the
preparation of these financial statements reflect industry practices
and conform to generally accepted accounting principles in the United
States of America ("US GAAP").
1.2.2 The preparation of financial statements in conformity with US GAAP
requires that management makes 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
reporting period. Management believes that the estimates used in the
preparation of the financial statements are prudent and reasonable.
Actual results could differ from these estimates.
1.3 Functional currency and convenience translation
1.3.1 The financial statements have been prepared in Indian rupees ("Rs."),
the national currency of India. Solely for the convenience of the
reader, the financial statements as of and for the year ended March
31, 2001 have been translated into US dollars at the noon buying rate
in New York city at March 30, 2001 for the cable transfers in rupees
as certified for customs purposes by the Federal Reserve of New York
of US$1.00 = Rs. 46.85. No representation is made that the rupee
amounts have been, could have been or could be converted into US
dollars at such rate or any other rate on March 31, 2001 or at any
other certain date.
1.4 Cash and cash equivalents
1.4.1 ICICI Bank considers all highly liquid investments, which are readily
convertible into cash and which 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.
F-8
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
1.5 Securities and trading account activities
1.5.1 The Bank classifies investments in debt and equity securities into
three categories based upon management's intention at the time of
purchase; securities held to maturity, trading account securities and
securities available for sale. Realized gains and losses on the sale
of securities are recorded at the time of sale (trade date).
1.5.2 Securities held to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts. The Bank has the
intent and ability to hold these securities until maturity.
1.5.3 Trading account securities, 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 account securities is recorded in interest income. The
fair value of trading account assets is based upon quoted market
prices or, if quoted market prices are not available, estimated using
similar securities or pricing models.
1.5.4 All securities not classified as held to maturity or trading account
securities are classified as available for sale. These include
securities used as part of the Bank'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 other comprehensive
income.
1.5.5 Any "other than temporary diminution" in the value of
held-to-maturity securities, available for sale is charged to the
income statement. "Other than temporary diminution" is identified
based on management's evaluation.
1.6 Loans
1.6.1 Loans are stated at the principal amount outstanding, net of unearned
income, if any. Loan origination fees (net of loan origination costs)
are deferred and recognized as an adjustment to yield over the period
of the loan. Interest is accrued on the unpaid principal balance and
is included in interest income. Loans include credit substitutes such
as privately placed debt instruments and preferred shares, which are
in essence loans.
1.6.2 Lease financing receivables are reported at the aggregate of lease
payments receivable and estimated residual values, net of unearned
and deferred income. Unearned income is recognized to yield a level
rate of return on the net investment in the leases.
1.6.3 Interest income is accounted on an accrual basis except in respect of
non-accrual loans, where it is recognized on a cash basis. Income
from leasing operations is accrued in a manner to provide a fixed
rate of return on outstanding investments. Interest on bills
discounted is recognized on a straight-line basis over the tenure of
the bills. Fees from non-fund based activities such as guarantees and
letters of credit are amortized over the contracted period of the
commitment.
1.6.4 ICICI Bank identifies a loan as impaired when it is probable that the
Bank will be unable to collect the scheduled payments of principal
and interest due under the contractual terms of the loan agreement. A
loan is also considered to be impaired if interest or principal is
overdue for more than 180 days. 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
loan is collateral dependent. If the value of the
F-9
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
impaired loan is less than the recorded investment in the loan, ICICI
Bank recognizes this impairment by creating a valuation allowance
with a corresponding charge to the provision for loan losses or by
adjusting an existing valuation allowance for the impaired loan with
a corresponding charge or credit to the provision for loan losses. A
loan is also considered impaired if its terms are modified in a
trouble debt restructuring. For these accruing impaired loans, cash
receipts are typically applied to principal and interest in
accordance with the terms of the restructured loan agreement.
1.6.5 ICICI Bank considers all loans on non-accrual status to be impaired.
Commercial loans are placed on non-accrual status when doubt as to
timely collection of principal or interest exists, or when principal
or interest is overdue for 180 days or more. 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 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.
1.6.6 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. If the collectibility of the
outstanding principal is doubtful, such interest received is applied
as a reduction of principal. 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.
1.7 Allowance for loan losses
1.7.1 The allowance for credit losses includes management estimate of
probable losses inherent in the portfolio. The allowance for loan
losses is available for future charge-offs of existing extensions of
credit loans and leases, or portions thereof, deemed uncollectible
are charged off against the reserve, while recoveries of amounts
previously charged off are credited to the reserve. Amounts are
charged off after giving consideration to such factors as the
customer's financial condition, underlying collateral and guarantees,
and general and industry economic conditions. The allowance for loan
losses reflects management's estimate of losses inherent in the
portfolio, considering evaluations of individual credits and
concentrations of credit risk, changes in the quality of the credit
portfolio, levels of non accrual loans and leases, current economic
considerations, cross-border risks, changes in the size and character
of the credit risks and other pertinent factors. The allowance for
loan losses related to loans that are identified as impaired is based
on discounted cash flows using the loan's effective interest rate or
the fair value of the collateral for collateral-dependent loans, or
the observable market price of the impaired loans.
1.7.2 Smaller balance homogeneous loans (including credit card receivables)
are collectively evaluated for impairment based on historical loss
experience, adjusted for changes in trends and conditions including
delinquencies and non accruals. Based on these analyses, the
allowance for loan losses is maintained at levels considered adequate
by management to provide for credit losses inherent in these
portfolios.
F-10
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
1.8 Property and equipment
1.8.1 Property and equipment including assets under capital lease are
stated at cost, less accumulated depreciation other than foreclosed
assets, which are accounted for at the net realizable value. The cost
of additions, capital improvements and interest during the
construction period are capitalized, while repairs and maintenance
are charged to expenses when incurred. Property and equipment to be
disposed of are reported as assets held for sale at the lower of
carrying amount or fair value less cost to sell.
1.8.2 Depreciation is provided over the estimated useful lives of the
assets, or lease term, whichever is shorter.
1.8.3 Property under construction and advances paid towards acquisition of
property, plant and equipment are disclosed as capital work in
progress. The interest cost incurred for funding an asset during its
construction period is capitalized based on the actual outstanding
investment in the asset from the date of purchase/expenditure and the
average cost of funds. The capitalized interest cost is included in
the cost of the relevant asset and is depreciated over the asset's
estimated useful life.
1.8.4 Capitalized cost of computer software obtained for internal use
represent costs incurred to purchase computer software from third
parties. The capitalized costs are amortized on a straight-line basis
over the estimated useful life of the software. Deposits paid towards
the acquisition of property, plant and equipment outstanding at each
balance sheet date and the cost of property, plant and equipment not
put to use before such date are disclosed under capital
work-in-progress.
1.9 Income taxes
1.9.1 The provision for income taxes is determined under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to the difference
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and operating loss
carry forwards. Deferred tax assets are recognized subject to a
valuation allowance based upon management's judgement as to whether
realization is more likely than not. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are
expected to be received and settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
income statement in the period of change.
1.10 Employee benefit plans
1.10.1 ICICI Bank provides a variety of benefit plans to eligible employees.
1.10.2 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.
F-11
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
1.11 Foreign currency translation
1.11.1 Revenue and expenses in foreign currency are accounted for at the
exchange rate on the date of the transaction. Foreign currency
balances at year-end are translated at the year-end exchange rates
and the revaluation gains and losses are adjusted through the income
statement.
1.12 Risk management instruments
1.12.1 The Bank enters into certain interest rate instruments, including
interest rate swaps to manage exposure to interest rate risk by
altering the interest risk characteristics of assets or liabilities
or hedging exposure to certain risks. For those interest rate
instruments that alter the repricing characteristics of assets or
liabilities, the net differential to be paid or received on the
instruments is treated as an adjustment to the yield on the
underlying assets or liabilities (the accrual method). To qualify for
accrual accounting, the interest rate instrument must be designated
to specific assets or liabilities or pools of similar assets or
liabilities. For instruments that are designated to floating rate
assets or liabilities to be effective, there must be high correlation
between the floating interest rate index on the underlying asset or
liability and the off-setting rate on the derivative. The Bank
measures initial and ongoing correlation by statistical analysis of
the relative movements of the interest indices over time. If
correlation were to cease of any interest rate instrument hedging net
interest income, it would then be accounted for as a trading
instrument. If an interest rate instrument hedging net interest
income is terminated, the gain or loss is deferred and amortized over
the shorter maturity of the designated asset or liability. If the
designated asset or liability matures, is sold, is settled or its
balance falls below the notional amount of the hedging instrument,
the hedge is usually terminated; if not, accrual accounting is
discounted to the extent that the notional amount exceeds the
balance, and accounting for trading instruments is applied to the
excess amount.
1.12.2 The Bank also enters into foreign exchange contracts to hedge a
portion of its own foreign exchange exposure, including foreign
currency positions. Such contracts are revalued at the spot rate,
with any forward premium or discount amortized over the life of the
contract to net interest income.
1.13 Debt issuance costs
1.13.1 Debt issuance costs are amortized over the tenure of the debt.
1.14 Dividends
1.14.1 Dividends on common stock and the related dividend tax are recorded
as a liability at the point of their approval by the board of
directors.
1.15 Earnings per share
1.15.1 Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect the dilution that could occur if
securities or other contracts to issue common stock are converted.
F-12
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
1.16 Stock-based compensation
1.16.1 The Bank accounts for stock-based compensation issued to employees
using the intrinsic value method under the provisions of Accounting
Principles Board (APB) No. 25 Accounting for Stock Issued to
Employees. The Bank's stock options are typically either
non-compensatory or compensatory with the exercise price equal to the
fair value of the stock on the date of grant, and accordingly, no
expense is recognized.
1.16.2 Options granted to employees of ICICI Limited are accounted for in
accordance with Statement of Financial Accounting Standard (SFAS) No.
123 Accounting for Stock-Based Compensation. The Bank values options
issued using an option pricing model and recognizes the expenses over
the period in which the options vest.
1.17 Reclassifications
1.17.1 Certain amounts in fiscal 2000 and fiscal 1999 were reclassified to
conform with the presentation in fiscal 2001. These reclassifications
have no effect on the stockholders' equity or net income as
previously reported.
2 Merger of Bank of Madura
2.1.1 On March 10, 2001, the Bank acquired Bank of Madura Limited (Bank of
Madura), a private sector bank in India. The acquisition was made
with an issuance of 2 shares of the Bank for 1 per share of Bank of
Madura. This acquisition has been accounted for by the purchase
method of accounting and accordingly, the operating results have been
included in the Banks results of operations from the date of
acquisition. The assets acquired and liabilities assumed were
recorded at estimated fair values as determined by the Bank's
management based on information currently available and on current
assumptions as to future operations. The goodwill of Rs. 2,582
million is being amortized over 12 years. A summary of the assets
acquired and liabilities assumed in the acquisition follows:
(in Rs. millions)
-------------------------------------------------------------------
Assets
Cash and cash equivalents........................ 5,649
Interest bearing deposits........................ 1,491
Investments...................................... 11,381
Loans, net....................................... 17,763
Property and equipment........................... 1,114
Intangible assets - Tenancy rights............... 73
Other assets..................................... 2,911
------
Total............................................ 40,382
------
Liabilities
Interest bearing deposits........................ 35,254
Trading account liabilities...................... 238
Long term Debt................................... 481
Other Liabilities................................ 3,141
------
Total............................................ 39,114
------
Net fair value................................... 1,268
Consideration paid and merger related costs...... 3,850
------
Goodwill......................................... 2,582
-------------------------------------------------------------------
2.1.2 Unaudited proforma results of the operations for the years ended
March 31, 2001 and 2000 as if the acquisition of "Bank of Madura" had
been made at the beginning of the periods follow. The
F-13
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
proforma 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
operations. The proforma 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.
--------------------------------------------------------------------------------------
At March 31, 2000 At March 31, 2001
----------------- -----------------
(in Rs. millions)
...............................................................
I Bank Bank of Total I Bank Bank of Total
Madura Madura
Net interest income... 1,778 1,006 2,784 3,998 1,189 5,187
Net Income............ 1,402 121 1,523 1,308 1,088 2,396
EPS - Basic........... 5.38 7.58
--------------------------------------------------------------------------------------
3 Cash and cash equivalents
3.1.1 Cash and cash equivalents at March 31, 2001 include a balance of Rs.
10,968 million (March 31, 2000: Rs. 6,904 million) maintained with
the Reserve Bank of India in accordance with the guidelines governing
cash reserve requirements. This balance is subject to withdrawal and
usage restrictions.
4 Trading account assets
4.1.1 A listing of the trading account assets is set out below:
-----------------------------------------------------------------
At March 31,
-------------------------
2000 2001
----------- ----------
(in Rs. millions)
Government of India securities.......... 26,903 14,055
Equity securities....................... 90 -
Debentures ............................. - 1,808
Bonds................................... - 2,348
Revaluation gains on derivative and
foreign exchange contracts............ 309 127
Commercial paper........................ 147 387
Mutual fund units....................... 779 -
----------- ----------
Total. ................................. 28,228 18,725
=========== ==========
-----------------------------------------------------------------
4.1.2 At March 31, 2001, trading account assets included certain securities
amounting to Rs. 569 million (March 31, 2000:Rs. 72 million), which
are pledged in favour of certain banks against borrowing and funds
transfer facilities.
4.1.3 In fiscal 2001, the Bank transferred securities amounting to Rs.
8,575 million and Rs. 10,178 million from 'trading account assets' to
'securities, available for sale' and to 'securities, held to
maturity' respectively at fair value on the date of transfer. The
Bank believes that in view of the recent changes in the market
scenario, the market for these securities has become illiquid and is
expected to remain so. Hence, these securities no longer have the
traits of trading securities.
F-14
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
5 Securities
5.1.1 The portfolio of securities is set out below:
---------------------------------------------------------------------------------------------------------
At March 31, 2000
-----------------------------------------------------------------
Book Gross unrealized Gross Fair
value gain unrealized loss Value
(in Rs. millions)
---------------------------------------------------------------------------------------------------------
Securities, held to maturity
Government of India securities........ - - - -
========== ================== ================= ========
Securities, available for sale
Corporate debt securities............. 2,540 53 (19) 2,574
Government of India securities........ 914 89 - 1,003
---------- ------------------ ----------------- --------
Total debt securities................. 3,454 142 (19) 3,577
Mutual fund units..................... 1,146 - (14) 1,132
---------- ------------------ ----------------- --------
Total securities, available for sale.. 4,600 142 (33) 4,709
========== ================== ================= ========
At March 31, 2001
-----------------------------------------------------------------
Book Gross unrealized Gross Fair
value gain unrealized loss Value
(in Rs. millions)
Securities, held to maturity
Government of India securities........ 10,944 580 - 11,524
---------- ------------------ ----------------- --------
Securities, available for sale
Corporate debt securities............. 6,057 210 (27) 6,240
Government of India securities........ 15,765 302 (7) 16,061
---------- ------------------ ----------------- --------
Total debt securities................. 21,822 512 (34) 22,301
Mutual fund units..................... 2,513 4 (142) 2,375
Others................................ 111 - - 111
---------- ------------------ ----------------- --------
Total securities, available for sale.. 24,446 516 (176) 24,787
---------- ------------------ ----------------- --------
---------------------------------------------------------------------------------------------------------
Income from securities, available for sale
5.1.2 A listing of interest and dividends on available for sale securities
is set out below:
---------------------------------------------------------------------
Year ended March 31
-------------------------------------
1999 2000 2001
----------- --------- ---------
(in Rs. millions)
Interest....................... 248 358 853
Dividends...................... 57 326 364
----------- --------- ---------
Total.......................... 305 684 1,217
Gross realized gain............ 25 259 114
Gross realized losses.......... (4) (184) (498)
----------- --------- ---------
Grand Total.................... 326 759 833
=========== ========= =========
---------------------------------------------------------------------
F-15
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
Maturity profile of debt securities
Held to Maturity Securities
5.1.3 Maturity profile of securities held to maturity at March 31, 2000 and
March 31, 2001 is set out below:
-------------------------------------------------------------------------------
At March 31, 2000 At March 31, 2001
-------------------- -----------------------
Amortized Fair Amortized Fair
cost Value cost Value
--------- -------- ------------ --------
(in Rs. millions)
Government of India securities
Less than one year.............. - - - -
One to five years............... - - 2,938 3,077
Five to ten years............... - - 6,380 6,726
More than 10 Years.............. - - 1,626 1,721
--------- -------- ------------ --------
Total........................... - - 10,944 11,524
========= ======== ============ ========
-------------------------------------------------------------------------------
Available for sale securities
5.1.4 Maturity profile of securities available for sale at March 31, 2000
and March 31, 2001 is set out below:
-----------------------------------------------------------------------------
At March 31, 2000 At March 31, 2001
-------------------- ---------------------
Amortized Fair Amortized Fair
cost Value Cost Value
--------- -------- ---------- --------
(in Rs. millions)
Corporate debt securities
Less than one year.............. 399 403 1,835 1,849
One to five years............... 1,548 1,563 3,737 3,876
More than five years............ 593 608 485 515
--------- -------- ---------- --------
Total........................... 2,540 2,574 6,057 6,240
Government of India securities
Less than one year.............. - - 5,963 5,971
One to five years............... 914 1,003 6,843 7,095
More than five years............ - - 2,959 2,995
--------- -------- ---------- --------
Total.......................... 914 1,003 15,765 16,061
========= ======== ========== ========
-----------------------------------------------------------------------------
6 Loans and leases
6.1.1 A listing of loans by category is set out below:
----------------------------------------------------------------------------------------------
At March 31, At March 31,
-------------- --------------
2000 2001
-------------- --------------
(in Rs. millions)
Working capital finance...................................... 31,576 57,316
Term loans - commercial...................................... 3,798 9,483
Credit substitutes (Corporate bonds and preference shares)... 10,532 23,624
Lease financing.............................................. 305 944
Retail loans and credit card receivables..................... 1,553 4,909
-------------- --------------
Total loans.................................................. 47,764 96,276
Allowance for loan losses.................................... (748) (2,890)
Unearned income.............................................. (30) (356)
-------------- --------------
Net loans.................................................... 46,986 93,030
============== ==============
----------------------------------------------------------------------------------------------
F-16
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
6.1.2 As at March 31, 2001, working capital finance include debit balances
in savings and current accounts of Rs. 4,695 million and loans given
to persons domiciled outside India of Rs. 951 million (March 31,
2000: Rs. 2,794 and Rs. 265 million respectively).
6.1.3 Normally, the working capital advances are secured by a first lien on
current assets, principally comprising inventory and receivables.
Additionally, in certain cases ICICI Bank may obtain additional
security through a first or second lien on property and equipment, a
pledge of financial assets like marketable securities and
corporate/personal guarantees. The term loans are secured by a first
lien on the property and equipment and other tangible assets of the
borrower.
Net investment in leasing activities
6.1.4 Contractual maturities of ICICI Bank's net investment in leasing
activities and its components, which are included in loans, are set
out below:
------------------------------------------------------------------------
At March 31,
----------------
2001
--------
(in Rs. millions)
-----------------
Gross finance receivable for the year ending March 31,
2002....................................................... 344
2003....................................................... 99
2004....................................................... 93
2005....................................................... 83
2006 & beyond.............................................. 436
1,055
Less: Unearned income...................................... 313
Security deposits.................................... 111
--------
Investment in leasing and other receivables................ 631
========
------------------------------------------------------------------------
Maturity profile of loans
6.1.5 A listing of each category of gross loans other than net investment
in leases and other receivables by maturity is set out below:
-------------------------------------------------------------------------------------------------------------
At March 31, 2000
--------------------------------------------------------------
Up to 1 Year 1-5 years More than 5 years Total
------------ --------- ----------------- -----
(in Rs. millions)
Term loan .................................. 1,402 2,302 94 3,798
Working capital finance..................... 28,421 3,155 - 31,576
Credit substitutes (Ccorporate bonds and
preference shares) ....................... 1,831 6,175 2,526 10,532
Retail loans and credit card receivables ... 1,553 - - 1,553
-------------- ----------- --------------- ----------
Total ...................................... 33,207 11,632 2,620 47,459
============== =========== =============== ==========
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
At March 31, 2001
---------------------------------------------------------------
Up to 1 Year 1-5 years More than 5 years Total
------------ --------- ----------------- -----
(in Rs. millions)
Term loan .................................. 3,865 4,204 1,414 9,483
Working capital finance .................... 54,798 2,518 - 57,316
Credit substitutes (corporate bonds and
preference shares) ....................... 6,907 12,794 3,923 23,624
Retail loans and credit card receivables ... 4,116 728 65 4,909
-------------- ----------- --------------- -----------
Total ...................................... 69,686 20,244 5,402 95,332
============== =========== =============== ===========
------------------------------------------------------------------------------------------------------------
F-17
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
Interest and fees on loans
6.1.6 A listing of interest and fees on loans (net of unearned income) is
set out below:
-----------------------------------------------------------------------------------
Year ended March 31
--------------------------------------
1999 2000 2001
---------- ---------- ----------
(in Rs. millions)
Working capital finance....................... 1,755 2,666 4,469
Term loan .................................... 338 480 847
Credit substitutes (corporate bonds and
preference shares) ......................... 465 981 1,539
Leasing and related activities ............... 21 14 22
Retail loans and credit card receivables...... 128 296 542
---------- ---------- ----------
Total ........................................ 2,707 4,437 7,419
========== ========== ==========
-----------------------------------------------------------------------------------
Impaired loans
6.1.7 A listing of impaired loans is set out below:
-------------------------------------------------------------------------
At March 31,
-------------------------
2000 2001
----------- ----------
(in Rs. millions)
Working capital finance ..................... 1,127 3,700
Term loan ................................... 61 1,242
Credit substitutes (corporate bonds and
preference shares) ........................ 45 121
Leasing and related activities .............. 185 227
----------- ----------
Total ....................................... 1,418 5,290
Related allowance for loan losses(1) ........ (748) (2,862)
----------- ----------
Impaired loans net of valuation allowance ... 670 2,428
=========== ==========
Loans with valuation allowance .............. 1,255 5,276
Loans without valuation allowance ........... 163 14
----------- ----------
Total ....................................... 1,418 5,290
=========== ==========
Interest foregone on non-performing assets .. 124 495
Average non-performing loans ................ 1,432 3,354
-------------------------------------------------------------------------
Note 1: (1) Included in allowance for loan losses.
Concentration of credit risk
6.1.8 Concentrations of credit risk exist when changes in economic,
industry or geographic factors similarly affect groups of
counterparties whose aggregate credit exposure is material in
relation to ICICI Bank's total credit exposure. ICICI Bank's
portfolio of financial instruments is broadly diversified along
industry, product and geographic lines within the country.
F-18
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
Allowance for loan losses
6.1.9 A listing of the changes in allowance for loan losses is set out
below :
-------------------------------------------------------------------------------
Year ended March 31
-------------------------
1999 2000 2001
---- ---- ----
(in Rs. millions)
Allowance for loan losses at beginning of the year .. 425 880 748
Additions
Provisions for loan losses, net of release of
provisions as a result of cash collections ........ 540 427 1,082
Provision for loan losses on loans acquired
from Bank of Madura................................ - - 1,572
---- ----- -----
965 1,307 3,402
Loans charged offs................................... (85) (559) (512)
---- ----- -----
Allowance for loan losses at end of the year......... 880 748 2,890
==== ===== =====
-------------------------------------------------------------------------------
Troubled debt restructuring
6.1.10 The Bank classifies a debt restructuring as a troubled debt
restructuring when it grants a concession, that it would not
otherwise consider to a borrower in financial difficulties.
6.1.11 Loans at March 31, 2001 include loans aggregating Rs. 467 million
(March 31, 2000: Rs. 43 million), which are currently under a scheme
of debt restructuring and which have been identified as impaired
loans. The gross recorded investment in these loans is Rs. 890
million (March 31, 2000: Rs. 68 million) against which an allowance
for loan losses aggregating Rs. 423 million (March 31, 2000: Rs. 25
million) has been established. Income on restructured loans would
have been Rs. 101 million for year ended March 31, 2001 (March 31,
2000: Rs. 7.70 million) based on original terms, and was Rs. 85
million based on the restructured terms (March 31, 2000: Rs. 6.44
million).
6.1.12 There are no commitments to lend incremental funds to any borrower
who is party to a troubled debt restructuring.
7 Property and equipment
7.1.1 Property and equipment are stated at cost less accumulated
depreciation other than foreclosed assets which are stated at net
realizable value. Generally, depreciation is computed over the
estimated useful life of the asset.
7.1.2 A listing of property and equipment by asset category is set out
below:
----------------------------------------------------------------------
At March 31,
----------------
2000 2001
---- ----
(in Rs. millions)
Land........................................ 126 286
Building.................................... 1,352 2,029
Equipment and furniture..................... 1,151 2,988
Capital work in progress.................... 52 216
----- -----
Gross value of property and equipment....... 2,681 5,519
Accumulated depreciation.................... (584) (1,460)
----- -----
Net book value of property and equipment.... 2,097 4,059
===== =====
----------------------------------------------------------------------
F-19
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
7.1.3 Equipment and furniture includes an amount of Rs. 246 million for
automated teller machines taken on capital lease. The following is a
summary of future minimum lease rental commitments for non-cancellable
leases:
-----------------------------------------------------------------
March 31, 2001
(in Rs. millions)
-----------------
Year ending
2002........................................... 24
2003........................................... 26
2004........................................... 37
2005........................................... 54
2006........................................... 68
Thereafter..................................... 223
---
Total minimum lease commitments............... 432
===
-----------------------------------------------------------------
7.1.4 Equipment and furniture include foreclosed assets held for resale
amounting to Rs. 139 million as on March 31, 2001.
7.1.5 Interest capitalized for the year ended March 31, 2001 is Rs. Nil
(March 31, 2000: Rs. 16 million).
7.1.6 Depreciation charge in year ended March 31, 2001 and year ended March
31, 2000 amounts to Rs. 352 million and Rs. 201 million,
respectively.
8 Intangible assets
8.1.1 Intangible assets include goodwill amounting to Rs. 2,568 million and
tenancy rights amounting to Rs. 73 million at March 31, 2001.
9 Other assets
9.1.1 Other assets at March 31, 2001 include interest accrued of Rs. 2,248
million (March 31, 2000: Rs. 1,147 million), taxes paid (net of
provisions) Rs. 1,051 million (March 31, 2000: Rs. 368 million),
deposits in leased premises and utilities of Rs. 346 million (March
31, 2000: Rs. 185 million), and prepaid expenses of Rs. 13 million
(March 31, 2000: Rs. 3 million).
10 Deposits
10.1.1 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:
-------------------------------------------------------------------
At March 31,
------------
2000 2001
---- ----
(in Rs. millions)
Interest bearing
Savings deposits ............................. 5,332 18,786
Time deposits................................. 77,453 119,097
------ -------
82,785 137,883
Non-interest bearing
Demand deposits............................... 15,875 26,371
------ -------
Total......................................... 98,660 164,254
====== =======
-------------------------------------------------------------------
F-20
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
10.1.2 Maturity profile of deposits at March 31, 2001 is set out below:
----------------------------------------------------------------------
At March 31,
------------
2000 2001
---- ----
(in Rs. millions)
Less than One year (include savings and demand
liabilities)................................... 60,999 111,215
One to Three years............................... 37,224 51,229
Three to Five years.............................. 437 1,097
Greater than Five years.......................... - 713
------ -------
Total Deposits................................... 98,660 164,254
====== =======
----------------------------------------------------------------------
10.1.3 At March 31, 2001, aggregate of deposits with amounts greater than
Rs. 10 million was Rs. 53,358 million. Demand and savings deposits
are included in less than one year bucket.
11 Short-term borrowings
11.1.1 Short term borrowings at March 31, 2001 represents borrowings from
Reserve Bank of India for a term of six months. These funds are in
the nature of export refinance with an interest rate of 7% per annum.
The average level of such borrowings, during period ended March 31,
2001 was 1,713 million (March 31, 2000: Rs. 1,298 million). There
were no unused lines of credit available to the Bank at March 31,
2001 (March 31, 2000: Nil).
Repurchase transactions
11.1.2 During the year, ICICI Bank has undertaken repurchase transactions in
government of India securities. The maximum amount of outstanding
repurchase agreements at any month-end during the period was Rs. 537
million (March 31, 2000: Rs. 970 million). The average level of
repurchase transactions during year ended March 31, 2001 was Rs. 78
million (March 31, 2000: Rs. 225 million). The repurchase contracts
outstanding on March 31, 2001 were Rs.537 million (March 31, 2000:
Nil).
11.1.3 ICICI Bank has undertaken reverse repurchase transactions in
government of India securities. The maximum amount of outstanding
reverse repurchase agreements at any month-end during the period was
Rs. Nil (March 31, 2000: Rs. 7,829 million). The average level of
reverse repurchase transactions outstanding during year ended March
31, 2001 was Rs. 206 million (March 31, 2000: Rs. 225 million). The
reverse repurchase contracts outstanding on March 31, 2001 and March
31, 2000 were nil and Rs. 256 million respectively.
12 Trading account liabilities
12.1.1 Trading account liabilities at March 31, 2001 include borrowings from
banks in the inter-bank call money market of Rs. 3,978 million (March
31, 2000: Rs. 1,922 million).
F-21
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
13 Long-term debt
13.1.1 Long-term debt represents debt with an original maturity of greater
than one year, net of the unamortized debt issuance costs. Long term
debt bears interest at fixed contractual rates ranging from 11.5% to
17%. A listing of long-term debt by residual maturity is set out
below:
----------------------------------------------------------------------
At March 31, 2000 At March 31, 2001
----------------- -----------------
(in Rs. millions) % (in Rs. millions) %
----------------------------------------------------
Maturity
2002............. 12 1 - -
2003............. 9 - 211 10
2004............. 1,003 59 1,136 52
2005............. 1 - 101 5
2006 and later... 680 40 723 33
----- --- ----- ---
Total ........... 1,705 100 2,171 100
===== === ===== ===
----------------------------------------------------------------------
14 Other liabilities
14.1.1 Other liabilities at March 31, 2001 include outward clearing suspense
of Rs. 5,656 million (March 31, 2000: Rs. 1,610 million), accounts
payable of Rs. 3,806 million (March 31, 2000: Rs. 1,422 million),
interest accrued but not due on deposits amounting to Rs. 557 million
(March 31, 2000: Rs. 335 million), cash margins on letters of credit
or guarantees of Rs. 80 million (March 31, 2000: Rs. 73 million) and
obligations on account of capital leases amounting to Rs. 251 million
(March 31, 2000: Rs. 96 million).
15 Common stock and earnings per share
15.1.1 At March 31, 2001 and March 31, 2000, the authorized common stock was
300 million shares with a par value of Rs. 10 per share. At March 10,
2001, the Bank granted 23,539,800 shares for acquisition of Bank of
Madura.
Earnings per share
15.1.2 A computation of earnings per share is set out below:
----------------------------------------------------------------------------
Year ended March 31
-------------------
1999 2000 2001
---- ---- ----
(in Rs. millions except per share data)
Basic
Average common shares outstanding.... 165 165 198
Net income........................... 503 1,402 1,308
Per share amount..................... 3.05 8.49 6.60
Diluted
Average common shares outstanding.... 165 165 198
Average diluted shares outstanding... 165 165 198
Net income........................... 503 1,402 1,308
Per share amount..................... 3.05 8.49 6.60
----------------------------------------------------------------------------
F-22
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
16 Regulatory matters
16.1.1 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
16.1.2 In accordance with the Banking Regulation Act, 1949, the Bank 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, 2001 was Rs. 38,087 million (March 31, 2000:
Rs. 20,570 million).
Capital adequacy requirements
16.1.3 ICICI Bank 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, at least half of
which must be Tier 1 capital. Effective March 31, 2000 the Reserve
Bank of India has increased the minimum capital adequacy ratio to 9%.
The capital adequacy ratio of the Bank calculated in accordance with
the Reserve Bank of India guidelines at March 31, 2001 was 11.57%
(March 31, 2000: 19.64%).
Restricted retained earnings
16.1.4 Retained earnings at March 31, 2001 computed as per generally
accepted accounting principles of India include profits aggregating
to Rs. 1,844 million (March 31, 2000: Rs. 1,039 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. 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 ICICI
Bank 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.
17 Business segments
Segmental disclosures
17.1.1 ICICI Bank's operations are solely in the financial services industry
and consist of providing traditional banking services, primarily
commercial lending activities, treasury operations and retail banking
activities. ICICI Bank carries out these activities through offices
in India.
17.1.2 Until the previous financial year, the Bank had been analyzing the
business information and making the operating decisions based upon
reviews of the Bank's operations as a whole. However, with continued
growth in business, the Bank has reorganized its business in three
Strategic Business Units ('SBUs') namely Retail Banking, Corporate
Banking and Treasury. Each of these SBUs caters to different segments
of customers and offers different financial products and services.
Accordingly, prior year comparatives are not available.
17.1.3 Retail Banking activity includes mobilizing of funds from retail
depositors by offering them a wide range of financial products and
providing services through various channels like branches,
F-23
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
ATMs, internet banking, phone banking and mobile banking. Retail
Banking SBU also offers consumer lending services namely credit
cards, loans against deposits and securities etc. Corporate Banking
SBU (CB-SBU) provides financial products and services to corporates,
institutions and government organizations. CB-SBU provides medium and
short-term credit, fee and commission based services (e.g.,
documentary credits, letters of credit, forward contracts etc.)
accepts deposits from corporate customers and also provides cash
management services. The Treasury SBU manages the treasury operations
of the bank through market operations. It also invests in various
money market instruments, debt instruments, shares and debentures.
17.1.4 As explained in note 2, effective March 10, 2001, the Bank acquired
Bank of Madura Limited, a private sector bank in India. Pursuant to
the merger, the results of Bank of Madura are being reviewed
separately until fully integrated into the Bank.
17.1.5 The following table gives information on segmental revenues and
segmental profits for year ended March 31, 2001:
(in Rs. million)
----------------------------------------------------------------------------------------------------
Particulars SBU-Retail SBU-Corporate SBU- Bank of Eliminations Total
Banking Banking Treasury Madura
Revenue from external customers
Interest revenue................... 1,464 7,932 2,777 233 - 12,406
Other revenue...................... 238 984 468 64 - 1,754
Revenue from other operating
segments
Interest & Other revenue........... 4,323 - 267 - (4,590) -
Total Revenue 6,025 8,916 3,512 297 (4,590) 14,160
Interest expenses to external
customers........................ 4,406 2,025 1,808 169 - 8,408
Interest & other expenses from Note 1
other operating segments......... - 3,264 1,326 - (4,590) -
Depreciation....................... 284 142 15 36 - 477
Provision for credit losses........ 30 1,052 - - - 1,082
Other expenses..................... 1,927 550 116 34 - 2,627
Income before Income Taxes......... (622) 1,883 247 58 - 1,566
Income tax expense................. (101) 308 41 10 - 258
Net Income......................... (521) 1,575 206 48 - 1,308
----------------------------------------------------------------------------------------------------
Note 1: Interest and other revenues from other segments represent the
notional interest charged by 'Retail Banking' to other segments, on
funds mobilized by it through deposits and which were utilized by
other segments for lending and investment purposes. This item also
includes notional management fee charged by 'Treasury' from other
segments for managing part of their assets and liabilities.
17.1.6 A listing of certain assets of reportable segments for year ended
March 31, 2001 is set out below:
(in Rs. million)
---------------------------------------------------------------------------------------------
Particulars SBU-Retail SBU-Corporate SBU- Bank of Eliminations Total
Banking Banking Treasury Madura
Property and equipment..... 2,270 650 56 1,083 - 4,059
Other assets............... 30,459 114,861 37,774 32,855 - 215,949
Total assets............... 32,729 115,511 37,830 33,938 - 220,008
---------------------------------------------------------------------------------------------
Major customers
17.1.7 ICICI Bank provides banking and financial services to a wide base of
customers. There is no major customer which contributes more than 10%
of total revenues.
F-24
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
18 Employee benefits
18.1 Retirement benefits
Gratuity
18.1.1 In accordance with Payment of Gratuity Act, 1972, ICICI Bank provides
for gratuity a defined benefit retirement plan covering all
employees. The plan provides a lump sum payment to vested employees
at retirement, on death while in employment or on termination of
employment based on the respective employee's salary and the years of
employment with ICICI Bank. The gratuity
benefit conferred by ICICI Bank on its employees is equal to or
greater than the statutory minimum.
18.1.2 ICICI Bank provides the gratuity benefit through annual contributions
to either a fund administered by a Board Trustees and managed by Life
Insurance Corporate of India or to a fund administered and managed by
a Board of trustees. ICICI Bank's liability for provision of gratuity
benefit to its employees is determined periodically through actuarial
valuations in accordance with SFAS 87.
18.1.3 The following table sets forth the funded status of the plan and the
amounts recognized in the financial statements for the year ended
March 31, 2001:
(in Rs. million)
-------------------------------------------------------------------------------
At March 31,
------------
2000 2001
---- ----
Change in benefit obligations
Projected benefit obligations at beginning of the year/period. 8.25 12
Obligations assumed on acquisition............................ - 317
Service cost.................................................. 4.65 3
Interest cost................................................. 1.00 4
Benefits paid.................................................(0.21) (1)
Actuarial (gain) / loss on obligations........................(1.27) 1
---- ---
Projected benefit obligations at the end of the period........12.42 336
Change in plan assets
Fair value of plan assets at beginning of the period..........11.31 17
Fair value of plan assets acquired on acquisition............. - 303
Expected return on plan assets................................ 1.29 3
Employer contributions........................................ 4.90 6
Gain/(loss) on plan assets.................................... - 4
Benefits paid.................................................(0.21) -
---- ---
Plan assets at the end of the period..........................17.29 333
Funded status position........................................(4.87) (3)
Net prepaid asset/(Accrued liability)......................... 4.87 3
-------------------------------------------------------------------------------
18.1.4 The components of the net gratuity cost for the year ended March 31,
2000 and year ended March 31, 2001 are given below:
----------------------------------------------------------------------
At March 31,
------------
2000 2001
---- ----
(in Rs. million)
----------------
Service cost......................................... 4.65 3
Interest cost........................................ 1.00 4
Expected return on assets............................(1.29) (3)
Actuarial (gain) / loss..............................(1.27) (3)
Net gratuity cost.................................... 3.09 1
----------------------------------------------------------------------
F-25
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
18.1.5 Assumptions used in accounting for the gratuity plan are given below:
----------------------------------------------------------------------
At March 31,
------------
2000 2001
---- ----
Discount rate........................................ 12% 11%
Rate of increase in the compensation levels..........8%+scales 8%
Rate of return on plan assets........................ 12% 10.5%
----------------------------------------------------------------------
Pension Plan
18.1.6 ICICI Bank provides for pension, a deferred benefit retirement plan
covering the employees of erstwhile Bank of Madura. The plan provides
for pension payment on a monthly basis to these employees on their
retirement based on the respective employee's salary and years of
employment with ICICI Bank. Employees covered by the pension plan are
not eligible for benefits under the provident fund plan, a defined
contribution plan.
18.1.7 The pension plan is funded through or periodic contributions to a
fund set up by ICICI Bank and administrated by a board of trustees.
Such contributions are actuarially determined in accordance with the
provisions of FAS 87.
18.1.8 The following table sets forth the funded status of the plan and the
amounts recognized in the financial statements for the year ended
March 31, 2001:
(in Rs. million)
--------------------------------------------------------------------------------
At March 31, 2001
-----------------
Change in benefit obligations
Projected benefit obligations at beginning of the year/period.. -
Obligations assumed on acquisitions............................ 711
Service cost................................................... 1
Interest cost.................................................. 4
Benefits paid.................................................. -
Actuarial (gain)/loss on obligations........................... 8
---
Projected benefit obligations at the end of the period......... 724
Change in plan assets
Fair value of plan assets at beginning of the period........... -
Fair value of plan assets acquired on acquisitions............. 779
Expected return on plan assets................................. 1
Employer contributions......................................... 1
Gain/(loss) on plan assets..................................... 14
Benefits paid.................................................. -
---
Plan assets at the end of the period........................... 795
Funded status position......................................... 71
Net prepaid benefit............................................ 71
--------------------------------------------------------------------------------
18.1.9 The components of the net pension cost for the year ended March 31,
2001 are given below:
----------------------------------------------------------------------
At March 31, 2001
-----------------
(in Rs. millions)
Service cost......................................... 1
Interest cost........................................ 4
Expected return on assets............................ (1)
Actuarial (gain)/loss................................ (6)
---
Net gratuity cost.................................... (2)
---
----------------------------------------------------------------------
F-26
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
18.1.10 Assumptions used in accounting for the pension plan are given below:
----------------------------------------------------------------------
At March 31, 2001
-----------------
Discount rate........................................ 11%
Rate of increase in the compensation levels.......... 8%
Rate of return on plan assets........................ 10.50%
----------------------------------------------------------------------
Superannuation
18.1.11 The permanent employees of ICICI Bank are entitled to receive
retirement benefits under the superannuation fund operated by ICICI
Bank. The superannuation fund is a defined contribution plan under
which ICICI Bank contributes annually a sum equivalent to 15% of the
employee's eligible annual salary to Life Insurance Corporation of
India, the manager of the fund, that undertakes to pay the lump sum
and annuity payments pursuant to the scheme. The Bank has contributed
Rs. 17 million and Rs. 22 million to the employees superannuation
plan in year ended March 31, 2000 and 2001 respectively.
Provident fund
18.1.12 In accordance with the Employees Provident Fund & Miscellaneous
Provisions Act, 1952, all employees of ICICI Bank are entitled to
receive benefits under the provident fund, a defined contribution
plan, in which both the employee and ICICI Bank contribute monthly at
a determined rate (currently 12% of employees' salary). These
contributions are made to a fund set up by ICICI Bank and
administered by a board of trustees. Further, in the event the return
on the fund is lower than 11% (current guaranteed rate of return to
the employees), such difference will be contributed by ICICI Bank and
charged to income. The contribution to the employees provident fund
amounted to Rs. 11 million and Rs. 23 million in year ended March 31,
2000 and 2001 respectively.
Leave encashment
18.1.13 The liability for leave encashment on retirement or on termination of
services of the employee of ICICI Bank is valued on the basis of the
employee's last drawn salary and provided for. Other liabilities also
include provision of Rs. 8 million on account of the leave encashment
liability of the Bank at March 31, 2001 (March 31, 2000: Rs. 5
million).
18.2 Employee stock option plan
18.2.1 In February 2000, the Bank introduced its employee stock option plan
wherein an aggregate of 1,788,000 options representing 1,788,000
shares were made available for grant to certain employees and
directors of the Bank and certain employees of the erstwhile parent
company. These options vest over three years and have a maximum term
of 10 years. Of these, 994,250 options were granted to the employees
and 75,000 options were granted to non-executive directors of the
Bank at an exercise price of Rs. 171.90, which was equal to the
quoted market value of the Bank's common stock on the date of grant.
The awards to non-executive directors of the Bank were forfeited in
fiscal 2000 and such options have been retired from the plan. The
Bank has computed and recognized compensation cost of Rs. 40 million
for 718,750 options granted to the employees of the erstwhile parent
company. This amount will be expensed over the vesting period.
18.2.2 Out of total options, 21,875 options granted to the employees of the
Bank and 55,000 options granted to the employees of the erstwhile
parent company have been forfeited during the year
F-27
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
ended March 31, 2001 and such options have been retired from the
plan, because of cessation of services of these employees.
18.2.3 Had compensation costs of the Bank's stock based compensation plan
been recognized based on the fair value on the grant date consistent
with the method prescribed by SFAS No 123, the Bank's net income and
earnings per share for the year ended March 31, 2000 would have been
impacted as indicated below:
----------------------------------------------------------------------
Year ended March 31
-------------------
2000 2001
---- ----
(in Rs. millions,
except per share data)
----------------------
Net income
As reported................................. 1,402 1,308
Proforma under SFAS No 123.................. 1,401 1,273
Basic earnings per share:
As reported................................. 8.49 6.60
Proforma under SFAS No 123.................. 8.49 6.42
Diluted earnings per share
As reported................................. 8.49 6.60
Proforma under SFAS No 123.................. 8.49 6.42
----------------------------------------------------------------------
18.2.4 The effects of applying SFAS No. 123, for disclosing compensation
cost under such pronouncement, may not be representative of the
effects on reported net income for future years.
18.2.5 The fair value of the stock options granted was estimated on the date
of grant using the Black-Scholes option-pricing model, with the
following assumptions:
----------------------------------------------------------------------
For the year ended March 31, 2000
----
Expected life in years.................................. 3
Risk free interest rate................................. 10.35%
Volatility.............................................. 30.0%
Dividend yield.......................................... 0.7%
----------------------------------------------------------------------
19 Income taxes
19.1 Components of deferred tax balances
19.1.1 The tax effects of significant temporary differences are reflected
through a deferred tax asset/liability, which is included in the
balance sheet of ICICI Bank.
19.1.2 A listing of the temporary differences is set out below:
----------------------------------------------------------------------
At March 31,
------------
2000 2001
---- ----
(in Rs. millions)
-----------------
Deferred tax assets
Allowance for loan losses.......................... 303 824
Amortization of HTM securities..................... - 165
Amortization of Trading & AFS securities........... - 82
Deposits........................................... - 141
Loan processing fee amortization................... 12 25
Others............................................. 10 34
--- -----
Gross deferred tax asset........................... 325 1,271
Valuation allowances............................... - 2
--- -----
Deferred tax asset................................. 325 1,269
Deferred tax liabilities
Property and equipment............................. (277) (475)
Investments........................................ - (77)
Unrealized gain on securities, available for sale.. (26) (117)
----------------------------------------------------------------------
F-28
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
----------------------------------------------------------------------
Amortization of debt issue costs................. (4) (34)
Others........................................... (32) (36)
--- -----
Total deferred tax liability..................... (339) (739)
--- -----
Net deferred tax asset/(liability)............... (14) 530
=== =====
Current.......................................... (40) 71
Non-current...................................... 26 459
----------------------------------------------------------------------
19.1.3 Management is of the opinion that the realization of the recognized
net deferred tax asset of Rs. 530 million at March 31, 2001 (March
31, 2000: Rs. (14) million) is more likely than not based on
expectations as to future taxable income.
19.2 Reconciliation of tax rates
19.2.1 The following is the reconciliation of estimated income taxes at
Indian statutory income tax rate to income tax expense as reported.
-------------------------------------------------------------------------------
Year ended March 31
-------------------
1999 2000 2001
---- ---- ----
(in Rs. millions)
---------------------------
Net income before taxes......................... 673 1,781 1,566
Statutory tax rate.............................. 35% 38.5% 39.55%
Income tax expense at statutory tax rate........ 236 686 619
Increase (reductions) in taxes on account of
Income exempt from taxes........................ (81) (340) (344)
Compensation costs.............................. - - 2
Effect of change in statutory tax rate.......... - 6 -
Others.......................................... 15 27 (19)
--- ----- -----
Reported income tax expense..................... 170 379 258
=== ===== =====
-------------------------------------------------------------------------------
19.3 Components of income tax expense
19.3.1 The components of income tax expense/(benefit) are set out below:
----------------------------------------------------------------------
Year ended March 31
-------------------
1999 2000 2001
---- ---- ----
(in Rs. millions)
---------------------------
Current................................... 300 266 700
Deferred.................................. (130) 113 (442)
--- --- ---
Total income tax expense.................. 170 379 258
=== === ===
----------------------------------------------------------------------
20 Commitments and contingencies
Loan commitments
20.1.1 ICICI Bank has outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs. 27,693
million and Rs. 18,091 million at March 31, 2001 and March 31, 2000
respectively. The interest rate on these commitments is dependent on
the lending rates on the date of the loan disbursement. Further, the
commitments have fixed expiry dates and may be contingent upon the
borrowers ability to maintain specific credit standards.
F-29
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
Guarantees
20.1.2 As a part of its commercial banking activities, ICICI Bank has issued
guarantees to enhance the credit standing of its customers. These
generally represent irrevocable assurances that ICICI Bank will make
payments in the event that the customer fails to fulfill his
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 18 months.
20.1.3 The credit risk associated with these products, as well as the
operating risks, are similar to those relating to other types of
financial instruments. Fees are recognised over the term of the
instruments.
20.1.4 Details of facilities outstanding are set out below:
----------------------------------------------------------------------
At March 31,
------------
2000 2001
---- ----
(in Rs. millions)
-----------------
Financial guarantees.............................. 4,270 7,511
Performance guarantees............................ 3,295 5,949
----- ------
Total............................................. 7,565 13,460
===== ======
----------------------------------------------------------------------
Lease commitments
20.1.5 ICICI Bank has commitments under long-term operating leases
principally for premises. Lease terms for premises generally cover
periods of nine years. The following is a summary of future minimum
lease rental commitments for non-cancellable leases.
----------------------------------------------------------------------
March 31, 2001
--------------
(in Rs. millions)
-----------------
Year ending 2002.................................... 124
2003................................................ 132
2004................................................ 131
2005................................................ 122
2006................................................ 123
Thereafter.......................................... 317
---
Total minimum lease commitments.................... 949
===
----------------------------------------------------------------------
20.1.6 Various related legal proceedings are pending against ICICI Bank.
Potential liabilities, if any, have been adequately provided for, and
management does not estimate any incremental liability in respect of
legal proceedings.
20.1.7 Further, ICICI Bank is 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 to Rs. 60 million at March 31, 2001 (March
31, 2000: Rs. 6 million).
F-30
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
21 Related party transactions
21.1.1 ICICI Bank has entered into transactions with the following related
parties:
o Affiliates of the Bank (including ICICI Limited (former parent
company));
o Employees Provident Fund Trust; and
o Directors and employees of the group.
21.1.2 The related party transactions can be categorized as follows:
Banking services
21.1.3 ICICI Bank provides banking services to all the related parties on
the same terms that are offered to other customers.
21.1.4 The revenues earned from these related parties are set out below:
----------------------------------------------------------------------
Year ended March 31
-------------------
2000 2001
---- ----
(in Rs. millions)
-------------------
ICICI Limited (former parent company)............ 24 45
Other affiliates(1).............................. 6 27
-- --
Total............................................ 30 72
== ==
----------------------------------------------------------------------
(1) Comprising ICICI Securities and Finance Company Limited, ICICI
Brokerage Services Limited, ICICI Capital Services Limited,
Prudential ICICI Asset Management Company Limited ICICI Venture
Funds Management Company Limited, ICICI Personal Financial
Services Limited, ICICI Home Finance Limited, Prudential ICICI
Mutual Funds Limited and Prudential ICICI Life Insurance Company
Limited.
21.1.5 ICICI Bank has paid to the related parties interest on deposits and
borrowings in call money markets amounting to Rs. 392 million for the
year ended March 31, 2001 (March 31, 2000: Rs. 310 million).
21.1.6 ICICI Bank paid brokerage to ICICI Brokerage Services Limited
amounting to Rs. 1 million for the year ended March 31, 2001 (March
31, 2000: Rs. 3 million).
Leasing of premises and infrastructural facilities
21.1.7 ICICI Bank has entered into lease agreements with ICICI Limited for
lease of certain premises and infrastructural facilities to ICICI
Bank. Total amount incurred, as rent for the year ended March 31,
2001, is Rs. 177 million (March 31, 2000: Rs. 36 million). Similarly,
ICICI Bank paid Rs. 16 million for the year ended March 31, 2001
(March 31, 2000: Rs. 5 million) towards lease rentals on certain
equipment leased from ICICI Limited. ICICI Bank has paid Rs. Nil
interest for the year ended March 31, 2001 (March 31, 2000: Rs. 4
million) to ICICI Limited for capital advances made by it for
purchase of equipment.
Acquisition of Equipment
21.1.8 ICICI Bank purchased equipment from ICICI Limited and ICICI Personnel
Financial Services for Rs. 99 million for the year ended March 31,
2001.
F-31
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
Forward Contracts
21.1.9 ICICI Bank enters into foreign exchange forward contracts with ICICI
Limited. The outstanding contracts as at March 31, 2001 in respect of
the forward contracts amounted to Rs. 2,262 million.
Derivative transactions
21.1.10 ICICI Bank enters into foreign exchange currency swaps and interest
rate swaps with ICICI Limited on a back to back basis. The
outstanding contracts as at March 31, 2001 in respect of cross
currency swaps amounted to Rs. 4,352 million (Rs. 3,829 million at
March 31, 2000) and in respect of interest rate swap contracts
amounted to nil (Rs. 800 million at March 31, 2000). Similarly, Bank
also enters into interest rate swaps with the affiliates on a back to
back basis. The outstanding contracts with other affiliates at March
31, 2001 in respect of interest rate swaps amounted to Rs. 2,900
million.
Expenses for services rendered
21.1.11 ICICI Bank incurred Rs. 4 million for the year ended March 31, 2001
(March 31, 2000: Rs. 2 million) to ICICI Limited for secondment of
their employees.
Receipts for services rendered
21.1.12 ICICI Bank received Rs. 5 million for the year ended March 31, 2001
(March 31, 2000: Rs. 6 million) from ICICI Limited for employees
seconded to them.
Share transfer activities
21.1.13 ICICI Bank has paid Rs. 3 million for the year ended March 31, 2001
(March 31, 2000: Rs. 4 million) to ICICI Infotech Services Limited
for share transfer services provided by them. The Bank incurred Rs. 5
million for the year ended March 31, 2001 for dematerialization
services provided by the above affiliate.
Dividend payments
21.1.14 ICICI Bank declared and paid a dividend @ 15% for the fiscal
1999-2000. Out of which the Bank paid Rs. 184 million to its
affiliates for the year ended March 31, 2000.
Other transaction with related parties
21.1.15 ICICI Bank has advanced loans to employees, bearing interest ranging
from 3.5% to 6%. These are housing, vehicle and general purpose
loans. The tenure of these loans ranges from five to twenty years.
The balance outstanding on account of all the staff loans at March
31, 2001 was Rs. 494 million (March 31, 2000 Rs. 221 million).
21.1.16 ICICI Bank has entered into an agreement with ICICI Personal
Financial Services Limited for telephone banking call center services
and transaction processing services for the credit card related
activities. The amount incurred for the year ended March 31, 2001 for
these services was Rs. 99 million.
21.1.17 ICICI Limited had undertaken a corporate brand building advertising
campaign of which ICICI Bank's share amounts to Rs. 15 million.
F-32
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
21.1.18 ICICI Limited has set up common technology infrastructure set up for
utilization by the ICICI Group. The amount incurred by ICICI Bank as
its share amounted to Rs. 34 million and Rs. 11 million towards
shares of communication expenses and share of backbone infrastructure
expense for the year ended March 31, 2001. Similarly, it incurred Rs.
73 million for the year ended March 31, 2001, expenses towards
development software and providing support services for the software
and hardware by ICICI Infotech Services Limited.
21.1.19 ICICI Bank has incurred an amount of Rs. 49 million for the year
ended March 31, 2001 towards its share of the operating costs of the
common data centre set up by ICICI Limited.
21.1.20 ICICI Bank hired the services of ICICI Capital Services Limited for
setting up of ATMs at various places for which Rs. 8 million were
incurred for the above services during the year ended March 31, 2001.
Also the Bank paid Rs. 8 million for the year ended March 31, 2001 to
the affiliates for sourcing of retail accounts at various branches of
Bank.
21.1.21 The balances pertaining to receivables from and payable to related
parties are as follows:
---------------------------------------------------------------------
ICICI Other
Limited Affiliates(1)
(in Rs. millions)
------------------------
At March 31, 2000
Accounts receivable....................... 1 -
Accounts payable.......................... 3,503 1,514
At March 31, 2001
Accounts receivable....................... 38 17
Accounts payable.......................... 5,209 2,847
---------------------------------------------------------------------
(1) Comprises ICICI Securities and Finance Company Limited,
Prudential ICICI Asset Management Company Limited, Prudential
ICICI Trust Limited, ICICI Infotech Services Limited, ICICI
Brokerage Services Limited, ICICI Personal Financial Services
Limited, ICICI Capital Services Limited, ICICI Venture Funds
Management Company Limited, ICICI Properties Limited, ICICI Home
Finance Company Limited, ICICI Real Estate Company Limited,
Traveljini.com Private Limited, ICICI Knowledge Park Limited,
ICICI Realty Limited, ICICI Web Trade Limited, Prudential ICICI
Mutual Fund Limited, ICICI e-Payments Limited and Prudential
ICICI Life Insurance Company Limited.
22 Off-balance sheet financial instruments
Foreign exchange and derivative contracts
22.1.1 ICICI Bank enters into foreign exchange forward contracts, Indian
rupee interest rate swaps and currency swaps with interbank
participants and customers. These transactions enable customers to
transfer, modify or reduce their foreign exchange and interest rate
risks.
22.1.2 Forward foreign exchange contracts are commitments to buy or sell
foreign currency at a future date at the contracted rate. Currency
swaps are commitments to exchange cash flows by way of interest in
one currency against another currency and to exchange the notional
principal amount at maturity based on predetermined rates. Currency
swaps offered to customers are hedged by opposite contracts with the
parent company and are accounted for as hedge contracts.
22.1.3 The market and credit risk associated with these products, as well as
the operating risks, are similar to those relating to other types of
financial instruments. Market risk is the exposure created by
movements in interest rates and exchange rates, during the currency
of the transaction. The extent of market risk affecting such
transactions depends on the type and nature of the transaction, value
of the transaction and the extent to which the transaction is
F-33
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
uncovered. Credit risk is the exposure to loss in the event of
default by counterparties. The extent of loss on account of a
counterparty default will depend on the replacement value of the
contract at the ongoing market rates.
22.1.4 Speculative forward exchange contracts are revalued at year-end based
on forward exchange rates for residual maturities and the contracted
rates and the revaluation gain or loss is recognized in the income
statement. Forward exchange contracts that are accounted for as
hedges of foreign currency exposures, are revalued based on year-end
spot rates and the spot rates at the inception of the contract. The
revaluation gain or loss is recognized in the income statement.
Premium or discount on such forward exchange contracts is recognized
over the life of the contract.
22.1.5 The following table presents the aggregate notional principal amounts
of ICICI Bank's outstanding foreign exchange and derivative contracts
at March 31, 2001 and March 31, 2000 together with the related fair
values.
------------------------------------------------------------------
Notional principal Fair Value
amounts
At March 31, At March 31,
------------------ -------------
2000 2001 2000 2001
---- ---- ---- ----
(in Rs. millions)
-------------------------------------
Interest rate agreements
Swap agreements........... 900 11,380 - 11,368
------ ------ ----- ------
900 11,380 - 11,368
====== ====== ===== ======
Foreign exchange products
Forward contracts......... 62,892 78,249 63,201 78,369
Swap agreements........... 7,658 8,710 - -
------ ------ ----- ------
70,550 86,959 63,201 78,369
====== ====== ===== ======
------------------------------------------------------------------
23 Estimated fair value of financial instruments
23.1.1 ICICI Bank'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.
23.1.2 Fair values vary from period to period based on changes in a wide
range of factors, including interest rates, credit quality, and
market perception of value and as existing assets and liabilities run
off and new items are generated. Fair value estimates are generally
subjective in nature and are made as of a specific point in time
based on the characteristic of the financial instruments and relevant
market information.
23.1.3 The data reported below represents management's best estimates based
on a range of methodologies and assumptions. 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 judgements made regarding risk
characteristics of various financial instruments, discount rates,
estimates of future cash flows, future estimated loss experience and
other factors. Changes in assumptions could significantly affect
these estimates and the resulting fair values. Further, the fair
values are estimated based on the existing financial instruments
without attempting to estimate the value of anticipated future
business.
F-34
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
23.1.4 Disclosure of fair values is not required for certain items such as
premise and equipment, prepaid expenses, credit card receivables,
obligations for pension and other postretirement benefits and other
intangible assets. Accordingly, the aggregate fair value of amounts
do not purport to represent the underlying "market" or franchise
value of the Bank. Further, because of the differences in assumptions
used and methodologies the fair values reported below may not be
strictly comparable with those of other banks.
23.1.5 A listing of the fair values by category of financial assets and
financial liabilities is set out below:
--------------------------------------------------------------------------------
Particulars Carrying Estimated Carrying Estimated
value fair value value fair value
At March 31, 2000 At March 31, 2001
----------------- -----------------
(in Rs. millions)
--------------------------------------------
Financial assets
Securities, available for sale....... 4,709 4,709 24,787 24,787
Securities, held to maturity......... - - 10,944 11,524
Trading account assets............... 28,228 28,228 18,725 18,725
Loans (Note 1)....................... 46,986 46,763 93,030 93,128
Other financial assets (Note 2)...... 48,363 48,363 65,809 65,809
------- ------- ------- -------
Total................................128,286 128,063 213,295 213,973
======= ======= ======= =======
Financial liabilities
Interest-bearing deposits............ 82,785 83,175 137,883 138,846
Non-interest-bearing deposits........ 15,875 15,875 26,371 26,371
Trading account liabilities.......... 1,922 1,922 6,495 6,495
Long-term debt....................... 1,705 1,798 2,171 2,344
Other financial liabilities (Note 3). 16,712 16,712 30,781 30,781
------- ------- ------- -------
Total................................118,999 119,482 203,701 204,837
======= ======= ======= =======
Derivatives
Currency swaps (Note 4).............. - 51 - 16
Interest rate swaps.................. - 39 - 18
------- ------- ------- -------
--------------------------------------------------------------------------------
Note 1: The carrying value of loans is net of allowance for loan
losses and unearned income.
Note 2: Includes cash, due from banks, deposits at interest with
banks, short-term highly liquid securities, and customers
acceptance liability for which the carrying value is a
reasonable estimate of fair value.
Note 3: Represents acceptances and other liabilities outstanding, for
which the carrying value is a reasonable estimate of the fair
value.
Note 4: All customer positions are hedged by opposite contracts with
the parent company.
23.1.6 The carrying value of cash and cash equivalents as reported in the
balance sheet approximates the fair values since maturities are less
than 90 days. Trading account assets and liabilities are carried at
fair values in the balance sheet. Fair values of securities in all
categories are based on quoted or independent market prices. The fair
value of certain long-term 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 frequent repricing characteristics of these
loans. For impaired loans where the credit quality of the borrower
has deteriorated, fair values are estimated by discounting expected
cash flows at a rate commensurate with the associated risk.
F-35
ICICI Bank Limited
Notes to financial statements
for the years ended March 31, 1999, 2000 and 2001
23.1.7 For liabilities, market borrowing rates of interest of similar
instruments are used to discount contractual cash flows. The
estimated fair value interest-bearing deposits and long term debt
reflects changes in market rates since the time these were sourced.
24 Future impact of new accounting standards
Recently issued accounting pronouncements
24.1.1 Statement of Financial Accounting Standards (SFAS) 133, Accounting
for Derivative Instrument and Hedging Activities, as amended by SFAS
137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, and SFAS
138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, is effective for the Bank as of April 1, 2001.
SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities measured at fair value. The accounting for
changes in the fair value of a derivative depends on the use of the
derivative. Derivatives that are not designated as part of a hedging
relationship must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, the
effective portion of the hedge's change in fair value is either (1)
offset against the change in fair value of the hedged asset,
liability or firm commitment through income or (2) held in equity
until the hedged item is recognized in income. The ineffective
portion of a hedge's change in fair value is immediately recognized
in income. Adoption of these new accounting standards will result in
cumulative after-tax reductions in earnings on a US GAAP basis of
approximately 25 million in the first quarter of fiscal 2002. The
adoption will also impact assets and liabilities recorded on the
balance sheet on a US GAAP basis. A majority of the derivatives
entered into by the Bank will not qualify as hedges under SFAS 133
therefore the same will have to be marked to market and the
difference between the market value and the face value would be
accounted for in earnings.
24.1.2 In September 2000, the Financial Accounting Standard Board (FASB)
issued SFAS No. 140, "Accounting for transfers and servicing of
Financial Assets and Extinguishments of liabilities", which revises
the criteria for accounting for securitizations and other transfers
of financial assets and collateral, and introduces new disclosures.
SFAS No. 140 replaces SFAS No. 125, which was issued in June 1996.
The enhanced disclosure requirements are effective for year-end 2001.
The other provisions of SFAS No. 140 apply prospectively to transfers
of financial ended March 31, 2001. Earlier or retroactive application
is not permitted. The effect of SFAS No. 140 in the Bank is not
expected to be material.
---------------------------------- -----------------------------------
G. Venkatakrishnan H.N. Sinor
Senior Executive Vice President & Managing Director &
Chief Financial Officer Chief Executive Officer
F-36
EXHIBIT INDEX
Exhibit No. Description of Document
----------- -----------------------
1.1 ICICI Bank Memorandum and 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 by reference from
ICICI Bank's Registration Statement on Form F-1 (File No.
333-30132)).
2.2 ICICI Bank's Specimen Certificate for Equity Shares
(incorporated by reference from ICICI Bank's Registration
Statement on Form F-1 (File No. 333-30132)).
4.1 ICICI Bank's Employee Stock Option Plan (incorporated
by reference from ICICI Limited's Annual Report on
Form 20-F for the year ended March 31, 2000 filed on
September 27, 2000).
4.2 Scheme of Amalgamation of Bank of Madura Limited with ICICI
Bank Limited.
4.3 Letter from the Reserve Bank of India to ICICI Bank Limited
dated February 27, 2001 and Order from the Reserve Bank of
India dated February 26, 2001 approving the Scheme of
Amalgamation of Bank of Madura Limited with ICICI Bank
Limited.
157
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/ H. N. Sinor
-------------------------
Name: H. N. Sinor
Title: Managing Director and
Chief Executive Officer
Place: Mumbai, India
Date: September 28, 2001
158