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, 2002
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_____________
Commission File Number 001-15002
ICICI BANK LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Vadodara, Gujarat, India
(Jurisdiction of incorporation or organization)
ICICI Bank Towers
Bandra-Kurla Complex
Mumbai 400051, India
(Address of principal executive 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(1)
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) Not including 392,672,724 Equity Shares issued pursuant to the
amalgamation of ICICI Limited, ICICI Personal Financial Services Limited and
ICICI Capital Services Limited with ICICI Bank Limited.
TABLE OF CONTENTS
Page
----
Cross Reference Sheet.................................................... 3
Certain Definitions ..................................................... 5
Forward-Looking Statements............................................... 6
Exchange Rates........................................................... 7
Risk Factors............................................................. 8
Business ................................................................ 25
Overview ............................................................. 25
History .............................................................. 26
Shareholding Structure and Relationship with the Government of India.. 30
Strategy ............................................................ 32
Principal Business Activities......................................... 36
Corporate Banking..................................................... 37
Retail Banking........................................................ 49
Treasury ............................................................. 57
Funding .............................................................. 62
Risk Management....................................................... 66
Loan Portfolio........................................................ 83
Impaired Loans........................................................ 88
Subsidiaries and Affiliates........................................... 102
Technology............................................................ 104
Competition........................................................... 106
Employees ............................................................ 107
Properties............................................................ 109
Legal and Regulatory Proceedings...................................... 109
Selected Financial and Operating Data for ICICI Bank..................... 112
Operating and Financial Review and Prospects for ICICI Bank.............. 119
Selected Consolidated Financial and Operating Data for ICICI............. 150
Operating and Financial Review and Prospects for ICICI................... 156
Unaudited Pro Forma Condensed Consolidated Financial Data for
ICICI Bank and ICICI .................................................. 193
Management .............................................................. 199
Overview of the Indian Financial Sector.................................. 216
Supervision and Regulation............................................... 226
Exchange Controls........................................................ 240
Market Price Information................................................. 242
Restriction on Foreign Ownership of Indian Securities.................... 244
Dividends................................................................ 247
Taxation................................................................. 249
Use of Proceeds.......................................................... 254
Presentation of Financial Information.................................... 254
Additional Information................................................... 255
Index to ICICI Bank US GAAP Financial Statements......................... F-1
Index to ICICI US GAAP Financial Statements.............................. F-40
Exhibit Index............................................................ 257
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 for ICICI
Bank.............................................. 111
Selected Financial and Operating Data for
ICICI............................................. 149
4 Information on the Company Business.......................................... 25
Operating and Financial Review and Prospects for
ICICI Bank--Capital Expenditures.................. 145
Operating and Financial Review and Prospects for
ICICI--Capital Expenditures....................... 181
Overview of the Indian Financial Sector........... 215
Supervision and Regulation........................ 225
5 Operating and Financial Operating and Financial Review and Prospects for
Review and Prospects ICICI Bank ..................................... 118
Operating and Financial Review and Prospects for
ICICI............................................. 155
6 Directors, Senior Managerment Management ....................................... 198
and Employees
Business--Employees............................... 105
7 Major Shareholders and Business--Shareholding Structure and Relationship
Related Party Transactions with the Government of India...................... 30
Operating and Financial Review and Prospects for
ICICI Bank--Related Party Transactions............ 147
Operating and Financial Review and Prospects for
ICICI--Related Party Transactions................. 185
Management--Interest of Management in Certain
Transactions...................................... 214
Market Price Information.......................... 241
Note 21 in Notes to ICICI Bank's US GAAP Financial
Statements........................................ F-36
Note 32 in Notes to ICICI's US GAAP Financial
Statements........................................ F-85
8 Financial Information Report of Independent Auditors on ICICI Bank's
US GAAP Financial Statements...................... F-2
3
ICICI Bank's US GAAP Financial Statements and the
notes thereto..................................... F-3
Report of Independent Auditors on ICICI's US GAAP
Financial Statements ............................. F-41
ICICI's US GAAP Financial Statements and the
notes thereto..................................... F-42
Operating and Financial Review and Prospects for
ICICI Bank--Significant Changes................... 145
Business-Legal and Regulatory Proceedings......... 108
Dividends......................................... 246
9 The Offer and Listing Details Market Price Information.......................... 241
Restriction on Foreign Ownership of Indian
Securities ....................................... 243
10 Additional Information Exchange Controls................................. 239
Restriction on Foreign Ownership of Indian
Securities ....................................... 243
Dividends......................................... 246
Taxation.......................................... 248
Additional Information............................ 255
11 Quantitative and Qualitative Business-Quantitative and Qualitative Disclosures
Disclosures About Market Risk About Market Risk................................. 71
12 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................................... 253
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
Report of Independent Auditors on ICICI's US GAAP
Financial Statements.............................. F-41
ICICI's US GAAP Financial Statements and the
notes thereto..................................... F-42
19 Exhibits Exhibit index and attached exhibits............... 257
4
CERTAIN DEFINITIONS
In this annual report, all references to "ICICI Bank" are to ICICI Bank
Limited prior to the amalgamation of ICICI Limited, ICICI Personal Financial
Services Limited and ICICI Capital Services Limited with and into ICICI Bank.
References to "ICICI" are to ICICI Limited on an unconsolidated basis prior to
the amalgamation. References to "the merged entity" are to ICICI Bank Limited
subsequent to the amalgamation. References to "ICICI Personal Financial
Services" are to ICICI Personal Financial Services Limited. References to
"ICICI Capital Services" are to ICICI Capital Services Limited. References to
"the amalgamation" are to the amalgamation of ICICI, ICICI Personal Financial
Services and ICICI Capital Services with and into ICICI Bank. References to
"the Scheme of Amalgamation" are to the Scheme of Amalgamation of ICICI, ICICI
Personal Financial Services and ICICI Capital Services with ICICI Bank
sanctioned by the High Court of Gujarat at Ahmedabad on March 7, 2002 and by
the High Court of Judicature at Bombay on April 11, 2002 and approved by the
Reserve Bank of India on April 26, 2002.
The amalgamation was approved by each of the boards of directors of ICICI,
ICICI Personal Financial Services, ICICI Capital Services and ICICI Bank at
their respective meetings held on October 25, 2001. The amalgamation was
approved by the shareholders of ICICI Bank and ICICI at their extraordinary
general meetings held on January 25, 2002 and January 30, 2002, respectively.
The amalgamation was sanctioned by the High Court of Gujarat at Ahmedabad on
March 7, 2002 and by the High Court of Judicature at Bombay on April 11, 2002.
The amalgamation was approved by the Reserve Bank of India on April 26, 2002.
The Statement on Financial Accounting Standards No. 141 on business
combinations requires that business combinations be accounted for in the period
in which the combination is consummated. Accordingly, under US GAAP, the
amalgamation has not been reflected in the financial statements of ICICI Bank
for the year ended March 31, 2002, as it was consummated in April 2002. The
effective date of the amalgamation for accounting purposes under US GAAP was
April 1, 2002. ICICI Bank's financial statements for fiscal 2002, therefore, do
not include the assets, liabilities and results of operations of ICICI, ICICI
Personal Financial Services and ICICI Capital Services. Under US GAAP, the
amalgamation was accounted for as a reverse acquisition. This means that ICICI
was recognized as the accounting acquirer in the amalgamation, although ICICI
Bank was the legal acquirer.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation. As ICICI Bank is
the surviving legal entity in the amalgamation, the other subsidiaries and
affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
5
FORWARD-LOOKING STATEMENTS
The merged entity has included statements in this annual report which
contain words or phrases such as "will", "would", "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 the merged entity's expectations
with respect to, but not limited to, the merged entity's ability to
successfully implement its strategy, the merged entity's ability to integrate
ICICI, ICICI Personal Financial Services and ICICI Capital Services or any
future mergers or acquisitions into the merged entity's operations, future
levels of impaired loans, the merged entity's growth and expansion, the
adequacy of the merged entity's allowance for credit and investment losses,
technological changes, investment income, the merged entity's ability to market
new products, cash flow projections, the outcome of any legal or regulatory
proceedings the merged entity is a party to, the future impact of new
accounting standards, the merged entity's ability to implement its dividend
policy, the impact of Indian banking regulations on the merged entity, which
includes the assets and liabilities of ICICI, a former financial institution
not subject to Indian banking regulations, the merged entity's ability to roll
over its short-term funding sources, the merged entity's exposure to market
risks and the market acceptance of and demand for Internet banking services. By
their nature, certain of the market risk disclosures are only estimates and
could be materially different from what actually occurs in the future. As a
result, actual future gains, losses or impact on net interest income and net
income could materially differ from those that have been estimated.
In addition, other factors that could cause actual results to differ
materially from those estimated by the forward-looking statements contained in
this annual report include, but are not limited to: general economic and
political conditions in India, southeast Asia, and the other countries which
have an impact on the merged entity's business activities or investments,
political or financial instability in India or any other country caused by any
terrorist attacks in the United States, any anti-terrorist or other attacks by
the United States, a United States-led coalition or any other country or any
other acts of terrorism world-wide, the monetary and interest rate policies of
India, political or financial instability in India or any other country caused
by tensions between India and Pakistan related to the Kashmir region or social
unrest in any part of India, inflation, deflation, unanticipated turbulence in
interest rates, changes in the value of the rupee, foreign exchange rates,
equity prices or other rates or prices, the performance of the financial
markets and level of Internet penetration in India and globally, changes in
domestic and foreign laws, regulations and taxes, changes in competition and
the pricing environment in India and regional or general changes in asset
valuations. For a further discussion on the factors that could cause actual
results to differ, see the discussion under "Risk Factors" contained in this
annual report.
6
EXCHANGE RATES
Fluctuations in the exchange rate between the Indian rupee and the US
dollar will affect the US dollar equivalent of the Indian rupee price of the
equity shares on the Indian stock exchanges and, as a result, will affect the
market price of the ADSs in the United States. These fluctuations will also
affect the conversion into US dollars by the depositary of any cash dividends
paid in Indian rupees on the equity shares represented by ADSs.
On an average annual basis, the Indian rupee has consistently declined
against the dollar since 1980. In early July 1991, the government of India
adjusted the Indian 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. Since the Indian rupee was made convertible on the
current account in March 1993, it has steadily depreciated at a rate of 5-6%
per annum, on average.
However, reflecting the improving structure of India's current account and
the weakening of the US Dollar, the Indian rupee has appreciated by about 0.5%
against the US dollar between April-August 2003. Compared to other Asian
currencies, though, the Indian rupee has depreciated.
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)(2)
-------------------------------------------------------------------------------
1998............................................ 39.53 37.37
1999............................................ 42.50 42.27
2000............................................ 43.65 43.46
2001 ........................................... 46.85 45.88
2002............................................ 48.83 47.80
2003 (through September 16)..................... 48.43 48.83
Month High Low
-------------------------------------------------------------------------------
March 2002...................................... 48.98 48.83
April 2002...................................... 49.01 48.83
May 2002........................................ 49.07 48.97
June 2002 ...................................... 49.07 48.86
July 2002....................................... 48.87 48.69
August 2002 .................................... 48.73 48.52
---------
(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 ICICI
Bank's and ICICI's financial statements.
(2) Represents the average of the noon buying rate on the last day of each
month during the period.
Although certain rupee amounts in this annual report have been translated
into dollars for convenience, this does not mean that the rupee amounts
referred to could have been, or could be, converted into dollars at any
particular rate, the rates stated below, or at all. Except in the section on
"Market Price Information", all translations from rupees to dollars are based
on the noon buying rate in the City of New York for cable transfers in rupees
at March 29, 2002. 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
29, 2002 was Rs. 48.83 per US$ 1.00 and on September 16, 2002 was Rs. 48.43 per
US$ 1.00. The exchange rates used for convenience translations differ from the
actual rates used in the preparation of ICICI Bank's and ICICI's 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 the merged
entity and its business.
Risks Relating to India
A slowdown in economic growth in India could cause the merged entity's
business to suffer.
The merged entity's performance and the quality and growth of its assets
are necessarily dependent on the health of the Indian economy. The Indian
economy has shown sustained growth over the last few years with real GDP
growing at 5.4% in fiscal 2002, 4.0% in fiscal 2001 and 6.1% in fiscal 2000.
However, industrial production in India also witnessed lower growth during
fiscal 2001 and fiscal 2002. The Index of Industrial Production grew at 2.7% in
fiscal 2002 and 4.9% in fiscal 2001 as compared to a growth rate of 6.7% in
fiscal 2000. Any future slowdown in the Indian economy or future volatility of
global commodity prices, in particular oil and steel prices, could adversely
affect the merged entity's borrowers and contractual counterparties. This in
turn could adversely affect the merged entity's business, including its ability
to grow its asset portfolio, the quality of its assets, its financial
performance, its stockholders' equity, its ability to implement its strategy
and the price of its equity shares and its ADSs.
A significant increase in the price of crude oil could adversely affect
the Indian economy, which could adversely affect the merged entity's
business.
India imports approximately 75.0% of its requirements of crude oil. The
sharp increase in global crude oil prices during fiscal 2001 adversely affected
the Indian economy in terms of volatile interest and exchange rates. This
adversely affected the overall state of liquidity in the banking system leading
to intervention by the Reserve Bank of India. The crude oil prices declined in
fiscal 2002 due to weaker demand. The continuing and possibly prolonged battle
against terrorism by the United States or any attack or other action by the
United States or a United States-led coalition on or in relation to Iraq could
result in lengthy regional hostilities in the Middle-East countries where most
of the world's oil production facilities are located. This could lead to
increases in oil prices or higher volatility in oil prices. Any significant
increase in crude oil prices could affect the Indian economy and the Indian
banking and financial system. This could adversely affect the merged entity's
business including its ability to grow, the quality of its assets, its
financial performance, its stockholders' equity, its ability to implement its
strategy and the price of its equity shares and its ADSs.
A significant change in the Indian government's economic liberalization
and deregulation policies could disrupt the merged entity's business and
cause the price of its equity shares and its ADSs to go down.
The merged entity is an Indian group and its assets and customers are
predominantly located in India. The Indian government has traditionally
exercised and continues to exercise a dominant influence over many aspects of
the economy. Its economic policies have had and could continue to have a
significant effect on private sector entities, including the merged entity, and
on market conditions and prices of Indian securities, including the merged
entity's equity shares and its 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 Bhartiya 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 the government's policies could adversely affect business
and economic conditions in India in general as well as the merged entity's
business, its future financial performance, its stockholders' equity and the
price of its equity shares and its ADSs.
8
Financial instability in other countries, particularly emerging market
countries in Asia, could disrupt the merged entity's business and cause
the price of its equity shares and its 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 the 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. 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 the merged entity. Any financial
disruption could have an adverse effect on the merged entity's business, its
future financial performance, its stockholders' equity and the price of its
equity shares and its ADSs.
If regional hostilities, terrorist attacks or social unrest in some parts
of the country increase, the merged entity's business could suffer and the
price of its equity shares and its 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. At
present, relations between India and Pakistan continue to be tense on the
issues of terrorism and Kashmir. These hostilities and tensions could lead to
political or economic instability in India and a possible adverse effect on the
merged entity's business, its future financial performance and the price of its
equity shares and ADSs. For example, the terrorist attacks in the United States
on September 11, 2001 affected the markets all over the world. The United
States' continuing battle against terrorism could lengthen these regional
hostilities and tensions. Further, India has also experienced social unrest in
some parts of the country like the state of Gujarat. If such tensions occur in
other parts of the country, leading to political and economic instability in
the country, it might have an adverse effect on the merged entity's business,
its future financial performance and the price of its equity shares and its
ADSs.
Trade deficits could cause the merged entity's business to suffer and the
price of its equity shares and its ADSs to go down.
India's trade relationships with other countries can also influence Indian
economic conditions. In fiscal 2002, India experienced a trade deficit of Rs.
620.1 billion (US$ 12.7 billion). If trade deficits increase or are no longer
manageable, the Indian economy, and therefore the merged entity's business, its
financial performance, its stockholders' equity and the price of its equity
shares and its ADSs, could be adversely affected.
A significant change in the composition of the Indian economy may affect
the merged entity's 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 54.1% in
fiscal 2002 from 48.7% in fiscal 1997 and the share of the agricultural sector
of total GDP declined to 24.3% in fiscal 2002 from 28.6% in fiscal 1997. It is
difficult to gauge the impact of such fundamental economic changes on the
merged entity's business. The merged entity cannot be certain that these
changes will not have a material adverse effect on its business.
9
Natural calamities could have a negative impact on the Indian economy and
could cause the merged entity's business to suffer and the price of its
equity shares and its ADSs to go down.
India has experienced natural calamities like earthquakes, floods and
drought in the past few years. The extent and severity of these natural
disasters determines their impact on the Indian economy. In fiscal 2003, many
parts of India have witnessed less than normal rainfall. This might have an
adverse impact on the agricultural sector which contributed to 24.3% of total
GDP in fiscal 2002. Prolonged spells of below normal rainfall in the country or
other natural calamities could have a negative impact on the Indian economy,
affecting the merged entity's business and causing the price of its equity
shares and its ADSs to go down.
Financial difficulty and other problems in certain long-term lending
institutions and investment institutions in India could cause the merged
entity's business to suffer and the price of its equity shares and its
ADSs could go down.
Unit Trust of India, a large investment institution in India with
substantial exposure to equity investments, is currently facing problems due to
a significant decline in the market value of its securities portfolio caused by
depressed equity capital markets. IFCI Limited, a long-term lending institution
in India, is facing financial difficulty due to inadequate capitalization,
asset-liability mismatch and deteriorating asset quality. These and other
similar developments could create adverse market perception about other
financial institutions and banks, which in turn could adversely affect the
merged entity's business, its future financial performance, its stockholders'
equity and the price of its equity shares and its ADSs.
The recent down-grading of India's domestic debt rating by an
international rating agency could cause the merged entity's business to
suffer and the price of its equity shares and its ADSs to go down.
Standard and Poor's, an international rating agency, has recently
downgraded India's domestic debt rating to sub-investment grade. Although this
revision in the rating may not affect the merged entity's business, the merged
entity cannot assure you that any further adverse revisions in India's ratings
by international rating agencies will not adversely affect the merged entity's
business, its future financial performance, its stockholders' equity and the
price of its equity shares and its ADSs.
Risks Relating to the Merged Entity's Business
The merged entity is likely to classify and reserve against impaired loans
significantly later than its counterparts in more developed countries,
such as the US.
Prior to the amalgamation, ICICI and ICICI Bank identified a commercial
loan as a "troubled debt restructuring" or an "other impaired loan"
(collectively referred to as an impaired loan) and placed it on a non-accrual
basis (that is, ICICI and ICICI Bank no longer recognized interest accrued or
due unless and until payments were actually received) when it was probable that
ICICI and ICICI Bank would be unable to collect the scheduled payments of
principal and interest due under the contractual terms of the loan agreement. A
commercial loan was also considered to be impaired and placed on a non-accrual
basis, when interest or principal was greater than 180 days overdue. The merged
entity follows the same rules. This time period of 180 days is substantially
longer than in more developed countries, like the US, where loans are generally
placed on a non-accrual basis when any payment, including any periodic
principal payment, is not made for a 90-day period. In India, payments on most
loans are on a quarterly basis unlike in more developed countries, like the
United States, where payments on most loans are on a monthly basis. As a
result, the merged entity obtains information later than it would in developed
countries and this delay in receiving current information may impact the
classification of, and reserving against, impaired loans. Consequently, the
merged entity is likely to classify and reserve against impaired loans
significantly later than in more developed countries. However, pursuant to
revised guidelines issued by the Reserve Bank of India, with effect from fiscal
10
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. Since October 2001, ICICI Bank's borrowers were required to make
payment on a monthly basis. The merged entity is in the process of implementing
systems required to change payment due dates for ICICI's borrowers from
quarterly to monthly intervals. For a discussion of impaired loans under Indian
GAAP, see "Supervision and Regulation--Loan Loss Provisions and Impaired
Assets".
A large proportion of ICICI's loans comprised project finance assistance,
a substantial portion of which was particularly vulnerable to completion
risk.
Long-term project finance assistance was a significant proportion of
ICICI's asset portfolio. The viability of these projects depends upon a number
of factors, including completion risk, market demand, government policies and
the overall economic environment in India and international markets. The merged
entity cannot be sure that these projects will perform as anticipated. Over the
last several years, ICICI experienced a high level of impaired loans in its
project finance loan portfolio to manufacturing companies as a result of the
downturn in certain global commodity markets and increased competition in
India. In addition, a significant portion of infrastructure projects financed
by ICICI are still under implementation and present risks such as delays in the
commencement of operations and breach of contractual obligations by
counterparties involved and therefore delays in the project's ability to
generate revenues. ICICI provided project assistance to a large private sector
power generation project in the state of Maharashtra. On account of a dispute
between the power project and the purchaser, the state electricity board, the
project implementation is currently suspended. The matter is currently pending
before the Indian courts, while parallel efforts are continuing for an out of
court settlement, including re-negotiation of the power tariff. The principal
sponsor of the project has filed for bankruptcy in the United States. The
assets of the project are in the possession of a receiver appointed by the High
Court of Judicature at Bombay on a plea by the lenders to the project including
ICICI. Efforts are continuing for sale of the project to new sponsors. The
merged entity cannot assure you that future credit losses on account of this
assistance and such other assistances would not have a materially adverse
effect on the merged entity's profitability. ICICI's infrastructure project
finance loans were largely recent loans and, as a result, asset quality
problems may not appear until the future. If a substantial portion of these
loans were to become impaired, the quality of the merged entity's loan
portfolio could be adversely affected.
The merged entity has high concentrations of loans to certain customers
and to certain sectors and if a substantial portion of these loans were to
become impaired, the quality of its loan portfolio could be adversely
affected.
At year-end fiscal 2002, ICICI Bank's 20 largest borrowers, based on gross
outstanding balances, totaled approximately Rs. 18.6 billion (US$ 381 million),
which represented approximately 24.6% of ICICI Bank's total gross loans
outstanding. ICICI Bank's largest single borrower by outstanding at that date
was approximately Rs. 2.6 billion (US$ 53 million), which represented
approximately 3.5% of ICICI Bank's total gross loans outstanding. The largest
group of companies under the same management control accounted for
approximately 1.7% of ICICI Bank's total gross loans outstanding. If a
substantial portion of these loans were to become impaired, the quality of the
merged entity's loan portfolio could be adversely affected.
At year-end fiscal 2002, ICICI's 20 largest borrowers, based on gross
outstanding balances, totaled approximately Rs. 139.6 billion (US$ 2.9
billion), which represented approximately 24.9% of ICICI's total gross loans
outstanding. ICICI's largest single borrower by outstanding at that date was
approximately Rs. 16.5 billion (US$ 337 million), which represented
approximately 2.9% of ICICI's total gross loans outstanding. The largest group
of companies under the same management control accounted for approximately 4.8%
of ICICI's total gross loans outstanding. If a substantial portion of these
loans were to become impaired, the quality of the merged entity's loan
portfolio could be adversely affected.
11
At year-end fiscal 2002, ICICI Bank had extended loans to several
industrial sectors in India. At that date, approximately 33.9% of ICICI Bank's
gross impaired loan portfolio was concentrated in three sectors: textiles
(14.5%), light manufacturing (11.9%) and iron and steel (7.5%). ICICI Bank's
total loan portfolio also had a significant concentration of loans in these
sectors. These sectors have been adversely affected by economic conditions over
the last few years in varying degrees. Although ICICI Bank's loan portfolio
contained loans to a wide variety of businesses, financial difficulties in
these sectors could increase ICICI Bank's level of impaired loans and adversely
affect the merged entity's business, its future financial performance, its
stockholders' equity and the price of its equity shares and its ADSs.
At year-end fiscal 2002, ICICI had extended loans to several industrial
sectors in India. At that date, approximately 47.9% of ICICI's gross
restructured loan portfolio was concentrated in three sectors: textiles
(22.6%), iron and steel (18.9%) and paper and paper products (6.4%). At that
date, approximately 28.7% of ICICI's gross other impaired loan portfolio was
concentrated in three sectors: iron and steel (11.6%), basic chemicals (8.7%)
and textiles (8.4%). ICICI's total loan portfolio also had a significant
concentration of loans in these sectors. These sectors have been adversely
affected by economic conditions over the last few years in varying degrees.
Although ICICI's loan portfolio contained loans to a wide variety of
businesses, financial difficulties in these sectors could increase ICICI's
level of impaired loans and adversely affect the merged entity's business, its
future financial performance, its stockholders' equity and the price of its
equity shares and its ADSs.
If the merged entity is not able to control or reduce the level of
impaired loans in its portfolio, its business will suffer.
ICICI Bank's gross impaired loans represented 7.2% of ICICI Bank's gross
loan portfolio at year-end fiscal 2002 compared to 5.6% at year-end fiscal
2001. ICICI Bank's gross restructured loans were Rs. 785 million (US$16
million) at year-end fiscal 2002 which represented 14.4% of the impaired loan
portfolio and 1.0% of the gross loan portfolio. ICICI Bank's net impaired loans
represented 3.7% of ICICI Bank's net loans at year-end fiscal 2002 compared to
2.7% at year-end fiscal 2001. Although the merged entity believes that ICICI
Bank's allowance for loan losses is adequate to cover all known losses in ICICI
Bank's portfolio of assets, the level of ICICI Bank's impaired loans was higher
than the average percentage of impaired loans in the portfolios of banks in
more developed countries. In addition, in absolute terms, ICICI Bank's gross
impaired loans grew by 2.3% in fiscal 2002 and 276.1% in fiscal 2001, whereas
the same had decreased by 12.1% in fiscal 2000. However, these figures are not
comparable since impaired loans aggregating Rs. 2.2 billion (US$ 47 million)
were added in fiscal 2001 consequent to ICICI Bank's acquisition of Bank of
Madura.
ICICI's gross restructured loans represented 17.0% of ICICI's gross loan
portfolio at year-end fiscal 2002 compared to 6.9% at year-end fiscal 2001.
ICICI's gross other impaired loans represented 9.1% of ICICI's gross loan
portfolio at year-end fiscal 2002 compared to 6.6% at year-end fiscal 2001.
ICICI's net restructured loans represented 14.8% of ICICI's net loans at
year-end fiscal 2002 compared to 5.4% at year-end fiscal 2001. ICICI's net
other impaired loans represented 6.3% of ICICI's net loans at year-end fiscal
2002 compared to 3.3% at year-end fiscal 2001. Although the merged entity
believes that ICICI's allowance for loan losses is adequate to cover all known
losses in ICICI's portfolio of assets, the level of ICICI's impaired loans was
higher than the average percentage of impaired loans in the portfolios of banks
in more developed countries. In addition, in absolute terms, ICICI's gross
impaired loans grew by 70.7% in fiscal 2002, 23.3% in fiscal 2001 and 18.5% in
fiscal 2000.
The growth in impaired loans of ICICI and ICICI Bank 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 ICICI's and ICICI
Bank's borrowers, and the resultant restructuring of certain Indian companies
in sectors such as textiles, iron and steel and man-made fibers. In fiscal
2001, ICICI Bank's impaired loans also increased on account of the impaired
loan portfolio acquired in the acquisition of Bank of
12
Madura. Further, ICICI's and ICICI Bank's growth-oriented strategy involved a
significant increase in their loan portfolio over the past few years. The
merged entity cannot assure you that there will be no additional impaired loans
on account of these new loans.
The directed lending norms of the Reserve Bank of India require that every
bank should extend 40.0% of its net bank credit to certain eligible sectors,
which are categorized as "priority sectors". Priority sectors are specific
sectors such as agriculture and small-scale industries. Considering that the
advances of ICICI were not subject to the requirement applicable to banks in
respect of priority sector lending, the Reserve Bank of India directed the
merged entity to maintain an additional 10.0% over and above the requirement of
40.0%, i.e., a total of 50.0% of its net bank credit on the residual portion of
its advances (i.e. the portion of its total advances excluding advances of
ICICI at year-end fiscal 2002) in the form of priority sector loans. This
additional 10.0% priority sector lending requirement will apply until such time
as the aggregate priority sector advances of the merged entity reach a level of
40.0% of the total net bank credit of the merged entity. As a result, the
merged entity may experience a significant increase in impaired loans in its
directed lending portfolio since economic difficulties are likely to affect
those borrowers more severely and the merged entity would be less able to
control the quality of this portfolio.
A number of factors will affect the merged entity's ability to control and
reduce impaired loans. Some of these, including developments in the Indian
economy, movements in global commodity markets, global competition, interest
rates and exchange rates, are not within the merged entity's control. Although
the merged entity is increasing its efforts to improve collections and to
foreclose on existing impaired loans, the merged entity cannot assure you that
it will be successful in its efforts or that the overall quality of its loan
portfolio will not deteriorate in the future. If the merged entity is not able
to control and reduce its impaired loans, its business, its future financial
performance, its stockholders' equity and the price of its equity shares and
its ADSs could be adversely affected.
A significant increase in the level of restructured loans forming part of
impaired loans in the merged entity's portfolio could affect its business.
ICICI Bank's gross restructured loans decreased by 11.8% to Rs. 785
million (US$ 16 million) at year-end fiscal 2002 from Rs. 890 million (US$ 18
million) at year-end fiscal 2001. ICICI's gross restructured loans increased by
117.7% to Rs. 95.1 billion (US$ 1.9 billion) at year-end fiscal 2002 from Rs.
43.7 billion (US$ 895 million) at year-end fiscal 2001. As a result of the
impact of the economic environment on the industrial sector, certain Indian
corporations have undergone a process of restructuring and repositioning. This
restructuring process took place in several industries such as textiles, iron
and steel and man-made fibers. As a result, the level of restructured loans in
ICICI's portfolio increased substantially in fiscal 2002. It is expected that
the restructuring process in these industries will continue in fiscal 2003. Any
further significant increase in restructured loans could cause the merged
entity's business to suffer and its future financial performance, its
stockholders' equity and the price of its equity shares and its ADSs could be
adversely affected.
If there is a further deterioration in the merged entity's impaired loan
portfolio and the merged entity is not able to improve its allowance for
loan losses as a percentage of impaired loans, the price of its equity
shares and its ADSs could go down.
ICICI Bank's allowance for loan losses on impaired loans represented 50.9%
of ICICI Bank's gross impaired loans at year-end fiscal 2002 compared to 53.5%
at year-end fiscal 2001. ICICI Bank's allowance for loan losses on restructured
loans represented 21.9% of ICICI Bank's gross restructured loans at year-end
fiscal 2002 compared to 47.5% at year-end fiscal 2001. ICICI's allowance for
loan losses on restructured loans represented 18.6% of ICICI's gross
restructured loans at year-end fiscal 2002 compared to 26.0% at year-end fiscal
2001. ICICI's allowance for loan losses on other impaired loans represented
34.6% of ICICI's gross other impaired loans at year-end fiscal 2002 compared to
51.9% at year-end fiscal 2001.
13
Although the merged entity believes that ICICI's and ICICI Bank's
allowances for loan losses will be adequate to cover all known losses in its
asset portfolio, the merged entity cannot assure you that there will be no
further deterioration in the allowance for loan losses as a percentage of gross
impaired loans or otherwise or that the percentage of impaired loans that the
merged entity will be able to recover will be similar to ICICI's and ICICI
Bank's past experience of recoveries of impaired loans. In the event of any
further deterioration in the merged entity's impaired loan portfolio, there
could be an adverse impact on its business, its future financial performance,
its stockholders' equity and the price of its equity shares and its ADSs.
The merged entity may experience delays in enforcing its collateral when
borrowers default on their obligations to the merged entity which may
result in failure to recover the expected value of collateral security
exposing it to a potential loss.
ICICI Bank's loan portfolio consisted primarily of working capital credit
facilities that were typically secured by a first lien on inventory,
receivables and other current assets. In some cases, it may have taken further
security of a first or second lien on fixed assets, a pledge of financial
assets like marketable securities, corporate guarantees and personal
guarantees.
A substantial portion of ICICI's loans were secured by real assets,
including property, plant and equipment. Although it was ICICI's practice to
lend between 60.0% and 80.0% of the appraised value of this type of collateral
security, an economic downturn could have resulted in a fall in relevant
collateral values.
In India, foreclosure on collateral generally requires a written petition
to an Indian court. An application, when made, may be subject to delays and
administrative requirements that may result, or be accompanied by, a decrease
in the value of the collateral. In the event a borrower makes a reference to a
specialized quasi-judicial authority called the Board for Industrial and
Financial Reconstruction, foreclosure and enforceability of collateral is
stayed. The merged entity cannot guarantee that it will be able to realize the
full value on its collateral, as a result of, among other factors, delays in
bankruptcy foreclosure proceedings, defects in the perfection of collateral and
fraudulent transfers by borrowers. A failure to recover the expected value of
collateral security could expose the merged entity to a potential loss. Any
unexpected losses could adversely affect the merged entity's business, its
future financial performance, its stockholders' equity and the price of its
equity shares and its ADSs.
The Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Ordinance, 2002, promulgated by the President of India in
June 2002 and re-promulgated in August 2002 but yet to be approved by
legislation passed by the Indian parliament, is expected to strengthen the
ability of lenders to resolve non-performing assets by granting them greater
rights as to enforcement of security and recovery of dues. However, there can
be no assurance that the legislation will be passed by the Indian parliament or
that, if passed, it will have a favorable impact on the merged entity's efforts
to resolve non-performing assets. See also "Overview of the Indian Financial
Sector - Recent Structural Reforms - Legislative Framework for Recovery of
Debts Due to Banks."
The merged entity faces greater credit risks than banks in developed
countries.
The merged entity's principal business is providing financing to its
clients, virtually all of whom are based in India. In the past, ICICI focused
its activities on financing large-scale projects. Increasingly, the merged
entity is focusing on large corporate customers, many of whom have strong
credit ratings, as well as on select middle market companies and individuals.
The merged entity's loans to middle market companies can be expected to be more
severely affected by adverse developments in the Indian economy than loans to
large corporations. In all of these cases, the merged entity is subject to the
credit risk that its borrowers may not pay in a timely fashion or at all. The
credit risk of all its borrowers is higher than in more developed countries due
to the higher uncertainty in the Indian regulatory, political, economic and
industrial environment and difficulties that many of
14
the merged entity's borrowers face in adapting to instability in world markets
and technological advances taking place across the world. In fiscal 2001 and
2002, India experienced a lower rate of overall industrial growth, which
reduced the profitability of certain of the merged entity's borrowers.
The directed lending norms of the Reserve Bank of India require that every
bank should extend 40.0% of its net bank credit to certain eligible sectors,
which are categorized as "priority sectors". Priority sectors are specific
sectors such as agriculture and small-scale industries. Considering that the
advances of ICICI were not subject to the requirement applicable to banks in
respect of priority sector lending, the Reserve Bank of India directed the
merged entity to maintain an additional 10.0% over and above the requirement of
40.0%, i.e., a total of 50.0% of its net bank credit on the residual portion of
its advances (i.e. the portion of its total advances excluding advances of
ICICI at year-end fiscal 2002) in the form of priority sector loans. This
additional 10.0% priority sector lending requirement will apply until such time
as the aggregate priority sector advances of the merged entity reach a level of
40.0% of the total net bank credit of the merged entity. As a result, the
merged entity may experience a significant increase in impaired loans in its
directed lending portfolio since economic difficulties are likely to affect
those borrowers more severely and the merged entity would be less able to
control the quality of this portfolio.
Higher credit risk may expose the merged entity to a potential loss, which
would adversely affect its business, its future financial performance, its
stockholders' equity and the price of its equity shares and its ADSs.
The merged entity's business is particularly vulnerable to volatility in
interest rates caused by deregulation of the financial sector in India.
Over the last few years, the Indian government has substantially
deregulated interest rates. As a result, interest rates are now primarily
determined by the market. This has increased the interest rate risk exposure of
all banks and financial institutions, including the merged entity.
The merged entity's results of operations are substantially dependent upon
the level of its net interest income. Interest rates are highly sensitive to
many factors beyond the merged entity's 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 the
merged entity's net interest income. Based on the asset-liability position of
ICICI Bank and ICICI at year-end fiscal 2002, an increase in interest rates
would result in an increase in the merged entity's interest expense relative to
its interest income leading to a reduction in the merged entity's net interest
income.
Income from treasury operations is particularly vulnerable to interest
rate volatility. Following the amalgamation, the businesses which were
conducted by ICICI became subject to the statutory liquidity ratio requirement,
which requires that an amount equal to a specified percentage, currently 25.0%,
of a bank's demand and time liabilities be invested in government of India
securities. This has increased the interest rate risk exposure of the merged
entity. An increasing interest rate environment is likely to adversely affect
the income from treasury operations of banks in India, such as the merged
entity. The estimated negative impact of a 1.0% rise in interest rates during
fiscal 2003 on the value of ICICI Bank's trading portfolio at year-end fiscal
2002 would have been Rs. 133 million (US$ 3 million). The estimated negative
impact of a 1.0% rise in interest rates during fiscal 2003 on the value of
ICICI's trading portfolio (including the trading portfolio of ICICI Securities,
formerly the investment banking subsidiary of ICICI and now the investment
banking subsidiary of the merged entity) at year-end fiscal 2002 would have
been Rs. 933 million (US$ 19 million). Declines in the value of the merged
entity's trading portfolio in such an environment will adversely affect its
income statement.
15
Interest rates in India, including yields on Indian government securities,
declined significantly during fiscal 2002, reflecting the liquidity in the
system. The rate of interest on government small savings schemes was lowered by
50 basis points in the Reserve Bank of India's monetary and credit policy
announced in April 2002. The Reserve Bank of India has stated its preference
for maintaining the current interest rate environment with a bias towards a
softer interest rate regime in the medium term. However, no assurance can be
given as to the likely trend of interest rates in the future.
Volatility in interest rates could adversely affect the merged entity's
business, its future financial performance and the price of its equity shares
and its ADSs.
If the merged entity is not able to succeed in its new business areas, it
may not be able to meet its projected earnings and growth targets.
The merged entity sees retail banking as the primary driver of its growth.
Retail banking is a critical component of the merged entity's projections of
earnings. However, the merged entity recognizes that retail banking is a
substantially different business from corporate banking and requires very
different personnel, skills and infrastructure. The merged entity cannot assure
you that it has accurately estimated the relevant demand for its new banking
products. Retail banking could expose the merged entity to the risk of
financial irregularities by various intermediaries and customers. The merged
entity cannot assure you that it will be able to master and deliver the skills
and management information systems necessary to successfully manage these new
businesses.
ICICI's retail loans increased by 168.5% during fiscal 2002 to Rs. 72.8
billion (US$ 1.5 billion) or 13.0% of its gross loans outstanding at year-end
fiscal 2002 as compared to Rs. 27.1 billion (US$ 555 million) or 4.3% of its
gross loans outstanding at year-end fiscal 2001. ICICI's retail loans are
relatively new and the merged entity cannot assure you that there will be no
additional impairment on account of these loans and that such impairment will
not have a materially adverse impact on the quality of the merged entity's loan
portfolio.
The merged entity is also looking at business opportunities in certain
sectors of the economy with which it has not traditionally been involved,
including the public sector, the agri-business sector and the information
technology sector. In addition, ICICI and ICICI Bank launched several
Internet-based products for their retail and corporate customers including
online broking services. ICICI entered the life insurance business in fiscal
2001 and the non-life insurance business in fiscal 2002 through its
subsidiaries. The merged entity is seeking to expand internationally by
leveraging on its home country links and technology competencies in financial
services. The merged entity is a new entrant in international business and the
skills required for this business are different from those for its domestic
businesses. The life insurance and non-life insurance businesses and the
international business are expected to require substantial capital in the
initial period. The merged entity cannot be certain that these new businesses
will perform as anticipated. The merged entity's inability to grow or succeed
in new business areas may adversely affect its business, its future financial
performance, its stockholders' equity and the price of its equity shares and
its ADSs.
The success of the merged entity's Internet-related 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 marketplace in
India for a number of reasons, including inadequate development of the
necessary network infrastructure. There can be no assurance that the Internet
infrastructure 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, the merged entity will not
be able to execute its growth strategy for its Internet-related businesses. The
merged entity's inability to grow in this business area may adversely affect
its business, its future financial performance, its stockholders' equity and
the price of its equity shares and its ADSs.
16
The merged entity's business is very competitive and its growth strategy
depends on its ability to compete effectively.
Interest rate deregulation and other liberalization measures affecting the
financial sector have increased the merged entity's exposure to competition.
The liberalization process has led to increased access for the merged entity's
customers to alternative sources of funds, such as domestic and foreign
commercial banks and the domestic and international capital markets. The merged
entity's corporate banking business will continue to face competition from
Indian and foreign commercial banks. It will also face competition from Indian
and foreign commercial banks and non-banking finance companies in the
development of its retail business. In addition, as the merged entity raises
its funds from market sources, it will face increasing competition for such
funds. The Indian financial sector may experience further consolidation,
resulting in fewer banks and financial institutions, some of which may have
greater resources than the merged entity. The merged entity's future success
will depend upon its ability to compete effectively. Due to competitive
pressures, the merged entity may be unable to successfully execute its growth
strategy and offer products and services at reasonable returns and this may
adversely impact its business, its future financial performance, its
stockholders' equity and the price of its equity shares and its ADSs.
If the merged entity is not able to integrate ICICI and ICICI Bank's
recent acquisitions or if the merged entity is not able to integrate any
future acquisitions, its business could be disrupted and the price of its
equity shares and ADSs could go down.
The merged entity was formed following the amalgamation of ICICI, ICICI
Personal Financial Services and ICICI Capital Services with ICICI Bank. In May
2002, ICICI OneSource, a company promoted by ICICI, acquired CustomerAsset, a
contact center services company based in India. In fiscal 2002, ICICI Infotech,
a company promoted by ICICI, acquired Insyst Technologies Limited, a software
development company based in India. ICICI Bank acquired Bank of Madura Limited,
an old private sector bank in India, in fiscal 2001. The integration of these
recent acquisitions is a major challenge for the merged entity, some or all of
which could adversely affect its business, its financial performance and the
price of its equity shares and ADSs.
The merged entity has no understanding, commitment or agreement with
respect to any material future acquisition or investment, though the merged
entity may seek opportunities for growth through future acquisitions. Any
future acquisitions may involve a number of risks, including deterioration of
asset quality, diversion of attention of the management of the merged entity,
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 the business of the merged entity, its future financial performance,
its stockholders' equity and the price of its equity shares and ADSs.
If the merged entity is not able to successfully integrate the operations
of ICICI, ICICI Personal Financial Services and ICICI Capital Services
with ICICI Bank, its financial performance could be adversely affected and
the price of its equity shares and ADSs could go down.
Following the amalgamation,with ICICI Bank, the operations of ICICI, ICICI
Personal Financial Services, ICICI Capital Services and ICICI Bank, including
their businesses, business systems and processes, systems and technology, and
human resources will have to be integrated. There can be no certainty that the
merged entity will be able to successfully integrate the operations of each of
these companies, or of the time that may be required for the integration to be
completed. Any failure to successfully integrate the operations or delay in
completing the integration could adversely affect the business of the merged
entity, its future financial performance, its stockholders' equity and the
price of its equity shares and ADSs.
17
The businesses conducted by ICICI, after the amalgamation, are subject to
a number of banking regulations under Indian law, which may impact the
profitability of the merged entity in its initial years.
The businesses conducted by ICICI are now, after the amalgamation, subject
to a number of banking regulations under the Indian law, including maintenance
of statutory liquidity and cash reserve ratios, directed lending requirements
and higher effective tax rates. Compliance with these regulations may impact
the profitability of the combined businesses of the merged entity in its
initial years. The merged entity has a different mix of assets and funding
sources than ICICI and ICICI Bank as independent and separate entities. The
impact of the statutory liquidity ratio, which requires that a significant
portion of an Indian bank's liabilities be held in Indian government
securities, will increase the market risk exposure of the merged entity. The
income, profitability and market risk profile of the merged entity may
therefore be adversely affected in the initial years by the impact of these
regulatory requirements. This may result in lower income in the initial years
after the amalgamation. The directed lending norms of the Reserve Bank of India
require that every bank should extend 40.0% of net bank credit to certain
eligible sectors, which are categorized as "priority sector". Considering that
the advances of ICICI were not subject to the requirement applicable to banks
in respect of priority sector lending, the Reserve Bank of India directed the
merged entity to maintain an additional 10.0% over and above the requirement of
40.0%, i.e., a total of 50.0% of its net bank credit on the residual portion of
its advances (i.e. the portion of its total advances excluding advances of
ICICI at year-end fiscal 2002) in the form of priority sector loans. Priority
sectors are specific sectors such as agriculture and small-scale industries.
This additional 10.0% priority sector lending requirement will apply until such
time as the aggregate priority sector advances of the merged entity reach a
level of 40.0% of the total net bank credit of the merged entity. The merged
entity may experience a significant increase in impaired loans in its directed
lending portfolio since economic difficulties are likely to affect those
borrowers more severely and the merged entity would be less able to control the
quality of this portfolio. The merged entity may not be able to maintain the
business, growth and financial performance of the two separate companies in the
initial years and any failure to do so could adversely affect its stockholder's
equity and the price of its equity shares and ADSs.
The merged entity's funding is primarily short-term and if depositors do
not roll over deposited funds upon maturity the merged entity's business
could be adversely affected.
Most of the merged entity's incremental funding requirements, including
replacement of maturing liabilities of ICICI which generally had longer
maturities, are met through short-term funding sources, primarily in the form
of deposits including inter-bank deposits. However, a large portion of its
assets, primarily the assets of ICICI, have medium or long-term maturities,
creating a potential for funding mismatches. At year-end fiscal 2002, savings
deposits and non-interest-bearing demand deposits together constituted 16.8% of
ICICI Bank's total deposits and 14.1% of ICICI Bank's total liabilities.
Although ICICI Bank's customer deposits were generally of less than one year
maturity, in ICICI Bank's experience, a substantial portion of its customer
deposits had been rolled over upon maturity and had been a stable source of
funding. However, no assurance can be given that this experience will continue.
If a substantial number of the merged entity's depositors do not roll over
deposited funds upon maturity, the merged entity's liquidity position could be
adversely affected. The failure to obtain rollover of customer deposits upon
maturity or to replace them with fresh deposits could have a material adverse
effect on the merged entity's business, its future financial performance and
the price of its equity shares and its ADSs.
Material changes in the regulations which govern the merged entity could
cause its business to suffer and the price of its equity shares and its
ADSs to go down.
Banks in India operate in a highly regulated environment. The Reserve Bank
of India extensively supervises and regulates banks. In addition, these banks
are subject generally to changes in Indian law, as well as to changes in
regulation and government policies, income tax laws and accounting principles.
The laws and regulations governing the banking sector could change in the
future and any
18
such changes could adversely affect the merged entity's business, its future
financial performance and the price of its equity shares and its ADSs.
Significant security breaches could adversely impact the merged entity's
business.
The merged entity seeks to protect its computer systems and network
infrastructure from physical break-ins as well as security breaches and other
disruptive problems caused by its increased use of the Internet. Computer
break-ins and power disruptions could affect the security of information stored
in and transmitted through these computer systems and network infrastructure.
The merged entity employs security systems, including firewalls and password
encryption, designed to minimize the risk of security breaches. Though the
merged entity intends to continue to implement security technology and
establish operational procedures to prevent break-ins, damage and failures,
there can be no assurance that these security measures will be successful. A
significant failure in security measures could have a material adverse effect
on its business, its future financial performance and the price of its equity
shares and its ADSs.
The merged entity's business operations are transaction-oriented. Although
the merged entity takes adequate measures to safeguard against fraud, there can
be no assurance that it would be able to prevent fraud. The merged entity's
reputation could be adversely affected by significant fraud committed by
employees or outsiders.
If the merged entity is unable to adapt to rapid technological changes,
its business could suffer.
The merged entity's success will depend, in part, on its 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 the merged entity will successfully
implement new technologies effectively or adapt its transaction-processing
systems to customer requirements or emerging industry standards. If the merged
entity is unable, for technical, legal, financial or other reasons, to adapt in
a timely manner to changing market conditions or customer requirements, its
business and its future financial performance could be materially affected.
Risks Relating to the ADSs and Equity Shares
You will not be able to vote your ADSs.
ADS holders have no voting rights unlike holders of the equity shares who
have voting rights. The depositary will exercise its right to vote on the
equity shares represented by the ADSs as directed by the merged entity's board
of directors. If you wish, you may withdraw the equity shares underlying the
ADSs and seek to vote the equity shares you obtain from the withdrawal.
However, for foreign investors, this withdrawal process may be subject to
delays. For a discussion of the legal restrictions triggered by a withdrawal of
the equity shares from the depositary facility upon surrender of ADSs, see
"Restriction on Foreign Ownership of Indian Securities".
US investors will be subject to special tax and interest charges if the
merged entity is considered to be a passive foreign investment company.
Based upon certain proposed Treasury Regulations which are proposed to be
effective for taxable years beginning after December 31, 1994 and upon certain
management estimates, the merged entity does not expect to be a Passive Foreign
Investment Company (PFIC). The merged entity has based the expectation that it
is currently not a PFIC on, among other things, provisions in the proposed
Treasury Regulations that provide that certain restricted reserves (including
cash and securities) of banks are assets used in connection with banking
activities and are not passive assets, as well as the composition of the merged
entity's income and the merged entity's assets from time to time. Since there
can be no
19
assurance that such proposed Treasury Regulations will be finalized in their
current form, and the composition of income and assets of the merged entity
will vary over time, there can be no assurance that the merged entity will not
be considered a PFIC for any taxable year. If the merged entity is a PFIC for
any taxable year during which a US holder holds equity shares or ADSs of the
merged entity, the US holder would be treated in a manner comparable to that
described under "Taxation--United States Tax - Passive Foreign Investment
Company Rules".
Your ability to withdraw equity shares from the depositary facility is
uncertain and may be subject to delays.
India's restrictions on foreign ownership of Indian companies limit the
number of shares that may be owned by foreign investors and generally require
government approval for foreign ownership. Investors who withdraw equity shares
from the depositary facility will be subject to Indian regulatory restrictions
on foreign ownership upon withdrawal. It is possible that this withdrawal
process may be subject to delays. For a discussion of the legal restrictions
triggered by a withdrawal of equity shares 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.
ADS holders seeking to sell in India any equity shares withdrawn upon
surrender of an ADS will require Reserve Bank of India approval for each such
transaction unless the sale of such equity shares is made on a stock exchange
or in connection with an offer made under the regulations regarding takeovers.
The merged entity cannot guarantee that any approval will be obtained in a
timely manner or at all. Because of possible delays in obtaining requisite
approvals, investors in equity shares may be prevented from realizing gains
during periods of price increases or limiting losses during periods of price
declines.
Restrictions on withdrawal of ADSs from the depositary facility and
redeposit of equity shares in the depositary facility could adversely
affect the price of 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 the
Indian market may be able to deposit them in the ADS program. However, in
either case, the deposit or redeposit of equity shares may be limited by
securities law restrictions and will be restricted so that the cumulative
aggregate number of equity shares that can be deposited or redeposited as of
any time cannot exceed the cumulative aggregate number represented by ADSs
converted into underlying equity shares as of such time. An investor who has
purchased equity shares in the Indian market could therefore face restrictions
in depositing them in the ADS program. This increases the risk that the market
price of the ADSs will be below that of the equity shares. For a discussion of
the legal restrictions triggered by withdrawal of ADSs from the depositary
facility and redeposit of equity shares in the depositary facility, see
"Restriction on Foreign Ownership of Indian Securities".
There may be restrictions on the resales in the United States or to US
persons of ICICI Bank shares or ADSs by affiliates of ICICI and/or ICICI
Bank.
The equity shares and ADSs of the merged entity issued pursuant to the
amalgamation were not registered under the US Securities Act of 1933, as
amended (the Securities Act) in reliance upon the exemption from the
registration requirements of the Securities Act provided by Section 3(a)(10) of
the Securities Act. ICICI Bank received a "no-action letter" from the staff of
the United States Securities and Exchange Commission ("SEC") stating that it
would not recommend that the SEC take enforcement action if ICICI Bank shares
were issued to ICICI shareholders pursuant to the amalgamation without
compliance with the registration requirements of the Securities Act in reliance
20
on the exemption from registration contained in Section 3(a)(10) thereof. As a
result, in the hands of most holders, the shares and ADSs issued pursuant to
the amalgamation will not be treated as "restricted securities" within the
meaning of Rule 144(a)(3) under the Securities Act, and may be resold by former
holders of ICICI shares (except affiliates as described below) without regard
to Rules 144 or 145(c) and (d) under the Securities Act.
Persons who received the shares or ADSs pursuant to the amalgamation and
who were affiliates of ICICI before the amalgamation but are not affiliates of
the merged entity after the amalgamation, or are affiliates of the merged
entity after the amalgamation, are permitted to resell these shares or ADSs in
the United States in the manner permitted by Rule 144(d) under the Securities
Act, in each case without regard to the holding period requirement (one year)
of Rule 144(d) under the Securities Act. Persons who may be deemed to be
affiliates of ICICI include individuals who, or entities that, directly or
indirectly controlled, or were controlled by, or were under common control with
ICICI and would include certain officers and directors of ICICI and would
likely include principal shareholders as well. Persons who may be deemed to be
affiliates of the merged entity include individuals who, or entities that,
directly or indirectly control, or are controlled by, or are under common
control with the merged entity and would include certain officers and directors
of the merged entity and would likely include principal shareholders as well.
The persons referred to above in addition to reselling the shares or ADSs
received pursuant to the amalgamation in the United States in the manner
permitted by Rule 145(d) under the Securities Act may also sell such securities
pursuant to any other available exemption under the Securities Act. ICICI
shareholders or ADS holders who believe they may be affiliates for the purposes
of the Securities Act, should consult their own legal advisers in the event
they plan to sell such shares or ADSs to a United States person or in the
United States.
Certain shareholders own a large percentage of the merged entity's equity
shares. Their actions could adversely affect the price of its equity
shares and the ADSs.
The merged entity's principal shareholders include the Life Insurance
Corporation of India, the General Insurance Corporation of India and its
subsidiaries and the Unit Trust of India, each of which is controlled by the
Indian government. At September 2, 2002, government-controlled entities owned
approximately 20.8% of the merged entity's outstanding equity shares. As a
result of such share ownership, the Indian government will continue to have the
ability to exercise influence over most matters requiring approval of the
merged entity's shareholders, including the election and removal of directors
and significant corporate actions. At September 2, 2002, the Unit Trust of
India held 3.3% of the merged entity's outstanding equity shares. The Unit
Trust of India is currently facing problems due to a significant decline in the
market value of its securities portfolio. Any substantial sale of the merged
entity's equity shares by the Unit Trust of India could adversely affect the
price of the merged entity's equity shares and its ADSs.
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 developed economies. The Indian stock exchanges have in
the past experienced substantial fluctuations in the prices of listed
securities.
Indian stock exchanges have also experienced problems that have affected
the market price and liquidity of the securities of Indian companies. These
problems have included temporary exchange closures, broker defaults, settlement
delays and strikes by brokers. The Stock Exchange, Mumbai, formerly known as
the Bombay Stock Exchange or the BSE, was closed for three days in March 1995
following a default by a broker. In March 2001, the BSE dropped 667 points or
15.6% and there were also rumors of insider trading in the BSE leading to the
resignation of the BSE president and several other members of the governing
board. In the same month, the Kolkata Stock Exchange, formerly known as the
Calcutta Stock Exchange, suffered a payment crisis when several brokers
defaulted and the exchange invoked guarantees provided by various Indian banks.
In addition, the governing bodies
21
of the Indian stock exchanges have from time to time imposed restrictions on
trading in certain securities, limitations on price movements and margin
requirements. Further, from time to time, disputes have occurred between listed
companies and stock exchanges and other regulatory bodies, which in some cases
may have had a negative effect on market sentiment. Similar problems could
happen in the future and, if they did, they could affect the market price and
liquidity of the merged entity's equity shares and the merged entity's ADSs.
Settlement of trades of equity shares on Indian stock exchanges may be
subject to delays.
The equity shares represented by the ADSs are listed on the Chennai,
Delhi, Kolkata, Vadodara Stock Exchanges, the BSE and the National Stock
Exchange of India. Settlement on those stock exchanges may be subject to delays
and an investor in equity shares withdrawn from the depositary facility upon
surrender of ADSs may not be able to settle trades on such stock exchanges in a
timely manner.
As a result of Indian government regulation of foreign ownership, the
price of the merged entity's ADSs could go down.
Foreign ownership of Indian securities is heavily regulated and is
generally restricted. ADSs issued by companies in certain emerging markets,
including India, may trade at a discount or premium to the underlying equity
shares, in part because of the restrictions on foreign ownership of the
underlying equity shares.
Your holdings may be diluted by additional issuances of equity and any
dilution may adversely affect the market price of the merged entity's
ADSs.
There is a risk that the merged entity's rapid growth could require the
merged entity to fund this growth through additional equity offerings. In
addition, up to 5.0% of the merged entity's issued equity shares following the
amalgamation, may be issued in accordance with the merged entity's employee
stock option scheme to eligible employees of the merged entity and its
subsidiaries. Both ICICI Bank and ICICI had separate stock option plans. From
the inception of ICICI Bank's stock option plan in February 2000 through June
30, 2002, ICICI Bank had granted a total of 6,448,200 stock options, of which
none have been exercised, 1,172,540 have vested but have not yet been exercised
and 248,225 have lapsed or been forfeited. From the inception of ICICI's stock
option plan in August 1999 through June 30, 2002, ICICI had granted a total of
14,924,950 stock options, of which 33,900 have been exercised, 3,035,750 have
vested but have not yet been exercised and 984,750 have lapsed or been
forfeited. In accordance with the Scheme of Amalgamation, holders of
unexercised stock options in ICICI received stock options in ICICI Bank equal
to half the number of their unexercised options in ICICI. Accordingly, the
outstanding unexercised stock options in the merged entity at June 30 2002 were
13,153,125 or 2.2% of its issued equity shares. Of this, 3,315,530 stock
options, or 0.9% of the merged entity's equity share capital had vested. On
April 1, 2003, 1,265,150 additional stock options will vest, representing a
further 0.2% of the merged entity's issued equity shares at June 30 2002. These
issuances, and any future issuance of equity shares, will dilute the positions
of investors in the ADSs and could adversely affect the market price of the
merged entity's ADSs.
You may be unable to exercise preemptive rights available to other
shareholders.
A company incorporated in India must offer its holders of equity shares
preemptive rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any new
equity shares, unless these rights have been waived by at least 75.0% of the
company's shareholders present and voting at a shareholders' general meeting.
US investors in ADSs may be unable to exercise preemptive rights for equity
shares underlying ADSs unless a registration statement under the Securities Act
is effective with respect to such rights or an exemption from the registration
requirements of the Securities Act is available. The merged entity's
22
decision to file a registration statement will depend on the costs and
potential liabilities associated with any such registration statement as well
as the perceived benefits of enabling US investors in ADSs to exercise their
preemptive rights and any other factors the merged entity considers appropriate
at the time. The merged entity does not commit that it would file a
registration statement under these circumstances. If the merged entity issues
any such securities in the future, such securities may be issued to the
depositary, which may sell such securities in the securities markets in India
for the benefit of the investors in the ADSs. There can be no assurance as to
the value, if any, the depositary would receive upon the sale of these
securities. To the extent that investors in ADSs are unable to exercise
preemptive rights, their proportional interests in the merged entity would be
reduced.
Because the equity shares underlying the ADSs are quoted in rupees in
India, you may be subject to potential losses arising out of exchange rate
risk on the Indian rupee and risks associated with the conversion of rupee
proceeds into foreign currency.
Investors that purchase ADSs are required to pay for the ADSs in US
dollars. Investors are subject to currency fluctuation risk and convertibility
risks since the equity shares are quoted in rupees on the Indian stock
exchanges on which they are listed. Dividends on the equity shares will also be
paid in rupees, and then converted into US dollars for distribution to ADS
investors. Investors that seek to convert the rupee proceeds of a sale of
equity shares withdrawn upon surrender of ADSs into 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 32.8% of its value against the US dollar in the last
five years, depreciating from Rs. 36.46 per US$ 1.00 on September 15, 1997 to
Rs. 48.43 per US$ 1.00 on September 16, 2002. In addition, in the past, the
Indian economy has experienced severe foreign exchange shortages. India's
foreign exchange reserves were US$ 61.5 billion at August 30, 2002.
You may be subject to Indian taxes arising out of capital gains.
Generally, capital gains, whether short-term or long-term, arising on the
sale of the underlying equity shares in India are subject to Indian capital
gains tax. For the purpose of computing the amount of capital gains subject to
tax, Indian law specifies that the cost of acquisition of the equity shares
will be deemed to be the share price prevailing on the BSE or the National
Stock Exchange on the date the depositary advises the custodian to redeem
receipts in exchange for underlying equity shares. The period of holding of
such equity shares, for determining whether the gain is long-term or
short-term, commences on the date of the giving of such notice by the
depositary to the custodian. Investors are advised to consult their own tax
advisers and to consider carefully the potential tax consequences of an
investment in the ADSs.
There may be less company information available in Indian securities
markets than securities markets in developed countries.
There is a difference between the level of regulation and monitoring of
the Indian securities markets and the activities of investors, brokers and
other participants and that of markets in the United States and other developed
economies. The Securities and Exchange Board of India is responsible for
23
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.
24
BUSINESS
Overview
ICICI Bank was organized under the laws of India in 1994 as a private
sector commercial bank. ICICI Bank offered a wide range of banking products and
services to corporate and retail customers through a variety of delivery
channels. In fiscal 2002, ICICI Bank's net income was Rs. 2,037 million (US$ 42
million). At year-end fiscal 2002, ICICI Bank had assets of Rs. 404.8 billion
(US$ 8.3 billion) and stockholders' equity of Rs. 18.1 billion (US$ 372
million).
ICICI Bank was an affiliate company of ICICI. ICICI was organized under
the laws of India in 1955 and together with its subsidiaries and affiliates was
a diversified financial services group. In April 2002, ICICI and two of its
subsidiaries, ICICI Personal Financial Services and ICICI Capital Services
merged with and into ICICI Bank in an all-stock amalgamation. Pursuant to the
amalgamation, the shareholders of ICICI were issued ICICI Bank equity shares in
the ratio of one fully paid-up equity share, par value Rs. 10 per share, of
ICICI Bank for every two fully paid-up equity shares, par value Rs. 10 per
share, of ICICI. As there were five ICICI equity shares underlying each ICICI
ADS and two ICICI Bank equity shares underlying each ICICI Bank ADS, holders of
ICICI ADSs were issued five ICICI Bank ADSs for every four ICICI ADSs. As ICICI
Bank is the surviving legal entity in the amalgamation, the other subsidiaries
and affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
The amalgamation was approved by each of the boards of directors of ICICI,
ICICI Personal Financial Services, ICICI Capital Services and ICICI Bank at
their respective meetings held on October 25, 2001. The amalgamation was
approved by the shareholders of ICICI Bank and ICICI at their extraordinary
general meetings held on January 25, 2002 and January 30, 2002, respectively.
The amalgamation was sanctioned by the High Court of Gujarat at Ahmedabad on
March 7, 2002 and by the High Court of Judicature at Bombay on April 11, 2002.
The amalgamation was approved by the Reserve Bank of India on April 26, 2002.
The Statement on Financial Accounting Standards No. 141 on business
combinations requires that business combinations be accounted for in the period
in which the combination is consummated. Accordingly, under US GAAP, the
amalgamation has not been reflected in the financial statements of ICICI Bank
for the year ended March 31, 2002, as it was consummated in April 2002. The
effective date of the amalgamation for accounting purposes under US GAAP was
April 1, 2002. ICICI Bank's financial statements for fiscal 2002, therefore, do
not include the assets, liabilities and results of operations of ICICI, ICICI
Personal Financial Services and ICICI Capital Services. Under US GAAP, the
amalgamation was accounted for as a reverse acquisition. This means that ICICI
was recognized as the accounting acquirer in the amalgamation, although ICICI
Bank was the legal acquirer. In fiscal 2002, ICICI's consolidated net income
was Rs. 1,360 million (US$ 28 million). At year-end fiscal 2002, ICICI had
consolidated assets of Rs. 745.8 billion (US$ 15.3 billion) and consolidated
stockholders' equity of Rs. 71.2 billion (US$ 1.5 billion).
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation. As ICICI Bank is
the surviving legal entity in the amalgamation, the other subsidiaries and
affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
During fiscal 2002, ICICI Bank had three key activities: corporate
banking, retail banking and treasury operations. In corporate banking, ICICI
Bank's primary goal was 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. ICICI Bank
also sought 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 helped ICICI Bank to increase its non-interest income. In
building its corporate banking activities, ICICI Bank capitalized on the strong
relationships that ICICI enjoyed with many of India's leading corporations.
25
ICICI Bank's retail products and services included 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. ICICI Bank offered its
customers a choice of delivery channels including physical branches, ATMs,
telephone banking call centers and the Internet. In recent years, ICICI Bank
expanded its physical delivery channels, including bank branches and ATMs, to
cover a total of 1,004 locations in 251 centers throughout India at year-end
fiscal 2002.
ICICI Bank's treasury engaged in domestic and foreign exchange operations.
It sought to manage ICICI Bank's balance sheet, including by maintaining
required regulatory reserves. In addition, ICICI Bank's treasury sought to
optimize profits from its trading portfolio by taking advantage of market
opportunities using funds acquired from the inter-bank markets and corporate
deposits. ICICI Bank's trading portfolio included its regulatory portfolio as
there was no restriction on active management of its regulatory portfolio.
Consequent to the amalgamation of ICICI with ICICI Bank, the businesses
carried on by ICICI and its subsidiaries and affiliates are now carried on by
the merged entity and its subsidiaries and affiliates. These include project
and corporate finance and a wide range of retail credit products such as
automobile loans, home loans and other consumer finance products and services,
as well as a number of advisory, investment and other financial activities,
venture capital, life insurance and non-life insurance businesses.
Both ICICI Bank and ICICI have consistently used technology to
differentiate their products and services from those of their competitors. For
example, ICICI Bank was among the first banks in India to offer Internet
banking. The merged entity's technology-driven products also include cash
management services, mobile phone banking services and electronic
commerce-based business-to-business and business-to-consumer banking solutions.
To support its technology initiatives, the merged entity has set up online real
time transaction processing systems. The merged entity remains focused on
changes in customer needs and technological advances and seeks to remain at the
forefront of electronic banking in India.
The merged entity's legal name is ICICI Bank Limited but it is known
commercially as ICICI Bank. ICICI Bank was incorporated in 1994 under the laws
of India as a limited liability corporation. The duration of ICICI Bank is
unlimited. Its principal corporate office is located at ICICI Bank Towers,
Bandra-Kurla Complex, Mumbai 400 051, India, its telephone number is +91 22 653
1414 and its web site address is www.icicibank.com. The merged entity's agent
for service of process in the United States is CT Corporation System and their
address is 111 Eighth Avenue, 13th Floor, New York, New York, 10011.
History
ICICI Bank was formed in 1994 as a part of the ICICI group of companies.
ICICI Bank's initial equity capital was contributed 75.0% by ICICI and 25.0% by
SCICI Limited, a diversified finance and shipping finance lender of which ICICI
owned 19.9% at December 1996. In December 1996, SCICI was merged into ICICI,
and as a result, ICICI Bank became a wholly-owned subsidiary of ICICI. In May
1994, when ICICI obtained its commercial banking license to establish ICICI
Bank, the Reserve Bank of India imposed a condition regarding dilution of
holdings in commercial banks by promoters. This condition required ICICI to
reduce its shareholding in ICICI Bank in stages, first to not more than 75.0%
of its equity share capital and ultimately to not more than 40.0% of its equity
share capital. In fiscal 1998, ICICI reduced its shareholding in ICICI Bank to
just below 75.0% of its equity share capital as required, through a public
offering of shares in India. In March 2000, ICICI Bank completed an equity
offering in the form of ADRs listed on the NYSE for an amount of US$ 175
million. After this offering, ICICI's shareholding in ICICI Bank was
approximately 62.2% of ICICI Bank's equity share capital.
26
Effective March 10, 2001, ICICI Bank acquired Bank of Madura, an old
private sector bank, in an all stock merger which was approved by ICICI Bank's
shareholders at an extraordinary general meeting held on January 19, 2001.
ICICI Bank issued two of its equity shares, par value Rs. 10 per share, for
every equity share, par value Rs. 10 per share, of Bank of Madura. The market
value of the shares issued by ICICI Bank was Rs 3.7 billion (US$ 80 million).
The fair value of the net assets acquired by ICICI Bank was Rs. 1.3 billion
(US$ 27 million) and the fair value of the liabilities assumed by ICICI Bank
was Rs. 39.1 billion (US$ 0.8 billion). This acquisition gave ICICI Bank a
larger balance sheet and extensive geographic reach. This acquisition was
accounted for under the purchase method of accounting. Accordingly, ICICI
Bank's 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 ICICI Bank's balance sheet at year-end fiscal 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 ICICI Bank's
management based on information then available and on assumptions made at that
time as to future operations. ICICI's shareholding in ICICI Bank was reduced to
approximately 55.6% after this merger.
In further compliance with the bank licensing condition stipulated by the
Reserve Bank of India regarding dilution of holdings in commercial banks by
promoters, ICICI divested, through sales in the Indian secondary markets to
institutional investors, 8.8% of ICICI Bank's equity shares during March 2001.
At year-end fiscal 2001, ICICI held 46.4% of ICICI Bank's equity shares. During
the first five months (April to August) of fiscal 2002, ICICI sold additional
equity shares of ICICI Bank in the Indian secondary markets to institutional
investors. Consequently, ICICI's holding in ICICI Bank was reduced to 46.0% of
ICICI Bank's equity share capital. In accordance with Section 4 of the Indian
Companies Act, ICICI Bank ceased to be a subsidiary of ICICI as of March 22,
2001 and was accounted for under the equity method of accounting from April 1,
2000. ICICI Bank had no subsidiaries during fiscal 2002.
ICICI was formed in 1955 at the initiative of the World Bank, the
Government of India and representatives of Indian industry. The principal
objective was to create a development financial institution for providing
medium-term and long-term project financing to Indian businesses. Until the
late 1980s, ICICI primarily focused its activities on project finance,
providing long-term funds to a variety of industrial projects. With the
liberalization of the financial sector in India in the 1990s, ICICI transformed
its business from a development financial institution offering only project
finance to a diversified financial services provider that, along with its
subsidiaries and affiliates, offered a wide variety of products and services.
As India's economy became more market-oriented and integrated with the world
economy, ICICI capitalized on the new opportunities to provide a wider range of
financial products and services to a broader spectrum of clients. ICICI set up
independent operations through the incorporation of subsidiaries and affiliates
in the areas of venture capital funding (1988), asset management (1993),
investment banking (1993), commercial banking (1994), brokering and marketing
(1994), personal finance (1997), Internet stock trading (1999), home finance
(1999) and insurance (2000).
ICICI Bank offered products and services which largely complemented the
products and services offered by ICICI and its other subsidiaries and
affiliates. ICICI Bank sought to take advantage of the customer relationships
of ICICI and its other subsidiaries and affiliates. These relationships were
particularly effective in helping ICICI Bank gain access to the larger
corporations, as ICICI Bank's balance sheet on a stand-alone basis would not
have permitted it to take the large exposures that might be undertaken by ICICI
given its large balance sheet capabilities. ICICI Bank also sought to benefit
from ICICI's corporate relationships in growing its retail business. ICICI Bank
sold retail products to the employees of ICICI group's corporate customers,
including offering corporate customers its payroll deposit scheme for their
employees. ICICI's retail bondholders also presented ICICI Bank with an
opportunity for cross-selling a variety of products, including bank accounts,
credit cards, depositary share accounts and, to a limited extent, retail loans.
27
The issue of universal banking, which in the Indian context means
conversion of long-term lending institutions into commercial banks, has been
discussed at length over the past few years. The Reserve Bank of India in its
Mid-Term Review of Monetary and Credit Policy for fiscal 2000 and its circular
on Approach to Universal Banking issued on April 28, 2001, announced that it
would consider proposals from long-term lending institutions (like ICICI)
wishing to transform themselves into banks on a case-by-case basis. In its
Mid-Term Review of Monetary and Credit Policy for fiscal 2002, the Reserve Bank
of India encouraged financial institutions to submit proposals for their
transformation into banks. See "Overview of the Indian Financial Sector -
Recent Structural Reforms - Universal Banking Guidelines" for a discussion of
the key regulatory provisions governing the transformation of financial
institutions into banks.
As a bank, ICICI would have the ability to accept low-cost demand deposits
and offer a wider range of products and services, and greater opportunities for
earning non-fund based income in the form of banking fees and commissions. In
view of the benefits of transformation into a bank and the Reserve Bank of
India's pronouncements on universal banking, ICICI explored various corporate
structuring alternatives for its transformation into a universal bank. ICICI
also held discussions with the Reserve Bank of India on an appropriate
transition path and compliance with regulatory requirements. ICICI Bank also
considered various strategic alternatives, in the context of the emerging
competitive scenario in the Indian banking industry, and the move towards
universal banking. ICICI Bank identified a large capital base and size and
scale of operations as key success factors in the Indian banking industry. The
strategic alternatives examined by ICICI and ICICI Bank included an
amalgamation of the two entities, in view of ICICI's significant shareholding
in ICICI Bank, and the existing strong business synergies between the two
entities. ICICI also considered the reorganization of its subsidiary companies.
Following this strategizing on the various alternatives including an
amalgamation of ICICI and ICICI Bank, the senior managements of ICICI and ICICI
Bank commenced a program of in-depth confidential discussions on the various
strategic alternatives in July 2001. These discussions were held on various
dates during July-August 2001. Based on these discussions, the managements of
ICICI and ICICI Bank formed the view that the amalgamation of ICICI with ICICI
Bank would be the optimal strategic alternative for both entities, and would
create the optimal legal structure for ICICI group's universal banking
strategy. The managements of ICICI and ICICI Bank accordingly decided to
prepare, for submission to their respective boards of directors, a proposal for
the amalgamation of ICICI, ICICI Capital Services and ICICI Personal Financial
Services, with ICICI Bank. ICICI Capital Services was a wholly-owned subsidiary
of ICICI, and was one of the largest distributors of financial and investment
products in India. It also provided front-office services to the retail and
semi-retail investors of ICICI, and undertook the management of the various
ICICI centers, which were low-cost stand-alone offices acting as marketing and
service centers, set up by ICICI. ICICI Personal Financial Services was also a
wholly-owned subsidiary of ICICI, and was engaged in the distribution and
servicing of various retail credit products and other services offered by ICICI
and ICICI Bank. See "-Rationale for the Amalgamation of ICICI with ICICI Bank"
for a discussion of the rationale for the amalgamation.
The amalgamation was approved by each of the boards of directors of ICICI,
ICICI Personal Financial Services, ICICI Capital Services and ICICI Bank at
their respective meetings held on October 25, 2001. The amalgamation was
approved by the shareholders of ICICI Bank and ICICI at their extraordinary
general meetings held on January 25, 2002 and January 30, 2002, respectively.
The amalgamation was sanctioned by the High Court of Gujarat at Ahmedabad on
March 7, 2002 and by the High Court of Judicature at Bombay on April 11, 2002.
The amalgamation was approved by the Reserve Bank of India on April 26, 2002.
The Statement on Financial Accounting Standards No. 141 on business
combinations requires that business combinations be accounted for in the period
in which the combination is consummated. The effective date of the amalgamation
for accounting purposes under US GAAP was April 1, 2002. Accordingly, under US
GAAP, the amalgamation has not been reflected in the financial statements of
ICICI Bank for the year ended March 31, 2002, as it was consummated in April
2002. ICICI Bank's financial statements for fiscal 2002, therefore, do not
28
include the assets, liabilities and results of operations of ICICI, ICICI
Personal Financial Services and ICICI Capital Services. Under US GAAP, the
amalgamation was accounted for as a reverse acquisition. This means that ICICI
was recognized as the accounting acquirer in the amalgamation, although ICICI
Bank was the legal acquirer.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation. As ICICI Bank is
the surviving legal entity in the amalgamation, the other subsidiaries and
affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
Rationale for the Amalgamation of ICICI with ICICI Bank
The management and board of directors of ICICI believed that the
amalgamation would enhance value for shareholders of ICICI through the merged
entity's access to low-cost deposits, greater opportunities for earning
fee-based income and the ability to participate in the payments system and
provide transaction-banking services. The management and board of directors of
ICICI Bank believed that the amalgamation would enhance value for shareholders
of ICICI Bank through a large capital base and scale of operations, seamless
access to ICICI's strong corporate relationships built up over more than 45
years, entry into new business segments, higher market share in various
business segments, particularly fee-based services, and access to the vast
talent pool of ICICI and its subsidiaries.
Following the amalgamation, the merged entity became the second largest
among all banks in India, ranked on the basis of their total assets. The merged
entity seeks to leverage on its large capital base, comprehensive suite of
products and services, extensive corporate and retail customer relationships,
technology-enabled distribution architecture, strong brand franchise and vast
talent pool. The merged entity believes that it has improved capability to
offer a wider range of products and services, ranging from project finance to
retail finance, with a diversified resource base, improved portfolio risk
management capability and deeper client relationships.
The amalgamation of ICICI Capital Service and ICICI Personal Financial
Services (which were wholly-owned subsidiaries of ICICI) with ICICI Bank
consolidates and integrates the retail business, which will be a key driver of
growth for the merged entity, with respect to both assets and liabilities. Both
ICICI Bank's and the ICICI group's retail strategy was based on the offering of
multiple products through multiple delivery channels to provide choice and
convenience to customers. The channels were owned and managed by different
subsidiaries of ICICI. Offering the entire range of products and services
through multiple channels also results in greater economies of scale.
See "Risk Factors" for factors that could cause the merged entity's
results to differ materially from the forward-looking statements. See
"Forward-Looking Statements" for information regarding the safe-harbor
protection for forward-looking statements.
Shareholding of ICICI in ICICI Bank
At year-end fiscal 2002, ICICI held 101,395,949 shares of ICICI Bank,
representing 46.0% of the equity share capital of ICICI Bank. Pursuant to the
provisions of the Scheme of Amalgamation, ICICI transferred all of the ICICI
Bank shares held by it to the ICICI Bank Shares Trust with the Western India
Trustee & Executor Company Limited as the Trustee, to hold such ICICI Bank
shares in trust exclusively for the benefit of ICICI and its successors. These
shares constituted 16.5% of the equity share capital of the merged entity. The
Trustee did not have any voting rights with respect to these shares. The Scheme
of Amalgamation provided that the Trustees were to divest or otherwise dispose
of the shares within 24 months of the amalgamation becoming effective and remit
the proceeds of divestment to the merged entity. The Trustee had the discretion
to extend this period based on the prevailing market conditions. These shares
are accounted for as treasury stock under US GAAP in the unaudited pro forma
condensed consolidated financial data for ICICI Bank and ICICI. See "Unaudited
Pro Forma Condensed Consolidated Financial Data for ICICI Bank and ICICI".
These shares were
29
sold by the Trust through the stock exchange to institutional investors on
September 26, 2002 at an average sale price of approximately Rs. 130 per share.
The settlement date for this transaction is October 3, 2002.
Shareholding Structure and Relationship with the Government of India
The merged entity operated as an autonomous and commercial enterprise,
making decisions and pursuing strategies that are designed to maximize
shareholder value, and the Indian government has never directly held any shares
of the merged entity. However, reflecting the dominant role of the Indian
government in the Indian economy and ICICI's status as a public financial
institution named in the Indian Companies Act, ICICI's principal shareholders
were government-controlled. They included the Life Insurance Corporation of
India, the General Insurance Corporation of India and its subsidiaries and the
Unit Trust of India. Consequent to the amalgamation of ICICI with ICICI Bank,
these government-controlled shareholders have received shares in ICICI Bank in
exchange for their shareholding in ICICI. There is no shareholders agreement or
voting trust relating to the ownership of the shares held by the
government-controlled shareholders. ICICI Bank is the surviving legal entity in
the amalgamation. Accordingly, the merged entity is not a public financial
institution. See "Supervision and Regulation - Public Financial Institution
Status" for a discussion of ICICI's public financial institution status and the
implications of the absence of such status for the merged entity.
The following table sets forth, at September 2, 2002, certain information
regarding the ownership of the merged entity's equity shares.
---------------------------------
Percentage of
total equity Number of
shares equity shares
outstanding held
---------------------------------
Government-controlled shareholders:
Life Insurance Corporation of India...................................... 8.56 52,455,024
General Insurance Corporation of India and its subsidiaries.............. 7.28 44,619,717
Unit Trust of India...................................................... 3.32 20,333,495
Other government-controlled institutions, corporations and banks......... 1.64 10,052,617
---------------------------------
Total government-controlled shareholders................................... 20.81 127,460,853
---------------------------------
Other Indian investors:
Individual domestic investors (1) (2).................................... 9.76 59,857,977
Bajaj Auto Limited ...................................................... 3.51 21,519,880
Indian corporates and others (excluding Bajaj Auto Limited).............. 1.33 8,134,021
Mutual funds and banks (other than government-controlled banks).......... 1.46 8,963,396
The Western India Trustee & Executor Co. Ltd. - ICICI Bank Shares Trust 16.54 101,395,949
(3) (4)................................................................ ---------------------------------
Total other Indian investors............................................... 32.61 199,871,223
---------------------------------
Total Indian investors..................................................... 53.42 327,332,076
---------------------------------
Foreign investors:
Deutsche Bank Trust Company Americas, as depositary(3) (5)............... 25.71 157,619,322
Foreign institutional investors, foreign banks, overseas corporate 20.89 128,080,006
bodies and non-resident Indians(2)..................................... ---------------------------------
Total foreign investors.................................................... 46.60 285,699,328
---------------------------------
Total ..................................................................... 100.0 613,031,404
=================================
---------
(1) Executive officers and directors as a group held less than 0.1% of the
equity shares as of this date.
(2) No single shareholder in this group owned 5.0% or more of the merged
entity's equity shares as of this date.
(3) Under the Indian Banking Regulation Act, no person holding shares in a
banking company can exercise more than 10.0% of the total voting power.
This means that Deutsche Bank Trust Company Americas (as depositary),
which owned 25.7% of the merged entity's equity shares as of this date,
could only vote 10.0% of the merged entity's equity shares.
(4) These shares were sold by the Trust through the stock exchange to
institutional investors on September 26, 2002. The settlement date for the
transaction is October 3, 2002.
30
(5) Deutsche Bank Trust Company Americas holds the shares as depositary on
behalf of holders of all 78.81 million ADSs outstanding which are listed
on the New York Stock Exchange. In March 2000, 15.91 million ADSs were
offered in a SEC-registered public offering. In June 2002, 62.90 million
ADSs were issued following the exchange offer of ICICI's ADSs for ICICI
Bank's ADSs pursuant to the amalgamation.
Under the terms of the loan and guarantee facilities provided by the
government of India to ICICI that have been transferred to the merged entity
consequent to the amalgamation, the government of India is entitled to appoint
and has appointed one representative to the board of the merged entity. ICICI
had traditionally invited a representative each of the government-controlled
insurance companies that are the merged entity's principal domestic
institutional shareholders, General Insurance Corporation of India and its
subsidiaries and Life Insurance Corporation of India, generally their
respective Chairman, on its board. However, currently there is no
representation of these shareholders on the merged entity's board. The merged
entity had, effective May 3, 2002, appointed the then Chairman of General
Insurance Corporation of India, Mr. D. Sengupta, to its board. He has resigned
from the board effective June 30, 2002, upon completion of his tenure as
Chairman of General Insurance Corporation of India. The merged entity expects
to appoint the recently-appointed Chairman of Life Insurance Corporation of
India, and the Chairman of General Insurance Corporation of India, when
appointed, to its board. See "Management--Directors and Executive Officers" for
a discussion of the composition of the merged entity's board of directors.
ICICI raised US$ 315 million through an offering of 32.14 million ADSs in
September 1999. ICICI Bank raised US$ 175 million through an offering of 15.91
million ADSs in March 2000. Pursuant to the amalgamation of ICICI with ICICI
Bank, holders of ADSs in ICICI have been issued ADSs in ICICI Bank. The
depositary has the right to vote on the equity shares represented by the ADSs
as directed by the merged entity's board of directors. The merged entity does
not have any agreement with its government-controlled shareholders regarding
management control, voting rights, anti-dilution or any other matter.
The holding of foreign investors increased to 46.6% in the merged entity
at September 2, 2002 from 35.6% in ICICI Bank at year-end fiscal 2001,
primarily due to the issue of ADSs and equity shares of the merged entity to
the ADS holders and foreign shareholders of ICICI pursuant to the amalgamation.
The holding of foreign investors in ICICI at year-end fiscal 2001 was 47.8%.
The holding of foreign investors in ICICI Bank increased to 35.6% at end-fiscal
2001 from 20.0% at year-end fiscal 2000, primarily due to the increase in the
holding of foreign institutional investors, foreign banks, overseas corporate
bodies and non-resident Indians to 17.3% from 3.9% (including due to the
divestment by ICICI of shares in ICICI Bank to foreign institutional investors
during March 2001). The holding of Deutsche Bank Trust Company Americas as
depositary increased to 25.7% in the merged entity at September 2, 2002 from
14.4% in ICICI Bank at year-end fiscal 2001 due to the issue of ADSs of the
merged entity to ADS holders of ICICI pursuant to the amalgamation. The holding
of Deutsche Bank Trust Company Americas as depositary declined to 14.4% in
ICICI Bank at year-end fiscal 2001 from 16.2% at year-end fiscal 2000 due to
the issue of equity shares to the equity shareholders of Bank of Madura
pursuant to the amalgamation of Bank of Madura with ICICI Bank.
The holding of government-controlled shareholders increased to 20.8% in
the merged entity at September 2, 2002 from 3.1% in ICICI Bank at year-end
fiscal 2001, primarily due to the issue of equity shares of the merged entity
to the government-controlled shareholders of ICICI pursuant to the
amalgamation. The holding of government-controlled shareholders in ICICI at
year-end fiscal 2001 was 33.6%. The holding of government-controlled
shareholders in ICICI Bank declined to 3.1% at year-end fiscal 2001 from 5.4%
at year-end fiscal 2000, primarily due to sale of ICICI Bank's equity shares by
Unit Trust of India and issue of equity shares to shareholders of Bank of
Madura pursuant to the amalgamation of Bank of Madura with ICICI Bank. The
holding of Life Insurance Corporation of India increased to 8.6% in the merged
entity at September 2, 2002 from 0.1% in ICICI Bank at year-end fiscal 2001
primarily due to the issue of equity shares of the merged entity to Life
Insurance Corporation of India in exchange for its shareholding in ICICI
pursuant to the amalgamation.
31
The holding of other Indian investors (including the ICICI Bank Shares
Trust) declined to 32.6% in the merged entity at September 2, 2002 from 74.7%
(including shares held by ICICI) in ICICI Bank at year-end fiscal 2000,
primarily due to the divestment of equity shares by ICICI in March 2001 and
between April-August 2001 and issue of ADSs and equity shares of the merged
entity to the ADS holders and foreign shareholders of ICICI pursuant to the
amalgamation.
The shares of the merged entity held by the ICICI Bank Shares Trust were
sold by the Trust through the stock exchange to institutional investors on
September 26, 2002 at an average sale price of approximately Rs. 130 per share.
Through this transaction, Hamblin Watsa Investment Counsel, an affiliate of
Lombard Insurance, Canada, through its registered foreign institutional
investor entity Orcasia Limited, acquired 42.3 million equity shares of the
merged entity, or 6.9% of the merged entity's equity share capital. Government
of Singapore Investment Corporation acquired 42.0 million equity shares of the
merged entity or 6.9% of the merged entity's equity share capital. The
settlement date for this transaction is October 3, 2002.
Strategy
The merged entity's objective is to enhance its position as a premier
provider of banking and other financial services in India.
The key elements of its business strategy are to:
o leverage on the synergies of the amalgamation of ICICI with ICICI
Bank;
o focus on profitable, quality growth opportunities by:
- maintaining and enhancing its strong retail franchise;
- maintaining and enhancing its strengths in corporate banking;
and
- building an international presence;
o emphasize conservative risk management practices and enhance
asset quality;
o use technology for competitive advantages; and
o attract and retain talented professionals.
Leverage on the Synergies of the Amalgamation of ICICI with ICICI Bank
With the amalgamation, the merged entity is now the second largest bank in
India in terms of total assets. The amalgamation has increased ICICI Bank's
capital base and expanded the scope of its business operations. The merged
entity aims to leverage on its increased capital base, comprehensive suite of
products and services, extensive corporate and retail customer relationships,
technology-enabled distribution architecture, strong brand franchise and vast
talent pool. It aims to take advantage of the combination of ICICI's large
capital base with ICICI Bank's strong deposit raising capabilities to develop
and increase its market share in profitable business lines.
Focus on Profitable, Quality Growth Opportunities by:
Maintaining and Enhancing Its Strong Retail Franchise
ICICI Bank has over the years achieved significant growth in its retail
deposit base. ICICI Bank has offered a wide range of products and services to
its retail liability customers, including deposits, debit cards, fund transfer
facilities and utility bill payment services. ICICI Bank has been able to
attract customers through innovative products such as "Power Pay", its direct
deposit product that allows its corporate customers' employee salaries to be
directly credited to special savings accounts. ICICI had also built a large
base of retail bondholders. The merged entity aims to market its retail
liability products to these bondholders and significantly increase the number
of retail customer
32
accounts to increase the merged entity's market share in retail deposits. The
merged entity's subsidiary ICICI Prudential Life Insurance Company Limited
offers life insurance products, which are also distributed through the merged
entity's branches.
The merged entity believes that retail credit offers a major growth
opportunity in view of the low levels of penetration of retail credit in
comparison with other countries, and upward migration of households from lower
to higher income levels. ICICI Bank's retail credit products included credit
cards, loans against time deposits and loans against shares. ICICI offered a
wide range of retail credit products including home loans (including through
its wholly-owned subsidiary ICICI Home Finance Company Limited), automobile
loans and personal loans. ICICI's retail assets increased significantly during
fiscal 2002. With the amalgamation, the merged entity now offers the entire
range of retail credit products. The retail business forms an integral part of
the merged entity's portfolio diversification strategy. The merged entity
believes that it is among the market leaders in all retail credit products,
based on publicly available data and its own market estimates. The merged
entity would continue to build on its leadership position in retail credit.
The merged entity earns fee income from its retail banking operations,
including retail loan processing fees, credit card and debit card fees, and
retail transaction fees. Its ATM acquiring business also generates fee income
when customers of other banks execute transactions at the merged entity's ATMs.
The merged entity has also entered the credit card acquiring business, in which
it earns fee income on transactions executed at merchant point of sale
terminals owned by the merged entity. The merged entity also offers its
customers depositary share accounts and direct sales of third party mutual
funds and Reserve Bank of India bonds, for which it earns fee income. The
merged entity's Internet banking services include Money2India, an online
remittance facility for non-resident Indians, which generates fee income.
ICICI Bank's and ICICI's business strategy in the retail business has been
to build a strong financial services brand, offer a comprehensive range of
innovative products and services across the country using multiple distribution
channels, provide efficient customer service, establish strong risk management
practices, develop technology-enabled processing systems and focus on operating
efficiency. The merged entity believes that these initiatives have provided a
distinct competitive advantage in the retail business. A strong corporate and
product advertising strategy has created a strong retail identity. Studies by
independent market research agencies commissioned by the merged entity have
shown that the ICICI brand is the number two financial services brand in India
in terms of spontaneous brand recall. ICICI Bank's and ICICI's innovations in
products and distribution methods, such as the Internet, call center and
doorstep service through a wide network of direct marketing agents, have been
well-received by the market. The merged entity's use of online delivery
channels offers added convenience for customers while reducing the cost of
financial transactions and the need to have an extensive branch network. The
merged entity seeks to control retail credit portfolio quality through its
focus on risk management. The merged entity seeks to leverage economies of
scale to control its distribution and processing costs. The merged entity aims
to create a customer-focused organization aimed at providing better levels of
customer service and to cross-sell its retail credit and liability products and
services to all its customers.
Maintaining and Enhancing Its Strengths in Corporate Banking
ICICI Bank's corporate lending products and services consisted principally
of working capital finance and term lending. Over the past few years, ICICI
Bank shifted its focus in favor of financing large, highly rated corporations,
although it continued to seek to identify and gain market share in the new
growth sectors of the Indian economy. ICICI Bank also focused on supply chain
financing, including the financing of selected suppliers and dealers of its
existing corporate clients. ICICI Bank benefited from ICICI's strong corporate
relationships in expanding its own corporate banking activities. ICICI had a
track record of more than 45 years of providing financial products and services
to Indian companies. It enjoyed a strong market position in project finance,
including the infrastructure sector. It had also established a significant
presence in the business of providing non-
33
project finance to leading corporations in India, classified as corporate
finance. ICICI focused on structured finance including securitization and
customized financing structures. With the amalgamation, ICICI's project finance
and corporate finance businesses now form part of the merged entity's
operations.
ICICI Bank earned fee income in its corporate banking business principally
from issuing standby letters of credit or guarantees, documentary credits and
similar instruments, providing cash management services and foreign exchange
transactions. ICICI Bank's ability to increase its share of such business was
limited by its capital base, while ICICI as a non-banking entity could not
participate in working capital consortiums of corporations. The larger capital
base of the merged entity will enable it to take larger non-fund based
exposures. The merged entity has developed countrywide collection and payment
mechanisms for rural and cooperative banks with limited geographic presence.
ICICI also earned fee income from structuring, syndication and advisory
services. The merged entity will continue to seek to develop value-added
products and services in an effort to enhance its market share and to increase
its recurring fee income.
The merged entity's corporate banking business will focus on leveraging
its strong corporate relationships and increased capital base to increase its
market share in non-fund based working capital products and fee-based services.
Its corporate lending activities will focus on structured finance, corporate
finance and working capital lending to highly-rated corporations, as well as
working capital lending to emerging corporates that are suppliers or dealers of
large corporations. The merged entity will also focus on achieving directed
lending obligations to the agricultural sector through carefully structured
credit products. The merged entity will seek to actively manage its asset
portfolio through securitisation of assets as well as through acquisition of
credit portfolios from other institutions and banks, to diversify the
portfolio, reduce long-term balance sheet exposures and maximize risk adjusted
returns. The merged entity continues to develop its expertise in providing
value-added advisory services, such as project structuring and syndication. The
merged entity's goal is to provide a comprehensive and integrated service to
corporate treasurers through its solution managers. The merged entity's
subsidiary ICICI Lombard General Insurance Company offers general insurance
products to the merged entity's corporate customers and seeks to capitalize on
the merged entity's corporate relationships. The merged entity aims to increase
the cross-selling of its products and services and maximize the value of its
corporate relationships through the effective use of technology, speedy
response times, quality service and the provision of products and services
designed to meet specific customer needs.
Building an International Presence
ICICI had already established a presence in the international markets,
primarily in the areas of trade finance, information technology and investment
banking. ICICI Bank also provided banking products and services for the
non-resident Indian community. The merged entity believes that the
international markets present a major growth opportunity and has therefore
expanded the range of its international business initiatives. ICICI had set up
an International Business Group in fiscal 2002 to develop and implement a
focused strategy for the international business.
The international business strategy is based on leveraging home country
links for international expansion by capturing market share in select
international markets. The critical strengths, which can be leveraged to create
value, include strong relationships with domestic corporations, access to local
currency markets, strong domestic distribution network and cultural ties with
the home country. The initial focus areas would be supporting Indian companies
in raising corporate and project finance for their investments abroad, trade
finance, personal financial services for non-resident Indians and international
alliances to support domestic businesses. ICICI Bank had over the last few
years built a large network of correspondent relationships across all major
countries. Most of these countries have significant trade and other
relationships with India. The merged entity is focusing on correspondent
banking business including letters of credit advising and confirmation,
issuance of stand by letters of
34
credits/guarantees on behalf of correspondent banks, payment services for
remittances, Indian rupee account and clearing services.
The merged entity has identified the United States, United Kingdom, the
Middle-East and South-East Asia as the key regions for establishing its
international presence. The merged entity has already established
representative offices in New York and London and is awaiting regulatory
approval for offices in Singapore, Canada and the United Arab Emirates.
Emphasize Conservative Risk Management Practices and Enhance Asset Quality
The merged entity believes that conservative risk management policies,
processes and controls are critical for long-term sustainable competitive
advantages in its business. The merged entity's Risk, Compliance and Audit
Group is an independent, centralized group responsible for establishing and
implementing company-wide risk management policies, with an increasing focus on
enhancing asset quality. The merged entity will continue to build on its credit
risk management procedures, credit evaluation and rating methodology, credit
risk pricing models, proprietary analytics and monitoring and control
mechanisms. The merged entity expects to enter new product markets only after
conducting detailed risk analysis and pilot testing programs.
To reduce risk, the merged entity is in the process of diversifying its
loan portfolio towards retail lending, shorter-term working capital and
corporate lending to highly-rated corporate customers and structured finance.
In addition, the merged entity seeks to lower the credit risk profile of the
project and corporate loan portfolio through the increased use of financing
structures based on a security interest in the cash flows generated from the
business of the borrower and increased collateral, including additional
security in the form of liquid assets, such as investment securities and
readily marketable real property. The merged entity is also trying to mitigate
project risk through the allocation of risk to various project counterparties,
such as construction contractors, operations and maintenance contractors and
raw material and fuel suppliers, by entering into rigorous project contracts
with those counterparties. The merged entity seeks to control credit risk in
the retail loan portfolio through carefully designed approval criteria and
credit controls and efficient collection and recovery systems. The merged
entity has placed emphasis on recruiting experienced retail credit
professionals to staff its retail credit approval function. The merged entity
has also established standards and investigative verification procedures for
selection of its marketing and processing agents.
Management has placed great emphasis on asset quality and this focus has
been institutionalized across the organization, with asset quality parameters
being a key factor in employee performance evaluation. The merged entity
believes it is the market driver in India in achieving early settlements with
troubled borrowers, thus maximizing its cash flows from these loans. The merged
entity's Special Asset Management Group has the responsibility for taking care
of large impaired loans and accounts under watch.
Use Technology for Competitive Advantages
The merged entity seeks to be at the forefront of technology usage in the
financial services sector. Information technology is a strategic tool for the
merged entity's business operations to gain competitive advantage and to
improve overall productivity and efficiency of the organization. All of the
merged entity's technology initiatives are aimed at enhancing value, offering
customer convenience and improved service while optimizing costs.
The merged entity expects to continue with its policy of making
investments in technology to achieve a significant competitive advantage. ICICI
Infotech, a company promoted by ICICI, currently manages substantially all of
the merged entity's key technology projects.
35
The key objectives behind the merged entity's information technology
strategy continue to be:
o building a cost-efficient distribution network to accelerate the
development of its retail franchise;
o enhancing cross-selling and client segmenting capability by using
analytical tools and efficient data storage and retrieval systems;
o improving credit risk and market risk management; and
o improving product, client and business unit profitability analysis to
enable optimal capital allocation.
Attract and Retain Talented Professionals
The merged entity believes a key to its success will be its ability to
continue to maintain and grow a pool of strong and experienced professionals.
The merged entity has been successful in building a team of talented
professionals with relevant experience, including experts in credit evaluation,
risk management, retail consumer products, technology and marketing.
Recruitment is a key management activity led by the Managing Director and Chief
Executive Officer and the merged entity continues to attract graduates from the
premier Indian business schools.
The merged entity's management team is committed to enhancing shareholder
value and all of the merged entity's performance targets seek to meet this
primary objective. The merged entity believes it has created the right balance
of performance bonus, stock option and other economic incentives for its
employees so that they will be challenged to develop business, achieve
profitability and asset quality targets and control risk. In the last two
years, the merged entity and its predecessors have conducted a comprehensive
review of their organizational structure and procedures, working with
internationally recognized consulting firms. The merged entity intends to
continue to re-engineer its management and organizational structure to allow it
to respond effectively to changes in the business environment and enhance its
overall profitability.
Principal Business Activities
ICICI Bank's principal business activities during fiscal 2002 included
corporate banking, retail banking and treasury operations.The following table
sets forth, for the periods indicated, the share of ICICI Bank's corporate and
retail banking deposits and loans in its total business.
At March 31, 2001 At March 31, 2002
------------------------------------- -------------------------------------
Corporate Retail Corporate Retail
banking banking Total banking banking Total
--------- --------- ------- --------- ------- -------
(in Rs. billion, except percentages)
Gross loans.............. 91.4 4.9 96.3 68.5 7.2 75.7
% of total............... 94.9% 5.1% 100.0% 90.5% 9.5% 100.0%
Deposits................. 63.8 100.5 164.3 151.3 173.9 325.2
% of total............... 38.8% 61.2% 100.0% 46.5% 53.5% 100.0%
In corporate banking, ICICI Bank made working capital loans and term loans
to its corporate borrowers, took deposits from corporate customers and provided
a range of fee-based products and services. In retail banking, ICICI Bank took
deposits from retail customers through multiple products and delivery channels
and offered certain retail credit products, primarily credit cards, loans
against time deposits and loans against shares. ICICI Bank's treasury managed
its balance sheet, including by maintaining required regulatory reserves. In
addition, ICICI Bank's treasury sought to optimize profits from its trading
portfolio by taking advantage of market opportunities.
Pursuant to the amalgamation, ICICI's business activities comprising
corporate banking (including project finance, corporate finance and working
capital) and retail banking (including retail lending activities and retail
savings products) have been transferred to the merged entity. ICICI also
provided investment banking services, venture capital, non-life insurance and
life insurance through
36
its subsidiaries, which have become subsidiaries of the merged entity
consequent to the amalgamation. Since the amalgamation, the merged entity and
its subsidiaries have engaged in all of the principal business activities of
ICICI Bank and ICICI and its subsidiaries.
Corporate Banking
General
ICICI Bank's key corporate banking products included loan products and fee
and commission-based products and services. ICICI Bank's principal loan
products consisted 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 included 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. ICICI Bank also took rupee
or foreign currency deposits with fixed or floating interest bases from its
corporate customers. ICICI Bank's deposit taking products included certificates
of deposit, checking accounts and time deposits. ICICI Bank delivered its
corporate banking products and services through a combination of physical
branches, correspondent banking networks, telephone banking and the Internet.
ICICI's corporate banking operations provided a range of products and
services to India's leading corporations and growth-oriented, middle market
commercial enterprises. This included project finance in the infrastructure,
oil, gas and petrochemicals, and manufacturing sectors, corporate and working
capital finance and investment banking services. In addition, ICICI also
provided venture capital funding and a range of fee and commission based
services, including investment banking, advisory services, loan syndication,
letters of credit, custodial services and corporate risk management services.
Corporate Loan Products
The merged entity offers the corporate loan products offered by each of
ICICI Bank and ICICI during fiscal 2002. ICICI Bank's corporate loan products
were primarily working capital finance and term loans. ICICI Bank offered a
substantial portion of its corporate loans on a floating rate basis linked to
its prime lending rate. ICICI's corporate loan products consisted primarily of
term loans, for both project finance and corporate finance. For details on
ICICI Bank's and ICICI's loan portfolio, see "- Loan Portfolio".
Working Capital Finance
Under working capital finance, the merged entity offers its customers cash
credit facilities and bill discounting. At year-end fiscal 2002, ICICI Bank's
gross working capital loans outstanding were Rs. 37.34 billion (US$ 765
million), constituting 49.3% of ICICI Bank's gross loan portfolio.
Cash Credit Facilities
Cash credit facilities are the most common form of working capital
financing in India. Cash credit facilities are given to borrowers to finance
the cash flow gap arising out of the time difference between the purchase of
raw materials and the realization of sale proceeds of the borrower's products.
A cash credit facility is a revolving overdraft line of credit for meeting the
working capital needs of companies and is generally backed by current assets
like inventories and receivables. Under the cash credit facility, a line of
credit is provided up to a pre-established amount based on the borrower's
projected level of inventories, receivables and cash deficits. Up to this
pre-established amount, disbursements are made based on the actual level of
inventories and receivables. A portion of the cash credit facility can also be
made in the form of a demand loan. A cash credit facility is typically given to
companies in the manufacturing, trading and service sectors on a floating
interest rate basis. Interest
37
is earned on this facility on a monthly basis, based on the daily outstanding
amounts. The facility is generally given for a period of up to 12 months, with
a review after that period. The merged entity's cash credit facility is
generally fully secured with full recourse to the borrower. In most cases, the
merged entity has a first lien on the borrower's current assets, which normally
are inventory and receivables. Additionally, in some cases, the merged entity
may take further security of a first or second lien on fixed assets including
real estate, a pledge of financial assets like marketable securities, corporate
guarantees and personal guarantees.
Cash credit facilities are extended to borrowers by a single bank,
multiple banks or a consortium of banks with a lead bank. The nature of the
arrangement is usually agreed between the bank(s) and the borrower and depends
upon the amount of working capital financing required by the borrower, the risk
profile of the borrower and the amount of loan exposure a single bank can take
on the borrower. Though in the past ICICI Bank extended cash credit facilities
on its own, the merged entity is focused on more highly rated large
corporations and is 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, the merged entity undertakes its own due diligence and follows its
credit risk policy to determine whether it should lend money to the borrower
and, if so, the amount to be lent to the borrower and the rate of interest to
be charged. For more details on the merged entity's credit risk procedures, see
"-- Risk Management -- Credit Risk".
Bill Discounting : Bill discounting involves the financing of short-term
trade receivables through negotiable instruments. These negotiable instruments
can then be discounted with other banks if required, providing the merged
entity with liquidity. In addition to traditional bill discounting, the merged
entity also provides customized solutions to its 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 the merged entity to strengthen its
relationships with its corporate customers and may be expanded into
Internet-based corporate banking services.
The merged entity seeks to extend its 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, through its
Emerging Corporates Group. This group focuses on supply chain financing,
including the financing of selected suppliers of the merged entity's existing
corporate clients. Typically, the financing is in the form of short-term
revolving facilities with overdraft or bill discounting limits and is extended
only to carefully pre-selected suppliers and dealers to be used only for
genuine transactions with the merged entity's corporate clients. This group
will be progressively moving towards a fee-based revenue model rather than
asset-driven growth.
Term Loans
Term loans are amortizing loans given typically for a period of between
three and seven years for financing projects, core working capital requirements
and normal capital expenditures. Term loans may also be given for financing
acquisitions. The merged entity's 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, the merged entity generally has 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. At year-end fiscal 2002, ICICI Bank's gross term loans outstanding
were Rs.7.31 billion (US$ 150 million), constituting 9.7% of ICICI Bank's gross
loan portfolio.
For over 45 years, ICICI had financed a vast majority of India's largest
projects in the private sector. The merged entity's project finance activities
include medium-term and long-term lending to the manufacturing sector and
structured finance to the infrastructure and oil, gas and petrochemicals
sectors. The merged entity's project finance business consists principally of
extending rupee loans to
38
its clients although it does provide financing in foreign currencies. The
merged entity also provides guarantees to foreign lenders and export credit
agencies, on behalf of its clients, typically for large projects in the
infrastructure sector.
The merged entity's manufacturing sector financing includes project-based
lending to companies in traditional manufacturing sectors, including iron,
steel and metal products, textiles, machinery and capital goods, cement and
paper. As a result of structural changes to the Indian economy, trade
liberalization and the downturn in prices of several major market commodities,
many of these industry segments have gone through a period of stress over the
last few years. Given ICICI's emphasis on improving asset quality in view of
the prevailing environment, ICICI had restricted approvals for new projects in
the manufacturing sector.
In 1996, ICICI had created a specialized oil, gas and petrochemicals group
to capitalize on the growth in financing opportunities afforded by ongoing
deregulation and privatization in these sectors. ICICI's significant in-house
expertise in project financing in the areas of oil exploration and production,
refineries, pipelines, liquefied natural gas, petrochemicals and fertilizers
enabled it to attain a pre-eminent position in financing this sector. This was
acknowledged by the government of India and the business community and resulted
in ICICI playing a significant role in policy formulation.
In 1996, ICICI had established a specialized group with the objective of
capitalizing on business opportunities in infrastructure sector, including
power, telecommunications, urban infrastructure and transportation. The merged
entity believes this group is a market leader in terms of the number of
infrastructure project finance mandates awarded among those projects that meet
its credit risk criteria. The merged entity focuses on project structuring and
syndication and advisory services.
ICICI had expanded its product mix to include a variety of products that
are designed to allow clients to effectively manage their balance sheets and
cash flows, mitigate risks and enhance the credit rating of certain of their
debt issuances. ICICI's structured products group, set up in 1997, focused
specifically on the application of securitization techniques to credit enhance
our traditional lending products. The merged entity believes securitization
will be a growth area in India. The securitization market in India is emerging
and the merged entity is playing a leading role in its growth and development.
The structured products group is also focusing on selling down of the merged
entity's loans to better manage mismatches in the maturities of its assets and
liabilities and to provide additional liquidity.
ICICI Bank and ICICI also provided lease financing for a wide range of
imported and locally manufactured equipment. The merged entity extends fund
based loans as well as stand by letters of credit facilities to corporates
outside India which are joint ventures and/or wholly-owned subsidiaries of
Indian corporates. At year-end fiscal 2002, ICICI Bank's balance outstanding in
respect of loans to corporates outside India was Rs. 620 million (US$ 12.7
million), representing approximately 0.8% of ICICI Bank's total gross loan
portfolio.
Fee and Commission-Based Activities
The merged entity's 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. Prior to the amalgamation, these services were primarily
offered by ICICI Bank. The merged entity also offers custodial services, loan
syndication and advisory services. Prior to the amalgamation, these services
were offered by ICICI.
Documentary Credits
The merged entity provides documentary credit facilities to its working
capital loan customers both for meeting their working capital needs as well as
for capital equipment purchases. For working
39
capital purposes, the merged entity issues documentary credits on behalf of its
borrowers for the sourcing of their raw materials and stock inputs. Lines of
credit for documentary credits and standby letters of credit are approved as
part of a working capital loan package provided to a borrower. These
facilities, like cash credit facilities, are generally given for a period up to
12 months, with review after that period. Typically, the line is drawn down on
a revolving basis over the term of the facility, resulting in a fee payable to
the merged entity at the time of each drawdown, based on the amount and term of
the drawdown.
The merged entity issues documentary credits on behalf of borrowers both
for domestic and foreign purchases. Borrowers pay a fee to the merged entity
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. The merged entity may also take collateral in the form of
cash deposits, in the range of 5.0% to 20.0% of the drawdown amount, from its
borrowers before each drawdown of the facility.
At year-end fiscal 2002, ICICI Bank had a portfolio of documentary credits
of Rs. 12.6 billion (US$ 258 million).
Standby Letters of Credit
The merged entity provides 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. The merged entity issues standby letters of
credit on behalf of its borrowers in favor of corporations and government
authorities. The standby letters of credit are generally issued for the purpose
of bid bonds, guaranteeing the performance of its borrowers under a contract as
security for advance payments made to its borrowers by project authorities and
for deferral of and exemption from the payment of import duties granted to its
borrowers by the government against fulfillment of certain export obligations
by its borrowers. The term of these standby letters of credit is generally up
to 36 months though in specific cases, the term could be higher. This facility
is generally secured by collateral similar to that of documentary credits.
At year-end fiscal 2002, ICICI Bank had a portfolio of standby letters of
credit of Rs. 21.1 billion (US$ 432 million).
Forward Contracts and Interest and Currency Swaps
The merged entity provides forward contracts to its customers for hedging
their short-term exchange rate risk on foreign currency denominated receivables
and payables. The merged entity generally provides this facility for a term of
up to six months and occasionally up to 12 months. The merged entity also
offers interest rate and currency swaps to its customers for hedging their
medium and long-term risks due to interest rate and currency exchange rate
movements. The merged entity offers these swaps for a period ranging from three
to 10 years. The merged entity's customers pay a commission for this product
that is included in the price of the product and is dependent upon market
conditions. The merged entity also hedges its own exchange rate risk related to
its foreign currency trading portfolio with products from banking
counterparties.
At year-end fiscal 2002, ICICI Bank had a portfolio of outstanding forward
contracts of Rs. 127.7 billion (US$ 2.6 billion) and a portfolio of interest
and currency swaps of Rs. 51.2 billion (US$ 1.0 billion).
Cash Management Services
Under cash management services, the merged entity offers its corporate
clients custom-made collection, payment and remittance services allowing them
to reduce the time period between collections and remittances, thereby
streamlining their cash flows. The merged entity's 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
40
and interest remittance services and Internet-based payment products. The
merged entity's customers pay a fee to the merged entity for these services
based on the volume of the transaction, the location of the check collection
center and speed of delivery. This also results in low-cost funds being
maintained for short durations in checking accounts of customers which the
merged entity invests profitably.
The total amount handled by ICICI Bank under cash management services was
Rs. 1,727.2 billion (US$ 35.4 billion) for fiscal 2002, resulting in fee income
of Rs. 330 million (US$ 6.8 million) for ICICI Bank. At year-end fiscal 2002,
ICICI Bank had 418 cash management service customers not including ICICI.
Trust and Retention Accounts
The merged entity offers 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 its customers include power and telecommunications companies.
This service enables the merged entity to capture the receivables of the
project on behalf of the lenders and channel the cash flows in a pre-determined
manner. The merged entity also offers escrow account facilities for
securitization and merger and acquisition transactions. The merged entity's
customers pay a negotiated fee to the merged entity for this product based on
the complexity of the structure and the level of monitoring involved in the
transaction.
Prior to the amalgamation, ICICI Bank actively provided these services and
used the strengths of ICICI, as a leading project financier in the country, to
obtain customers for these services. The cash flows managed by ICICI Bank under
this product during fiscal 2002 were about Rs. 47.8 billion (US$ 979 million).
Payment Services
The merged entity offers online electronic payment facilities through its
corporate Internet banking platform to its corporate customers and their
suppliers and dealers as a closed user group, where the entire group is
required to maintain bank accounts with the merged entity. The merged entity
uses the Internet as the delivery platform for this business-to-business
electronic commerce product, which it calls "i-payments". Under this service,
payments from the merged entity's corporate customers to their suppliers and
payments from the dealers to the merged entity's 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 individual customers. The merged entity
presently does not charge a fee for this service, as it results in large
low-cost funds being maintained for short durations in checking accounts of
customers, that the merged entity invests profitably.
At year-end fiscal 2002, there were 1,130 corporates on ICICI Bank's
corporate Internet banking platform. A few of these corporates are also using
the platform for making payments/receiving collections from their channel
partners. Based on these statistics, the merged entity believes that, based on
its corporate relationship base of over 2,500 customers, it has the potential
to service a much larger number of large, medium and small corporate clients
over the next few years.
Custodial Services
The merged entity has a significant market share as a custodian of
overseas depositary banks for depositary receipt issues of Indian companies in
the international markets. Prior to the amalgamation, these services were
provided by ICICI. The total assets held in custody on behalf of ICICI's
clients, mainly foreign institutional investors, offshore funds, overseas
corporate bodies and depositary banks for GDR investors, increased to Rs. 247.7
billion (US$ 5.1 billion) at year-end fiscal 2002 from Rs. 219.9 billion (US$
4.5 billion) at year-end fiscal 2001. In addition, the merged entity is
registered as a
41
depositary participant of National Securities Depositary Limited and Central
Depositary Services (India) Limited, the only two securities depositaries
operating in India, and provides electronic depositary facilities to investors
including retail investors. To facilitate settlement services, the merged
entity is the clearing member of clearing agencies of the leading stock
exchanges.
Corporate Risk Management Services
The merged entity's risk management products are currently limited to
foreign currency forward transactions and currency and interest rate swaps for
selected approved clients. The merged entity believes, however, that the demand
for risk management products will grow, and the merged entity is building the
capabilities to grow this business. The merged entity is focusing particularly
on setting up the sophisticated infrastructure and internal control procedures
which are critical to this business.
Treasury Products
The merged entity provides liquidity management services to its 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 the merged
entity's 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. The merged entity also
facilitates the holding of foreign currency accounts. Its target customers for
these products are large public and private sector companies, provident funds
and high net worth individuals.
Loan Syndication
ICICI had developed significant syndication capabilities while structuring
and arranging large project finance transactions. The merged entity seeks to
leverage these syndication capabilities to arrange project and corporate
finance for its corporate clients and earn fee income, as well as to sell-down
loans originated by the merged entity. The merged entity has been granted a
merchant banking license by the Securities and Exchange Board of India.
Advisory Services
The merged entity provides additional advisory services to clients to
complement its financing services. ICICI had been awarded mandates in various
sectors and had focused particularly on advisory services in the energy sector.
Internet banking services
The merged entity provides Internet banking services to its corporate
clients through ICICI Bank e-business, a finance portal which is the single
point web based interface for all the merged entity's corporate clients. The
Corporate Internet Banking platform of ICICI Bank e-business allows clients to
conduct banking business online in a secure environment. Clients can view
accounts online, transfer funds between their own accounts or to other
accounts, among other services. The merged entity is the only Indian private
sector bank offering foreign exchange trading through the Internet through
FXOnline, a secure and user-friendly platform that makes it easy for clients to
get live prices for their deals and transact from virtually anywhere in the
world. FxOnline provides automated quotes for spots and forwards, with
transparent prices in all transactions. The Debt Online channel allows
companies to transact in government of India Securities in a seamless manner.
This is achieved through straight through processing using a constituent
subsidiary ledger Account. The client can view real time quotes offered by the
merged entity and ICICI Securities. The client can use the chat facility to
negotiate the deal over the Internet. The merged entity ensures credit of
interest and
42
redemption payments from the Reserve Bank of India to the client's bank
account. The client can monitor transactions and the portfolio at any given
time.
Investment Banking
The merged entity offers investment banking services to Indian corporate
customers principally through ICICI Securities, its subsidiary. ICICI
Securities was a subsidiary of ICICI prior to the amalgamation. ICICI
Securities provides investment banking services through three main business
lines - corporate advisory, fixed income and equities. The clients of ICICI
Securities include a range of Indian and foreign corporations and institutional
investors. ICICI Securities is a non-bank finance company. For a description of
non-bank finance companies, see "Overview of the Indian Financial Sector -
Non-Bank Finance Companies".
Corporate Advisory
ICICI Securities provides a variety of advisory services, including advice
on financing and strategic transactions. ICICI Securities was one of the first
Indian investment banks to form a dedicated mergers and acquisitions group to
provide a range of services to large and mid-market Indian corporate clients,
including business valuations, pricing and structuring of transactions, and
financial and corporate restructuring. In addition, ICICI Securities provides
specialized services, such as private equity syndication and privatization
advisory services for public sector companies.
Fixed Income
The merged entity believes ICICI Securities is one of the market leaders
in the Indian debt market, having been named the "Best Domestic Bond House in
India - 2002" by Asiamoney. In fiscal 2002, ICICI Securities assisted public
sector entities, financial institutions and corporates to raise over Rs. 160.0
billion (US$ 3.3 billion) of debt. ICICI Securities is a primary dealer
appointed and authorized by the Reserve Bank of India to trade in government
securities. As a primary dealer, ICICI Securities is permitted to underwrite
the issuance of government securities and treasury bills and act as a market
maker in these instruments. ICICI Securities was the first primary dealer to
commence activity in interest rate derivative products such as interest rate
swaps and forward rate agreements following their introduction by the Reserve
Bank of India in July 1999. ICICI Securities is also a leading player in the
non-government debt market in India. This activity primarily involves running a
proprietary book in various money market instruments.
Equities
In equities, ICICI Securities offers a range of products including
underwriting of equity offerings, public and private placement of corporate
equity and assistance in buyback programs. Indian law prohibits ICICI
Securities from holding or trading the merged entity's equity shares.
Other Corporate Banking Activities
International Banking Business
The merged entity's international business division is responsible for its
international businesses in the retail, corporate and technology areas and for
the international alliances required for its domestic businesses. This division
seeks to leverage on the merged entity's home country links and technology
competencies in financial services. The merged entity's international business
services include foreign currency loans for imports and exports, documentary
credits, standby letters of credit and collection and funds transfer services.
The merged entity provides a wide range of cross-border banking services from
21 of its branches spread across the country. All of these branches are
connected directly to the Society for Worldwide Inter-Bank Financial
Telecommunication network
43
(SWIFT), to quickly facilitate transactions. The merged entity also has
correspondent arrangements with over 330 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. The merged entity also provides travel-related
banking services to its corporate customers including money changing, sale and
cashing of travelers' checks and foreign currency remittances to international
travel destinations. The merged entity's customers pay fees to it for
substantially all of these products and services. In May and June 2002, the
merged entity opened representative offices in London and New York.
Venture Capital Funding
The merged entity provides venture capital funding to start-up companies
through its subsidiary ICICI Venture Funds Management Company Limited. Prior to
the amalgamation, ICICI Venture was a subsidiary of ICICI. At year-end fiscal
2002, ICICI Venture managed or advised funds of Rs. 18.1 billion (US$ 370
million). The company focuses on the information technology and healthcare
sectors. The merged entity believes that ICICI Venture is the leading private
equity investor in India, having invested in a large number of the private
equity deals completed in the country to date and having established a track
record of successfully exiting from several investments.
Non-Life Insurance
Following the deregulation of the insurance sector, private sector
companies have been allowed to enter the insurance business. In the non-life
insurance sector, ICICI had entered into a joint venture partnership with
Lombard Canada Limited in fiscal 2001. ICICI had a 74.0% interest in this joint
venture. The joint venture company, ICICI Lombard General Insurance Company
Limited, obtained the license to conduct general insurance business in August
2001 and since then has commenced operations. Pursuant to the amalgamation,
ICICI Lombard has become a subsidiary of the merged entity.
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. The merged entity offers
customized products and solutions for cooperative banks. Although the merged
entity does not charge a fee for these products, they result in amounts being
maintained with the merged entity in non-interest-bearing current accounts that
it can invest profitably.
Corporate Loan Pricing
The merged entity prices its loans to corporate borrowers based on four
factors:
o its internal credit rating of the company;
o the maturity of the loan;
o the nature of the banking or financing arrangement (either a single
bank, multiple bank or consortium arrangement);
o the collateral available; and
o market conditions.
For a description of the merged entity's credit rating system, see "- Risk
Management - Credit Risk".
The Asset-Liability Management Committee of the merged entity's board of
directors fixes prime lending rates based on yield curve factors, such as
interest rate and inflation rate expectations, as well
44
as the market demand for loans of a certain term and the merged entity's cost
of funds. For corporate loans, the merged entity has three prime lending rates
linked to the term of the loan and one prime lending rate for cash credit. The
merged entity's prime lending rates effective September 1, 2002 are as follows:
Term Prime lending rate
--------------------------------------------------------------------------------
Up to one year................................................ 11.5
One to three years............................................ 12.0
Over three years.............................................. 12.5
Cash credit................................................... 13.0
Under the earlier Reserve Bank of India regulations, loan exposures
through corporate debt instruments and bill discounting were not subject to the
prime lending rate regulations. Banks could lend at an interest rate below
their prime lending rates when delivery was through these products. From fiscal
2002, the Reserve Bank of India further liberalized the interest rate regime by
allowing banks the freedom to lend below their respective prime lending rates
pursuant to their internally approved guidelines.
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, small businesses and housing finance up to certain
limits. Out of the 40.0%, banks are required to lend a minimum of 18.0% of
their net bank credit to the agriculture sector and the balance to certain
specified sectors, including small scale industries (defined as manufacturing,
processing and services businesses with a limit on investment in plant and
machinery of Rs. 10 million), small businesses, including retail merchants,
professional and other self employed persons and road and water transport
operators, housing loans up to certain limits and to specified state financial
corporations and state industrial development corporations. ICICI Bank was
required to comply with this priority sector lending pursuant to the above
norms prior to the amalgamation.
The following table sets forth, at the dates indicated, ICICI Bank's
priority sector loans broken down by type of borrower.
% of net
bank credit
at March
At March 31, 31,
------------------------------------------------------------------------------ ------------
1998 1999 2000 2001 2002 2002 2002
----------- ----------- ----------- ---------- ---------- ----------- ------------
(in millions, except percentages)
Small scale industries.... Rs. 2,753 Rs. 3,510 Rs. 5,958 Rs. 5,592 Rs. 4,633 US$ 95 9.9%
Others including small
businesses........... 513 1,959 2,662 10,354 6,930 142 14.8
Agricultural sector....... 501 675 1,520 7,096 8,561 175 18.3
----------- ----------- ----------- ---------- ---------- ----------- ------------
Total..................... Rs. 3,767 Rs. 6,144 Rs. 10,140 Rs. 23,042 Rs. 20,124 US$ 412 43.0%
=========== =========== =========== =========== ========== =========== ============
At year-end fiscal 2002, ICICI Bank's priority sector loans were Rs. 20.1
billion (US$ 412 million), constituting 43.0% of net bank credit.
While granting its approval for the amalgamation, the Reserve Bank of
India stipulated that since ICICI's loans transferred to the merged entity were
not subject to the priority sector lending
45
requirement, the merged entity is required to maintain priority sector lending
of 50.0% of its net bank credit on the residual portion of its advances (i.e.
the portion of its total advances excluding advances of ICICI at year-end
fiscal, 2002). This additional 10.0% priority sector lending requirement will
apply until such time as the aggregate priority sector advances of the merged
entity reach a level of 40.0% of the total net bank credit of the merged
entity. The Reserve Bank of India's existing instructions on sub-targets under
priority sector lending and eligibility of certain types of investments/ funds
for reckoning as priority sector advances apply to the merged entity.
The merged entity is required to comply with the priority sector lending
requirements at the end of each fiscal year. Any shortfall in the amount
required to be lent to the priority sectors may be required to be deposited
with government sponsored Indian development banks like the National Bank for
Agriculture and Rural Development and the Small Industries Development Bank of
India. These deposits have a maturity of up to five years and carry interest
rates lower than market rates.
Export Credit
As part of directed lending, the Reserve Bank of India also requires banks
to make loans to exporters at concessional rates of interest. Export credit is
provided for pre-shipment and post-shipment requirements of exporter borrowers
in rupees and foreign currencies. At the end of the fiscal year, 12.0% of a
bank's net bank credit is required to be in the form of export credit. This
requirement is in addition to the priority sector lending requirement but
credits extended to exporters that are small scale industries or small
businesses may also meet part of the priority sector lending requirement. The
Reserve Bank of India provides export refinancing for an eligible portion of
total outstanding export loans at the bank rate prevailing in India from time
to time. The interest income earned on export credits is supplemented through
fees and commissions earned from these exporter customers from other fee-based
products and services taken by them from the merged entity, such as foreign
exchange products and bill handling. At year-end fiscal 2002, ICICI Bank's
export credit was Rs. 6.2 billion (US$ 127 million), constituting 13.3 % of its
net bank credit.
Housing Finance
The Reserve Bank of India requires banks to lend up to 3.0% of their
incremental deposits in the previous fiscal year for housing finance. This can
be in the form of home loans to individuals or investments in the debentures
and bonds of the National Housing Bank and housing development institutions
recognized by the government of India. Housing finance also qualifies as
priority sector lending. At year-end fiscal ICICI Bank's housing finance was
Rs. 5.9 billion (US$ 121 million), comprising primarily investments that
qualify as housing finance for this purpose.
Corporate Deposits
The merged entity takes deposits from its 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. The merged entity routinely provides 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. Banks are not permitted to pay interest for periods less than
seven days. Also, pursuant to the current regulations, the merged entity is
permitted to vary the interest rates on its 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 the merged entity from large public sector
corporations, government organizations, other banks and private sector
companies. ICICI Bank's corporate deposits totaled Rs. 151.3 billion (US$ 3.1
billion) at year-end fiscal 2002, constituting 46.5% of its total deposits and
39.1% of its total liabilities at year-end fiscal 2002.
46
The merged entity offers a variety of deposit products to its corporate
customers. The merged entity takes rupee or foreign currency denominated
deposits with fixed or floating interest rates. The merged entity's 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, at the dates indicated, ICICI Bank's
corporate deposits by product.
% of total
At March 31, at March 31,
----------------------------------------------------- ------------
2000 2001 2002 2002 2002
---------- ---------- ----------- --------- ------------
(in millions, except percentages)
Current accounts-banks....... Rs. 854 Rs. 909 Rs. 1,090 US$ 22 0.7%
Current accounts-others...... 14,090 19,992 20,919 428 13.8
Time deposits-banks.......... 15,335 20,900 44,230 906 29.2
Time deposits-others......... 37,434 21,400 83,376 1,708 55.1
Certificates of deposits..... 377 553 1,708 35 1.2
---------- ---------- ----------- --------- ------------
Total Rs. 68,090 Rs. 63,754 Rs. 151,323 US$ 3,099 100.0%
========== ========== =========== ========= ============
The following table sets forth, at the date indicated, the maturity
profile of ICICI Bank's rupee term deposits (including deposits of banks) of
Rs. 10 million (US$ 204,792) or more:
At March 31,
---------------------------------------------
% of total
2002 deposits
---------------------------- ----------
(in millions, except percentages)
Less than three months....................................... Rs. 51,264 US$ 1,050 15.8%
Above three months and less than six months.................. 12,434 255 3.8
Above six months and less than twelve months................. 41,149 843 12.6
More than twelve months...................................... 10,712 219 3.3
----------- ------------- ---------
Total deposits of Rs. 10 million and more.................... Rs. 115,559 US$ 2,367 35.5%
=========== ============= =========
ICICI was one of ICICI Bank's deposit customers. At year-end fiscal 2002,
ICICI Bank had Rs. 2.2 billion (US$ 45.1 million) of current deposits and Rs.
2.1 billion (US$ 43 million) of time deposits from ICICI. ICICI Bank did not
pay interest on these current deposits and paid interest on these time deposits
until March 29, 2002 at the same rates at which it paid interest to all other
time deposit customers.
The merged entity markets corporate deposits from branches and directly
from its corporate office. The merged entity continues 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 the merged entity. The merged
entity acts as bankers to corporates for their dividend pay out to their
shareholders and interest payout to bondholders, which results in mobilizing
interest-free, float balances to the merged entity. The merged entity believes
that its management of its corporate deposit customers as well as its ability
to offer competitive rates on large deposits significantly reduces the
volatility in its corporate deposit base. The merged entity also offers
inter-bank call rate-linked floating rate deposits.
47
The growth in corporate deposits has been supplemented by the "anywhere
banking service" offered by ICICI Bank and also by the merged entity, which
allows multi-locational corporations in India to receive cash inflows and make
payments in various cities by maintaining one central pooling account.
Client Coverage
In fiscal 2002, ICICI Bank created four new client relationship groups,
namely, the Agriculture Banking Group, the Small and Medium Enterprises Group,
the Transaction Banking Group and the Corporate Banking Group. The relationship
managers of the Corporate Banking Group were responsible for identifying
business opportunities for all medium and large sized corporates. The
relationship managers provided a one-point contact and headed 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. In fiscal 2002, ICICI created a team of dedicated client bankers, called
the Client Relationship Group, which managed the relationship with corporate
clients. 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. ICICI Bank's client relationship
groups worked in close coordination with ICICI's Client Relationship Group and
Government and Institutional Group, to jointly market ICICI's and ICICI Bank's
products and services to corporate, government and institutional customers.
ICICI had separate groups for customers in the infrastructure (including
telecommunications, transportation and urban infrastructure and energy, oil and
gas) and shipping and related sectors. ICICI had a Structured Products Group
responsible for structuring customized financing solutions for ICICI's
customers.
Pursuant to the amalgamation, the merged entity has reorganized its
organizational structure and corporate banking business around focused
relationship and product groups. The merged entity's principal corporate
relationship groups are the Corporate Solutions Group, the Government and
Institutional Solutions Group, the Emerging Corporates Group and the
Agri-Business Group. The Corporate Solutions Group is responsible for managing
relationships and providing banking solutions to large, highly rated
corporates. The Government and Institutional Group is a dedicated group for
public sector units, government departments and authorities and quasi
governmental agencies like municipal corporations. The Emerging Corporates
Group and the Agri-Business Group work closely with the Corporate Solutions
Group and the Government and Institutional Solutions Group to offer products
and services to suppliers and dealers of the merged entity's large corporate
customers. The principal corporate product groups are the Product and
Technology Group which is responsible for delivery of products and services,
the Structured Products and Portfolio Management Group which is responsible for
supporting the product groups by designing financing structures that satisfy
customer requirements while adequately mitigating risk and the Treasury which
is responsible for designing and providing corporate treasury and risk
management products and services. The merged entity has specialized groups for
infrastructure project finance and manufacturing project finance (including
oil, gas and petrochemicals and shipping). These groups focus on project
appraisal and monitoring and work closely with the other relationship and
product groups to provide a wider range of products and services, in addition
to project financing, to the merged entity's project finance customers.
The relationship managers are supported by product specialists from the
product groups who focus on product improvements and customization. The main
focus of the relationship managers is to market the merged entity's products.
In addition to the above, they cross sell the products offered by the merged
entity's subsidiaries and affiliates.
Delivery Channels
Branch Network
The merged entity's corporate banking relationship groups are principally
based at Mumbai, New Delhi, Chennai, Kolkata, Bangalore, Hyderabad, Ahmedabad,
Pune, Vadodara, Coimbatore, Ludhiana, Chandigarh, Jaipur and Kochi. The merged
entity's corporate banking services are
48
delivered through its network of branches. At year-end fiscal 2002, the merged
entity had 359 branches.
Correspondent Banking Networks
The merged entity has correspondent banking relationships with other banks
in India with large physical branch networks to offer a broader coverage for
its funds transfers and remittance related products. As a result of its
correspondent banking associations, the merged entity provides remittance and
cash management services at over 1,750 locations in India.
Retail Banking
General
The merged entity believes that the Indian retail financial services
market is likely to experience significant growth in the future. ICICI Bank's
retail banking operations primarily consisted of raising deposits from retail
customers. ICICI Bank's total retail deposits were Rs. 173.9 billion (US$ 3.6
billion) or 53.5% of ICICI Bank's total deposits at year-end fiscal 2002 as
compared to Rs. 100.5 billion (US$ 2.0 billion) or 61.2% of ICICI Bank's total
deposits at year-end fiscal 2001. ICICI Bank's rapidly expanding retail
franchise was augmented by the acquisition of Bank of Madura in fiscal 2001.
The merged entity intends to continue to grow its retail deposits for funding
purposes since retail deposits are a good source of low cost, stable funds.
ICICI Bank also offered certain retail credit products, such as credit cards,
loans against term deposits and loans against shares. ICICI's retail banking
operations consisted of its consumer credit products such as automobile loans,
home loans, two-wheeler loans, loans for commercial vehicles and personal
loans. ICICI also offered retail liability products in the form of a variety of
unsecured redeemable bonds and had built a customer base of about 3.5 million
bondholders through issuances of bonds to the public. ICICI's former wholly
owned subsidiary, ICICI Capital Services, was one of the largest distributors
of financial and investment products in India. It also provided front-office
services to the retail and semi-retail investors of ICICI, and undertook the
management of the various ICICI centers, which were low-cost stand-alone
offices acting as marketing and service centers, set up by ICICI. ICICI
Personal Financial Services was also a wholly-owned subsidiary of ICICI, and
was engaged in the distribution and servicing of various retail credit products
and other services offered by ICICI and its subsidiaries and affiliates. Both
ICICI Capital Services and ICICI Personal Financial Services merged with and
into ICICI Bank in the amalgamation. Until fiscal 2002, ICICI offered home loans
directly and through its wholly-owned subsidiary ICICI Home Finance Company.
ICICI Home Finance Company now distributes the merged entity's home loans to
the merged entity's home loan customers.
Since the amalgamation, the merged entity and its subsidiaries and its
affiliates have engaged in all of the principal business activities of ICICI
Bank and ICICI and its subsidiaries. The merged entity's subsidiary ICICI
Prudential Life Insurance Company, a joint venture between the merged entity
and Prudential Corporation plc of the United Kingdom, offers a wide range of
life insurance products. The merged entity's affiliate Prudential ICICI Asset
Management Company, a joint venture between Prudential Corporation plc of the
United Kingdom and the merged entity, offers a variety of mutual fund products.
All of the merged entity's retail products are marketed under the ICICI
brand. To enhance the merged entity's brand equity, it undertakes comprehensive
brand building and advertising campaigns with advertisements in print and
television. Studies by independent market research agencies commissioned by the
merged entity have shown that the ICICI brand is the number two financial
services brand in India in terms of spontaneous brand recall.
49
Retail Deposits
The merged entity's 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, the merged entity accepts
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, at the dates indicated, the balance
outstanding by type of retail deposit.
At March 31,
----------------------------------------------------------------------
2000 2001 2002
---------------------------- ---------------------------------------
Balance outstanding % of total
--------------------------------------------------------- -----------
(in millions, except percentages)
Current accounts.......................... Rs. 930 Rs. 5,470 Rs. 7,565 US$ 155 4.4%
Savings accounts.......................... 5,330 18,786 24,970 511 14.4
Time deposits............................. 24,310 76,244 141,365 2,895 81.2
-------------- ----------- ------------ ------------ ---------
Total retail deposits..................... Rs. 30,570 Rs. 100,500 Rs. 173,900 US$ 3,561 100.0%
============== =========== ============ ============ =========
For a description of the Reserve Bank of India's regulations applicable to
deposits in India and required deposit insurance, see "Supervision and
Regulation -- Regulations Relating to Deposits" and "Supervision and Regulation
--Deposit Insurance".
In addition to its conventional deposit products, the merged entity offers
a variety of special value-added products and services which seek to maximize
returns as well as convenience for its customers.
Power Pay
In September 1996, ICICI Bank introduced "Power Pay", a direct deposit
product for its corporate customers, to help them streamline their salary
payment systems. At year-end fiscal 2002, over 7,600 corporate clients were
using Power Pay, which allows their employees' salaries to be directly credited
to a special savings account established for this purpose. This product
provides the merged entity with a competitive advantage as these new payroll
account holders often open other accounts with the merged entity, including
time deposits. The merged entity also seeks to market its retail credit
products to its payroll account holders. The merged entity aims to deliver
value to corporates and their employees by offering end-to-end financial
solutions from salary processing through strategic alliances, offering payment
services through checks, debit and credit cards as well as online bill payment
and in-house as well as third party investment vehicles.
50
Value Added Savings Account
The merged entity's value added savings account 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, resulting in higher yields. Whenever there is a shortfall in the
customer's savings accounts, deposits are transferred back from the time
deposit account, automatically in units of Rs. 1,000 to meet the shortfall.
Private Banking
The merged entity's private banking services seek to meet the entire
banking and financial advisory needs of customers with a relationship size in
excess of Rs. 1 million. The merged entity offers private banking services at
55 branches in 22 cities. The merged entity offers financial planning and
investment advisory services to assist its customers in their investment and
savings plans.
Web Brokering
ICICI Web Trade Limited, a company promoted by ICICI, provides web
brokering services. This service involves the online integration of a
customer's depositary share accounts and bank accounts with the merged entity
and securities brokerage accounts with ICICI Web Trade. This service has
assisted the merged entity in its efforts to acquire new customers and low-cost
savings deposits as each e-brokering customer is required to open a bank
account.
Portfolio Investment Scheme (PINS)
The merged entity is one of the banks designated by the Reserve Bank of
India for issuing approvals to non-resident Indians and overseas corporate
bodies to trade in shares and convertible debentures on the Indian stock
exchanges. Pursuant to this scheme of the Reserve Bank of India, these
investors can trade on the Indian stock exchanges within a prescribed limit by
obtaining an approval from a designated bank and by routing all the
transactions through that bank. The merged entity reports all such transactions
to the Reserve Bank of India as a designated bank. The merged entity also helps
these investors with regulatory compliance, such as ensuring delivery based
trading and limit monitoring and providing tax calculations.
Debit Cards
The merged entity offers an international debit card, branded as
ICICINCash, in association with VISA International on its popular VISA Electron
signature based platform. This provides a greater choice of payment solutions
to customers. It provides customers a safer and more convenient alternative to
carrying cash both locally and internationally. The ICICINCash debit card
enables direct deductions of the purchase amount from the customer's account
from any of 11 million VISA merchant establishments and ATMs around the world.
The merged entity's debit card base has increased to over one million cards in
July 2002.
Bond Issues
ICICI offered a variety of unsecured redeemable bonds to the Indian
public. These bonds, which are not insured by any Indian authority, are
designed to address various investor needs, such as the need for regular
income, liquidity and tax saving. The merged entity has a customer base of
about 3.5 million bondholders through ICICI's issuances of bonds to the Indian
public. During fiscal 2002, ICICI raised Rs. 40.2 billion (US$ 823 million)
through these bond issuances. The merged entity seeks to continue to offer
similar bonds to the public, though deposits will be its primary source of
funding.
51
Internet banking services
The merged entity offers Internet banking services to its retail customers
through its website www.icicibank.com. The merged entity believes that the
increasing number of Internet users, the demographic characteristics of those
users and the relative flexibility and convenience of Internet banking provide
an opportunity for the merged entity to capitalize on its experience in this
area and gain market share in the retail banking sector. The services currently
offered by the merged entity to its Internet banking customers include access
to online account information, transfer of funds to any other account with the
merged entity, placement of time deposits, secure e-mail facility for
communications with an accounts manager, and bill payments using credit cards
issued by the merged entity or by debit to savings account. The number of ICICI
Bank's Internet banking customers was approximately one million at year-end
fiscal 2002.
Online Bill Payment
The merged entity has tie-ups with leading telecommunication companies,
utility providers, insurance companies and Internet shopping malls for online
payment of bills by the merged entity's Internet banking customers. The merged
entity currently offers this service free to its customers with the intention
of building a base of users, based on cost sharing arrangements with most of
these companies where the merged entity either charges the company a fixed fee
per bill or the company maintains a balance with the merged entity before the
funds are used by the company, resulting in short-term low cost deposits with
the merged entity.
Money2India Remittance Facility
For easy transfer of funds to India, the merged entity offers Money2India,
a wire transfer remittance facility with a web interface. Non-resident Indians
can send money to over 170 locations in India.
Retail Lending Activities
The merged entity offers a range of retail asset products, including
primarily automobile loans, home loans, loans for consumer durable products,
commercial vehicles and farm and construction equipment and two wheelers,
personal loans and credit cards. The merged entity also funds dealers who sell
automobiles, two wheelers, consumer durables and commercial vehicles. The
merged entity also provides loans against time deposits and loans against
shares, including for subscriptions to initial public offerings of Indian
companies. Prior to the amalgamation, these products were primarily offered by
ICICI, other than credit cards, loans against time deposits and loans against
shares, which were offered by ICICI Bank. At year-end fiscal 2002, ICICI's
consolidated retail loan portfolio was Rs. 72.8 billion (US$ 1.5 billion) or
13.0% of its consolidated gross loans at year-end fiscal 2002 compared to Rs.
27.1 billion (US$ 555 million) or 4.3% of its consolidated gross loans at
year-end fiscal 2001. At year-end fiscal 2002, ICICI Bank's retail loan
portfolio was Rs. 7.2 billion (US$ 147 million) or 9.5% of its gross loans at
year-end fiscal 2002.
Home Finance
The merged entity's home finance business involves giving long-term
secured housing loans to individuals and corporations and construction finance
to builders. The merged entity has a wholly-owned subsidiary called ICICI Home
Finance Company Limited, but currently provides housing loans directly.
Currently, these loans are being given to resident and non-resident Indians for
the purchase, construction and extension of residential premises and to
self-employed professionals for office premises. At year-end fiscal 2002, the
total home finance loans of ICICI and ICICI Home Finance Company were
approximately Rs. 28.4 billion (US$ 582 million).
52
Automobile Finance
Automobile finance generally involves the provision of retail consumer
credit for an average maturity of three to five years to acquire specified new
and used automobiles. Automobile loans are secured by a lien on the purchased
automobile. The merged entity believes it is the market leader in the
automobile finance segment. The merged entity has "preferred financier" status
with 11 car manufacturers in India. The merged entity has a strong external
distribution network and a strong in-house team to manage the distribution
network which has been instrumental in achieving this leadership position. At
year-end fiscal 2002, ICICI's total automobile finance loans were approximately
Rs. 27.1 billion (US$ 555 million). The merged entity also gives loans for
purchase of two wheelers. At year-end fiscal 2002, ICICI's total two wheeler
finance loans were approximately Rs. 2.4 billion (US$ 49 million)
Commercial Business
The merged entity funds commercial vehicles, utility vehicles and
construction and farm equipment sold through manufacturer-authorized dealers.
The finance is generally for a maximum term of five years through loans, hire
purchase agreements or a lease. At year-end fiscal 2002, ICICI's total
commercial business loans were approximately Rs. 9.0 billion (US$ 184 million).
Personal Loans
Personal loans are unsecured loans provided to customers for personal
purposes such as higher education, medical expenses, social events and
holidays. At year-end fiscal 2002, ICICI's total personal loans were
approximately Rs. 4.1 billion (US$ 83 million).
Consumer Durable Finance
The merged entity's consumer durable finance business involves the
financing of home products, such as refrigerators, televisions, washing
machines, air conditioners and audio equipment. At year-end fiscal 2002,
ICICI's total consumer durable finance loans were approximately Rs. 760 million
(US$ 16 million).
Credit Cards
In January 2000, ICICI Bank launched its credit card operations. As the
Indian economy develops, the merged entity expects that the retail market will
seek short-term credit for personal uses, and the merged entity's offering of
credit cards will facilitate further extension of the merged entity's retail
credit business. The merged entity also expects that as credit usage increases,
the merged entity will be able to leverage its customer relationships to
cross-sell additional retail and consumer-oriented products and services. At
year-end fiscal 2002, ICICI Bank had approximately 586,000 credit cards in
force and its credit card receivables were approximately Rs. 3.6 billion (US$
73 million).
Dealer Funding
The merged entity funds dealers who sell automobiles, two wheelers,
consumer durables and commercial vehicles. At year-end fiscal 2002, ICICI's
total dealer funding loans were approximately Rs. 1.1 billion (US$ 23 million).
Other Fee-Based Products and Services
Mutual Fund Sales
The merged entity has entered into arrangements with select mutual funds
to distribute their products through its distribution network, for which it
earns up-front and trailing commissions.
53
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. The merged entity is a depositary participant of the
National Securities Depository Limited and Central Depository Services (India)
Limited and offers depositary share accounts.
Government of India Relief Bond Sales
The merged entity has been permitted by the Reserve Bank of India to sell
government of India relief bonds. This includes the receipt of applications for
relief bonds, the issue of relief bonds in the form of bond ledger accounts and
the servicing of bondholders. Relief bonds are sold across all of the merged
entity's branches. Interest earned on relief bonds is tax-free and is hence a
good investment avenue for many high net worth individuals. The merged entity
seeks to capitalize on this opportunity by effectively distributing relief
bonds through its distribution network and earning fee income in the process.
Life Insurance
The merged entity has a joint venture partnership with Prudential plc of
the UK for the life insurance business. The merged entity has a 74.0% interest
in this joint venture. This joint venture company, ICICI Prudential Life
Insurance Company Limited, obtained the license to conduct life insurance
business in November 2000 and commenced business operations in December 2000.
ICICI Prudential Life Insurance sold about 98,000 policies in fiscal 2002. The
sum assured for policies in force at year-end fiscal 2002 was Rs. 27.6 billion
(US$ 565 million). The net premiums earned for fiscal 2002 were Rs. 1.2 billion
(US$ 24 million). There is a Memorandum of Understanding between the merged
entity and ICICI Prudential Life Insurance Company for distribution of life
insurance policies issued by ICICI Prudential Life Insurance Company through
the merged entity's branch network.
Distribution Channels
The merged entity delivers its retail products and services through a
variety of distribution outlets, ranging from traditional bank branches to ATMs
and the Internet. The merged entity believes that India's vast geography
necessitates a variety of distribution channels to best serve the merged
entity's customers' needs. As part of its strategy to migrate customers to
lower cost electronic delivery channels, the merged entity has made significant
investments in channels such as ATMs, call centers and the Internet. The merged
entity's channel migration effort is aimed at reducing cost while enhancing
customer satisfaction levels by providing them round the clock transaction and
servicing assistance. The key components of the merged entity's distribution
network are described below.
Branches
At year-end fiscal 2002, ICICI Bank had a network of 359 branches and 44
extension counters in 251 centers across several Indian states, an increase of
four branches and 10 extension counters over the previous year. Extension
counters are small offices primarily within office buildings or on factory
premises, that provide commercial banking services. Prior to opening a branch,
the merged entity conducts a detailed study in which it assesses the deposit
potential of the area. The merged entity's branch locations are largely leased
rather than owned. The merged entity's back office operations are centralized
at regional processing centers, enabling the merged entity to create a more
efficient branch network.
As a part of its branch licensing conditions, the Reserve Bank of India
has stipulated that at least 25.0% of the merged entity's 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
54
is defined as a center with a population of less than 10,000. The population
figures relate to the 1991 census. The merged entity has adhered to this
requirement as shown in the table below. Several of these branches are located
in suburbs of large cities, and some of these branches are located in areas
where large corporations have their manufacturing facilities.
The following table sets forth, at the date indicated, the number of
branches broken down by area.
At March 31, 2002
-----------------------------------
Number of branches % of total
------------------ ---------------
Metropolitan/urban................... 183 51.0%
Semi-urban/rural .................... 176 49.0
-----------------------------------
Total ............................... 359 100.0%
-----------------------------------
ICICI Centers
ICICI had set up a number of "ICICI Centers", which were low-cost,
technology driven, stand-alone offices with three or more employees, acting as
marketing and service centers. At year-end fiscal 2002, ICICI had 95 ICICI
Centers. Pursuant to the amalgamation, the merged entity has submitted a
proposal to the Reserve Bank of India in respect of these centers, including
conversion of some of these centers into bank branches and some into
distribution and servicing centers attached to bank branches. The Reserve Bank
of India has not yet responded to this proposal.
Franchisee Network
The merged entity has a vast franchisee network spread over all major
cities in India. The franchisees deliver the merged entity's retail credit
products. These agencies help the merged entity achieve deeper penetration by
offering door-step service to the customer. These agencies market the merged
entity's products on an exclusive basis. All credit and risk management
decisions pertaining to any customer are made by the merged entity and no
agency can extend credit to any customer without the merged entity's approval.
These agencies receive a fee based on the volume of business generated by them.
Automated Teller Machines (ATMs)
At year-end fiscal 2002, ICICI Bank had 1,000 ATMs, of which 398 were
located at the merged entity's branches and extension counters. The remaining
602 were located at the offices of select corporate clients, large residential
developments, airports, gas stations and on major roads in metropolitan cities.
The merged entity's ATMs also acquire VISA/VISA Plus/VISA Electron
transactions.
Internet
The merged entity believes that Internet access and information is key to
satisfying the needs of certain customer segments. As a result, the merged
entity maintains a website at www.icicibank.com offering generalized
information on the merged entity's products and services. The merged entity's
Internet banking service allows customers to access all account-related
information, perform on-line fund transfers to other accounts with the merged
entity and give account instructions 24 hours a day, seven days a week through
the merged entity's website. It also allows transactions and bill payment
facilities. The merged entity seeks to continue to be at the forefront of
providing web-based products to its corporate and retail customers.
Call Centers
The merged entity provides telephone banking services through a
centralized call center in Mumbai. The call center functions 24 hours a day and
seven days a week and offers a self-service option to customers for automated
phone banking. In addition, well-trained customer service officers
55
offer personalized services for banking, dematerialized securities, online
share trading customers, credit card holders and bondholders. The call center
is also used in product specific marketing campaigns to generate leads which
are assigned to the franchisees for fulfillment. At year-end fiscal 2002, this
call center had 620 work stations and provided telephone-banking services to
customers in around 100 cities. The merged entity has set up another call
center at Hyderabad in September 2002 which will have a capacity of over 1,000
workstations.
Mobile Phone Banking
The merged entity's mobile phone banking services are available to its
customers using any cellular telephone service operator in India. Savings
account and credit card customers can view their account details on their
mobile phones.
ICICI Prudential Life Insurance
ICICI Prudential Life Insurance, the merged entity's life insurance
subsidiary, had 16 branches in 13 locations at year-end fiscal 2002.
56
Treasury
Through its treasury operations, the merged entity seeks to manage its
balance sheet including the maintenance of required regulatory reserves and to
optimize profits from its trading portfolio by taking advantage of market
opportunities. The merged entity's trading portfolio includes its regulatory
portfolio, as there is no restriction on active management of the merged
entity's regulatory portfolio.
General
Due to regulatory requirements, a substantial portion of the merged
entity's trading portfolio consists of government of India securities. At
year-end fiscal 2002, government of India securities constituted 79.6% of ICICI
Bank's trading portfolio and 36.8% of ICICI's trading portfolio while the
remainder of both ICICI Bank's and ICICI's trading portfolios included domestic
debt and equity securities and foreign currency assets.
Under the Reserve Bank of India's statutory liquidity ratio requirement,
the merged entity is required to maintain 25.0% of its total demand and time
liabilities by way of approved securities, such as government of India
securities and state government securities. The merged entity maintains the
statutory liquidity ratio through a portfolio of government of India securities
that it actively trades to optimize the yield and benefit from price movements
to increase its trading income from this portfolio. Under the Reserve Bank of
India's cash reserve ratio requirements, the merged entity is required to
maintain 5.0% of its demand and time liabilities in a current account with the
Reserve Bank of India. The Reserve Bank of India pays no interest on these cash
reserves up to 3.0% of the net demand and time liabilities and pays interest at
the bank rate (the rate at which the Reserve Bank of India provides refinance
to the banking system, currently 6.0%) on the remaining eligible balance.
For further discussion of these regulatory reserves, see "Supervision and
Regulation -- Legal Reserve Requirements".
Since ICICI was not a commercial bank, it was not required to maintain
these regulatory reserves. The Reserve Bank of India, while approving the
amalgamation, stipulated that the merged entity must maintain these regulatory
reserves on all of ICICI's demand and time liabilities. During fiscal 2002,
ICICI Bank acquired government of India securities required to maintain the
statutory liquidity ratio on ICICI's demand and time liabilities transferred to
the merged entity pursuant to the amalgamation. In addition, a large cash
balance was maintained by ICICI Bank and ICICI towards the end of fiscal 2002
in order to meet the cash reserve ratio on ICICI's outstanding demand and time
liabilities following the amalgamation.
As part of the merged entity's treasury activities, the merged entity
maintains proprietary trading portfolios in domestic debt and equity securities
and in foreign currency assets. ICICI Bank had a limited equity portfolio
because the Reserve Bank of India restricts investments by a bank in equity
securities to 5.0% of its total outstanding domestic loan portfolio as on March
31 of the previous year. ICICI's investments in equity securities were not
subject to this restriction. A significant portion of ICICI's investments in
equity securities were related to projects financed by it. The Reserve Bank of
India has permitted the merged entity to exclude these investments for
determining compliance with the restriction on investments by banks in equity
securities, for a period of five years from the amalgamation.
The merged entity's treasury engages in domestic and foreign exchange
operations from a centralized trading floor in Mumbai. The merged entity's
treasury manages the merged entity's liquidity and regulatory reserves with an
objective of optimizing yield on its investment portfolio. It undertakes
transactions in both fixed income securities and equity securities. Its trading
portfolio consists mainly of fixed income securities. At year-end fiscal 2002,
fixed income securities were 84.5% of ICICI Bank's trading portfolio and 98.2%
of ICICI's trading portfolio. The merged entity's treasury manages the merged
entity's foreign currency exposures, offers foreign exchange and risk hedging
derivative products to its customers and engages in proprietary trading of
currencies. The
57
merged entity's investment and market risk policies are approved by the Risk
Committee and Asset-Liability Management Committee of the merged entity's board
of directors.
The merged entity's treasury undertakes liquidity management by seeking to
maintain an optimum level of liquidity and complying with the cash reserve
ratio. The objective is to ensure the smooth functioning of all the merged
entity's branches and at the same time avoid the holding of excessive cash. The
merged entity's treasury maintains a balance between interest-earning liquid
assets and cash to optimize earnings. The treasury undertakes reserve
management by maintaining statutory reserves, including the cash reserve ratio
and the statutory liquidity ratio.
The merged entity's securities, as in the case of ICICI Bank's and ICICI's
securities, are classified into held to maturity securities, available for sale
securities, trading securities, venture capital investments and non-readily
marketable securities. The following table sets forth, at the dates indicated,
certain information related to ICICI Bank's trading portfolio.
Year ended March 31,
----------------------------------------------------------------
2000 2001 2002 2002
----------- ----------- ---------- ----------
(in millions)
Government of India securities.............. Rs. 26,903 Rs. 14,055 Rs. 20,765 US$ 425
Equity securities........................... 90 - - 0
Debentures.................................. - 1,808 538 11
Bonds....................................... - 2,348 727 15
Fair value of derivative and foreign
exchange contracts....................... 309 127 541 11
Mutual funds units.......................... 779 - 3,504 72
Commercial paper and certificates of deposit 147 387 0 0
----------- ----------- ---------- ----------
Total....................................... Rs. 28,228 Rs. 18,725 Rs. 26,075 US$ 534
=========== =========== ========== ==========
The following table sets forth, for the periods indicated, certain
information related to interest and dividends on ICICI Bank's trading
securities, net gain from the sale of these securities and unrealized
gain/(loss) on these securities.
Year March 31,
----------------------------------------------------------------
2000 2001 2002 2002
----------- ----------- ---------- ----------
(in millions)
Interest and dividends...................... Rs. 3,073 Rs. 2,833 Rs. 3,965 US$ 81
Gain on sale of trading securities.......... 936 769 2,324 48
Unrealized gain/(loss) on trading securities (79) (167) (128) (3)
----------- ----------- ---------- ----------
Total....................................... Rs. 3,930 Rs. 3,435 Rs. 6,161 US$ 126
=========== =========== ========== ==========
In addition to trading securities, ICICI Bank also held available for sale
securities. The following tables set forth, at the dates indicated, certain
information related to ICICI Bank's available for sale securities. ICICI Bank's
investments in government of India securities increased during fiscal 2002 due
to the Reserve Bank of India's requirement that the merged entity maintain the
statutory liquidity ratio for ICICI's demand and time liabilities, which
requirement was not applicable to ICICI as it was not a commercial bank.
58
At March 31,
--------------------------------------------------------------
2000
--------------------------------------------------------------
Amortized Gross Gross
cost unrealized gain unrealized loss Fair value
---------- --------------- ---------------- ----------
(in millions)
Corporate debt securities............. Rs. 2,540 Rs. 53 Rs. (19) Rs. 2,574
Government of India securities....... 914 89 - 1,003
---------- -------------- ---------------- ---------
Total debt securities................. 3,454 142 (19) 3,577
Mutual fund securities................ 1,146 - (14) 1,132
---------- -------------- ---------------- ---------
Total................................. Rs. 4,600 Rs. 142 Rs. (33) Rs. 4,709
========== ============== ================ =========
At March 31,
---------------------------------------------------------------------------------------------------------
2001 2002
--------------------------------------------- -----------------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized
cost gain loss value cost gain loss Fair value
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------------------
(in millions)
Corporate debt securities Rs. 6,057 Rs. 210 Rs. (27) Rs. 6,240 Rs. 4,437 Rs. 142 Rs. - Rs. 4,579 US$ 94
Government of India
securities............ 15,765 302 (7) 16,061 149,280 1,492 - 150,772 3,088
---------- ------- ---------- ---------- ----------- --------- -------- ----------- ---------
Total debt securities... 21,822 512 (34) 22,301 153,717 1,634 - 155,351 3,182
Mutual fund securities.. 2,513 4 (142) 2,375 350 - (57) 293 6
Others.................. 111 - - 111 122 - (8) 114 2
---------- ------- ---------- ---------- ----------- --------- -------- ----------- ---------
Total................... Rs. 24,446 Rs. 516 Rs. (176) Rs. 24,787 Rs. 154,189 Rs. 1,634 Rs. (65) Rs. 155,758 US$ 3,190
========== ======= ========== ========== =========== ========= ======== =========== =========
The following table sets forth, at the date indicated, an analysis of the
maturity profile of ICICI Bank's investments in debt securities classified as
available for sale securities and the yields thereon.
At March 31, 2002
------------------------------------------------------------------------------------------
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. 992 9.5% Rs. 1,782 11.3% Rs. 1,805 11.8% Rs. - 0.0%
Government of India
securities............. 79,316 7.4 45,123 10.9 26,206 9.8 127 9.3
---------- --- ---------- ---- ---------- ---- -------- ---
Total interest-earning
securities............ Rs. 80,308 7.4% Rs. 46,905 10.9% Rs. 28,011 10.0% Rs. 127 9.3%
========== === ========== ==== ========== ==== ======== ===
Total amortized cost..... Rs. 79,856 Rs. 46,351 Rs. 27,383 Rs. 127
From time to time, ICICI acquired and held equity securities. These
securities, which typically consisted of ordinary shares, were acquired in
multiple ways: direct subscriptions, rights issues and by conversion of ICICI's
performing and to a smaller extent impaired loans into equity. ICICI also
acquired equity securities in connection with underwritings conducted by ICICI
and ICICI Securities. A significant portion of these equity positions were
acquired at the time of the initial project finance assistance. Like ICICI, the
merged entity may also acquire and hold equity securities. The decision to
invest in equity securities along with project financing activities is an
independent business decision to participate in the equity of the company with
the intention of realizing capital gains arising out of expected increases in
market prices. This decision is taken strictly on a case-by-case basis and
there is no correlation between the basis for the lending decision and the
reasons for making the equity investment. All of the merged entity's equity
investments, other than in its subsidiaries and affiliates, are made with the
intent of holding them for medium-term to long-term periods strictly as
portfolio investments. To ensure compliance with the Securities and Exchange
Board of India's revised insider trading regulations, all dealings in the
merged entity's equity investments in listed companies are undertaken by the
equity and corporate bonds dealing desks of its treasury, which are segregated
from the other business groups of the merged entity as well as the other groups
and desks in the treasury, and which do not have access to unpublished price
sensitive information about these companies that may be available to the merged
entity.
59
Equity securities, forming part of the merged entity's investment
securities portfolio, are considered as publicly traded if they have been
traded on a securities exchange within six months of the balance sheet. The
last quoted price of such securities is taken and recorded as their fair value.
Non-readily marketable equity securities for which there is no readily
determinable fair value are recorded at cost and a provision is made for other
than temporary diminution. Securities acquired through conversion of loans in a
troubled debt restructuring are recorded at the fair value on the date of
conversion and subsequently accounted for as if acquired for cash. Venture
capital investments are carried at fair value. However, they are generally
carried at cost during the first year, unless a significant event occurs that
effects the long-term value of the investment. Substantially all venture
capital investments were acquired during fiscal 2001 and fiscal 2002.
Equity securities, including venture capital investments and mutual fund
units, increased to 3.8% of ICICI's total assets at year-end fiscal 2002 and
2.3% at year-end fiscal 2001 primarily due to investment of approximately Rs.
9.25 billion (US$ 189 million) in liquid mutual funds units at year-end fiscal
2002. Equity securities were 45.2% of ICICI's total investment securities
portfolio at year-end fiscal 2002 compared to 84.8% at year-end fiscal 2001. As
these investments are primarily in the nature of long-term investments in
start-up projects, returns on such investments generally accrue well after
commencement of operations by the projects. A detailed discussion on the
valuation of this portfolio is provided in the section on "-Risk
Management-Quantitative and Qualitative Disclosures About Market Risk". A Risk
Committee of the merged entity's board of directors sets the overall policy for
divestment of the merged entity's equity securities. In general, the merged
entity pursues a strategy of active management of its long-term equity
portfolio to maximize return on investment.
The following tables set forth, at the dates indicated, the gross
unrealized gains and losses within ICICI's investment securities portfolio and
the amortized cost and fair value of the portfolio by type of investment
security.
At March 31, 2000
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gain loss value
----------------------------------------------
(in millions)
Available for sale:
Government of India securities.............................. Rs. 914 Rs. 89 Rs. - Rs. 1,003
Corporate debt securities................................... 2,558 34 - 2,592
Equity securities(1)........................................ 11,326 1,203 (4,976) 7,553
----------------------------------------------
Total available for sale....................................... 14,798 1,326 (4,976) 11,148
----------------------------------------------
Held to maturity:
Government of India securities.............................. 560 54 -
614
Corporate debt securities.................................. 84 - - 84
Other debt securities....................................... 1 - - 1
----------------------------------------------
Total held to maturity......................................... 645 54 - 699
----------------------------------------------
Non-readily marketable equity securities (2)................... 6,542 - - N.A.
---------
N.A: Not applicable
(1) Excludes venture capital investments of Rs. 536 million (US$ 11 million).
(2) Non-readily marketable equity securities represent securities acquired as
a part of project financing activities or conversion of loans in debt
restructuring and are carried at cost, less any provision for other than
temporary diminution.
60
At March 31, 2001 At March 31, 2002
----------------- -----------------
Amortized Gross Gross Fair Amortized Gross Gross Fair value
cost unrealized unrealized value cost unrealized unrealized
gain loss gain loss
-------------------------------------------------------------------------------------------
(in millions)
Available for sale:
Government of India
securities ............ Rs. 975 Rs. 35 - Rs. 1,010 Rs. 28,262 Rs. 507 Rs. - Rs. 28,769
Corporate debt securities 485 4 - 489 5,724 52 (32) 5,744
Equity securities ....... 11,821 482 (6,110) 6,193 19,181 365 (3,223) 16,323
----------------------------------------------------------------------------------------
Total available for sale 13,281 521 (6,110) 7,692 53,167 924 (3,255) 50,836
----------------------------------------------------------------------------------------
Held to maturity:
Government of India
securities ............ 1,088 58 - 1,146 - - - -
Corporate debt securities 418 - (1) 417 - - - -
----------------------------------------------------------------------------------------
Total held to maturity .. 1,506 58 (1) 1,563 - - - -
----------------------------------------------------------------------------------------
Non-readily marketable
equity securities (1) . 7,148 - - N.A. 8,268 - - N.A.
Venture capital
investments(2) ........ - - - 3,769 - - - 3,921
---------
N.A.: Not applicable
(1) Primarily represents securities acquired as a part of project financing
activities or conversion of loans in debt restructurings.
(2) Represents venture capital investments held by venture capital
subsidiaries of ICICI.
The following table sets forth, for the period indicated, an analysis of
the maturity profile of ICICI's investments in debt securities classified as
available for sale securities and the yields thereon.
At March 31, 2002
---------------------------------------------------------------------------------
Up to one year One to five years Five to ten years More than 10 years
---------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------
(in millions except percentages)
Corporate debt securities 316 10.0% 2,933 11.0% 2,418 9.8% 77 10.4%
Other debt securities ... 6,767 6.9 18,687 6.3 1,055 7.4 2,260 7.7
---------------------------------------------------------------------------------
Total interest-earning
securities............. 7,083 7.0 21,620 6.9 3,473 9.1 2,337 7.8
=================================================================================
Total amortized cost .... 7,072 - 21,378 - 3,447 - 2,089 -
The merged entity deals in 19 major foreign currencies and takes deposits
from non-resident Indians in three major foreign currencies. The merged entity
also manages onshore accounts in foreign currencies. The foreign exchange
treasury manages its portfolio through money market and foreign exchange
instruments to optimize yield and liquidity.
The merged entity controls market risk and credit risk on its 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. The merged entity also uses a value
at risk model to monitor its spot positions.
Customer Foreign Exchange
The merged entity provides customer specific products and services and
risk hedging solutions in 19 currencies to meet the trade and service-related
requirements of its 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.
61
The merged entity earns commissions on these products and services from
its corporate customers.
Proprietary Trading in Currencies
The merged entity is active in the proprietary trading of currencies. The
merged entity's trading is focused on US dollar, the Euro, the Japanese yen and
the UK pound sterling. The following table sets forth, for the periods
indicated, the merged entity's growth in trading volume in various segments of
its foreign exchange operations.
Year ended March 31,
--------------------------------------------------------------
2000 2001 2002 2002
----------- ------------ ------------- ----------
(in billions, except number of currencies and nostro accounts)
Trading volume:
Inter-bank................................... Rs. 1,402.7 Rs. 2,349.6 Rs. 2,463.2 US$ 50.4
Merchant transactions........................ 129.8 294.7 341.0 7.0
----------- ------------ ------------- ----------
Total trading volume............................ Rs. 1,532.5 Rs. 2,644.3 Rs. 2,804.2 US$ 57.4
=========== ============ ============= =========
Size of foreign currency book.................. Rs. 19.1(1) Rs. 18.8 Rs. 31.5 US$ 0.7
Number of currencies............................ 15 18 19
Number of nostro accounts....................... 22 56 73
---------
(1) Includes Rs. 7.6 billion (US$ 175 million) of proceeds raised from ICICI
Bank's ADS offering in March 2000.
Funding
The merged entity's funding operations are designed to ensure both
stability of funding and effective liquidity management. ICICI Bank's primary
sources of funding were deposits raised from both retail and corporate
customers. ICICI Bank also obtained funds from short-term rupee borrowings and
issuance of subordinated debt securities. ICICI's primary sources of funding
were rupee borrowings from a wide range of institutional investors and retail
bonds. ICICI also obtained funds through foreign currency borrowings from
multilateral institutions like the Asian Development Bank and the World Bank,
which were guaranteed by the government of India, as well as through commercial
foreign currency borrowings. The merged entity's primary source of funding is
deposits raised from retail customers. The merged entity also takes deposits
from corporate and institutional customers. The merged entity constantly
monitors its funding strategy with a view to minimizing funding costs and
matching maturities with its loan portfolio.
The following table sets forth, for the periods indicated, ICICI Bank's
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,
----------------------------------------------------------------------------
2000 2001 2002
------------------------ ------------------------ ------------------------
Amount % of total Amount % of total Amount % of total
---------- ---------- ----------- ---------- ----------- ----------
(in millions except percentages)
Non-interest-bearing demand deposits.. Rs. 7,428 11.0% Rs. 12,505 13.4% Rs. 19,829 10.2%
Savings deposits(1)................... 3,530 5.3 8,598 9.2 21,397 11.0
Time deposits(2)...................... 56,351 83.7 72,411 77.4 153,613 78.8
---------- ---------- ----------- ---------- ----------- ----------
Total................................. Rs. 67,309 100.0% Rs. 93,514 100.0% Rs. 194,839 100.0%
========== ========== =========== ========== =========== ==========
----------
(1) With an average cost of 3.34 % in fiscal 2000, 2.83% in fiscal 2001 and
3.03% in fiscal 2002.
(2) With an average cost of 10.06% in fiscal 2000, 9.69% in fiscal 2001 and
8.42% in fiscal 2002.
62
For a breakdown of ICICI Bank's corporate deposits, see "-- Corporate
Banking -- Corporate Deposits", and for a breakdown of ICICI Bank's retail
deposits, see " -- Retail Banking -- Deposits".
The following table sets forth, at the dates indicated, certain
information related to ICICI Bank's short-term rupee borrowings from banks,
primary dealers and financial institutions, excluding deposits.
Year ended March 31,
---------------------------------------------------
2000 2001 2002
----------- ----------- -----------
(in millions, except percentages)
Period end balance(1)......................... Rs. 4,109 Rs. 9,507 Rs. 24,045
Average balance during the period(2).......... 5,264 8,268 11,747
Maximum month-end balance..................... 9,710 10,293 24,045
Average interest rate during the period(3).... 11.84% 10.97% 8.43%
Average interest at period end(4)............. 7.37 9.35 5.91
---------
(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.
ICICI Bank also obtained funds from the issuance of subordinated debt
securities. At year-end fiscal 2002, ICICI Bank's outstanding subordinated debt
was Rs. 3.7 billion (US$ 76 million). This debt is classified as Tier 2 capital
in calculating the merged entity's capital adequacy ratio. Under the Reserve
Bank of India's capital adequacy requirements, the merged entity is 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.
The following table sets forth, for the periods indicated, ICICI's average
outstanding rupee borrowings based on quarterly balance sheets and by category
of borrowing and the percentage composition by category of borrowing. The
average cost (interest expense divided by average of quarterly balances) for
each category of borrowings is provided in the footnotes.
Year ended March 31,(1)
--------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
--------------------------------------------------------------------------------------------------------------------
Amount % to Amount % to Amount % to Amount % to Amount Amount % to
total total total total total
--------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
SLR bonds(2)....Rs. 29,949 12.4% Rs. 27,936 8.4% Rs. 26,507 6.5% Rs. 23,405 4.9% Rs. 20,518 US$ 420 4.0%
Borrowings from
Indian
Government(3). 10,431 4.3 9,995 3.0 9,194 2.2 8,049 1.7 7,333 150 1.4
Convertible
debentures(4). 518 0.2 518 0.2 130 0.1 - - - - -
Other borrowings
(5)(6)........ 200,960 83.1 293,312 88.4 373,256 91.2 442,718 93.4 481,928 9,870 94.6
--------------------------------------------------------------------------------------------------------------------
Total(6)........Rs. 241,858 100.0% Rs. 331,761 100.0% Rs. 409,087 100.0% Rs. 474,172 100.0% Rs. 509,779 US$ 10,440 100.0%
====================================================================================================================
---------
(1) Average of quarterly balances at the end of March of the previous fiscal
year and June, September, December and March of that fiscal year for each
of fiscal 1998, 1999, 2000 and 2002 and average of quarterly balances at
the end of June, September, December and March for fiscal 2001.
(2) With an average cost of 10.29% in fiscal 1998, 10.39% in fiscal 1999,
10.33% in fiscal 2000, 10.62% in fiscal 2001 and 11.10% in fiscal 2002.
(3) With an average cost of 10.94% in fiscal 1998, 11.11% in fiscal 1999,
10.85% in fiscal 2000, 10.70% in fiscal 2001 and 10.40% in fiscal 2002.
(4) With an average cost of 12.50% in 1998 and 1999 and 14.38% in fiscal 2000.
The convertible debentures were redeemed on July 17, 1999.
(5) With an average cost of 15.06% in fiscal 1998, 14.53% in fiscal 1999,
13.67% in fiscal 2000, 13.06% in fiscal 2001 and 12.36% in fiscal 2002.
(6) Includes publicly and privately placed bonds, borrowings from institutions
and wholesale deposits such as inter-corporate deposits and certificate of
deposits.
63
The following table sets forth, at the dates indicated, certain
information related to ICICI's short-term rupee borrowings, which consist of
certificates of deposits, inter-corporate deposits and borrowings from
government-owned companies, known commonly as public sector units.
At March 31, (1)
-------------------------------------------------------------------
1998 1999 2000 2001 2002
-------------------------------------------------------------------
(in millions, except percentages)
Year-end balance...........................Rs. 32,306 Rs. 50,585 Rs. 87,758 Rs. 99,997 Rs. 69,135
Average balance during the year (2) ........ 27,410 51,098 68,626 100,569 85,056
Maximum quarter-end balance................. 39,501 68,858 90,442 104,412 91,950
Average interest rate during the year (3)... 10.00% 10.42% 12.38% 10.17% 9.65%
Average interest rate at year-end (4)....... 12.40 12.10 10.82 11.01 9.34
---------
(1) Short-term borrowings include trading liabilities, such as borrowings in
the call market and repurchase agreements.
(2) Average of quarterly balances at the end of March of the previous fiscal
year, June, September, December and March of that fiscal year for each of
fiscal 1998, 1999, 2000 and 2002 and average of quarterly balances at the
end of June, September, December and March for fiscal 2001.
(3) Represents the ratio of interest expense on short-term borrowings to the
average of quarterly balances of short-term borrowings.
(4) Represents the weighted average rate of the short-term borrowings
outstanding at fiscal year-end.
The following table sets forth, at the dates indicated, ICICI's average
outstanding volume of foreign currency borrowings based on quarterly balance
sheets by source and the percentage composition by source. The average cost
(interest expense divided by average of quarterly balances) for each source of
borrowings is provided in the footnotes.
At March 31, (1)
------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount total Amount total Amount total Amount total Amount Amount total
------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Commercial borrowings
(2)...................Rs. 77,437 79.7% Rs. 81,140 79.1% Rs. 74,509 77.4% Rs. 74,745 77.6% Rs. 73,955 US$1,515 76.8%
Multilateral borrowings
(3)................... 19,716 20.3 21,483 20.9 21,748 22.6 Rs. 21,554 22.4 22,290 456 23.2
------------------------------------------------------------------------------------------------------------
Total...................Rs. 97,153 100.0% Rs. 102,623 100.0% Rs. 96,257 100.0% Rs. 96,299 100.0% Rs. 96,246 US$1,971 100.0%
============================================================================================================
---------
(1) Average of quarterly balances at the end of March of the previous fiscal
year, June, September, December and March of that fiscal year for each of
fiscal 1998, 1999, 2000 and 2002 and average of quarterly balances at the
end of June, September, December and March for fiscal 2001.
(2) With an average cost of 6.60% in fiscal 1998, 6.15% in fiscal 1999, 5.72%
in fiscal 2000, 7.6% in fiscal 2001 and 6.8% in fiscal 2002.
(3) With an average cost of 5.71% in fiscal 1998, 5.79% in fiscal 1999, 5.53%
in fiscal 2000, 4.39% in fiscal 2001 and 4.93% in fiscal 2002.
The following table sets forth, at the date indicated, the maturity
profile of ICICI's deposits by type of deposit
At March 31, 2002
--------------------------------------------------------------------------
After one
month After six After
Within and within months and one year After
one six within and within three
month months 12 months three years years Total
--------------------------------------------------------------------------
(in millions)
Interest-bearing deposits:
Savings deposits ........... Rs. - Rs. - Rs. - Rs. - Rs. - Rs. -
Time deposits .............. 17 241 966 3,550 2,606 7,380
Non-interest-bearing deposits:
Demand deposits ............ - - - - - -
--------------------------------------------------------------------------
Total deposits ............... Rs. 17 Rs. 241 Rs. 966 Rs. 3,550 Rs. 2,606 Rs. 7,380
==========================================================================
64
The following table sets forth, for the periods indicated, the average
volume and average cost of ICICI's deposits by type of deposit.
Year ended March 31,(1)
--------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
--------------------------------------------------------------------------------------------------------------
Amount Cost(2) Amount Cost(2) Amount Cost(2) Amount Cost(2) Amount Amount Cost(2)
--------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Interest-bearing
deposits:
Savings deposits...Rs. 832 3.37% Rs. 1,633 3.25% Rs. 3,530 3.34% Rs. - Rs. - US$ - -
Time deposits...... 15,335 9.65 40,636 10.60 64,309 9.31 3,682 13.31% 6,618 135 11.24%
Non-interest-bearing
deposits:
Demand deposits.... 4,203 - 4,430 - 7,443 - - - - - -
----------- ---------- ----------- --------- -------------------
Total deposits.......Rs. 20,370 7.40% Rs. 46,699 9.34% Rs. 75,282 8.11% Rs. 3,682 13.31% Rs. 6,618 US$ 135
=========== ========== =========== ========= ===================
---------
(1) Average of quarterly balances at the end of March of the previous fiscal
year and June, September, December and March of that fiscal year for each
of fiscal 1998, 1999, 2000 and 2002 and average of quarterly balances at
the end of June, September, December and March for fiscal 2001.
(2) Represents interest expense divided by the average of quarterly balances.
The average volume of deposits at year-end fiscal 2001 and 2002 is not
comparable with fiscal 2000 due to the deconsolidation of ICICI Bank effective
April 1, 2000.
65
Risk Management
As a financial intermediary, the merged entity is exposed to specific
risks that are particular to its lending and trading businesses and the
environment within which it operates. The merged entity's goal in risk
management is to ensure that it understands, measures and monitors the various
risks that arise and that the merged entity's organization adheres strictly to
the policies and procedures which are established to address these risks. As a
financial intermediary, the merged entity is primarily exposed to credit risk,
market risk, liquidity risk, operational risk and legal risk.
The merged entity has a central Risk, Compliance and Audit Group with a
mandate to identify, assess, monitor and manage all the merged entity's
principal risks in accordance with well-defined policies and procedures. The
Head of the Risk, Compliance and Audit Group reports to the Executive Director
responsible for the Corporate Center, which does not include any business
groups, and is thus independent from the merged entity's business units. The
Risk, Compliance and Audit Group coordinates with representatives of the merged
entity's business units to implement the merged entity's risk methodologies.
The Risk, Compliance and Audit Group is accountable to the Audit Committee of
the merged entity's board of directors. The Audit Committee of the merged
entity's board of directors provides direction to the risk management function
and also monitors the quality of the internal audit function. In addition, the
Risk Committee of the merged entity's board of directors reviews risk
management policies in relation to various risks including portfolio,
liquidity, interest rate, off-balance sheet and operational risks, investment
policies and strategy, and regulatory and compliance issues in relation
thereto. The Credit Committee of the merged entity's board of directors reviews
developments in key industrial sectors and the merged entity's exposure to
these sectors. The Asset-Liability Management Committee of the merged entity's
board of directors is responsible for managing the balance sheet and reviewing
the asset-liability position to manage the merged entity's market risk
exposure. For a discussion of these Committees, see "Management".
As shown in the following chart, the Risk, Compliance and Audit Group is
organized into six sub-groups: Credit Risk Rating and Industry Analysis, Market
Risk Management, Analytics, Internal Audit, Retail Risk Management and Credit
Policies, Reserve Bank of India Inspection and Credit Audit. The Analytics Unit
develops proprietary quantitative techniques and models for risk measurement.
------------------- -----------------
Managing Director Audit Committee
& CEO of the Board
------------------- -----------------
| |
-------------------------------
|
|
v
-------------------------------
Executive Director, Corporate
Center
-------------------------------
|
|
v
-------------------------------
Head, Risk, Compliance and
Audit Group
-------------------------------
|
|
-----------------------------------------------------------------------------------------------------------------
| | | | | |
v v v v v v
----------------- --------------- ------------------ --------------------------- --------------- -------------------
Credit Risk Market Risk Analytics Internal Audit Retail Risk Credit Policies,
Rating & Management (including Reserve Bank of
Industry Analysis subsidiaries) India Inspection
& Credit Audit
----------------- --------------- ------------------ --------------------------- --------------- -------------------
Borrower credit Developing and Development of Comprehensive Approval of Formulation of
ratings implementing proprietary models coverage of operational retail policies credit policies
market risk for risk risk inherent in all areas and procedures and ensuring
Sectoral analysis and measurement measurement of business compliance
review methodologies Impact of macro
Initiation of systems economic Co-ordinating
66
Credit portfolio Approval of all audit in information changes on the Reserve Bank of
analysis new products technology-intensive retail portfolio India inspections
areas
Monitoring market Portfolio review
risk exposures and monitoring
The merged entity is increasingly integrating risk management, performance
measurement and capital allocation in a comprehensive integrated framework to
allow for better understanding of these areas and efficient allocation of
economic capital.
Credit Risk
In the merged entity's lending operations, it is principally exposed to
credit risk. Credit risk is the risk of loss that may occur from the failure of
any party to abide by the terms and conditions of any financial contract with
the merged entity, principally the failure to make required payments on loans
due to the merged entity. The merged entity currently measures, monitors and
manages credit risk for each borrower and also at the portfolio level. The
merged entity has a structured and standardized credit approval process, which
includes a well-established procedure of comprehensive credit appraisal.
Credit Risk Assessment Procedures for Corporate Loans
In order to assess the credit risk associated with any financing proposal,
the merged entity assesses a variety of risks relating to the borrower and the
relevant industry. Borrower risk is evaluated by considering:
o the financial position of the borrower by analyzing the quality of
its financial statements, its past financial performance, its
financial flexibility in terms of ability to raise capital and its
cash flow adequacy;
o the borrower's relative market position and operating efficiency; and
o the quality of management by analyzing their track record, payment
record and financial conservatism.
Industry risk is evaluated by considering:
o certain industry characteristics, such as the importance of the
industry to the economy, its growth outlook, cyclicality and
government policies relating to the industry;
o the competitiveness of the industry; and
o certain industry financials, including return on capital employed,
operating margins and earnings stability.
After conducting an analysis of a specific borrower's risk, the Credit
Risk Rating and Industry Analysis group assigns a credit rating to the
borrower. The merged entity has a scale of 10 ratings ranging from AAA to B and
an additional default rating of D. Credit rating is a critical input for the
credit approval process. The merged entity uses studies on the historical
default patterns of loans in order to predict defaults. The merged entity
determines the desired credit risk spread over its cost of funds by considering
the borrower's credit rating and the default pattern corresponding to the
credit rating. Every proposal for a financing facility is prepared by the
relevant business unit and reviewed by the appropriate industry specialists in
the Credit Risk Rating and Industry Analysis group before being submitted for
approval to the appropriate approval authority. The approval process for
non-fund facilities is similar to that for fund-based facilities. The credit
rating for every borrower is reviewed at least annually and is typically
reviewed on a quarterly basis for higher risk credits and large exposures. The
merged entity also reviews the ratings of all borrowers in a particular
industry upon the occurrence of any significant event impacting the industry.
67
Working capital loans are generally approved for a period of 12 months. At
the end of 12 months, the merged entity reviews the loan arrangement and the
credit rating of the borrower and takes a decision on continuation of the
arrangement and the changes in the loan covenants as may be necessary.
Credit Approval Procedures for Corporate Loans
Project Finance Procedures
The merged entity has a strong framework for the appraisal and execution
of project finance transactions. The merged entity believes that this framework
creates optimal risk identification, allocation and mitigation, and helps
minimize residual risk.
The project finance approval process begins with a detailed evaluation of
technical, commercial, financial, marketing and management factors and the
sponsor's financial strength and experience. Once this review is completed, an
appraisal memorandum is prepared for credit approval purposes. As part of the
appraisal process, a risk matrix is generated, which identifies each of the
project risks, mitigating factors and residual risks associated with the
project. The appraisal memorandum analyzes the risk matrix and establishes the
viability of the project. Typical key risk mitigating factors include the
commitment of stand-by funds from the sponsors to meet any cost overruns and a
conservative collateral position. After credit approval, a letter of intent is
issued to the borrower, which outlines the principal financial terms of the
proposed facility, sponsor obligations, conditions precedent to disbursement,
undertakings from and covenants on the borrower. After completion of all
formalities by the borrower, a loan agreement is entered into with the
borrower.
In addition to the above, in the case of structured project finance in
areas such as infrastructure and oil, gas and petrochemicals, as a part of the
due diligence process, the merged entity appoints consultants, wherever
considered necessary, to advise the lenders, including technical advisors,
business analysts, legal counsel and insurance consultants. These consultants
are typically internationally recognized and experienced in their respective
fields. Risk mitigating factors in these financings generally also include
creation of debt service reserves and channeling project revenues through a
trust and retention account.
The merged entity's project finance credits are generally fully secured
and have full recourse to the borrower. In most cases, the merged entity has a
security interest and first lien on all the fixed assets and a second lien on
all the current assets of the borrower. Security interests typically include
property, plant and equipment as well as other tangible assets of the borrower,
both present and future. Typically, it is the merged entity's practice to lend
between 60.0% and 80.0% of the appraised value of this type of collateral
securities. It may take several months to complete the registration of these
security interests in India. The merged entity's borrowers are required to
maintain comprehensive insurance on their assets where the merged entity is
recognized as payee in the event of loss. In some cases, the merged entity also
takes additional collateral in the form of the corporate or personal guarantees
from one or more sponsors of the project and a pledge of the sponsors' equity
holding in the project company. In certain industry segments, the merged entity
also takes security interest in relevant project contracts such as concession
agreements, off-take agreements and construction contracts as part of the
security package. In limited cases, loans are also guaranteed by commercial
banks and, in the past, have also been guaranteed by Indian state governments
or the government of India.
It is the merged entity's current practice to disburse funds after the
entire project funding is committed and all necessary contractual arrangements
have been entered into. Funds are disbursed in tranches to pay for approved
project costs as the project progresses. When the merged entity appoints
technical and market consultants, they are required to monitor the project's
progress and certify all disbursements. The merged entity also requires the
borrower to submit periodic reports on project implementation, including orders
for machinery and equipment as well as expenses incurred. Project completion is
contingent upon satisfactory operation of the project for a certain minimum
period and,
68
in certain cases, the establishment of debt service reserves. The merged entity
continues to monitor the credit exposure until its loans are fully repaid.
Corporate Finance Procedures
The merged entity's corporate finance activities are usually restricted to
clients with a high investment grade credit rating. As part of the corporate
loan approval procedures, the merged entity carries out a detailed analysis of
funding requirements, including normal capital expenses, long-term working
capital requirements and temporary imbalances in liquidity. The merged entity's
funding of long-term core working capital requirements is assessed on the
basis, among other things, of the borrower's present and proposed level of
inventory and receivables. In case of corporate loans for other funding
requirements, the merged entity undertakes a detailed review of those
requirements and an analysis of cash flows. A substantial portion of the merged
entity's corporate finance loans are secured by appropriate assets of the
borrower.
The focus of the merged entity's structured corporate finance products is
on cash flow based financings. The merged entity has a set of distinct approval
procedures to evaluate and mitigate the risks associated with such products.
These procedures include:
o carrying out a detailed analysis of cash flows to accurately forecast
the amounts that will be paid and the timing of the payments based on
an exhaustive analysis of historical data;
o conducting due diligence on the underlying business systems,
including a detailed evaluation of the servicing and collection
procedures and the underlying contractual arrangements; and
o paying particular attention to the legal, accounting and tax issues
that may impact any structure.
The merged entity's analysis enables it to identify risks in these
transactions. To mitigate risks, the merged entity uses various credit
enhancement techniques, such as over-collateralization, cash collateralization,
creation of escrow accounts and debt service reserves and performance
guarantees. The residual risk is typically managed by complete or partial
recourse to the borrowing company whose credit risk is evaluated as described
above. The merged entity also has a monitoring framework to enable continuous
review of the performance of such transactions.
Working Capital Finance Procedures
The merged entity carries out a detailed analysis of its borrowers'
working capital requirements. Credit limits are approved in accordance with the
approval authorization approved by the merged entity's board of directors. Once
credit limits are approved, the merged entity calculates the amounts that can
be lent on the basis of monthly statements provided by the borrower and the
margins stipulated. Quarterly information statements are also obtained from
borrowers to monitor the performance on a regular basis. Monthly cash flow
statements are obtained wherever considered necessary. Any irregularity in the
conduct of the account is reported to the appropriate authority on a monthly
basis. Credit limits are reviewed on an annual basis.
Working capital facilities are primarily secured by inventories and
receivables. Additionally, in certain cases, these credit facilities are
secured by personal guarantees of directors, or subordinated security interests
in the tangible assets of the borrower including plant and machinery.
Investment Banking Procedures
ICICI Securities provides investment banking services, including corporate
advisory, fixed income and equity services, to corporate customers. All
investment banking mandates, including underwriting commitments, are approved
by ICICI Securities' Commitments Committee. This committee consists of the
Managing Director and the Senior Vice-President of ICICI Securities.
69
ICICI Securities is registered with the Securities and Exchange Board of
India as a merchant bank. In that capacity, ICICI Securities has decided not to
engage in any lending and leasing activities and conducts only activities
related to the securities markets.
Credit Approval Authority for Corporate Loans
The merged entity has established four levels of credit approval
authorities for its corporate banking activities, the Credit Committee of the
board of directors, the Committee of Directors, the Committee of Executives
(Credit) and the Regional Committee (Credit). The Credit Committee has the
power to approve all financial assistance. The merged entity's board of
directors has delegated the authority to the Committee of Directors, consisting
of the merged entity's executive directors, to the Committee of Executives
(Credit) and the Regional Committee (Credit), both consisting of designated
executives of the merged entity, to approve financial assistance to any company
within certain individual and group exposure limits set by the board of
directors.
The following table sets forth the composition and the approval authority
of these committees.
Committee Members Approval Authority
-------------------------------------------------------------------------------------------------------------------
Credit Committee of the Chaired by an independent director o All approvals to companies with rating
board of directors and consisting of a majority of below BBB, pursuant to the merged entity's
independent directors. internal credit rating policy.
o All approvals (in practice, generally
above the prescribed authority of the
Committee of Directors).
o Approvals to companies identified by the
Credit Committee where the company or
the borrower group requires close
monitoring.
Committee of Directors Chaired by the Managing All approvals above the prescribed authority of
Director and Chief Executive the Committee of Executives (Credit) subject to
Officer and consisting of all the following total exposure limits:
executive directors. o Up to 10.0% of the merged entity's
capital funds(1) to a single entity; and
o Up to 30.0% of the merged entity's
capital funds(1) to a single group of
companies.
Committee of Executives Consisting of heads of client Approvals subject to the following total exposure
(Credit) relationship groups, retail limits:
assets, treasury, international
banking, structured products and o Up to Rs. 3.0 billion (US$ 61.4 million)
portfolio management and project for each company with an internal credit
finance, with Chief Financial rating of AAA;
Officer and Head-Risk, Compliance o Up to Rs. 2.0 billion (US$ 41.0 million)
and Audit Group as permanent for each company with an internal credit
invitees. rating of AA+ or AA;
o Up to Rs. 1.0 billion (US$ 20.5 million)
for a company with an internal rating of AA-
or A+;
o Up to Rs. 500.0 million (US$ 10.2
million) for each company with an internal
credit rating of A;
o Up to Rs. 50.0 million (US$ 1.0 million)
for each company with an internal credit
rating of A-; and
o Up to Rs. 30.0 million (US$ 614,376) for
each company with an internal credit rating
of BBB.
70
Regional Committee (Credit) Consisting of regional Approvals subject to the following total exposure
representatives of various client limits:
relationship groups and a o Up to Rs. 1.5 billion (US$ 30.7 million)
representative of Structured for each company with an internal credit
Finance and Portfolio Management rating of AAA;
Group, with a representative of o Up to Rs. 1.0 billion (US$ 20.5 million)
Risk, Compliance and Audit Group for each company with an internal credit
as a permanent invitee. rating of AA+ or AA;
o Up to Rs. 500.0 million (US$ 10.2
million) for a company with an internal
rating of AA- or A+;
o Up to Rs. 250.0 million (US$ 5.6 million)
for each company with an internal credit
rating of A; and
o Up to Rs. 30.0 million (US$ 614,376) for
each company with an internal credit rating
of A-.
In all cases, subject to adherence to limits on the
merged entity's capital funds(1) imposed on the
Committee of Directors as mentioned above.
---------
(1) Capital funds consist of Tier-1 and Tier-2 capital, as defined in the
Reserve Bank of India regulations, under Indian GAAP. See "Supervision and
Regulation - Capital Adequacy Requirements".
All new loans must be approved by the above committees in accordance with
their respective powers. Certain designated executives are authorized to
approve:
o ad-hoc/additional working capital facilities not exceeding the lower
of 10.0% of existing approved facilities and Rs. 20 million (US$
409,584);
o temporary accommodation not exceeding the lower of 20.0% of existing
approved facilities and Rs. 10 million; and
o facilities fully secured by deposits, cash margin, letters of credit
of approved banks or approved sovereign debt instruments.
Credit Monitoring Procedures for Corporate Loans
The Credit Middle Office Group monitors compliance with the terms and
conditions for credit facilities prior to disbursement. It also reviews the
completeness of documentation, creation of security and insurance policies for
assets financed. All borrower accounts are reviewed at least once a year.
Larger exposures and lower rated-borrowers are reviewed more frequently.
Retail Loan Procedures
The merged entity's retail credit products presently include automobile
loans, home loans, loans for consumer durable products, commercial vehicles and
farm and construction equipment, two wheelers, personal loans and credit cards.
The merged entity also funds dealers who sell automobiles, two wheelers,
consumer durables and commercial vehicles. The merged entity also provides
loans against time deposits and loans against shares, including for
subscriptions to initial public offerings of Indian companies. The merged
entity's borrowers are typically middle and high-income, salaried or
self-employed individuals, and, in some cases, partnerships and corporations.
Except for personal loans and credit cards, the merged entity requires a
contribution from the borrower, typically up to 15.0% of the value of the
assets purchased, and the merged entity's loans are secured by the asset
financed.
The Retail Asset Product Group is responsible for the merged entity's
retail lending business. This is sub-divided into various product lines. Each
product line is further sub-divided into separate sales and marketing and
credit groups. The Risk, Compliance and Audit Group, which is independent of
the business groups, approves all new retail products and product policies and
credit approval authorizations. All products and policies require the approval
of the Committee of Directors comprising all the executive directors. All
credit approval authorizations require the approval of the merged entity's
board of directors.
71
The merged entity has an established process for evaluating and selecting
its dealers and franchisees and there is a clear segregation between the group
responsible for originating loans and the group that approves the loans. A
centralized set of risk assessment criteria has been created for retail lending
operations after approval by the Risk, Compliance and Audit Group. These
criteria vary across product segments but typically include factors such as
borrower's income, the loan-to-value ratio and certain stability factors. The
loan approval authority is delegated to credit officers, subject to loan amount
limits, which vary across different loan products.
Credit officers approve loans in compliance with the risk assessment
criteria. External agencies are used to facilitate a comprehensive due
diligence process including visits to office or home in the case of loans to
individual borrowers. Before disbursements are made, the credit officer
conducts a centralized check and review of the borrower's profile.
In order to limit the scope of individual discretion in the loan
assessment and approval process, the merged entity has implemented a
credit-scoring program for credit cards. The merged entity has also implemented
a credit-scoring program for certain variants within the consumer durables
business. The credit-scoring program is an automated credit approval system for
evaluating loan applications by assigning a credit score to each applicant
based on certain demographic attributes like earnings stability, educational
background and age. The credit score then forms the basis of loan evaluation.
Though a formal credit bureau does not operate in India, the merged entity
avails the services of some private agencies operating in India to check
applications before disbursement.
The merged entity has a separate retail credit team, which undertakes
review and audit of credit quality across each credit approval team. The merged
entity has established centralized operations to manage operating risk in the
various back office processes of its retail loan business except for a few
operations which are decentralized to improve turnaround time for the merged
entity's customers. The Risk, Compliance and Audit Group conducts an
independent audit of processes and documents at periodic intervals. As with the
merged entity's other retail loan business, the merged entity emphasizes
conservative credit standards, including credit scoring and strict monitoring
of repayment patterns, to optimize risks associated with the credit cards
business.
The merged entity has a collections unit independent of the various
product lines, to manage delinquency levels. The collections unit operates
under the guidelines of a standardized recovery process. The merged entity also
makes use of external collection agents to aid the merged entity in its
collection efforts, including collateral repossession in accounts that are
overdue for more than 90 days. A fraud control department has been set up to
manage levels of fraud, primarily through fraud prevention in the form of
forensic audits and also through recovery of fraud losses. The fraud control
department is aided by specialized agencies. External agencies for collections
are strictly governed by standardized process guidelines. External agencies are
also used to facilitate a comprehensive due diligence process including
property valuation prior to the approval of home loans and visits to home or
office in the case of loans to individual borrowers.
In addition to the above retail loan products, the merged entity's Rural
Micro Banking Group provides loans to self-help groups, rural agencies, as well
as certain categories of agricultural loans and loans under
government-sponsored schemes. These loans are typically of small amounts. The
credit approval authorization approved by the board of directors of the merged
entity requires that all such loans above Rs. 1.5 million (US$ 30,719) be
approved by the Committee of Directors comprising all the executive directors,
while the authority to approve loans up to Rs. 1.5 million (US$ 30,719) has
been delegated to designated executives.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss arising from changes in the value of a
financial instrument as a result of changes in market variables such as
interest rates, exchange rates and asset prices. The prime source of market
risk for the merged entity is the interest rate risk it is exposed to as a
financial intermediary, which arises on account of its asset liability
management activities. The other elements
72
of market risk to which it has exposures are liquidity risk, price risk on its
trading positions, equity risk on its investments in equity securities and
exchange risk on account of foreign currency exposures.
Market Risk Management Procedures
The board of directors of the merged entity, reviews and approves the
policies for the management of market risks. The board has delegated the
responsibility for market risk management to the Risk Committee and the Asset
Liability Management Committee. The Joint Managing Director chairs the Asset
Liability Management Committee and all four executive directors are members of
the Committee. The Committee generally meets on a monthly basis and reviews the
merged entity's interest rate and liquidity gap position, formulates a view on
interest rates, sets deposit and benchmark lending rates, reviews the business
profile and its impact on asset liability management and determines the
business strategy, as deemed fit, in light of the current and expected business
environment. The committee reports to the Risk Committee of the Board of
Directors. A majority of the members of the Risk Committee are non-executive
directors and the Committee is chaired by a non-executive director.
The Asset Liability Support Group which reports to the Chief Financial
Officer, is responsible for measuring and monitoring liquidity and interest
rate risk on the merged entity's asset-liability positions. An independent
Market Risk Management Group, which is part of the Risk, Compliance and Audit
Group, exercises control over the process of market risk management in the
merged entity, and recommends changes in processes and methodologies for
quantifying and assessing market risk, that it feels are necessary. All new
products and market risk policies are submitted for consideration to this group
and only thereafter presented to the Asset-Liability Management Committee for
approval. The Asset-Liability Management Committee also sets market risk limits
for the trading activities of the merged entity.
Interest Rate Risk
ICICI Bank
Since ICICI Bank's balance sheet consisted predominantly of rupee assets
and liabilities, movements in domestic interest rates constituted the main
source of interest rate risk. Its portfolio of traded debt securities and its
loan portfolio were negatively impacted by an increase in interest rates.
Exposure to fluctuations in interest rates was measured primarily by way of gap
analysis, providing a static view of the maturity and re-pricing
characteristics of balance sheet positions. An interest rate gap report is
prepared by classifying all assets and liabilities into various time period
categories according to contracted maturities or anticipated re-pricing date.
The difference in the amount of assets and liabilities maturing or being
re-priced in any time period category, would then give an indication of the
extent of exposure to the risk of potential changes in the margins on new or
re-priced assets and liabilities. ICICI Bank prepared interest rate risk
reports on a weekly basis. The same were reported to the Reserve Bank of India
on a quarterly basis up to September 2001 and on a monthly basis thereafter.
ICICI Bank's core business was 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 foreign markets, the gap positions in
these markets are different.
In the Indian market, ICICI Bank's liabilities were mostly at fixed rates
of interest for fixed periods. However, it had a mix of floating and fixed
interest rate assets. ICICI Bank had term-based prime lending rates. ICICI Bank
quoted interest rates for its short-term working capital loan products as a
mark-up over the relevant prime lending rate, effectively making these floating
rate loans. ICICI Bank's corporate loan portfolio consisted principally of
working capital loans, which were on a floating rate basis.
73
ICICI Bank's foreign currency liabilities, which were primarily deposits
from non-resident Indians, were at fixed rates. A large portion of its foreign
currency loans were on a floating rate basis. On account of this re-pricing
mismatch, ICICI Bank had entered into Interest Rate Swaps (ICICI Bank paid a
floating rate and received a fixed rate). Foreign currency liabilities, net of
foreign currency loans, enabled ICICI Bank to raise rupee liquidity quickly by
way of currency swaps, which helped it to address liquidity risk, if any.
The following tables set forth for both ICICI Bank's loan portfolio and
trading portfolio, at the date indicated, its asset-liability gap position.
At March 31, 2002(1)-(7)
---------------------------------------------------------------------------------------------------------
Greater
than one
year and
Total within up to five Greater than
0-28 days 29-90 days 91-180 days 6-12 months one year years five years Total
---------- ---------- ----------- ----------- ------------ --------- ------------- -----------
(in millions)
Loans, net........ Rs. 6,679 Rs. 37,925 Rs. 2,354 Rs. 7,901 Rs. 54,859 Rs. 15,453 Rs. 2,162 Rs. 72,474
Securities........ 3,507 17,525 11,479 79,882 112,393 41,216 26,443 180,052
Fixed assets...... - - - - - - 4,831 4,831
Trading assets.... 812 2,245 10,931 7,468 21,456 338 4,281 26,075
Cash and cash
equivalents..... 58,396 1,175 8,164 - 67,735 212 20,018 87,965
Other assets(6)... 2,229 3,480 3,772 12,608 22,089 1,041 10,278 33,408
---------- ---------- ----------- ----------- ----------- ---------- ---------- -----------
Total assets...... Rs. 71,623 Rs. 62,350 Rs. 36,700 Rs. 107,859 Rs. 278,532 Rs. 58,260 Rs. 68,013 Rs. 404,805
========== ========== =========== =========== =========== ========== ========== ===========
Stockholders'
equity.......... Rs. - Rs. - Rs. - Rs. - Rs. - Rs. - Rs. 18,150 Rs. 18,150
Debt(6)........... - 38 452 882 1,372 2,101 2,267 5,740
Deposits.......... 44,166 58,552 60,166 95,689 258,573 29,298 37,350 325,221
Other
liabilities(6).. 23,144 4 - 12,608 35,756 - 19,938 55,694
---------- ---------- ----------- ----------- ----------- ---------- ---------- -----------
Total liabilities. Rs. 67,310 Rs. 58,594 Rs. 60,618 Rs. 109,179 Rs. 295,701 Rs. 31,399 Rs. 77,705 Rs. 404,805
========== ========== =========== =========== =========== ========== ========== ===========
Total gap......... Rs. 4,313 Rs. 3,756 Rs. (23,918) Rs. (1,320) Rs. (17,169) Rs. 26,861 Rs. (9,692)
========== ========== =========== =========== =========== ========== ==========
---------
(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) Non-performing 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 ICICI Bank classified the interest
sensitive portion of these balances under the "91-180 days" category and
the remainder in the "greater than five years" category.
The following table sets forth, at the date indicated, the amount of ICICI
Bank's loans with residual maturities greater than one year that had fixed and
variable interest rates.
At March 31, 2002
------------------------------------------
Fixed rate Variable Total
loans rate loans
------------------------------------------
(in millions)
Loans........................ Rs.14,441 Rs. 8,769 Rs. 23,211
74
ICICI
ICICI's balance sheet consisted predominantly of rupee assets and
liabilities. Hence, movements in rupee interest rates were the main source of
interest rate risk. ICICI also monitored interest rate risk associated with its
trading activities and its asset and liability management activities, by
different approaches, as described below. Based on ICICI's asset-liability
position at year-end fiscal 2002 and fiscal 2001, ICICI's portfolio of traded
debt securities and loan portfolio were negatively impacted by an increase in
interest rates.
ICICI also measured exposure to interest rate risk primarily by the use of
gap analysis, which provides a static view of the maturity and re-pricing
characteristics of balance sheet positions. ICICI prepared interest rate
sensitivity reports on a fortnightly basis for fiscal 2002. Interest rate risk
was further monitored by the interest rate risk limits approved by the
Resources, Treasury and Asset-Liability Management Committee.
ICICI's business activities involved lending and borrowing in rupees as
well as foreign currencies. These activities exposed ICICI to interest rate
risk. As the rupee market is significantly different from the international
currency markets, gap positions in these markets differ significantly.
In the rupee market, most of ICICI's borrowing and lending took place at
fixed rates of interest. ICICI usually borrowed for a fixed period with a
one-time repayment on maturity, with some borrowings having European call/put
options, exercisable only on specified dates, attached to them. However,
ICICI's loans generally were repaid more gradually, with principal repayments
being made over the life of the loan. ICICI had well-established systems to
monitor and minimize asset and liability mismatches.
In contrast to ICICI's rupee loans, a large proportion of ICICI's foreign
currency loans were floating rate loans. These loans were generally funded with
floating rate foreign currency funds. In addition, ICICI's fixed rate foreign
currency loans were generally funded with fixed rate foreign currency funds.
ICICI generally converted all its foreign currency borrowings into floating
rate dollar liabilities through the use of interest rate and currency swaps
with leading international banks. As a consequence of all these steps, the
foreign currency gaps were generally significantly lower than rupee gaps,
representing a considerably lower exposure to fluctuations in foreign currency
interest rates.
For fiscal 2002, ICICI continued to follow a three-tier prime rate
structure, namely, a short-term prime rate for one-year loans or loans that
re-price at the end of one year, a medium-term prime rate for one to three year
loans and a long-term prime rate for loans with maturities greater than three
years. Interest rate risk on undisbursed commitments was sought to be
eliminated by fixing interest rates on rupee loans at the time of loan
disbursement.
The following table sets forth, at the date indicated, ICICI's
asset-liability gap position.
At March 31, 2002 (1)-(6)
---------------------------------------------------------------------
Less than or Greater than Greater than
equal to one one year and up five years Total
year to five years
---------------------------------------------------------------------
(in millions)
Loans, net................................... Rs. 140,137 Rs. 214,803 Rs. 168,661 Rs. 523,601
Securities................................... 6,807 21,845 42,963 71,615
Fixed assets................................. - - 12,949 12,949
Other assets(6).............................. 81,572 2,905 53,188 137,665
---------------------------------------------------------------------
Total assets................................. 228,516 239,553 277,761 745,830
Stockholders' equity......................... - - 71,161 71,161
Debt(6)...................................... 202,926 229,234 87,415 519,575
Other liabilities(6)......................... 92,681 5,787 56,626 155,094
---------------------------------------------------------------------
Total liabilities............................ 295,607 235,021 215,202 745,830
Total gap before risk management positions... (67,091) 4,532 62,559 -
Risk management positions.................... (22,697) 13,422 9,275 -
---------------------------------------------------------------------
Total gap after risk management positions.... Rs. (89,788) Rs. 17,954 Rs. 71,834 Rs. -
=====================================================================
75
---------
(1) Assets and liabilities are classified into the applicable categories,
based on residual maturity or re-pricing date whichever is earlier.
(2) Items that neither re-price nor mature are included in the "greater than
five years" category. This includes issued equity share capital, as well
as all equity investments other than those held as part of the trading
portfolio.
(3) Impaired loans of residual maturity less than three years are classified
in the "greater than one year and up to five years" category and impaired
loans of residual maturity between three to five years are classified in
the "greater than five years" category.
(4) Loan funds dedicated to the trading portfolio have been classified as
assets in the "less than or equal to one year" category.
(5) The risk management positions comprise foreign currency and rupee swaps.
The risk management position has been adjusted for a sum of Rs. 380
million on account of revaluation of swaps.
(6) The categorization for these items is different from that reported in the
financial statements.
The following table sets forth, at the date indicated, the amount of
ICICI's loans with residual maturities greater than one year that had fixed and
variable interest rates.
At March 31, 2002
------------------------------------------
Fixed rate Variable Total
Loans rate loans
------------------------------------------
(in millions)
Loans.............................. Rs. 306,311 Rs. 92,349 Rs. 398,661
Merged entity
The merged entity's core business is deposit taking and lending, in both
rupees and foreign currencies, as permitted by the Reserve Bank of India. In
the Indian market, the merged entity's liabilities are mostly at fixed rates of
interest for fixed periods. However, it has a mix of floating and fixed
interest rate assets. The merged entity follows a three-tier prime rate
structure namely, a short-term prime rate for one year term loans or loans that
re-price at the end of one year, a medium-term prime rate for one to three year
loans and a long-term prime rate for loans with maturities greater than three
years. In addition, it follows a specific short-term prime rate for short-term
working capital products. Immediately after the merger, the loan portfolio
consists of project lending which is largely on a fixed rate basis, working
capital loans which are largely on a floating rate basis and retail loans which
include fixed and floating rate loans. The term loans portfolio has principal
amortizing over the life of the loan.
The merged entity's foreign currency liabilities consist of commercial
borrowings, multi-lateral/bilateral lines of credit and deposits from
non-resident Indians. The deposits bear a fixed rate of interest. A large
portion of the foreign currency loan portfolio is floating rate. These are
generally funded with floating rate foreign currency funds. The merged entity
generally converts a substantial portion of its foreign currency borrowings
into floating rate dollar liabilities through the use of cross-currency
interest rate swaps. Foreign currency liabilities, net of foreign currency
loans, are a good source of rupee liquidity, by way of currency swaps.
The merged entity actively uses interest rate derivatives to manage its
asset and liability positions. The merged entity and its subsidiary, ICICI
Securities, are both active participants in the interest rate swap market.
However, since these markets are currently able to support only very
small-sized transactions and limited maturities, the merged entity is
constrained to follow a strategy of cash flow matching on a portfolio basis in
order to contain asset-liability mismatches and manage the duration of its
government securities portfolio. Cash flow matching is done as far as feasible,
through the management of the maturity structure of incremental assets and
liabilities. However, even using this route, given the highly illiquid nature
of the domestic debt market, it is not always possible to achieve a perfect
hedge. Therefore, the merged entity is left with residual risk which it seeks
to monitor through the interest rate gap and sensitivity analysis.
76
Price Risk (Loan Portfolio)
ICICI Bank
The following tables set forth, using the balance sheet at year-end fiscal
2002 as the base, one possible prediction of the impact of changes in interest
rates on net interest revenue for fiscal 2003, assuming a parallel shift in
yield curve at year-end fiscal 2002.
At March 31, 2002
-------------------------------------------------------------
Change in interest rates
(in basis points)
-------------------------------------------------------------
(100) (50) 50 100
-------------- -------------- ------------ ------------
(in millions, except percentages)
Rupee portfolio................................ Rs. 232 Rs. 116 Rs. (116) Rs. (232)
Foreign currency portfolio..................... (30) (15) 15 30
-------------- -------------- ------------ ------------
Total.......................................... Rs. 202 Rs. 101 Rs. (101) Rs. (202)
============== ============== ============ ============
Profit/(loss) as a % of net income............. 9.9% 5.0% (5.0%) (9.9%)
Based on ICICI Bank's asset and liability position at year-end fiscal
2002, the sensitivity model shows that net interest revenue from the loan
portfolio for fiscal 2003 would fall by Rs. 202 million (US$ 4 million) if
interest rates increased by 100 basis points during fiscal 2003. Conversely,
the sensitivity model shows that if interest rates decreased by 100 basis
points during fiscal 2003, net interest revenue for fiscal 2003 would rise by
Rs. 202 million (US$ 4 million). The amount of Rs. 202 million constituted 9.9%
of ICICI Bank's net income for fiscal 2002.
ICICI
The following table sets forth, using the balance sheet at year-end fiscal
2002 as the base, one possible prediction of the impact of changes in interest
rates on net interest revenue for fiscal 2003, assuming a parallel shift in
yield curve at year-end fiscal 2002.
At March 31, 2002
-------------------------------------------------------------
Change in interest rates
(in basis points)
-------------------------------------------------------------
(100) (50) 50 100
-------------- -------------- ------------ ------------
(in millions, except percentages)
Rupee portfolio................................ Rs. 298 Rs. 149 Rs. (149) Rs. (298)
Foreign currency portfolio..................... 67 34 (34) (67)
-------------- -------------- ------------ ------------
Total.......................................... Rs. 365 Rs. 183 Rs. (183) Rs. (365)
============== ============== ============ ============
Profit/(loss) as a % of net income............. 26.8% 13.4% (13.4%) (26.8%)
Based on ICICI's asset and liability position at year-end fiscal 2002, the
sensitivity model shows that net interest revenue from the loan portfolio for
fiscal 2003 would fall by Rs. 365 million (US$ 7 million) if interest rates
increased by 100 basis points during fiscal 2003. Conversely, the sensitivity
model shows that if interest rates decreased by 100 basis points during fiscal
2003, net interest revenue for fiscal 2003 would rise by Rs. 365 million (US$ 7
million). The amount of Rs. 365 million constituted 26.8% of ICICI's net income
for fiscal 2002. Though the overall interest rate risk number on the overall
portfolio is not very different from fiscal 2001, there was an increase in
foreign currency sensitivity. This is largely on account of the strategy of
swapping foreign currency to raise cheaper rupee resources. ICICI maintained a
liability-sensitive profile based on its outlook of a soft interest rate
regime.
Sensitivity analysis, which is based upon a static interest rate risk
profile of assets and liabilities, is used for risk management purposes only
and the models above for ICICI Bank and ICICI assume that during the course of
the year no other changes are made in the respective portfolios. Actual changes
in net interest revenue will vary from the models above for ICICI and ICICI
Bank.
77
It must be noted that the interest rate sensitivities shown above for
ICICI Bank and ICICI 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)
ICICI Bank
ICICI Bank undertook trading activities primarily to optimize the income
from its regulatory fixed income portfolio and secondarily to enhance its
earnings through profitable trading for its own account. A substantial
proportion of ICICI Bank's trading portfolio (79.6%) consisted of investments
in government of India securities at year-end fiscal 2002. ICICI Bank was
required by law to invest 25.0% of its demand and time liabilities in specified
securities, including government of India securities. ICICI Bank used holding
period limits and stop-loss limits to manage risks for debt security positions
in the trading book.
The following tables sets forth, using ICICI Bank's fixed income portfolio
at year-end fiscal 2002 as the base, one possible prediction of the impact of
changes in interest rates on the value of ICICI Bank's rupee fixed income
trading portfolio for fiscal 2003, assuming a parallel shift in yield curve.
At March 31, 2002
------------------------------------------------------------------------------
Change in interest rates
(in basis points)
------------------------------------------------------------------------------
Portfolio
Size (100) (50) 50 100
-------------- ----------- ------------- -------------- ------------
(in millions except percentages)
Government of India securities(1)..... Rs. 20,765 Rs. 102 Rs. 51 Rs. (50) Rs. (100)
Corporate bonds....................... Rs. 1,265 Rs. 34 Rs. 17 Rs. (16) Rs. (33)
-------------- ----------- ------------- -------------- ------------
Total................................. Rs. 22,030 Rs. 136 Rs. 68 Rs. (66) Rs. (133)
============== =========== ============= ============== ============
Profit/(loss) as a % of net income 6.7% 3.3% (3.3%) (6.5%)
============== =========== ============= ============== ============
(1) For the purpose of analysis, certain quasi-government corporate securities
are included as government of India securities.
At year-end fiscal 2002, the total value of ICICI Bank's rupee fixed
income portfolio was Rs. 22.0 billion (US$ 451 million). Based on ICICI Bank's
fixed income portfolio at year-end fiscal 2002, the sensitivity model shows
that the value of the trading portfolio would fall by Rs. 133 million (US$ 3
million) or 6.5% of ICICI Bank's net income for fiscal 2002, if interest rates
increased by 100 basis points during fiscal 2003. Conversely, if interest rates
fell by 100 basis points, under the model, the value of this portfolio, would
rise by Rs. 136 million (US$ 3 million) or 6.7% of ICICI Bank's net income for
fiscal 2002. The sensitivity of the value of ICICI Bank's trading portfolio to
changes in interest rates was largely due to the government of India securities
that it was required to hold under the Reserve Bank of India's statutory
liquidity ratio requirement.
ICICI
ICICI undertook trading activities primarily to enhance earnings through
profitable trading for its own account. ICICI Securities, formerly the
wholly-owned investment banking subsidiary of ICICI and now the wholly-owned
investment banking subsidiary of the merged entity, is a primary dealer in
government of India securities, and a significant proportion of its portfolio
consists of government of India securities.
The following tables sets forth, using the fixed income portfolio at
year-end fiscal 2002 as the base, one possible prediction of the impact of
changes in interest rates on the value of ICICI's rupee fixed income trading
portfolio for fiscal 2003, assuming a parallel shift in yield curve.
78
At March 31, 2002
---------------------------------------------------------
Change in interest rates
(in basis points)
---------------------------------------------------------
Portfolio
Size (100) (50) 50 100
---------------------------------------------------------
(in millions)
Government of India securities(1)......... Rs. 15,602 Rs. 788 Rs. 401 Rs. (399) Rs. (781)
Corporate debt securities................. 4,627 153 77 (77) (152)
---------------------------------------------------------
Total..................................... Rs. 20,229 Rs. 941 Rs. 478 Rs. (476) Rs. (933)
---------------------------------------------------------
Profit/(loss) as a % of net income........ 69.2% 35.1% (35.0%) (68.6%)
===========================================
---------
(1) For the purpose of analysis, certain quasi-government corporate securities
are included as government of India securities.
At year-end fiscal 2002, the total value of ICICI's rupee fixed income
portfolio was Rs. 20.2 billion (US$ 414 million). The sensitivity model shows
that if interest rates increase by 100 basis points during fiscal 2003, the
value of the trading portfolio, would fall by Rs. 933 million (US$ 19 million)
or 68.6% of ICICI's net income for fiscal 2002. Conversely, if interest rates
fell by 100 basis points during fiscal 2003, under the model, the value of this
portfolio would rise by Rs. 941 million (US$ 19 million) or 69.2% of ICICI's
net income for fiscal 2002. The sensitivity of the value of the trading
portfolio to changes in interest rates was largely due to the government of
India securities held by ICICI Securities in its capacity as a primary dealer.
As noted above, sensitivity analysis, is used for risk management purposes
only and the models used above for ICICI Bank of ICICI assume that during the
course of the year no other changes are made in the respective portfolios.
Actual changes in the value of the fixed income portfolio will vary from the
models above for ICICI Bank and ICICI.
Merged Entity
The total interest rate risk faced by the merged entity is a combination
of non-trading risk and trading risk. A decrease in interest rates during
fiscal 2003 will increase the value of the merged entity's trading portfolio. A
decrease in interest rates during fiscal 2003 would increase the merged
entity's non-trading income due to the increase in net interest revenue.
The merged entity revalues its trading portfolio on a daily basis and
recognizes aggregate revaluation gains and losses in its profit and loss
account. The asset liability management policy stipulates an interest rate risk
limit which seeks to cap the risk on account of the mark-to-market impact on
the trading book and the earnings at risk on the banking book, based on a
sensitivity analysis of a 100 basis points parallel and immediate shift in
interest rates.
In addition, the Market Risk Management Group stipulates risk limits
including position limits and stop loss limits for the trading book. These
limits are monitored on a daily basis and reviewed periodically. In addition to
risk limits, risk monitoring tools such as a Value-at-Risk (VaR) models for
measuring market risk in the merged entity's trading portfolio, are also used.
This Group is also exploring the feasibility of using these models to design
limits on exposures.
The Market Risk Management Group is in the process of implementing more
advanced statistical tools to conduct sensitivity analysis, scenario
simulations and stress testing to assess the impact of changes in market
conditions on portfolio positions. The risk management processes for risk
measurement and risk management conform to the Reserve Bank of India's
guidelines.
Equity Risk
ICICI Bank
ICICI Bank's equity positions included both equity securities and units of
mutual funds. ICICI Bank invested in equity securities only in book-entry form,
which decreased the settlement and liquidity risk. ICICI Bank did not hold any
equity securities at year-end fiscal 2001 and 2002. ICICI
79
Bank had investments of Rs. 293 million (US$ 6 million) in mutual funds at
year-end fiscal 2002. Position limits, stop-loss limits and holding period
limits are used to manage risks for equity positions in the trading book.
ICICI
ICICI assumed equity risk both as part of its investment book and its
trading book. On the investment book, investments in equity shares and
preference shares were essentially long-term in nature. Nearly all the equity
investment securities were driven by its project financing activities. The
decision to invest in equity shares during project financing activities was a
conscious decision to participate in the equity of the company with the
intention of realizing capital gains arising from the expected increases in
market prices, and was separate from the lending decision.
Trading account securities were recorded at market value. For the purpose
of valuation of equity investment securities, an assessment was made whether a
decline in the fair value, below the amortized cost of the investments, was
other than temporary. If the decline in fair value below the amortized cost was
other than temporary, the decline was provided for in the income statement. A
temporary decline in value was excluded from the income statement and charged
directly to the shareholders' equity. To assess whether a decline in fair value
was temporary, the duration for which the decline had existed, industry and
company specific conditions, and dividend record were considered. Non-readily
marketable securities for which there is no readily determinable fair value
were recorded at cost. Venture capital investments were carried at fair value.
However, they were generally carried at cost during the first year, unless a
significant event occurred that affected the long-term value of the investment.
Substantially all venture capital investments were acquired during fiscal 2001.
At year-end fiscal 2002, the fair value of trading account equity
securities was Rs. 742 million (US$ 15 million). The fair value of equity
securities investment portfolio, including non-readily marketable securities of
Rs. 8.26 billion (US$ 169 million), was Rs. 28.5 billion (US$ 584 million). It
included investment of approximately Rs. 9.3 billion (US$ 190 million) in
liquid mutual funds units at year-end fiscal 2002. At year-end fiscal 2001, the
fair value of trading equity securities was Rs. 2.7 billion (US$ 55 million).
The fair value of equity securities investment portfolio, including non-readily
marketable securities of Rs. 7.1 billion (US$ 145 million), was Rs. 17.1
billion (US$ 350 million).
Exchange Rate Risk
The merged entity offers foreign currency hedge instruments like swaps and
forwards to clients, which are primarily banks and highly rated corporate
customers. The merged entity actively uses cross currency swaps and forwards to
hedge against exchange risks arising out of these transactions. Trading
activities in the foreign currency markets expose the merged entity to exchange
rate risks. This risk is mitigated by setting counterparty limits, stipulating
limits on the loss of the entire foreign exchange trading floor, and engaging
in exception reporting.
In addition, foreign currency loans are made on terms that are similar to
foreign currency borrowings, thereby transferring the foreign exchange risk to
the borrower. In case of certain foreign currency borrowings that are on-lent
in rupees, the government of India bears foreign exchange risk on these
borrowings subject to certain agreements between the merged entity and the
government of India. Foreign currency cash balances are generally maintained
abroad in currencies matching with the underlying borrowings.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the
risk of unexpected increases in the cost of funding an asset portfolio at
appropriate maturities and the risk of being unable to liquidate a position in
a timely manner at a reasonable price. The goal of liquidity management is to
be able, even under
80
adverse conditions, to meet all liability repayments on time and fund all
investment opportunities. See "Operating and Financial Review and Prospects for
ICICI Bank - Financial Condition - Liquidity Risk" for a description of
liquidity risk for ICICI Bank, ICICI and merged entity.
Operational Risk
The merged entity is exposed to many types of operational risk.
Operational risk can result from a variety of factors, including failure to
obtain proper internal authorizations, improperly documented transactions,
failure of operational and information security procedures, computer systems,
software or equipment, fraud, inadequate training and employee errors. The
merged entity attempts to mitigate operational risk by maintaining a
comprehensive system of internal controls, establishing systems and procedures
to monitor transactions, maintaining key back-up procedures and undertaking
regular contingency planning.
Operational Controls and Procedures in Branches
The merged entity has operating manuals detailing the procedures for the
processing of various banking transactions and the operation of the application
software. Amendments to these manuals are implemented through circulars sent to
all offices.
When taking a deposit from a new customer, the merged entity requires the
new customer to complete a relationship form, which details the terms and
conditions for providing various banking services. Photographs of customers are
also obtained for the merged entity's records, and specimen signatures are
scanned and stored in the system for online verification. The merged entity
enters into a relationship with a customer only after the customer is properly
introduced to the merged entity. 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.
The merged entity has a scheme of delegation of financial powers that sets
out the monetary limit for each employee with respect to the processing of
transactions in a customer's account. Withdrawals from customer accounts are
controlled by dual authorization. Senior officers have delegated power to
authorize larger withdrawals. The merged entity's operating system validates
the check number and balance before permitting withdrawals. Cash transactions
over Rs. 1 million (US$ 20,479) are subject to special scrutiny to avoid money
laundering. The merged entity's banking software has multiple security features
including user access rights and terminal-based security features to protect
the integrity of applications and data.
The merged entity gives 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.
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, the customer is
allotted a user ID and password. Second, the customer must send to the merged
entity further documentation to prove the customer's identity, including a copy
of the customer's passport, a photograph and specimen signature of the
customer. After the customer completes these formalities satisfactorily, the
merged entity gives him full access to his account online. For a description of
the security features of the merged entity's technology related to Internet
banking, see "-Technology".
81
Operational Controls and Procedures in Regional Processing Centers
To improve customer service at the merged entity's physical locations, the
merged entity handles transaction processing centrally by taking away such
operations from branches. The merged entity has 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.
In Mumbai, the merged entity has centralized transaction processing on a
nationwide basis for transactions like the issue of ATM cards and PIN mailers,
reconciliation of ATM transactions, monitoring of ATM functioning, issue of
passwords to Internet banking customers, depositing post-dated cheques received
from retail loan customers and credit card transaction processing. Centralized
processing has been extended to the issuance of personalized check books, back
office activities of non-resident Indian accounts, opening of new bank accounts
for customers who seek web broking services and recovery of service charges for
accounts for holding shares in book-entry form.
Operational Controls and Procedures in Treasury
The merged entity has a high level of automation in trading operations.
The merged entity's technology to monitor risk limits and exposures on a near
real-time basis. The merged entity's front office, back office and accounting
and reconciliation functions are fully segregated in both the domestic treasury
and foreign exchange treasury. The respective middle offices use various risk
monitoring tools such as counterparty limits, position limits, exposure limits
and individual dealer limits. Procedures for reporting breaches in limits are
also in place.
Domestic Treasury. The merged entity's 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.
The Treasury Middle Office Group, which reports to the Chief Financial
Officer, monitors counterparty limits, evaluates the mark-to-market impact on
various positions taken by dealers and monitors market risk exposure of the
investment portfolio.
The merged entity's 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 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. Trade
strategies are discussed frequently and decisions are taken based on the market
forecasts, information and liquidity considerations. Trading operations are
conducted in conformity with the code of conduct prescribed by internal and
regulatory guidelines.
The Treasury Middle Office Group monitors counterparty limits, positions
taken by dealers and adherence to various market risk limits set by the Risk,
Compliance and Audit Group.
The merged entity's back office procedures were put in place to ensure
speedy processing, confirmation, accounting, confirmation matching, deal
settlements and cash balance monitoring. The
82
back office systems are designed to minimize settlement risk. The matching and
checking of counterparty confirmation of deals is fully automated.
Audit
The Internal Audit Group undertakes a comprehensive audit of all business
groups and other functions, in accordance with a risk-based audit plan. This
plan allocates audit resources based on an assessment of the operational risks
in the various businesses. The Internal Audit group conceptualizes and
implements improved systems of internal controls, to minimize operational risk.
The audit plan for every fiscal year is approved by the Audit Committee of the
merged entity's board of directors.
The Reserve Bank of India requires banks to have a process of concurrent
audits at branches handling large volumes, to cover a minimum of 50.0% of
business volumes. The merged entity has instituted systems to conduct
concurrent audits, using reputed chartered accountancy firms.
Legal Risk
The uncertainty of the enforceability of the obligations of the merged
entity's customers and counter-parties, including the foreclosure on
collateral, creates legal risk. Changes in law and regulation could adversely
affect the merged entity. Legal risk is higher in new areas of business where
the law is often untested by the courts. The merged entity seeks to minimize
legal risk by using stringent legal documentation, employing procedures
designed to ensure that transactions are properly authorized and consulting
internal and external legal advisors.
Derivative Instruments Risk
The merged entity engages in limited trading of derivative instruments on
its own account and generally enters into interest rate and currency derivative
transactions primarily for the purpose of hedging interest rate and foreign
exchange mismatches. The merged entity provides limited derivative services to
selected major corporate customers and other domestic and international
financial institutions, including foreign currency forward transactions and
foreign currency and interest rate swaps. The merged entity's derivative
transactions are subject to counter-party risk to the extent particular
obligors are unable to make payment on contracts when due.
Loan Portfolio
At year-end fiscal 2002, ICICI Bank's gross loan portfolio, which included
its holdings of corporate debt instruments and preferred stock, was Rs. 75.7
billion (US$ 1.5 billion).
The following table sets forth, for the periods indicated, ICICI Bank's
gross loan portfolio classified by product group.
At March 31,
--------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
-------------- ------------ ----------- ------------- ------------- -------------
(in millions)
Working capital................... Rs. 9,256 Rs. 17,508 Rs. 31,576 Rs. 57,316 Rs. 37,340 US$ 765
Term loans(1)..................... 3,344 9,859 14,635 34,051 31,168 638
Retail loans...................... 590 1,110 1,553 4,909 7,150 146
--------------------------------------------------------------------------------------
Gross loans....................... 13,190 28,477 47,764 96,276 75,658 US$ 1,549
============== ============= ============= ============== ============= ==============
Unearned Income................... - - (30) (356) (364) (7)
--------------------------------------------------------------------------------------
Gross loans net of unearned income Rs. 13,190 Rs. 28,477 Rs. 47,734 Rs. 95,920 Rs. 75,294 US$ 1,542
======================================================================================
Of which:
Corporate debt instruments and
preferred stock.............. Rs. 1,424 Rs. 6,762 Rs. 10,532 Rs. 23,624 Rs. 23,035 US$ 472
======================================================================================
---------
(1) Includes corporate debt instruments, preferred stock and lease finance
products. ICICI Bank had lease finance of Rs. 820 million (US$ 17 million)
83
at year-end fiscal 2002 and Rs. 944 million (US$ 19 million) at year-end
fiscal 2001, representing 1.08% and 0.98% of gross loans, respectively. In
fiscal 1996, ICICI Bank offered lease financing to a limited number of
customers due to certain tax advantages from these transactions. ICICI
Bank discontinued all of its 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". ICICI Bank
acquired a portfolio of hire purchase business, representing Rs. 8 million
(US$ 163,834) at year-end fiscal 2001 from Bank of Madura. ICICI Bank has
extended fund based loans as well as stand by letters of credit facilities
to corporates outside India which are joint ventures and/or wholly-owned
subsidiaries of Indian corporates. At year-end fiscal 2002, the balance
outstanding in respect of these loans was Rs. 620 million (US$ 13 million)
which represented approximately 0.8% of ICICI Bank's total gross loan
portfolio.
Corporate debt instruments and preferred stock amounted to Rs. 23.0
billion (US$ 472 million) at year-end fiscal 2002, or 30.4 % of ICICI Bank's
gross loans. Although trading in these corporate debt securities is not very
active, the merged entity believes 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 ICICI Bank's loans at year-end fiscal 2002 were to Indian borrowers.
ICICI's gross loan portfolio, which included loans structured as
debentures and preference shares, at year-end fiscal 2002 was Rs. 560.3 billion
(US$ 11.5 billion), a decrease of 11.8% from Rs. 635.1 billion (US$ 13.0
billion), at year-end fiscal 2001. At year-end fiscal 2001, the gross loan
portfolio increased 6.6% to Rs. 635.1 billion (US$ 13.0 billion) from Rs. 595.5
billion (US$ 12.2 billion) at year-end fiscal 2000. In the past few years, an
increasing proportion of ICICI's long-term lending particularly in
infrastructure financing was provided in the form of debentures since ICICI
expected that in the future these debentures could be sold in secondary debt
markets in India. This structure was intended to facilitate a transfer of
assets and provide flexibility in managing the exposure and liquidity of the
balance sheet. Approximately 87.1% of ICICI's gross loans were rupee loans at
year-end fiscal 2002. All of ICICI's loans at year-end fiscal 2002 were to
Indian borrowers, and ICICI had no loans outstanding to entities outside India.
Collateral -- Completion, Perfection and Enforcement
The merged entity's loan portfolio consists predominantly of working
capital, corporate finance and project finance loans to corporate borrowers.
Working capital loans are typically secured by a first lien on current assets,
which normally consist of inventory and receivables. Additionally, in some
cases, the merged entity 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. Corporate finance and project
finance loans are typically secured by a first lien on fixed assets, which
normally consist of property, plant and equipment. These security interests are
perfected by the registration of these interests within 30 days with the
Registrar of Companies pursuant to the provisions of the Indian Companies Act.
The merged entity may also take security of a pledge of financial assets like
marketable securities, corporate guarantees and personal guarantees. This
registration amounts to a constructive public notice to other business
entities. In general, the merged entity's 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. The
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Ordinance, 2002, promulgated by the President of India in
June 2002 and re-promulgated in August 2002 but yet to be approved by
legislation passed by the Indian parliament, is expected to strengthen the
ability of lenders to resolve non-performing assets by granting them greater
rights as to
84
enforcement of security and recovery of dues. However, there can be no
assurance that the legislation will be passed by the Indian parliament or that,
if passed, it will have a favorable impact on the merged entity's efforts to
resolve non-performing assets. See "Overview of the Indian Financial Sector -
Recent Structural Reforms - Legislative Framework for Recovery of Debts due to
Banks".
The merged entity recognizes that its ability to realize the full value of
the collateral in respect of current assets is difficult, due to, among other
things, delays on its 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
the merged entity is able to capture the cash flows of its customers for
recovery of past due amounts. In addition, the merged entity has a right of
set-off for amounts due to it on these facilities. Also, the merged entity
monitors the cash flows of its working capital loan customers on a daily basis
so that it can take any actions required before the loan becomes impaired. On a
case-by-case basis, the merged entity may also stop or limit the borrower from
drawing further credit from its facility.
Most of the merged entity's 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 an 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 an 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 identifiable collateral through individual security documents and
the creation of requisite liens. Unlike a consortium arrangement lending, in a
multiple bank or sole bank lending, the merged entity can independently pursue
recovery of past due amounts either through full cash recovery, a negotiated
settlement or a legal suit. At year-end fiscal 2002, loans with consortium
arrangements accounted for 39.6% of ICICI Bank's gross impaired loans, loans
with multiple bank arrangements accounted for 12.7% of ICICI Bank's gross
impaired loans and sole bank lending accounted for 47.7% of ICICI Bank's gross
impaired loans.
Loan Concentration
The merged entity follows a policy of portfolio diversification and
evaluates its total financing exposure in a particular industry in light of its
forecasts of growth and profitability for that industry. The merged entity's
risk management department monitors all major sectors of the economy and
specifically follows industries in which the merged entity has credit
exposures. The merged entity responds 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 merged entity, like ICICI Bank
and ICICI, limits its loan portfolio to any particular industry (other than
retail loans) to 15.0%.
Pursuant to the guidelines of the Reserve Bank of India, the merged
entity's credit exposure to individual borrowers must not exceed 15.0% of its
capital funds comprising Tier-1 and Tier-2 capital, calculated pursuant to the
guidelines of the Reserve Bank of India, under Indian GAAP. The merged
85
entity's exposure to a group of companies under the same management control
must not exceed 40.0% of its capital funds unless the exposure is in respect of
an infrastructure project. In that case, the exposure to a group of companies
under the same management control may be up to 50.0% of the merged entity's
capital funds. 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
(100.0% of the committed non-funded amount or the outstanding non-funded
amount, whichever is higher, with effect from fiscal 2004). The merged entity
is in compliance with these limits, except in the case of two borrowers where
it has breached the single exposure limit. This is mainly due to the write-down
of reserves as part of the fair valuation exercise conducted at the time of the
amalgamation under Indian GAAP. The merged entity was not in breach of the
limit at the time of providing the assistance. Subsequent to the amalgamation,
the merged entity has applied to the Reserve Bank of India for its approval for
exceeding the exposure limit in respect of these two borrowers.
The following table sets forth, at the dates indicated, ICICI Bank's gross
loans outstanding by the borrower's industry or economic activity and as a
percentage of gross loans.
At March 31,
-----------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
---------------- ---------------- ---------------- ----------------- -------------------------
(in millions, except percentages)
Light manufacturing....... Rs. 1,300 9.9% Rs. 2,800 9.8% Rs. 4,895 10.3% Rs. 6,782 7.0% Rs. 6,323 US$ 129 8.4%
Chemicals, drugs and
Pharmaceuticals........... 1,092 8.3 2,420 8.5 5,772 12.0 11,032 11.4 4,840 99 6.4
Electricity............... 540 4.1 1,488 5.2 2,784 5.8 7,752 8.1 4,632 95 6.1
Other personal loans...... 590 4.5 1,110 3.9 1,553 3.3 6,691 7.0 4,206 86 5.6
Agriculture............... 501 3.8 675 2.4 1,520 3.2 2,984 3.1 3,831 78 5.1
Automobiles including 3,529 72 4.7
trucks.................... 600 4.5 1,006 3.5 1,680 3.5 2,111 2.2
Transport................. 360 2.7 159 0.6 1,686 3.6 4,363 4.5 2,909 60 3.8
Finance................... 780 5.9 1,949 6.9 6,113 12.8 9,375 9.7 2,753 56 3.6
Textiles.................. 1,170 8.9 1,405 4.9 1,600 3.4 3,605 3.7 2,578 53 3.4
Other metals and metal 1,425 29 1.9
products.................. 330 2.5 1,370 4.8 1,269 2.7 1,439 1.5
Construction.............. 770 5.8 740 2.6 882 1.8 1,396 1.5 1,322 27 1.7
Computer software......... 230 1.7 460 1.6 823 1.7 1,368 1.4 1,296 27 1.7
Cement.................... 170 1.3 540 1.9 1,124 2.3 2,394 2.5 1,232 25 1.6
Iron and steel............ 460 3.5 620 2.2 703 1.4 1,118 1.2 1,103 23 1.5
Paper and paper products.. 240 1.8 373 1.3 745 1.6 1,118 1.2 1,009 21 1.3
Other industries(1)....... 4,057 30.8 11,362 39.9 14,615 30.6 32,748 34.0 32,670 669 43.2
-----------------------------------------------------------------------------------------------
Gross loans............... Rs.13,190 100.0% Rs.28,477 100.0% Rs.47,764 100.0% Rs.96,276 100.0% Rs.75,658 US$1,549 100.0%
===============================================================================================
---------
(1) Other industries consist of over 20 industries, including coal, mining,
sugar, tea, rubber and rubber products, food processing, gems and jewelry,
with no industry constituting more than 5.0% of gross loans.
At year-end fiscal 2002, no single industry accounted for more than 15.0%
of ICICI Bank's gross loan portfolio.
In fiscal 1999, there was an increase in the proportion of ICICI Bank's
assets in the chemicals, drugs and pharmaceuticals and other metals and metal
products sectors, while there was a decrease in the proportion of assets in the
construction, iron and steel, and textiles sectors. In fiscal 2000, there was
an increase in the proportion of ICICI Bank's assets in the finance, chemicals,
transport, agriculture and light manufacturing sectors while there was a
decrease in the proportion of its assets in the construction, textiles, iron
and steel, other metals and metal products sectors. In fiscal 2001, there was
an increase in the proportion of ICICI Bank's assets in the cement, electricity
and transport sectors while there was a decrease in the proportion of its
assets in the automobiles including trucks, chemicals, drugs and
pharmaceuticals, finance, other metal and metal products and light
manufacturing sectors. In fiscal 2002, there was an increase in the proportion
of ICICI Bank's assets in the automobiles including trucks, agriculture, other
metals and metal products and iron and steel sectors while there was a decrease
in the proportion of its assets in the finance, chemicals, drugs and
pharmaceuticals and electricity sectors.
ICICI Bank's 20 largest borrowers at year-end fiscal 2002 totaled
approximately Rs. 18.6 billion (US$ 381 million) and represented 24.6% of its
total gross loan portfolio. The largest group of
86
companies under the same management control accounted for approximately 1.7% of
ICICI Bank's portfolio at that date.
The following table sets forth, at the dates indicated, ICICI's gross
loans outstanding, including loans structured as debentures and preference
shares, by the borrower's industry or economic activity.
At March 31,
---------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
---------------------------------------------------------------------------------------------------------
Retail Finance ........... Rs. - -% Rs. 602 0.1 Rs. 6,679 1.1% Rs. 27,106 4.3% Rs. 72,789 US$ 1,491 13.0%
Iron and steel ........... 34,469 8.6 48,908 9.7 59,246 9.9 70,547 11.1 71,272 1460 12.7
Power .................... 34,079 8.5 40,154 8.0 56,162 9.4 66,368 10.5 61,159 1,252 10.9
Services ................. 28,047 7.0 40,500 8.0 62,997 10.6 74,425 11.7 47,676 976 8.5
Textiles ................. 32,587 8.2 35,979 7.1 42,019 7.1 47,052 7.4 40,867 837 7.3
Crude petroleum and
petroleum refining ..... 22,158 5.5 44,492 8.8 51,338 8.6 54,822 8.6 32,099 657 5.7
Telecom .................. 8,235 2.2 9,867 2.0 15,903 2.7 20,244 3.2 25,547 523 4.6
Cement ................... 17,592 4.4 17,069 3.4 19,559 3.3 25,709 4.0 19,088 391 3.4
Electronics .............. 9,461 2.4 11,275 2.2 12,597 2.1 15,032 2.4 17,817 365 3.2
Basic chemicals .......... 15,589 3.9 18,864 3.7 22,058 3.7 15,825 2.5 14,115 289 2.5
Machinery ................ 15,355 3.8 19,562 3.9 19,089 3.2 16,973 2.7 13,196 270 2.4
Transport equipment ...... 17,692 4.4 18,226 3.6 23,020 3.9 19,613 3.1 13,086 268 2.3
Paper and paper products . 11,397 2.9 12,655 2.5 16,934 2.8 16,205 2.6 12,865 263 2.3
Plastics ................. 8,185 2.1 9,022 1.8 10,988 1.8 11,213 1.8 10,086 207 1.8
Food products ............ 7,793 1.9 6,293 1.2 7,736 1.3 8,755 1.4 9,264 190 1.7
Fertilizers and pesticide. 16,798 4.2 18,493 3.7 21,001 3.5 17,801 2.8 9,202 188 1.6
Transportation ........... 11,260 2.8 17,795 3.5 18,982 3.2 15,568 2.5 8,715 178 1.6
Man-made fibers .......... 11,261 2.8 11,832 2.3 11,505 1.9 11,061 1.7 8,670 178 1.5
Electrical equipment ..... 10,707 2.7 12,738 2.5 18,526 3.1 14,068 2.2 8,357 171 1.5
Drugs .................... 5,677 1.4 6,616 1.3 6,936 1.2 9,950 1.6 7,766 159 1.4
Sugar .................... 7,788 2.0 7,872 1.6 9,464 1.6 9,718 1.5 7,645 157 1.4
Petrochemicals ........... 5,311 1.3 8,128 1.6 7,396 1.2 11,471 1.8 7,621 156 1.4
Metal products ........... 7,621 1.9 7,847 1.6 9,783 1.7 7,924 1.2 6,912 142 1.2
Non-ferrous metals ....... 3,362 0.8 5,453 1.1 5,376 0.9 4,473 0.7 6,536 134 1.2
Mining ................... 2,566 0.6 7,918 1.6 8,330 1.4 6,503 1.0 4,970 102 0.9
Rubber and rubber
products................ 3,036 0.8 3,321 0.7 4,086 0.7 3,431 0.5 3,500 72 0.6
Other chemicals .......... 311 0.1 774 0.2 332 0.1 335 0.1 189 4 0.0
Other (1) ................ 51,304 12.8 61,375 12.3 47,491 8.0 32,866 5.1 19,239 393 3.4
---------------------------------------------------------------------------------------------------------
Gross loans .............. Rs. 399,641 100.0% Rs. 503,630 100.0% Rs. 595,533 100.0% Rs. 635,058 100.0% Rs. 560,248 US$ 11,473 100.0%
===== ===== ===== ===== =====
Allowance for loan losses. (22,457) (28,524) (34,085) (33,035) (36,647) (750)
----------- ----------- ----------- ----------- ----------------------
Net loans ................ Rs. 377,184 Rs. 475,106 Rs. 561,448 Rs. 602,023 Rs. 523,601 US$ 10,723
=========== =========== =========== =========== ======================
---------
(1) Other principally includes shipping, printing, mineral products, glass and
glass products, watches, healthcare, leather and wood products industries.
ICICI's gross loan portfolio at year-end fiscal 2002 decreased by 11.8%
compared to year-end fiscal 2001. Consequently the proportion of loans to the
iron and steel sector was higher at 12.7% at year-end fiscal 2002 compared to
11.1% at year-end fiscal 2001, although the gross loans to the iron and steel
sector at year-end fiscal 2002 increased by only 1.0% from year-end fiscal
2001. The proportion of loans to the services sector and the crude petroleum
and petroleum refining sector decreased in fiscal 2002 compared to fiscal 2001
due to the sale of loans in these sectors to banks and other financial
intermediaries in fiscal 2002, as part of ICICI's strategy to improve the
liquidity of its loan portfolio. The retail finance segment was the fastest
growing sector and constituted 13.0% of gross loans at year-end fiscal 2002
compared to 1.1% at year-end fiscal 2000 and 4.3% at year-end fiscal 2001.
At year-end fiscal 2002, ICICI's 20 largest borrowers accounted for
approximately 24.9% of its gross loan portfolio, with the largest borrower
accounting for approximately 2.9% of its gross loan portfolio. The largest
group of companies under the same management control accounted for
approximately 4.8% of ICICI's gross loan portfolio.
87
Geographic Diversity
Except as described below, ICICI Bank's and ICICI's portfolios were
geographically diversified throughout India, primarily reflecting the location
of its corporate borrowers. The states of Maharashtra and Gujarat, the two most
industrialized states in India, accounted for the largest proportion of ICICI's
total gross loans outstanding, with Maharashtra accounting for about 22.4% and
Gujarat accounting for about 13.5% at year-end fiscal 2002.
Loan Portfolio by Categories
The following table sets forth, at the dates indicated, ICICI's gross
rupee and foreign currency loans by business category.
At March 31
----------------------------------------------------------------------
1998 1999 2000 2001 2002
----------------------------------------------------------------------
(in millions)
Wholesale banking(1)
Rupee.................................. Rs.256,991 Rs.335,306 Rs. 371,257 Rs.428,782 Rs.342,068 US$ 7,005
Foreign currency....................... 92,054 88,298 88,581 82,530 68,488 1,403
Working capital finance
Rupee.................................. 10,203 22,203 72,317 42,592 39,943 818
Foreign currency....................... 505 494 3,289 1,850 2,282 47
Leasing and related activities (2)
Rupee.................................. 30,303 49,942 33,787 38,258 22,879 468
Foreign currency ...................... 349 1,530 1,467 1,483 1,453 29
Other(3)
Rupee ................................. 9,236 5,862 24,835 39,563 83,135 1,703
Foreign currency ...................... -- -- -- -- -- --
Gross loans
Rupee ................................ 306,733 413,308 502,196 549,195 488,025 9,994
Foreign currency ...................... 92,908 90,322 93,337 85,863 72,223 1,479
----------------------------------------------------------------------
Total gross loans ....................... 399,641 503,630 595,533 635,058 560,248 11,473
Allowance for loan losses................ (22,457) (28,524) (34,085) (33,035) (36,647) (750)
----------------------------------------------------------------------
Net loans ............................... Rs.377,184 Rs.475,106 Rs. 561,448 Rs. 602,023 Rs.523,601 US$10,723
======================================================================
-----------
(1) Wholesale banking includes project finance, corporate finance and
receivable financing but excludes leasing and related activities.
(2) Leasing and related activities includes leasing and hire purchase.
(3) Other includes bills discounted, inter-corporate deposits and retail
finance assets.
The proportion of foreign currency loans to ICICI's total gross loans has
decreased steadily from 23.2% at year-end fiscal 1998 to 12.9% at year-end
fiscal 2002 due to a decrease in demand for these loans.
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 on the Industrial Sector
The Indian economy has been impacted by negative trends in the global
marketplace, particularly in the commodities markets, which impaired the
operating environment of the industrial sector. The manufacturing sector has
also been adversely impacted by several other 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 ICICI Bank's and ICICI's borrowers and the
restructuring of certain Indian companies in sectors such as textiles, iron and
steel and man-made fibers. Certain Indian corporations are gradually coming to
terms with this new competitive reality through a process of restructuring and
repositioning. This restructuring process, including rationalization of capital
structures and production capacities, is taking place in several
88
industries such as iron and steel, man-made fibers and textiles. This has led
to stress on the operating performance of Indian corporations and the
impairment of some loan assets in the financial system, including some of ICICI
Bank's and ICICI's assets. The processing of restructuring gained momentum
during fiscal 2002, as companies in key commodity sectors continued to witness
slowdown in demand and increased competitive pressures. The recessionary
conditions in various economies including the United States had an adverse
impact on several sectors during fiscal 2002.
Recognition of Impaired Loans
The merged entity identifies a loan as impaired when it is probable that
the merged entity 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 Reserve Bank of India's revised asset classification rules
effective from fiscal 2004 will require Indian banks to classify an asset as
impaired when principal or interest has remained overdue for more than 90 days.
Delays or shortfalls in loan payments are evaluated along with other factors to
determine if a loan should be placed on non-accrual status. Generally, loans
with delinquencies under 180 days are placed on non-accrual status only if
specific conditions indicate that impairment is probable. The decision to place
a loan on non-accrual status is also based on an evaluation of the borrower's
financial condition, collateral, liquidation value, and other factors that
affect the borrower's ability to repay the loan in accordance with the
contractual terms. Generally, at the time a loan is placed on non-accrual
status, interest accrued and uncollected on the loan in the current fiscal year
is reversed from income, and interest accrued and uncollected from the prior
year is charged off against the allowance for loan losses. Thereafter, interest
on non-accrual loans is recognized as interest income only to the extent that
cash is received and future collection of principal is not in doubt. When
borrowers demonstrate over an extended period the ability to repay a loan in
accordance with the contractual terms of a loan, which the merged entity
classified as non-accrual, the loan is returned to accrual status.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. The merged entity classifies a loan as a troubled debt
restructuring where it has made concessionary modifications, that it would not
otherwise consider, to the contractual terms of the loan to a borrower
experiencing financial difficulties. Such loans are placed on a non-accrual
status. For these loans, cash receipts are typically applied to principal and
interest in accordance with the terms of the restructured loan agreement. With
respect to restructured loans, performance prior to the restructuring or
significant events that coincide with the restructuring are evaluated in
assessing whether the borrower can meet the rescheduled terms and may result in
the loan being returned to accrual status after a performance period.
Consumer loans are generally identified as impaired not later than a
predetermined number of days overdue on a contractual basis. The number of days
is set at an appropriate level by loan product. The policy for suspending
accruals of interest and impairment on consumer loans varies depending on the
terms, security and loan loss experience characteristics of each product.
The value of impaired loans is measured at the present value of expected
future cash flows discounted at the loan's effective interest rate, at the
loan's observable market price, or the fair value of the collateral if the
recovery of the loan is solely collateral dependent. If the value of the
impaired loan is less than the recorded investment in the loan, the merged
entity recognizes this impairment by creating a valuation allowance with a
corresponding charge to the provision for loan losses.
ICICI Bank's Impaired Loans
At year-end fiscal 2002, ICICI Bank's gross impaired loans were Rs. 5.5
billion (US$ 112 million), an increase of 2.3% from Rs. 5.3 billion (US$ 109
million) at year-end fiscal 2001.
At year-end fiscal 2002, ICICI Bank's gross impaired loans as a percentage
of gross loan assets was 7.2% (of which 1.0% represented restructured loans and
6.2% represented other impaired loans)
89
compared to 5.6% at year-end fiscal 2001. ICICI Bank made total valuation
allowances for 50.9% of its gross impaired loans on which valuation allowances
had been made. These allowances were based on the expected realization of cash
flows from these assets. The merged entity cannot, however, assure you that the
provisions will be adequate to cover any further increase in the amount of
impaired loans or any further deterioration in its impaired loan portfolio.
ICICI Bank had not made valuation allowances on 0.2% of gross impaired loans at
year-end fiscal 2002 based on the fact that the discounted cash flows from
these borrowers were sufficient to cover the entire exposure of these loans.
Out of ICICI Bank's total impaired loans outstanding, the top 10 represented
32.4% of ICICI Bank's gross impaired loans and 2.4% of its gross loan
portfolio.
ICICI Bank's impaired loans, net of allowances for loan losses, increased
by Rs. 194 million (US$ 4 million) in fiscal 2002 to Rs. 2.7 billion (US$ 55
million) at year-end fiscal 2002 compared to Rs. 2.5 billion (US$ 51 million)
at year-end fiscal 2001. Net impaired loans were 3.7% of total net loan assets
at year-end fiscal 2002 compared to 2.7% at year-end fiscal 2001.
The following tables set forth, at the dates indicated, certain details of
ICICI Bank's gross impaired portfolio, along with an analysis of impaired loans
by product.
At March 31,
----------------------------------------------------------------------------------------
% of total
at March
1998 1999 2000 2001 2002 2002 31, 2002
----------------------------------------------------------------------------------------
(in millions, except percentages)
Impaired working capital loans... Rs. 558 Rs. 1,158 Rs. 1,127 Rs. 3,700 Rs. 3,665 US$ 75 67.2%
Impaired term loans.............. 46 236 61 1,242 1,041 22 19.1
Impaired lease loans............. - 144 185 227 310 6 5.7
Impaired corporate debt
Instruments(1)................. - 75 45 121 86 2 1.6
Impaired credit card receivable.. - - - 43 355 7 6.4
----------------------------------------------------------------------------------------
Gross impaired loans............. Rs. 604 Rs. 1,613 Rs. 1,418 Rs. 5,333 Rs. 5,457 US$ 112 100.0%
========================================================================================
Gross impaired loans without
Valuation allowances(2) Rs. 26 Rs. 466 Rs. 163 Rs. 14 Rs. 9 US$ -
Gross impaired loans with valuation
Allowances(3).................. 578 1,147 1,255 5,319 5,448 112
Total valuation allowances(4).... 425 880 748 2,844 2,774 57
Impaired loans net of valuation
Allowances..................... 179 733 670 2,489 2,683 55
Gross loan assets (net of unearned
income).......................... 13,190 28,477 47,734 95,920 75,294 1,542
Net loan assets (net of unearned
income) 12,765 27,597 46,896 93,030 72,474 1,484
---------
(1) Includes debentures, preferred stock and bonds.
(2) Includes impaired loans on which ICICI Bank has not made a valuation
allowance.
(3) Includes impaired loans on which ICICI Bank has made a valuation
allowance.
(4) Does not include a general provision on loans of Rs. 46 million (US$ 1
million) at year-ended fiscal and 2002.
At March 31,
---------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in billions, except percentages)
Gross impaired loans as a percentage of gross loan assets...... 4.6% 5.7% 3.0% 5.6% 7.2%
Gross impaired loans with valuation allowances as a percentage
of gross loan assets........................................ 4.4 4.0 2.6 5.5 7.2
Impaired loans net of valuation allowances as a percentage of
net loan assets............................................. 1.4 2.7 1.4 2.7 3.7
Total valuation allowances as a percentage of impaired loans with
valuation allowances........................................ 73.5 76.7 59.6 53.5 50.9
Impaired working capital loans were 67.2% of total impaired loans at
year-end fiscal 2002. The proportion of term loans in the gross impaired loans
increased from 7.6% at year-end fiscal 1998 to 19.1% at year-end 2002. Impaired
credit card receivables at year-end fiscal 2002 were 6.5% of the
90
gross impaired loans. Although lease finance represented 1.1% of ICICI Bank's
gross loans at year-end fiscal 2002, it represented 5.7% of its gross impaired
loans at year-end fiscal 2002. In fiscal 1996, ICICI Bank offered lease
financing to a limited number of small and medium-sized companies because it
gained certain tax advantages from these transactions. ICICI Bank 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". The merged entity believes that ICICI Bank's gross impaired loans
were greater for this type of exposure compared to others due to the small size
of these borrowers and their concentration in industry sectors that have
experienced a slowdown, such as the textiles sector.
Analysis of Impaired Loans by Directed Lending Sector
When lending under Indian directed lending requirements, the merged entity
follows the same credit risk assessment and credit approval processes as in all
its lending. In view of the possibility of higher incidence of asset impairment
in directed lending relative to non-directed lending, the merged entity
maintains the option of fulfilling its 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.
The following table sets forth, at the dates indicated, ICICI Bank's gross
impaired loans classified into directed lending and non-directed lending.
At March 31,
---------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
--------------- --------------- --------------- --------------- ------------------------
Impaired Impaired Impaired Impaired Impaired
Loans % Loans % Loans % Loans % Loans %
-------- ----- -------- ----- --------- ----- --------- ----- ------------------ -----
Directed
Lending:
Agriculture .... Rs. 33 5.5% Rs. 96 6.0% Rs. 90 6.3% Rs. 246 4.6% Rs. 108 US$ 2 2.0%
Small scale
industries ..... 170 28.1 209 13.0 154 10.9 1,530 28.7 1,547 32 28.3
Other ............ 44 7.3 100 6.1 112 7.9 228 4.3 87 2 1.6
Total directed
lending ........ 247 40.9 405 25.1 356 25.1 2,004 37.6 1,742 36 31.9
Non-directed
lending ........ 357 59.1 1,208 74.9 1,062 74.9 3,329 62.4 3,715 76 68.1
-------- ----- -------- ----- --------- ----- --------- ----- --------- ------ -----
Total ............ Rs. 604 100.0% Rs.1,613 100.0% Rs. 1,418 100.0% Rs. 5,333 100.0% Rs. 5,457 US$112 100.0%
======== ===== ======== ===== ========= ===== ========= ===== ========= ====== =====
Allowance for
loan losses .... Rs. (425) Rs. (880) Rs. (748) Rs.(2,844) Rs. (2,774) US$(57)
-------- -------- --------- --------- --------- ------
Net impaired
loans .......... Rs. 179 Rs. 733 Rs. 670 Rs. 2,489 Rs. 2,683 US$ 55
======== ======== ========= ========= ========== ======
Directed lending contributed 31.9% to ICICI Bank's gross impaired loans at
year-end fiscal 2002. Impaired loans in the directed lending sector as a
percentage of gross loans were 2.3% at year-end fiscal 2002. Impaired loans in
the other sectors as a percentage of gross loans were 4.9% at year-end fiscal
2002. At year-end fiscal 2002 and year-end fiscal 2001 impaired loans to the
directed lending sector as a percentage of gross loans in the same sector was
8.7%.
Analysis of Impaired Loans by Industry Sector
The following table sets forth, at the dates indicated, ICICI Bank's
impaired loans by borrowers' industry or economic activity and as a percentage
of loans in the respective industry or economic activity sector.
91
At March 31,
---------------------------------------------------------------------
1998 1999 2000
---------------------- --------------------- ----------------------
Impaired Impaired Impaired
loans % loans % Loans %
---------- ------ --------- ------ ------------- ------
(in millions, except percentages)
Textiles......................... Rs. 62 10.3% Rs. 313 19.4% Rs. 222 15.7%
Light manufacturing.............. 423 29.8
94 15.6 400 24.8
Iron and steel................... 56 9.3 268 16.6 194 13.7
Chemicals,
drugs and pharmaceuticals...... 58 9.6 79 4.9 80 5.7
Auto including trucks ........... - - - - - -
Finance ......................... - - 61 3.8 53 3.7
Paper and paper products ........ - - - - - -
Agriculture...................... 33 5.4 96 6.0 90 6.3
Construction..................... 24 4.0 24 1.5 - -
Computer software................ - - - - 1 0.1
Transport........................ - - - - - -
Other personal loans............. - - - - - -
Other metals and metal products.. - - - - - -
Electricity...................... - - - - - -
Other industries(1).............. 277 45.9 372 23.0 355 25.0
---------- ----- --------- ----- --------- -----
Total............................ Rs. 604 100.0% Rs. 1,613 100.0% Rs. 1,418 100.0%
===== ===== =====
Allowance for loan losses........ Rs. (425) Rs. (880) (748)
---------- --------- ---------
Net impaired loans............... Rs. 179 Rs. 733 670
========== ========= =========
At March 31, 2001 At March 31, 2002
----------------------- ------------------------------------
Impaired
loans % Impaired loans %
------------- ------ -------------------------- ------
(in millions, except percentages)
Textiles................................ Rs. 679 12.7% Rs. 792 US$ 16 14.5%
Light manufacturing..................... 839 15.7 650 13 11.9
Iron and steel.......................... 175 3.3 410 8 7.5
Chemicals, drugs and pharmaceuticals.... 247 4.6 275 6 5.0
Auto including trucks................... 27 0.5 197 4 3.6
Finance................................. 755 14.2 168 3 3.1
Paper and paper products................ 119 2.2 126 3 2.3
Agriculture............................. 246 4.6 108 2 2.0
Construction............................ 92 1.7 99 2 1.8
Computer software....................... - - 84 2 1.5
Transport............................... 23 0.5 39 1 0.7
Other personal loans.................... 85 1.6 31 1 0.6
Other metals and metal products......... 112 2.1 25 1 0.5
Electricity............................. - - 10 - 0.2
Other industries(1)..................... 1,934 36.4 2,443 50 44.8
---------- ----- ----------- ---------- -----
Total................................... Rs. 5,333 100.0% Rs. 5,457 US$ 112 100.0%
===== =====
Allowance for loan losses............... Rs. (2,844) Rs. (2,774) US$ (57)
----------- ----------- ----------
Net impaired loans...................... Rs. 2,489 Rs. 2,683 US$ 55
=========== =========== ==========
---------
(1) Other industries consist of over 20 industries, including coal, mining,
sugar, tea, rubber and rubber products, food processing, gems and jewelry.
The proportion of gross impaired loans were the highest in the textiles,
light manufacturing and iron and steel sectors. At year-end fiscal 2002, ICICI
Bank had classified 7.5% of its gross loans in other industries as impaired
compared to 5.9% at year-end fiscal 2001.
Textiles: Over the last few years, the textiles sector was adversely
affected by the impact of erratic monsoons on the output of cotton, the
South-east Asian economic crisis and anti dumping duties levied by the European
Union. The majority of ICICI Bank's loans to small entities in this sector have
been classified as impaired, and the balance of its exposure is primarily to
large economically sized plants. At year-end fiscal 2002, ICICI Bank had
classified 30.7% of its gross loans in this sector as impaired compared to
18.8% at year-end fiscal 2001.
92
Light Manufacturing: The light manufacturing industry category includes
manufacturers of electronic equipment, electrical cables, fasteners, watches
and other light manufacturing items. The capital goods industry has witnessed a
slowdown in demand due to the fewer number of new projects and general
recession in the manufacturing sector. At year-end fiscal 2002, ICICI Bank had
classified 10.3% of its gross loans in this sector as impaired compared to
12.4% at year-end fiscal 2001.
Iron and Steel: Over the last few years, a sharp reduction in
international steel prices to historic lows has had a significant impact on
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 ICICI Bank's 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 year-end fiscal 2002, ICICI Bank had
classified 37.2% of its gross loans in this sector as impaired, compared to
15.7% at year-end fiscal 2001.
Top Ten Impaired Loans
At year-end fiscal 2002, out of the total impaired loans of ICICI Bank,
the top 10 represented 32.4% of its gross impaired loans, 34.6% of its net
impaired loans and 2.3% of its gross loan portfolio. Two of its top 10 impaired
loans have been restructured. The merged entity is currently working out
detailed restructuring packages for one of these borrowers in conjunction with
other term lenders and other working capital consortium members. One of these
borrowers has made an application for relief to the Board for Industrial and
Financial Reconstruction.
The following table sets forth, at the date indicated, certain information
regarding ICICI Bank's 10 largest impaired loans.
At March 31, 2002
--------------------------------------------------------------------------------------------------
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...... Petrochemicals Consortium Rs. 271 Rs. 190 Rs. 88 No
Borrower B...... Textile Consortium 244 100 254 No
Borrower C...... Plastic Consortium 200 99 412 No
Borrower D...... Steel Consortium 170 110 1,477 No
Borrower E...... Steel Consortium 165 80 307 No
Borrower F...... Textiles Sole 160 66 74 No
Borrower G...... Electricals Consortium 153 70 271 No
Borrower H...... Light
Manufacturing Consortium 151 97 85 Yes
Borrower I...... Telephone cables Consortium 150 77 110 Yes
Borrower J...... Chemicals Consortium 104 40 80 No
------------ ------------- ----------
Total........... Rs. 1,768 Rs. 929 Rs. 3,158
============ ============= ==========
---------
(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. ICICI Bank had collateral in the form of a 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, ICICI Bank is primarily
dependent on recovery through cash flows, collateral being of secondary
importance.
(4) Since ICICI Bank also classified loans as impaired once it determined that
the payment of interest or principal was doubtful, and since such
classification occurred even before the borrower stopped paying interest
and principal, certain of the merged entity's impaired loans are currently
servicing all interest payments.
93
Nine of the top 10 impaired loans were to borrowers where ICICI Bank acted
together with other banks or as part of a consortium of banks with its share of
exposure being a maximum of 4.9% 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 ICICI Bank's books of accounts. The following table sets forth, for
the periods indicated, the amount of interest foregone by ICICI Bank.
Interest foregone
(in millions)
-----------------------
Fiscal 1998.......................................... Rs. 81 US$ 2
Fiscal 1999.......................................... 93 2
Fiscal 2000.......................................... 124 3
Fiscal 2001.......................................... 495 10
Fiscal 2002.......................................... 451 9
Restructuring of Impaired Loans
ICICI Bank's impaired loans were restructured on a case-by-case basis
after management had determined that restructuring was 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.
The following table sets forth, at the dates indicated, ICICI Bank's
impaired loans that had been restructured through rescheduling of principal
repayments and deferral or waiver of interest.
At March 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
------ ----------- --------- ------- -------- --------
(in millions, except percentages)
Gross restructured loans.............. - Rs. 38 Rs. 68 Rs. 890 Rs. 785 US$ 16
Allowance for loan losses............. - (22) (25) (423) (172) (3)
Net restructured loans................ - 16 43 467 613 13
Gross restructured loans as a
percentage of gross impaired loans.. - 2.4% 4.8% 16.7% 14.4%
Net restructured loans as a percentage
of net impaired loans.............. - 2.2% 6.4% 18.8% 22.8%
The merged entity is currently working out restructuring packages for four
of ICICI Bank's borrowers along with other term lenders and working capital
consortium members in the case of its impaired loans under a consortium
arrangement, and two of ICICI Bank's borrowers who are 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 ICICI Bank's
acquisition of nine restructured loan accounts aggregating Rs. 306 million (US$
6 million) from Bank of Madura and the restructuring of four of ICICI Bank's
loan accounts in fiscal 2001with an aggregate outstanding balance of Rs. 539
million (US$ 11 million), of which two loan accounts with an aggregate
outstanding balance of Rs.187 million (US$ 4 million) were classified as
impaired as at March 31, 1999.
ICICI's Impaired Loans
ICICI's gross restructured loans increased 117.7% during fiscal 2002 to
Rs. 95.1 billion (US$ 1.9 billion) at year-end fiscal 2002, from Rs. 43.7
billion (US$ 895 million) at year-end fiscal 2001 primarily due to
restructuring of loans to companies in the textiles, transport equipment and
iron and steel sectors and reclassification of other impaired loans of Rs. 12.5
billion (US$ 257 million) as restructured loans at year-end fiscal 2002 after
restructuring of these impaired loans in fiscal 2002. Gross other impaired
loans increased 21.6% to Rs. 50.8 billion (US$ 1.0 billion) in fiscal 2002 over
the previous year levels. As a percentage of net loans, net restructured loans
were 14.8% at year-end
94
fiscal 2002 compared to 5.4% at year-end fiscal 2001 and net other impaired
loans were 6.3% at year-end fiscal 2002 compared to 3.3% at year-end fiscal
2001.
The following table sets forth, at the dates indicated, ICICI's gross
restructured rupee and foreign currency loan portfolio by business category.
At March 31,
---------------------------------------------------------------------
1998 1999 2000 2001 2002
---------------------------------------------------------------------
(in millions, except percentages)
Wholesale banking(1)................Rs. 9,556 Rs. 13,171 Rs. 18,513 Rs. 37,726 Rs. 84,048 US$ 1,721
Rupee............................. 7,139 8,549 11,896 25,190 60,017 1,229
Foreign currency.................. 2,417 4,622 6,617 12,536 24,031 492
Working capital finance............. - - 33 818 5,283 108
Rupee............................. - - 33 818 5,283 108
Foreign currency.................. - - - - - -
Leasing and related activities(2)... - - - 5,137 5,652 116
Rupee............................. - - - 5,137 5,652 116
Foreign currency.................. - - - - - -
Other(3)............................ - - - - 105 2
Rupee............................. - - - - 105 2
Foreign currency.................. - - - - - -
Total restructured loans
Rupee............................. 7,139 8,549 11,929 31,145 71,057 1,455
Foreign currency.................. 2,417 4,622 6,617 12,536 24,031 492
---------------------------------------------------------------------
Gross restructured loans............ 9,556 13,171 18,546 43,681 95,088 1,947
Allowance for loan losses........... (4,346) (6,422) (7,751) (11,372) (17,722) (363)
---------------------------------------------------------------------
Net restructured loans..............Rs. 5,210 Rs. 6,749 Rs. 10,795 Rs. 32,309 Rs. 77,366 US$ 1,584
=====================================================================
Gross loan assets................... 399,641 503,630 Rs.595,533 Rs. 635,058 Rs.560,248 US$ 11,473
Net loan assets..................... 377,184 475,106 561,448 602,023 523,601 10,723
Gross restructured loans as a
percentage of gross loan assets... 2.39% 2.62% 3.11% 6.88% 16.97%
Net restructured loans as a
percentage of net loan assets......... 1.38% 1.42% 1.92% 5.37% 14.78%
---------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities.
(2) Includes leasing and hire purchase.
(3) Includes bills discounted, inter-corporate deposits and retail finance
assets.
The following table sets forth, at the dates indicated, ICICI's gross
other impaired rupee and foreign currency loan portfolio by business category.
At March 31,
---------------------------------------------------------------------
1998 1999 2000 2001 2002
---------------------------------------------------------------------
(in millions, except percentages)
Wholesale banking(1)..................Rs. 31,742 Rs. 41,611 Rs. 45,616 Rs. 39,430 Rs. 48,093 US$ 985
Rupee................................. 20,579 27,634 29,714 23,514 32,847 673
Foreign currency...................... 11,163 13,977 15,902 15,916 15,246 312
Working capital finance................. 604 1,158 1,420 1,234 1,699 35
Rupee................................. 604 1,158 1,420 1,234 1,699 35
Foreign currency...................... -- -- -- -- -- --
Leasing and related activities(2)....... 1,855 2,360 2,965 899 731 15
Rupee................................. 1,855 2,360 2,965 899 731 15
Foreign currency...................... -- -- -- -- -- --
Other(3)................................ 1,366 187 573 181 231 5
Rupee................................. 1,366 187 573 181 231 5
Foreign currency...................... -- -- -- -- -- --
95
Total other impaired loans
Rupee................................. 24,404 31,339 34,672 25,828 35,508 728
Foreign currency...................... 11,163 13,977 15,902 15,916 15,246 312
---------------------------------------------------------------------
Gross other impaired loans.............. 35,567 45,316 50,574 41,744 50,754 1039
Allowance for loan losses............... (18,111) (22,102) (26,334) (21,663) (17,567) (360)
---------------------------------------------------------------------
Net other impaired loans..............Rs. 17,456 Rs. 23,214 Rs. 24,240 Rs. 20,081 Rs. 33,187 US$ 680
=====================================================================
Gross loan assets.....................Rs.399,641 Rs. 503,630 Rs.595,533 Rs. 635,058 Rs.560,248 US$ 11,473
Net loan ............................. 377,184 475,106 561,448 602,023 523,601 10,723
Gross other impaired loans as a
percentage of gross loan assets....... 8.90% 9.00% 8.49% 6.57% 9.06%
Net other impaired loans as a
percentage of net loan assets......... 4.63% 4.89% 4.32% 3.34% 6.34%
---------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities.
(2) Includes leasing and hire purchase.
(3) Includes bills discounted, inter-corporate deposits and retail finance
assets.
The following table sets forth, at the dates indicated, gross restructured
loans by borrowers' industry or economic activity and as a percentage of total
gross restructured loans.
At March 31,
-------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
-------------------------------------------------------------------------------------------------
(in millions, except percentages)
Textiles ...................... Rs. 1,447 15.1% Rs. 1,611 12.2% Rs. 2,276 12.3% Rs. 12,437 28.5% Rs. 21,468 US$ 440 22.6%
Iron and steel ................ 730 7.6 909 6.9 1,461 7.9 7,270 16.6 18,013 369 18.9
Paper and paper products ...... 130 1.4 137 1.0 338 1.8 2,211 5.1 6,076 124 6.4
Transport equipment ........... 14 0.1 13 0.1 13 0.1 418 1.0 5,857 120 6.2
Man-made fibers ............... 2,452 25.7 2,616 19.9 3,456 18.6 4,561 10.4 5,759 118 6.1
Fertilizers and pesticides .... 51 0.5 99 0.8 76 0.4 141 0.3 3,695 76 3.9
Cement ........................ 286 3.0 286 2.2 300 1.6 888 2.0 3,454 71 3.6
Sugar ......................... 148 1.5 209 1.6 570 3.1 446 1.0 2,859 59 3.0
Plastics ...................... 173 1.8 2,447 18.6 2,525 13.6 2,586 5.9 2,738 56 2.9
Services ...................... 589 6.2 688 5.2 1,098 5.9 1,605 3.7 2,710 55 2.8
Basic chemicals ............... 723 7.6 703 5.2 1,527 8.2 1,306 3.0 1,991 41 2.1
Electrical equipment .......... 107 1.1 121 0.9 235 1.3 1,035 2.4 1,713 35 1.8
Non-ferrous metals ............ 98 1.0 160 1.2 214 1.2 180 0.4 1,337 27 1.4
Machinery ..................... 222 2.3 209 1.6 283 1.5 902 2.1 1,336 27 1.4
Electronics ................... 837 8.8 868 6.6 933 5.0 854 2.0 899 18 0.9
Petrochemicals ................ 512 5.4 546 4.1 710 3.8 937 2.1 853 17 0.9
Metal products ................ 93 1.0 86 0.7 171 0.9 761 1.7 636 13 0.7
Rubber and rubber products .... 7 0.1 150 1.1 143 0.8 169 0.4 460 9 0.5
Food products ................. 365 3.8 588 4.5 655 3.5 707 1.6 434 9 0.5
Drugs ......................... 60 0.6 - - - - 27 0.1 189 4 0.2
Other(1) ...................... 466 4.9 725 5.6 1,562 8.5 4,240 9.7 12,611 259 13.2
Other chemicals ............... 46 0.5 - - - - - - - - -
-------------------------------------------------------------------------------------------------
Gross restructured loans...... Rs. 9,556 100.0% Rs. 13,171 100.0% Rs.18,546 100.0% Rs. 43,681 100.0% Rs. 95,088 US$1,947 100%
====== ====== ====== ====== ====
Aggregate allowance for
loan losses................. (4,346) (6,422) (7,751) (11,372) (17,722) (363)
--------- ---------- --------- ---------- -------------------
Net restructured loans ....... Rs. 5,210 Rs. 6,749 Rs.10,795 Rs. 32,309 Rs. 77,366 1,584
========= ========== ========= ========== ===================
---------
(1) Other principally includes shipping, renewable sources of energy,
lubricants, printing, mineral products, glass and glass products, watches,
healthcare, leather and wood products industries and retail finance
assets.
96
The following table sets forth, at the dates indicated, gross other
impaired loans by borrowers' industry or economic activity and as a percentage
of total gross other impaired loans.
At March 31,
------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------------------------------------------------------------------------------------------
(in millions, except percentages)
Iron and steel ...........Rs. 3,650 10.3% Rs. 5,058 11.2% Rs. 4,942 9.8% Rs. 5,894 14.1% Rs. 5,899 US$ 121 11.6%
Basic chemicals .......... 1,266 3.6 3,101 6.9 2,879 5.7 2,075 5.0 4,412 90 8.7
Textiles ................. 2,843 8.0 3,764 8.3 5,978 11.8 6,041 14.5 4,250 87 8.4
Petrochemicals ........... 279 0.8 157 0.3 169 0.3 86 0.2 3,440 70 6.8
Metal products ........... 789 2.2 2,872 6.3 3,284 6.5 2,970 7.1 2,628 54 5.2
Machinery ................ 1,094 3.1 1,696 3.7 1,802 3.6 919 2.2 2,596 53 5.1
Drugs .................... 2,151 6.0 2,448 5.4 2,481 4.9 2,401 5.7 2,544 52 5.0
Paper and paper products . 831 2.3 1,125 2.5 3,147 6.2 2,456 5.9 2,199 45 4.3
Electrical equipment ..... 1,007 2.8 1,333 2.9 1,653 3.3 1,652 4.0 2,008 41 4.0
Man-made fibers .......... 3,991 11.2 3,993 8.8 4,092 8.1 2,129 5.1 1,802 37 3.6
Food products ............ 2,577 7.2 2,523 5.6 2,663 5.3 2,415 5.8 1,389 28 2.8
Cement ................... 1,784 5.0 1,728 3.8 1,371 2.7 1,972 4.7 1,287 26 2.5
Electronics .............. 2,820 7.9 2,829 6.2 2,537 5.0 1,456 3.5 1,281 26 2.5
Plastics ................. 1,058 3.0 1,268 2.8 1,312 2.6 1,280 3.1 1,137 23 2.2
Sugar .................... 554 1.6 291 0.7 951 1.9 1,461 3.5 722 15 1.4
Transport equipment ...... 848 2.4 856 1.9 852 1.7 761 1.8 715 15 1.4
Non-ferrous metals ....... 530 1.5 597 1.3 639 1.3 503 1.2 447 9 0.9
Services ................. 1,153 3.2 1,768 3.9 2,015 4.0 1,324 3.2 416 9 0.8
Rubber and rubber
products ............... 484 1.4 462 1.0 485 1.0 335 0.8 328 7 0.6
Fertilizers and pesticides 501 1.4 450 1.0 442 0.9 193 0.5 163 3 0.3
Other chemicals .......... 6 - 6 - 48 0.1 45 0.1 92 2 0.2
Other(1) ................. 5,351 15.1 6,991 15.5 6,832 13.3 3,376 8.0 10,999 226 21.7
------------------------------------------------------------------------------------------------
Gross other impaired
loans ..................Rs.35,567 100.0% 45,316 100.0% Rs.50,574 100.0% Rs. 41,744 100.0% Rs. 50,754 US$ 1,039 100%
====== ====== ====== ====== ====
Aggregate allowance for
loan losses............ (18,111) (22,102) (26,334) (21,663) (17,567) (360)
--------- --------- --------- ---------- -------------------
Net other impaired loans ..Rs.17,456 Rs.23,214 Rs.24,240 Rs. 20,081 Rs. 33,187 US$ 680
========= ========= ========= =========== ===================
---------
(1) Other principally includes shipping, renewable sources of energy,
lubricants, printing, mineral products, glass and glass products, watches,
healthcare, leather and wood products industries and retail finance
assets.
The largest proportion of ICICI's impaired loans was to the iron and
steel, basic chemicals and textile sectors. There is a risk that impaired loans
in each of these sectors and in other sectors including man-made fibers, paper
and paper products, transport equipment, plastics and metal products sectors
could increase if Indian economic conditions deteriorate or there is a negative
trend in global commodity prices.
Iron and Steel. Over the last few years, a persistent downward trend in
international steel prices to historic lows has had a significant impact on
companies in this sector. In addition, a significant reduction in import
tariffs led to price competition from certain countries, significantly reducing
domestic prices. The merged entity's outlook for the medium to long-term for
this sector is positive owing to the recent increase in prices and an increase
in domestic consumption. In fiscal 2000 and fiscal 2001, the increase in
ICICI's assets in this sector was primarily due to phased disbursements to
projects that were approved earlier. While most of these projects have now been
completed, a part of these loans is to projects still under implementation. The
majority of the loans to fragmented capacities and small steel plants have
already been classified as impaired loans, and the balance of loans in this
sector is primarily to economically sized plants with advanced technology. At
year-end fiscal 2002, ICICI had classified 25.3% of its assets in this sector
as restructured loans and 8.3% as other impaired loans.
97
Basic Chemicals. Increasing competition in the global chemical industry
has resulted in significant structural changes, with players opting for
increased focus on core competencies through corporate restructuring and
consolidation or spin-off to attain leadership position in their core
businesses. These trends in the global chemical industry environment have
significantly affected the Indian chemical industry. The tariff rationalization
measures effected by the government of India since 1991 have made the domestic
chemical industry vulnerable to movements in international prices, with
viability being closely linked to cost of production and capacity utilization.
The majority of ICICI's loans to uneconomic or inefficient plants (primarily
manufacturing dyes and inorganic chemicals) have been classified as impaired,
and the balance of the exposure is primarily to large diversified plants with a
wide product range and strong export base. At year-end fiscal 2002, ICICI had
classified 14.1% of its total loans to the basic chemicals sector as
restructured loans and 31.3% as other impaired loans.
Textiles. The textile industry was affected adversely by the south-east
Asian economic crisis. This resulted in Indian textile exports being less
competitive. Competitive pressures in global textile exports have intensified
further with the entry of more price competitive south Asian producers like
Bangladesh, Nepal and Sri Lanka. While textile exports have increased in fiscal
2000 and 2001, the rate of growth has been adversely impacted due to the
imposition of anti-dumping duties by the European Union. The industry is
expected to benefit from the successful bilateral resolution of issues between
the government of India and the European Union. The majority of ICICI's loans
to small entities in these sectors have been classified as impaired, and the
balance of the exposure is primarily to large economically-sized plants with
established raw material procurement systems and extensive distribution
networks. At year-end fiscal 2002, ICICI had classified 52.5% of its total
loans to the textiles sector as restructured loans and 10.4% as other impaired
loans.
Interest Foregone
The following table sets forth, for the periods indicated, the amount of
interest foregone by ICICI in respect of loans that were on non-accrual basis
at the respective fiscal year-end.
Interest foregone
(in billions)
-----------------------------
Fiscal 1998..................................... Rs. 8.7 US$ 0.2
Fiscal 1999..................................... 10.4 0.2
Fiscal 2000..................................... 12.4 0.3
Fiscal 2001..................................... 14.3 0.3
Fiscal 2002..................................... 16.1 0.3
Impaired Loans Strategy
The Special Asset Management Group of the merged entity is responsible for
finding early solutions for large and complex impaired loans. This group works
closely with other banks and financial institutions and uses outside experts
and specialized agencies for due diligence, valuation and legal advice to
expedite early resolution. The group also seeks to leverage the merged entity's
corporate relationships to facilitate quicker resolution of impaired loans. It
consists of professionals with significant experience in credit management
supported by a team of dedicated legal professionals.
The merged entity places great emphasis on recovery and settlement of its
stressed asset portfolio and impaired loans, and this focus has been
institutionalized across the organization. Asset quality targets are a key
parameter for employee performance evaluation.
Methods for resolving impaired loans include:
o early enforcement of collateral through judicial means;
98
o encouraging the consolidation of troubled borrowers in fragmented
industries with stronger industry participants;
o encouraging the financial restructuring of troubled borrowers; and
o encouraging modernization of existing plants through technology
upgrades.
Further, the merged entity has taken concrete measures to enhance the
security structures in accounts that may be under stress, including through:
o the pledge of sponsor's shareholding;
o the right to convert debt into equity at par so as to facilitate
transfer of control to the merged entity;
o ensuring majority control in the board of directors of these
companies;
o continuous monitoring of the physical performance of the company's
operations through independent technical consultants; and
o escrow mechanisms to capture cash flows.
Allowance for Loan Losses
The following table sets forth, at the dates indicated, movements in ICICI
Bank's allowance for loan losses.
At March 31,
--------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
--------- --------- --------- --------- --------- -------
(in millions)
Allowance for credit losses at the
beginning of the year............... Rs. 187 Rs. 425 Rs. 880 Rs. 748 Rs. 2,890 US$ 59
Add:
Provision for credit losses acquired from
Bank of Madura...................... - - - 1,572 - -
Provisions for credit losses:
Working capital....................... 256 349 470 1,034 1,786 36
Term loans............................ 104 17 9 69 422 9
Leasing finance....................... - 144 24 17 191 4
Marketable corporate debt instruments. - 30 - 73 78 2
Credit cards.......................... - - - 28 268 5
Release of provision as a result of
cash collection .................... - - (76) (185) (1,023) (21)
General Provisions on standard assets - - - 46
Total provisions for loan losses......... 360 540 427 2,654 1,722 35
Less:
Write-offs............................... (122) (85) (559) (512) (1,792) (36)
--------- --------- --------- --------- --------- ------
Allowances for loan losses at the end
of the year......................... Rs. 425 Rs. 880 Rs. 748 Rs. 2,890 Rs. 2,820 US$ 58
========= ========= ========= ========= ========= ======
The following table sets forth, at the dates indicated, movements in
ICICI's allowances for loan losses.
At March 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------------------------------------------------------------------
(in millions)
Aggregate allowance for loan losses
at the beginning of the year................Rs. 17,689 Rs. 22,457 Rs. 28,524 Rs. 34,085 Rs. 33,035 US$ 677
Less: Effect of deconsolidation of subsidiary
on Allowance for loan losses................ - - - (747) - -
Add: Provisions for loan losses
99
Wholesale banking(1)......................... 3,497 5,129 5,571 9,097 7,711 158
Working capital finance...................... 152 419 518 479 513 11
Leasing and related activities (2)........... 813 434 279 249 6 -
Others (3)................................... 306 85 (5) 67 155 3
Portfolio provision(4)....................... - - - - 1,358 28
Total provisions for loan losses...............Rs. 4,768 Rs. 6,067 Rs. 6,363 Rs. 9,892 Rs. 9,743 US$ 200
Write offs(5).................................. - - (802) (10,195) (6,131) (126)
------------------------------------------------------------------------
Aggregate allowance for loan losses
at the end of the year.......................Rs. 22,457 Rs. 28,524 Rs. 34,085 Rs. 33,035 Rs. 36,647 US$ 751
------------------------------------------------------------------------
Ratio of net provisions for loan losses
during the period to average loans
outstanding.................................. 1.4% 1.4% 1.2% 1.7% 1.6%
========================================================================
------------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities.
(2) Includes leasing and hire purchase.
(3) Includes bills discounted, inter-corporate deposits and retail finance
assets.
(4) Portfolio provision represents provisions on non-impaired lending assets
based on management's estimate of the probable losses inherent in the
portfolio.
(5) Until year-end fiscal 2000, ICICI followed a policy whereby loan balances
were not charged-off against the allowance for loan losses. This policy
was in response to the regulatory environment governing debt recovery
proceedings in India. During fiscal 2001, changes in the tax laws
necessitated that loan balances deemed unrecoverable be charged-off
against the allowance for credit losses. Accordingly, ICICI charged-off
significant loan balances deemed unrecoverable in fiscal 2001 and fiscal
2002.
The merged entity conducts a comprehensive analysis of its 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 the entire loan portfolio, and an
allowance is made for any probable loss on each account. In estimating the
allowance, the merged entity considers the net realizable value on a present
value basis by discounting the future cash flows over the expected period of
recovery. Further, the merged entity also considers ICICI Bank's and ICICI's
past history of loan losses and value of underlying collateral. For further
discussions on allowances for loan losses, see "Operating and Financial Review
and Prospects for ICICI Bank" and "Operating and Financial Review and Prospects
for ICICI". In fiscal 2002, ICICI also made provisions of Rs. 1,358 million
(US$ 28 million) as portfolio provisions on its non-impaired lending assets.
Under US GAAP analysis of the provisions for impaired loans, the merged
entity is required to take into account the time delay in its ability to
foreclose upon and sell collateral. The net present value of an impaired loan
includes the net present value of the underlying collateral, if any. As a
result, even though the merged entity is 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.
Each portfolio of smaller-balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, is
individually evaluated for impairment. The allowance for loan losses attributed
to these loans is established via a process that includes an estimate of
probable losses inherent in the portfolio, based upon various statistical
analysis. These include migration analysis, in which historical delinquency and
credit loss experience is applied to the current aging of the portfolio,
together with an analysis that reflects current trends and conditions. The use
of different estimates or assumptions could produce different provisions for
smaller balance homogeneous loan losses.
When there is an equity investment for which the corresponding loan asset
is impaired, an adjustment is made to record an impairment of the related
equity security.
100
For impaired loans in excess of Rs. 100 million, which were 84.2% of
ICICI's gross impaired loan portfolio at year-end fiscal 2002, ICICI followed a
detailed process for each account to determine the allowance for loan losses to
be provided. For the balance of smaller loans in the impaired loan portfolio,
ICICI followed the classification detailed below for determining the allowance
for loan losses. The merged entity will follow the same classification for
determining the allowance for loan losses for these loans.
Settlement Cases
Settlement cases include cases in which the merged entity is in the
process of entering into a "one-time settlement" because it believes that the
potential to recover the entire amount due (the gross principal plus
outstanding interest, including penalty interest) in these cases is limited. In
ICICI's experience, it recovered almost 100.0% of gross principal outstanding
over a period of time and about 85.0% on a present value basis, as a result of
negotiated settlements.
Enforcement Cases
Enforcement cases are those cases (excluding cases referred to the Board
for Industrial and Financial Reconstruction or BIFR) in which the merged entity
has commenced litigation. The merged entity expects that only the secured
portion of these loans is recoverable, after a specified number of years from
the date the loan is recalled. The realizable value of these loans on a present
value basis is determined by discounting the estimated cash flow at the end of
the specified number of years from the date of the recall by the average
interest implicit in these loans.
Non-Enforcement BIFR Cases
Non-enforcement BIFR cases include cases which have been referred to the
Board for Industrial and Financial Reconstruction, which are further
categorized into accounts where the plant is under operation and accounts where
the plant is closed. The merged entity expects that in accounts where the plant
is operational, the secured portion of the loan is recoverable over specified
annual payments. In respect of those accounts where the plant is closed, the
merged entity expects that the secured portion of the loan will be recoverable
at the end of a specified number of years based upon historical experience.
Non-Enforcement Non-BIFR Cases
Non-enforcement non-BIFR cases include cases, which are neither under
litigation nor referred to the Board for Industrial and Financial
Reconstruction. This category is also divided into accounts where the plant is
under operation and accounts where the plant is closed. The merged entity
expects that in those accounts where the plant is operational, the secured
portion of the loan is recoverable over specified annual payments together with
a recovery in interest due at a specified rate. In respect of those loans where
the plant is closed, the merged entity expects that the secured portion of the
loan will be recoverable over specified annual payments.
The following table sets forth, for the period indicated, the results of
ICICI's impaired loan classification scheme.
101
At March 31, 2002
-----------------------------------------------------
Percentage
expected to be Impaired
Gross realized on a net loans, net of
impaired present value allowance for
loans basis loan losses
-----------------------------------------------------
(in millions, except percentages)
Gross principal greater than Rs. 100 million......... Rs. 122,819 80.5% Rs. 98,827
Settlement cases..................................... 1,866 85.0 1,586
Enforcement cases.................................... 6,087 66.3 4,034
Non-enforcement BIFR cases........................... 3,025 44.9 1,359
Non-enforcement non-BIFR cases....................... 1,595 83.8 1,337
Other loans.......................................... 10,450 32.6 3,410
---------------- -------------------
Total................................................ Rs. 145,842 75.8% Rs. 110,553
================ ===================
Subsidiaries and Affiliates
Prior to the amalgamation, ICICI Bank had no subsidiaries. As ICICI Bank
is the surviving legal entity in the amalgamation, the subsidiaries and
affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
The following table sets forth, for the period indicated, certain
information relating to ICICI's direct subsidiaries and affiliates at year-end
fiscal 2002.
-------------------------------------------------------------------------------------------------------------------
Total Net worth Assets at
Year of Shareholding revenue in at March March 31,
Name formation Activities by ICICI fiscal 2002(1) 31, 2002(1) 2002(1)(2)
-------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
ICICI Securities and February Investment banking 99.9% Rs. 3,807 Rs. 3,295 Rs. 22,732
Finance Company 1993 activities
Limited(3)
ICICI Venture Funds January Venture capital 100.0 203 286 679
Management 1988 management
Company Limited
ICICI Prudential Life July 2000 Life insurance business 74.0 1,415 1,150 2,892
Insurance Company
Limited
ICICI Lombard October 2000 General insurance 74.0 271 1,002 1,653
General Insurance business
Company Limited
ICICI Home Finance May Home and property 100.0 1,922 1,619 16,197
Company Limited 1999 financing
ICICI International January Offshore fund 100.0 47 27 30
Limited 1996 management
ICICI Trusteeship April Trustees for various 100.0 - - -
Services Limited 1999 funds
ICICI Investment March Investment manager 100.0 11 107 118
Management 2000 for mutual fund
Company Limited
102
ICICI Capital September Placing and 100.0 539 61 264
Services 1994 distribution of
Limited(4) liability
products
ICICI Personal March Distribution and 100.0 497 95 408
Financial 1997 servicing of retail
Services asset
Limited(4) products
Prudential ICICI June Trustee company for 45.0 4 7 13
Trust Limited 1993 mutual fund
Prudential ICICI June Investment manager 45.0 615 699 866
Asset Management 1993 for mutual fund
Company Limited
---------
(1) All financial information in respect of ICICI Securities and Finance
Company and ICICI Venture Funds Management Company is in accordance with
US GAAP. In respect of companies incorporated outside India, all financial
information has been prepared in accordance with the applicable accounting
standards in their countries of incorporation. US dollar amounts for
fiscal 2002 have been translated into Rupees using the noon buying rate in
effect on March 29, 2002 of US$ 1.00 = Rs. 48.83. All financial
information for other subsidiaries and affiliates is in accordance with
Indian GAAP.
(2) Current liabilities and the debit balance in the income statement, if
applicable, have been added to assets.
(3) Consolidated.
(4) Merged with ICICI Bank in the amalgamation.
The following table sets forth, for the period indicated, information on
significant other entities required to be consolidated in ICICI's financial
statements for fiscal 2002 under US GAAP.
-------------------------------------------------------------------------------------------------------------------
Shareholding
By ICICI,
venture
apital funds
or trusts to Net worth/
which ICICI Total net assets Assets at
Date of was a revenue in at March March 31,
Name formation Activities ccontributory fiscal 2002(1) 31, 2002(1) 2002(1)(2)
-------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
ICICI Infotech October Software consulting 93.7% 2,560 627 2,484
Services 1993 and development, IT
Limited (3) (4) enabled services, IT
infrastructure and
facilities management
ICICI Web Trade December Internet-based broking 100.0 237 151 692
Limited (4) 1999 services
ICICI OneSource December Business process 100.0 - 7 21
Limited (4) 2001 outsourcing and call
center services
ICICI Information February Investment in equity 98.5 4 2,559 3,336
Technology Fund 2000 or equity-related
securities of early
stage and medium sized
Indian IT companies
ICICI Equity Fund March Investment 100.0 34 5,695 5,990
2000 predominantly in
equity and equity
linked securities of
mid sized Indian
companies.
103
ICICI Eco-Net December Investment in equity 92.1 7 996 1,218
Internet 2000 or equity-related
& Technology Fund securities of early stage,
unlisted internet and
technology companies.
---------
(1) All financial information in respect of ICICI Infotech Services is in
accordance with US GAAP. In respect of companies incorporated outside
India, all financial information has been prepared in accordance with the
applicable accounting standards in their countries of incorporation. US
dollar amounts for fiscal 2002 have been translated into Rupees using the
noon buying rate in effect on March 29, 2002 of US$ 1.00 = Rs. 48.83. All
financial information for other subsidiaries and affiliates is in
accordance with Indian GAAP.
(2) Current liabilities and the debit balance in the income statement, if
applicable, have been added to assets.
(3) Consolidated.
(4) Prior to the amalgamation, ICICI's entire interest in ICICI Web Trade
Limited and majority interest in ICICI Infotech Services Limited was
transferred to ICICI Information Technology Fund and ICICI Equity Fund
respectively. The majority interest in ICICI OneSource Limited was held by
ICICI Information Technology Fund and the minority interest by ICICI.
At year-end fiscal 2002, all of ICICI's subsidiaries and affiliated
companies and entities consolidated or accounted for under equity method under
US GAAP, were incorporated or organized in India, except the following six
companies:
o ICICI Securities Holdings Inc., incorporated in the US;
o ICICI Securities Inc., incorporated in the US;
o ICICI Infotech Inc., incorporated in the US;
o ICICI Infotech Pte Limited, incorporated in Singapore;
o ICICI International Limited, incorporated in Mauritius; and
o Command International Holdings LLC, incorporated in Mauritius.
ICICI Securities Holdings Inc. is a wholly-owned subsidiary of ICICI
Securities and ICICI Securities Inc. is a wholly-owned subsidiary of ICICI
Securities Holdings Inc. ICICI Securities Holdings Inc. and ICICI Securities
Inc. are consolidated in ICICI Securities' financial statements. ICICI Infotech
Inc. and ICICI Infotech Pte Limited are wholly-owned subsidiaries of ICICI
Infotech and are consolidated in its financial statements.
Technology
The merged entity is focused on the application of technology to its
business operations. The merged entity believes that technology is a key source
of competitive advantage in the Indian banking sector. The merged entity's
focus on technology emphasizes:
o Electronic and online channels to:
- Offer easy access to the merged entity's products and services;
- Reduce distribution and transaction costs;
- Reach new target customers; and
- Enhance existing customer relationships.
o Application of information systems to:
- Effectively market to the merged entity's target customers;
104
- Monitor and control risks; and
- Identify, assess and capitalize on market opportunities.
Technology Organization
The merged entity's technology initiatives are centralized in its
Technology Management Group. In addition, there are dedicated technology groups
for the retail and corporate banking businesses. The merged entity's technology
initiatives are undertaken in conjunction with ICICI Infotech Services Limited,
an ISO 9001 certified company promoted by ICICI.
Electronic and Online Channels
At year-end fiscal 2002, 244 branches and 44 extension counters of ICICI
Bank were completely automated to ensure prompt and efficient delivery of
products and services. The merged entity's branch banking software is flexible
and scalable and integrates well with its electronic delivery channels.
The merged entity's ATMs are sourced from NCR and Diebold, the world's
leading vendors. These ATMs work with the branch banking software. At March 31,
2002, ICICI Bank had 1,004 ATMs across the country.
ICICI Bank was one of the first banks to offer Internet banking facilities
to its customers. The merged entity now offers a number of online banking
services to its customers.
The merged entity's 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 the
merged entity. The database enables customer segmentation and assists the call
agent in identifying cross-selling opportunities. The merged entity is
currently implementing a technology architecture which enables a customer to
access any product from any channel.
Application of Information Systems
Treasury and Trade Finance Operations
The merged entity uses technology to monitor risk limits and exposures on
a near real time basis. The merged entity has invested significantly to acquire
advanced systems from IBM, Reuters and TIBCO and connectivity to the SWIFT
network.
Banking Application Software
The merged entity has installed an advanced banking system which addresses
the merged entity's corporate banking as well as retail banking requirements.
It is robust, flexible and scalable and allows the merged entity to effectively
and efficiently serve its growing customer base.
High-Speed Electronic Communications Infrastructure
The merged entity has installed a nationwide data communications network
linking all its offices. The network design is based on a mix of dedicated
leased lines and satellite links to provide for reach and redundancy which is
imperative in a vast country like India. The communications network is
monitored 24 hours a day using advanced network management software. The merged
entity also uses a data center in Mumbai for centralized data base management,
data storage and retrieval.
Customer Relationship Management
The merged entity has implemented a Customer Relationship Management
solution for the automation of customer handling in all key retail products.
The solution allows customer service agents to track all customer complaints
and requests. It also allows target setting and centralized
105
tracking of turnaround times for request fulfillment. The solution went live in
phases during fiscal 2002. The merged entity has also undertaken a retail data
warehouse initiative to achieve customer integration at the back-office level.
The merged entity seeks to use this central view of the total customer
relationship extensively for identifying opportunities to cross-sell new
products and services to its existing customer base.
Competition
The merged entity is the second largest among all banks in India, ranked
on the basis of their total assets. The merged entity faces strong competition
in all its principal areas of business from Indian and foreign commercial
banks, non-bank finance companies, mutual funds and investment banks. The
merged entity believes that its principal competitive advantage over its
competitors arises from its long-standing customer relationships, its use of
technology, its innovative products and services and its highly motivated and
skilled employees. Because of these factors, the merged entity believes that it
has a strong competitive position in the Indian financial services market. The
merged entity evaluates its competitive position based on its principal lines
of business, corporate banking and retail banking.
Corporate Banking
In corporate banking, the merged entity faces strong competition primarily
from public sector banks, foreign banks and other new private sector banks. The
merged entity's principal competition in corporate banking comes from public
sector banks, which have built extensive branch networks that have enabled them
to raise low-cost deposits and, as a result, price their loans and fee-based
services very competitively. Their wide geographical reach facilitates the
delivery of banking products to their corporate customers located in most parts
of the country. The merged entity has been able, however, to build a quality
loan portfolio without compromising its lending rates, because of its efficient
service and prompt turnaround times that are significantly faster than public
sector banks. The merged entity seeks to compete with the large branch networks
of the public sector banks through its multi-channel distribution approach.
Traditionally, foreign banks have been active in providing trade finance,
fee-based services and other short-term financing products to top tier Indian
corporations. The merged entity effectively competes with foreign banks in
cross-border trade finance as a result of its strong correspondent banking
relationships, its SWIFT-enabled corporate branches and customized trade
financing solutions. The merged entity has established strong fee-based cash
management services and competes with foreign banks due to its 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 merged entity's strong corporate relationships and ability to use
technology to provide innovative, value-added products and services provide it
with a competitive edge.
In project finance, ICICI's primary competitors were established long-term
lending institutions. In recent years, Indian and foreign commercial banks have
sought to expand their presence in this market. The merged entity believes it
has a competitive advantage due to its strong market reputation and expertise
in risk evaluation and mitigation. The merged entity believes that its in-depth
sector specific knowledge has allowed it to gain credibility with project
sponsors, overseas lenders and policy makers.
Retail Banking
The retail credit business in India is in a relatively early stage of
development. As per-capita income levels grow, the merged entity expects strong
growth in retail lending. In the retail markets, competition is primarily from
foreign and Indian commercial banks, non-bank finance companies and housing
finance companies. Foreign banks have the product and delivery capabilities but
are likely to focus on limited customer segments. Effective distribution
channels, which include direct selling
106
agents, robust credit processes and collection mechanisms, experienced
professionals and superior technology, have helped the merged entity to develop
and market products, leveraging on existing retail investors and
infrastructure. Based on these factors, management believes that the merged
entity has thus gained significant market share in this emerging market.
Indian commercial banks attract the majority of retail bank deposits,
historically the preferred retail savings product in India. The merged entity
has capitalized on its 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
customers.
Mutual funds are another source of competition to the merged entity. With
the promise of better returns than the interest earned on term deposits, mutual
fund offerings have become a viable alternative to bank deposits.
Employees
At year-end fiscal 2002, ICICI Bank had 4,820 employees, an increase from
4,491 employees at year-end fiscal 2001 and 1,344 employees at year-end fiscal
2000. Of the 4,820 employees at year-end fiscal 2002, 2,016 were professionals,
holding degrees in management, accountancy, engineering, law, computer science,
economics and banking.
Management believes that it has good relationships with its employees. The
merged entity has a staff center, which serves as a forum for grievances, pay
and benefit negotiations and other industrial relations matters. ICICI Bank
inducted 2,725 employees of Bank of Madura consequent to its acquisition in
March 2001. The employees inducted from Bank of Madura in the grade of clerks
and sub-staffs are unionized. The merged entity has a cordial relationship with
this union. ICICI Bank was able to realign the service conditions and
compensation structure of the officers who came to it from Bank of Madura,
which is now comparable with the one existing for the merged entity's officers.
The financial services industry in India is undergoing unprecedented
change as deregulation gains momentum. Moreover, changing customer needs and
rapid advances in technology are continually re-defining the lines of
innovation and competition, thereby providing the merged entity with new
challenges and opportunities. To meet these challenges, the merged entity has
relied extensively on its human capital, which comprises some of the best
talent in the industry.
The merged entity continues to attract the best graduates from the premier
business schools of the country. The merged entity dedicates significant amount
of senior management time to ensure that employees remain highly motivated and
perceive the organization as a place where opportunities abound, innovation is
fuelled, teamwork is valued and success is rewarded. Employee compensation is
clearly tied to performance and the merged entity encourages the involvement of
all its employees in its overall performance and profitability through profit
sharing incentive schemes based on the financial results. A revised performance
appraisal system has been implemented to assist management in career
development and succession planning. ICICI Bank does not employ a significant
number of temporary employees.
The merged entity has an employee stock option scheme to encourage and
retain high performing employees. Pursuant to the employee stock option scheme
as amended by the Scheme of Amalgamation, up to 5.0% of the aggregate of the
merged entity's issued equity shares after the amalgamation, can be allocated
under the employee stock option scheme. The stock option will entitle eligible
employees to apply for equity shares. The grant of stock options is approved by
the merged entity's board of directors on the recommendations of the Board
Governance and Remuneration Committee. The eligibility of each employee is
determined based on an evaluation of the employee including employee's work
performance, technical knowledge and leadership qualities. Moreover, the merged
entity places considerable emphasis and value on its policy of encouraging
internal
107
communication and consultation between employees and management. See
also "Management - Compensation and Benefits to Directors and Officers -
Employee Stock Option Scheme."
The merged entity has training centers at Khandala and Pune in the state
of Maharashtra, which conduct a series of training programs designed to meet
the changing skill requirements of its employees. These training programs
include orientation sessions for new employees and management development
programs for mid-level and senior executives. The training center regularly
offers courses conducted by faculty, both national and international, drawn
from industry, academia and the merged entity's own organization. Training
programs are also conducted for developing functional as well as managerial
skills.
In addition to basic compensation, employees are eligible to receive loans
from the merged entity at subsidized rates and to participate in its provident
fund and other employee benefit plans. The provident fund, to which both the
merged entity and its employees contribute a defined amount, is a savings
scheme, required by government regulation, under which the merged entity at
present is required to pay to employees a minimum 9.5% annual return. If such
return is not generated internally by the fund, the merged entity is liable for
the difference. The merged entity's provident fund has generated sufficient
funds internally to meet the 9.5% annual return requirement since inception of
the funds. The merged entity has also set up a superannuation fund to which it
contributes defined amounts. In addition, the merged entity contributes
specified amounts to a gratuity fund set up pursuant to Indian statutory
requirements.
The following table sets forth, at the dates indicated, the
approximate number of employees in ICICI and its subsidiaries and other
consolidated entities (excluding ICICI Bank).
At March 31,
------------------------------------------------------------
2001 2002
------------------------------------------------------------
Number % to total Number % to total
------------------------------------------------------------
ICICI....................................... 1,065 28.1% 1,165 19.6%
ICICI Infotech.............................. 1,050 27.8 1,443 24.2
ICICI Personal Financial Services .......... 651 17.2 1,236 20.8
ICICI Prudential Life Insurance............. 294 7.8 793 13.3
ICICI Capital Services...................... 325 8.6 505 8.5
ICICI Securities............................ 128 3.4 143 2.4
ICICI Home Finance.......................... 96 2.5 442 7.4
Other subsidiaries of ICICI................. 173 4.6 227 3.8
------------------------------------------------------------
Total number of employees................... 3,782 100.0% 5,954 100.0%
============================================================
At year-end fiscal 2002, ICICI and its subsidiaries and other consolidated
entities (excluding ICICI Bank) had approximately 5,954 employees, an increase
from 3,782 employees at year-end fiscal 2001 and from 2,159 employees at
year-end fiscal 2000. Of these, 1,165 at year-end fiscal 2002, 1,065 at
year-end fiscal 2001 and 1,009 at year-end fiscal 2000 were employed by ICICI.
Of the 1,165 employees of ICICI at March 31, 2002, 795 were professionals,
holding degrees in management, accountancy, engineering, law, computer science
and economics. The increase in number of employees in fiscal 2002 was primarily
in the subsidiaries ICICI Prudential Life Insurance, ICICI Infotech and ICICI
Home Finance, which had been rapidly growing their business and distribution
infrastructure.
The following table sets forth, the approximate number of employees in the
merged entity and its subsidiaries and other consolidated entities at June 30,
2002.
-----------------------------------
Number % to total
-----------------------------------
ICICI Bank................................... 8,410 70.2%
ICICI Infotech............................... 1,476 12.3
ICICI Prudential Life Insurance.............. 1,195 10.0
ICICI Securities............................. 143 1.2
108
ICICI Home Finance........................... 537 4.5
Other subsidiaries of ICICI Bank............. 233 1.8
-----------------------------------
Total number of employees.................... 11,994 100.0%
===================================
Properties
The merged entity's registered office is located at Landmark, Race Course
Circle, Vadodara 390 007, Gujarat, India. The merged entity's corporate
headquarters are located at ICICI Bank Towers, Bandra-Kurla Complex, Mumbai 400
051, Maharashtra, India.
ICICI Bank had a principal office network consisting of 359 branches, 44
extension counters and 1,000 ATMs at year-end fiscal 2002. These facilities are
located throughout India. Forty of these facilities are located on properties
owned by the merged entity, while the remaining facilities are located on
leased properties. The net book value of all properties and equipment at
year-end fiscal 2002 was Rs. 4.8 billion (US$ 98 million), which included 205
apartments and two residential facilities for employees.
ICICI's registered office and corporate headquarters were located at ICICI
Bank Towers, Bandra-Kurla Complex, Mumbai 400 051, Maharashtra, India.
ICICI's principal office network consisted of 27 facilities, which were
situated in Ahmedabad, Bangalore, Chennai, Coimbatore, Hyderabad, Kolkata,
Mumbai, New Delhi, Pune and Vadodara. Twenty of these facilities were located
on properties that were owned by ICICI and seven were located on leased
properties. ICICI had 95 ICICI centers located in cities across India. All
these facilities were located on leased properties primarily in cities where
ICICI did not have its own office premises. ICICI Infotech, ICICI Venture and
ICICI Securities own 3 properties and also have 19 properties on lease. The
merged entity also provides residential and holiday home facilities to
employees at subsidized rates. The net book value of property and equipment of
ICICI at March 31, 2002 was Rs. 12.9 billion (US $ 264 million).
Legal and Regulatory Proceedings
The merged entity is involved in a number of legal proceedings in the
ordinary course of its business. However, excluding the legal proceedings
discussed below, it is not a party to any proceedings and no proceedings are
known by it to be contemplated by governmental authorities or third parties,
which, if adversely determined, may have a material adverse effect on its
financial condition or results of operations.
At year-end fiscal 2002, ICICI Bank had been assessed an aggregate of Rs.
1.9 billion (US$ 40 million) in income tax and interest tax demands by the
government of India's tax authorities for past year, of which Rs. 1.9 billion
(US$ 39 million) has been paid. Appeals by ICICI Bank are pending in respect of
disputed tax demands for Rs. 851 million (US$ 18 million) including the unpaid
amount of Rs. 40 million (US$ 1 million) and an amount of Rs. 811 million (US$
17 million) which has been paid. Management believes that the tax authorities
are not likely to be able to substantiate their income tax and interest tax
assessments 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 ICICI Bank, the tax treatment adopted by ICICI
Bank is in conformity with industry practice. Moreover, these tax
demands are recoverable from lessees of assets under various lease
agreements. Accordingly, ICICI Bank has not provided for or disclosed
this tax demand as a contingent liability.
o The appellate authorities have ruled in ICICI Bank's favor in respect
of tax demands relating to the deductibility of software expenses.
The tax authorities, however, have appealed against this ruling. The
appeal is pending adjudication before a higher appellate authority.
109
o The tax authorities have treated as capital expenditure, interest
accrued on securities at the time of their purchase, which has been
treated by ICICI Bank as revenue expenditure in accordance with
standard accounting practices and the Reserve Bank of India
guidelines.
o The tax authorities have disallowed an amount they have estimated as
expenditure relating to ICICI Bank's income exempt from tax. The
merged entity believes that there is no cost attributable to earning
this income as the investments are made out of interest-free funds
such as share capital, internal accruals and interest free deposit
balances.
o The tax authorities have disputed computations made by ICICI Bank for
claiming exemptions on provisions for doubtful assets.
At year-end fiscal 2002, ICICI had been assessed an aggregate of Rs. 9.4
billion (US$ 192 million) in excess of the provision made in its accounts, in
income tax, interest tax, wealth tax and sales tax demands by the government of
India's tax authorities for past years. ICICI has appealed each of these tax
demands. Management believes that the tax authorities are not likely to be able
to substantiate their income tax, interest tax, wealth tax and sales tax
assessment for the following reasons:
o ICICI received favorable decisions from the appellate authorities
with respect to Rs. 633 million (US$ 13 million) of the assessment.
The income tax authorities have appealed these decisions to higher
appellate authorities and the same are pending adjudication.
o ICICI received a favorable decision of the Supreme Court of India in
respect of writ petitions filed by it relating to the sales tax
issues that are currently being appealed by it with respect to Rs.
270 million (US$ 6 million) of the assessment.
o ICICI received favorable appellate decisions in earlier years related
to the income tax, interest tax and wealth tax issues currently being
appealed by it with respect to Rs. 245 million (US$ 5 million) of the
assessment, and in respect of Rs. 8,264 million (US$ 169 million),
favorable appellate decisions in the cases of other Indian companies
and expert opinions are available to substantiate the issues that are
currently being appealed.
Of the Rs. 9.4 billion (US$ 192 million) aggregate tax assessments of
ICICI, a major portion relates to the treatment of depreciation claim on leased
assets. In accordance with the expert opinion obtained by ICICI and the
judicial pronouncements on similar issues, the merged entity believes that the
tax treatment adopted by ICICI is in conformity with Indian tax law and in its
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.
In January 2001, the Bank of Nova Scotia Asia Limited and Commerzbank AG
filed a claim against ICICI before the English courts in London challenging
certain transactions between ICICI and Arvind Mills Limited, a borrower to whom
both ICICI and the plaintiffs were lenders. These transactions related to
certain lease, brand-financing and investment agreements between ICICI and
Arvind Mills Limited. These transactions aggregated approximately Rs. 5.7
billion (US$ 117 million). The plaintiffs alleged that these transactions
breached the Security Agent and Trust Agreement between ICICI and the
plaintiffs, whereby ICICI was appointed as a trustee for the plaintiffs. The
same transactions were also the subject matter of a criminal complaint filed by
Commerzbank AG against ICICI and its executive directors (including the former
deputy managing director) before the Indian courts. In August 2002, the English
courts in London dismissed the claim with the consent of all parties and the
Supreme Court of India dismissed the criminal complaint filed in the Indian
courts.
In March 2002, the Securities and Exchange Board of India informed ICICI
Bank that its investigation of certain transactions that had taken place in the
equity shares of Bank of Madura prior to the announcement, in December 2000, of
its proposed acquisition by ICICI Bank, indicated that the parties involved in
these transactions may have had information regarding the proposed acquisition
110
and the proposed share exchange ratio prior to their public announcement. The
Securities and Exchange Board of India requested ICICI Bank to conduct an
internal investigation to determine whether there had been a disclosure of the
proposed acquisition prior to its public announcement, by the valuers, advisers
and employees of ICICI Bank and Bank of Madura. ICICI Bank had appointed an
independent expert to investigate the conduct of its employees and directors as
well as the employees and directors of ICICI, who were aware of the proposed
acquisition prior to its public announcement. The independent expert appointed
by ICICI Bank submitted his findings that there was no disclosure of the
proposed acquisition by employees or directors of ICICI or ICICI Bank prior to
the public announcement. The merged entity submitted these findings to the
Securities and Exchange Board of India in June 2002. ICICI Bank also requested
the advisers, merchant bankers and valuers to conduct their own investigations
in this matter and submit the results of the investigations directly to the
Securities and Exchange Board of India. The results of the internal
investigations conducted by the advisers, merchant bankers and valuers were
submitted to the Securities and Exchange Board of India in May and June 2002.
The Securities and Exchange Board of India has not taken any further action in
the matter. The merged entity does not expect any further proceedings or action
in this regard.
In March 1999, ICICI filed a suit in the Debt Recovery Tribunal, Delhi
against Esslon Synthetics Limited and its Managing Director (in his capacity as
guarantor) for recovery of amounts totaling Rs. 169 million (US$ 3 million) due
from Esslon Synthetics. In May 2001, the guarantor filed a counterclaim for an
amount of Rs. 1.0 billion (US$ 20 million) against ICICI and other lenders who
were parties to the suit on the grounds that he had been coerced by officers of
the lenders, specifically IFCI Limited, into signing an agreement between LML
Limited, Esslon Synthetics and the lenders on account of which he suffered,
among other things, loss of business. In April 1999, ICICI also filed a suit
before the High Court of Judicature at Bombay against Mardia Chemicals Limited
for recovery of amounts totaling Rs. 1.4 billion (US$ 28 million) due from
Mardia Chemicals. In July 2002, the merged entity issued a notice to Mardia
Chemicals under the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Ordinance, 2002 demanding payment of its
outstanding dues. In August 2002, Mardia Chemicals Limited filed a suit in the
City Civil Court at Ahmedabad against the merged entity, Mr. K. V. Kamath,
Managing Director and Chief Executive Officer and Ms. Lalita D. Gupte, Joint
Managing Director, for an amount of Rs. 56.3 billion (US$ 1.2 billion) on the
grounds that Mardia Chemicals has allegedly suffered financial losses on
account of ICICI's failure to provide adequate financial facilities, ICICI's
recall of the advanced amount and ICICI's filing of a recovery action against
it. Mardia Chemicals has also filed a petition in the Delhi High Court
challenging the constitutional validity of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Ordinance, 2002. Management believes, based on consultation with counsel, that
the legal proceedings instituted by each of Esslon Synthetics and Mardia
Chemicals against the merged entity are frivolous and untenable and their
ultimate resolution will not have a material adverse effect on the merged
entity's results of operations, financial condition or liquidity.
111
SELECTED FINANCIAL AND OPERATING DATA FOR ICICI BANK
The selected financial and other data for ICICI Bank for and at year-end
fiscal 1998, 1999, 2000, 2001 and 2002 have been derived from the financial
statements prepared in accordance with US GAAP. These financial statements have
been audited by KPMG, independent accountants.
In October 2001, the boards of directors of ICICI and ICICI Bank approved a
plan of combination whereby ICICI Bank acquired ICICI, ICICI Personal Financial
Services and ICICI Capital Services (otherwise referred to in this annual report
as the "amalgamation"). The amalgamation was approved by the shareholders of
ICICI Bank and ICICI at their extraordinary general meetings held on January 25,
2002 and January 30, 2002, respectively. The amalgamation was sanctioned by the
High Court of Gujarat at Ahmedabad on March 7, 2002 and by the High Court of
Judicature at Bombay on April 11, 2002. The amalgamation was approved by the
Reserve Bank of India on April 26, 2002. The Statement on Financial Accounting
Standards No. 141 on business combinations requires that business combinations
be accounted for in the period in which the combination is consummated, other
than in exceptional circumstances. Accordingly, under US GAAP, the amalgamation
has not been reflected in the financial statements of ICICI Bank for the year
ended March 31, 2002, as it was consummated in April 2002. The effective date of
the amalgamation for accounting purposes under US GAAP was April 1, 2002. ICICI
Bank's financial statements for fiscal 2002, therefore, do not include the
assets, liabilities and results of operations of ICICI, ICICI Personal Financial
Services and ICICI Capital Services. Under US GAAP, the amalgamation was
accounted for as a reverse acquisition. This means that ICICI was recognized as
the accounting acquirer in the amalgamation, although ICICI Bank was the legal
acquirer. The amalgamation was accounted for by the purchase method to reflect
the increase in ownership interest of ICICI in ICICI Bank from 46.0%, ICICI's
ownership interest in ICICI Bank at the time of the amalgamation, to 100.0%.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation. As ICICI Bank is the
surviving legal entity in the amalgamation, the other subsidiaries and
affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
You should read the following data with the more detailed information
contained in "Operating and Financial Review and Prospects for ICICI Bank" and
ICICI Bank's financial statements. You should also read the following data in
light of ICICI's financial information contained in "Operating and Financial
Review and Prospects for ICICI" and ICICI's financial statements in this annual
report. Historical results do not necessarily predict the results in the future.
Income statement data and balance sheet data for future periods will not be
comparable to ICICI Bank's historical results due to the amalgamation. See
"Unaudited Pro Forma Condensed Consolidated Financial Data for ICICI Bank and
ICICI" for the results of operations and financial condition of ICICI Bank for
the year ended March 31, 2002, reflecting the amalgamation as if it had occurred
on April 1, 2000. In ICICI Bank's annual report on Form 20-F for fiscal 2003, as
a result of the reverse merger accounting, ICICI Bank will be required to
present three years of ICICI's financial statements only. ICICI's financial
statements for fiscal 2003 will reflect the amalgamation, and ICICI's financial
statements for fiscal 2002 and 2001 will reflect the results of ICICI Bank as an
equity investment.
112
Year ended March 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002(1)
---- ---- ---- ---- ---- -------
(in millions, except per common share data)
Selected income statement data:
Interest revenue................................. Rs. 2,579 Rs. 5,390 Rs. 8,434 Rs. 12,406 Rs. 20,837 US$ 426
Interest expense................................. (1,854) (4,244) (6,656) (8,408) (15,116) (309)
--------- --------- --------- ---------- ---------- ---------
Net interest revenue............................. 725 1,146 1,778 3,998 5,721 117
Provision for loan losses........................ (360) (540) (427) (1,082) (1,722) (35)
--------- --------- --------- ---------- ---------- ---------
Net interest revenue after provisions
for loan losses............................... 365 606 1,351 2,916 3,999 82
Non-interest revenue, net........................ 591 866 1,759 1,754 5,213 107
Net revenue...................................... 956 1,472 3,110 4,670 9,212 189
Non-interest expense............................. (554) (799) (1,329) (3,104) (6,260) (128)
--------- --------- --------- ---------- ---------- ---------
Income before taxes.............................. 402 673 1,781 1,566 2,952 61
Income tax expense............................... (104) (170) (379) (258) (931) (19)
--------- --------- --------- ---------- ---------- ---------
Net income before cumulative effect
of change in accounting principle............. Rs. 298 Rs. 503 Rs. 1,402 Rs. 1,308 Rs. 2,021 US$ 42
Cumulative effect of change in
accounting principle.......................... - - - - 16 -
--------- ---------- --------- ---------- ---------- ---------
Net income....................................... Rs. 298 Rs. 503 Rs. 1,402 Rs. 1,308 Rs. 2,037 US$ 42
========= ========== ========= ========== ========== =========
Per common share data:
Basic-before cumulative effect of
change in accounting principle............... Rs. 1.84 Rs. 3.05 Rs. 8.49 Rs. 6.60 Rs. 9.17 US$ 0.19
Basic-after cumulative effect of
change in accounting principle................ 1.84 3.05 8.49 6.60 9.24 0.19
Diluted-before cumulative effect of
change in accounting principle (2)............ 1.84 3.05 8.49 6.60 9.17 0.19
Diluted-after cumulative effect of
change in accounting principle (2)............ 1.84 3.05 8.49 6.60 9.24 0.19
Dividends(3)..................................... 1.00 1.00 1.20 1.50 4.00 0.08
Book value....................................... 14.98 17.15 57.86 74.00 82.37 1.76
Common shares outstanding at end of
period (in millions of common shares)......... 165 165 197 220 220
Weighted average common shares outstanding -
basic (in millions of common shares).......... 162 165 165 198 220
Weighted average common shares outstanding -
diluted (in millions of common shares)........ 162 165 165 198 220
------------
(1) Rupee amounts for fiscal 2002 have been translated into US dollars using
the noon buying rate in effect on March 29, 2002 of Rs. 48.83 = US$1.00.
(2) Options to purchase 1,636,125 equity shares and 6,327,825 equity shares
granted to employees at a weighted average exercise price of Rs. 171.90 and
Rs. 145.98 were outstanding at March 31, 2001 and 2002, respectively, and
have been included in the computation of diluted earnings per share
wherever the average market price of the equity shares during the period
was greater than the exercise price of the options.
(3) In India, dividends for a fiscal year are normally declared and paid in the
following year. The same was true for ICICI Bank until fiscal 2001.
However, in fiscal 2002 the dividend was paid by ICICI Bank as an interim
dividend during fiscal 2002. The dividend per equity share shown above is
based on the total amount of dividends paid out on the equity shares during
the year, exclusive of dividend tax. This is different from the dividend
declared for the year.
113
At March 31,
------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002(1)
---- ---- ---- ---- ---- -------
(in millions)
Selected balance sheet data:
Total assets............................ Rs. 35,278 Rs. 76,265 Rs. 130,386 Rs. 220,538 Rs. 404,805 US$ 8,290
Cash and cash equivalents(2)............ 8,728 19,928 36,361 47,306 89,371 1,830
Trading account assets.................. 7,387 15,822 28,228 18,725 26,075 534
Loans, net(3)........................... 12,765 27,597 46,986 93,030 72,474 1,484
Securities available for sale........... 1,476 3,963 4,709 24,787 155,758 3,190
Securities held to maturity ............ - - - 10,944 24,294 498
Impaired loans, net..................... 179 733 670 2,489 2,683 55
Total liabilities....................... 32,807 73,435 118,999 204,231 386,655 7,918
Long-term debt(4)....................... 129 1,764 2,476 2,421 5,740 118
Deposits................................ 26,290 60,729 98,660 164,254 325,221 6,660
Stockholders' equity.................... 2,471 2,830 11,387 16,307 18,150 372
Period average(5):
Total assets............................ 26,661 53,325 87,264 137,033 255,051 5,223
Interest-earning assets................. 19,467 42,521 68,982 105,697 208,254 4,265
Loans, net(3)........................... 9,498 18,546 31,148 57,889 85,381 1,749
Total liabilities....................... 24,351 50,657 83,967 123,186 237,822 4,870
Interest-bearing liabilities............ 17,185 41,212 66,897 90,993 191,509 3,922
Long-term debt.......................... 109 1,127 1,752 1,716 4,435 91
Total deposits.......................... 18,539 39,455 67,309 93,514 194,839 3,990
Of which:
Interest-bearing deposits............. 15,140 35,916 59,881 81,009 175,010 3,584
Stockholders' equity.................... 2,310 2,668 3,297 13,847 17,229 353
At or for the year ended March 31,
------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in percentages)
Profitability:
Net income as a percentage of:
Average total assets........................................... 1.12% 0.94% 1.61% 0.95% 0.80%
Average stockholders' equity................................... 12.90 18.85 42.52 9.45 11.82
Dividend payout ratio(including dividend tax)(6)................ 50.34 35.39 15.53 20.95 20.95
Spread(7)....................................................... 2.46 2.38 2.28 2.50 2.11
Net interest margin(8).......................................... 3.72 2.70 2.58 3.78 2.75
Cost-to-income ratio(9)......................................... 42.10 39.71 37.57 53.96 57.25
Cost-to-average assets ratio(10)................................ 2.08 1.50 1.52 2.27 2.45
Capital:
Total capital adequacy ratio(11)................................ 13.48 11.06 19.64 11.57 16.12
Tier 1 capital adequacy ratio(11)............................... 13.38 7.32 17.42 10.42 13.16
Tier 2 capital adequacy ratio(11)............................... 0.10 3.74 2.22 1.15 2.96
Average stockholders' equity as a percentage of average total
assets...................................................... 8.66 5.00 3.78 10.10 6.76
Asset quality:
Gross impaired loans as a percentage of gross loans(12)......... 4.58 5.66 2.97 5.56 7.25
Net impaired loans as a percentage of net loans................. 1.40 2.66 1.43 2.68 3.70
Net impaired loans as a percentage of total assets.............. 0.51 0.96 0.51 1.13 0.66
Allowance for loan losses as a percentage of gross impaired
loans....................................................... 70.36 54.56 52.75 53.33 50.83
Allowance for loan losses as a percentage of gross loans (12)... 3.22 3.09 1.57 3.01 3.75
------------------------------------------
(1) Rupee amounts for fiscal 2002 have been translated into US dollars
using the noon buying rate in effect on March 30, 2002 of Rs. 48.83 =
US$1.00.
(2) Includes interest-bearing deposits maintained with the
Reserve Bank of India pursuant to the cash reserve ratio requirement.
(3) Net of allowance for loan losses in respect of impaired loans.
(4) Includes current portion of long-term debt.
114
(5) Average balances are the daily average outstanding amounts.
(6) Represents the ratio of dividends declared for the year on common stock,
as a percentage of net income for that year.
(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) ICICI Bank's capital adequacy is computed in accordance with the Reserve
Bank of India guidelines. The computation is based on ICICI Bank's
financial statements prepared in accordance with Indian GAAP. ICICI Bank's
total capital adequacy ratio computed under the applicable Reserve Bank of
India guidelines and based on ICICI Bank's financial statements prepared
in accordance with US GAAP was 15.9% at year-end fiscal 2002. Using the
same basis of computation, ICICI Bank's Tier 1 capital adequacy ratio was
13.0% and ICICI Bank's Tier 2 capital adequacy ratio was 2.9% at year-end
fiscal 2002. See "Operating and Financial Review and Prospects for ICICI
Bank -- Financial Condition -- Capital".
(12) Gross loans are net of unearned income.
(13) Figures for fiscal 2000 and fiscal 2001 have been reclassified. Please see
the notes to ICICI Bank's 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 yield on average interest-earning assets is the ratio of interest revenue to
average interest-earning assets. The cost of 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. Tax-exempt income on a tax-equivalent basis has not
been recalculated because ICICI Bank believed the effect of doing so would not
be significant. The following tables set forth, for the periods indicated, the
average balances of assets and liabilities outstanding, which are major
components of interest revenue, interest expense and net interest margin.
115
Year ended March 31, 2000 Year ended March 31, 2001 Year ended March 31, 2002
------------------------- ------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average revenue/ yield/ Average revenue/ yield/ Average revenue/ yield/
balance expense cost balance expense cost balance expense 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 Rs. 9.52% Rs. 48,867 Rs. 4,100 8.39%
Securities, available for
sale (2)........................ 6,017 684 11.37 11,889 1,217 10.24 53,210 3,709 6.97
Securities, held to maturity....... - - - 4,641 543 11.70 20,796 2,006 9.65
Loans, net......................... 31,148 4,437 14.24 57,889 7,419 12.82 85,381 10,327 12.10
Other interest income(3)........... - 129 - - 249 - 695 -
------ ----- ------- ------ ------- ------
Total interest-earning assets...... 68,982 8,434 12.23 105,697 12,406 11.74 208,254 20,837 10.01
Non-interest-earning assets:
Cash and cash equivalents(4)....... 7,273 16,131 19,646
Acceptances........................ 7,356 10,727 12,963
Property and equipment............. 1,777 2,290 4,605
Other assets....................... 1,876 2,188 9,583
Total non-earning assets........... 18,282 31,336 46,797
---------- --------- ----------- ----------- ----------- ----------
Total assets....................... Rs. 87,264 Rs. 8,434 Rs. 137,033 Rs. 12,406 Rs. 255,051 Rs. 20,837
========== ========= =========== =========== =========== ==========
Liabilities:
Interest-bearing liabilities:
Savings account deposits........... Rs. 3,530 Rs. 118 3.34% Rs. 8,598 Rs. 244 2.83% Rs. 21,397 Rs. 649 3.03%
Time deposits...................... 56,351 5,671 10.06 72,411 7,017 9.69 153,613 12,932 8.42
Long-term debt..................... 1,752 244 13.93 1,716 240 13.99 4,435 506 11.41
Trading account and other
liabilities..................... 5,264 623 11.84 8,268 907 10.97 12,064 1,029 8.53
---------- --------- ----------- ----------- ----------- ----------
Total interest-bearing liabilities. 66,897 6,656 9.95 90,993 8,408 9.24 191,509 15,116 7.89
========== ========= =========== =========== =========== ==========
Non-interest-bearing liabilities:
Non-interest-bearing deposits...... 7,428 12,505 19,829
Other liabilities.................. 9,642 19,688 26,484
----- ------
Total non-interest-bearing
liabilities..................... 17,070 32,193 46,313
----------- --------- ----------- ----------- ----------- ----------
Total liabilities.................. Rs. 83,967 Rs. 6,656 Rs. 123,186 Rs. 8,408 Rs. 237,822 Rs. 15,116
=========== ========= =========== =========== =========== ==========
Stockholders' equity............... Rs. 3,297 Rs. 13,847 Rs. 17,229
=========== =========== ===========
Total liabilities and
stockholders' equity............ Rs. 87,264 Rs. 137,033 Rs. 255,051
=========== =========== ===========
---------------------
(1) Includes government of India securities in trading book, inter-bank
deposits and lending, commercial paper, certificate of deposits, mutual
fund units 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. See
"Supervision and Regulation -- Legal Reserve Requirements -- Cash Reserve
Ratio". The Reserve Bank of India pays interest at the bank rate on
balances in excess of 3.0% of ICICI Bank's demand and time liabilities.
(4) Includes interest-bearing deposits maintained with the Reserve Bank of
India pursuant to the cash reserve ratio requirement.
116
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 ICICI Bank's net interest revenue.
Fiscal 2001 vs. Fiscal 2000 Fiscal 2002 vs. Fiscal 2001
---------------------------------------- ---------------------------------------------
Increase (decrease)(1) due to Increase (decrease)(1) due to
---------------------------------------- ---------------------------------------------
Change in Change in
Net Change in Change in Net average average
change average volume average rate change volume Rate
------ -------------- ------------ ------- --------- ------------
(in millions)
Interest revenue:
Cash, cash equivalents and trading
assets............................... Rs. (206) Rs. (51) Rs.(155) Rs. 1,122 Rs. 1,476 Rs. (354)
Securities, available for sale......... 533 601 (68) 2,492 2,880 (388)
Securities, held to maturity........... 543 543 -- 1,463 1,558 (95)
Loans, net............................. 2,982 3,427 (445) 2,908 3,325 (417)
Other interest income.................. 120 120 -- 446 446 --
----------- --------- ------- ---------- ----------- ------------
Total interest revenue................. Rs. 3,972 Rs. 4,640 Rs.(668) Rs. 8,431 Rs. 9,685 Rs. (1,254)
=========== ========= ======= ========== =========== ============
Interest expense:
Savings account deposits............... Rs. 126 Rs. 144 Rs. (18) Rs. 405 Rs. 388 Rs. 17
Time deposits.......................... 1,346 1,556 (210) 5,915 6,836 (921)
Long-term debt......................... (4) (5) 1 266 310 (44)
Trading account and other liabilities.. 284 330 (46) 122 324 (202)
----------- --------- ------- ---------- ----------- -----------
Total interest expense................. Rs. 1,752 Rs. 2,025 Rs.(273) Rs. 6,708 Rs. 7,858 Rs. (1,150)
=========== ========= ======= ========== =========== ===========
Net interest revenue................... Rs. 2,220 Rs. 2,615 Rs.(396) Rs. 1,723 Rs. 1,827 Rs. (104)
=========== ========= ======= ========== =========== ===========
-------------------
(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 ICICI Bank's interest-earning assets.
Year ended March 31,
-----------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions, except percentages)
Interest revenue............................................ Rs. 2,579 Rs. 5,390 Rs. 8,434 Rs. 12,406 Rs. 20,837
Average interest-earning assets............................. 19,467 42,521 68,982 105,697 208,254
Interest expense............................................ 1,854 4,244 6,656 8,408 15,116
Average interest-bearing liabilities........................ 17,185 41,212 66,897 90,993 191,509
Average total assets........................................ 26,661 53,325 87,264 137,033 255,051
Average interest-earning assets as a percentage of average
total assets............................................. 73.0% 79.7% 79.0% 77.1% 81.7%
Average interest-bearing liabilities as a percentage of
average total assets..................................... 64.5 77.3 76.7 66.4 75.1
Average interest-earning assets as a percentage of average
interest-bearing liabilities............................. 113.3 103.2 103.1 116.2 108.7
Yield....................................................... 13.25 12.68 12.23 11.74 10.00
Cost of funds............................................... 10.79 10.30 9.95 9.24 7.89
Spread(1)................................................... 2.46 2.38 2.28 2.50 2.11
Net interest margin(2)...................................... 3.72 2.70 2.58 3.78 2.75
------------
(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.
117
(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.
118
OPERATING AND FINANCIAL REVIEW AND PROSPECTS FOR ICICI BANK
You should read the following discussion and analysis of ICICI Bank's
financial condition and results of operations together with ICICI Bank's audited
financial statements. The following discussion is based on ICICI Bank's audited
financial statements, which have been prepared in accordance with US GAAP. You
should also read the discussion and analysis of ICICI's financial condition and
results of operation contained in "Operating and Financial Review and Prospects
for ICICI" together with ICICI's financial statements.
Introduction
ICICI Bank's 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 its corporate customers. For ease of understanding the discussion
of ICICI Bank's results of operations that follows, you should consider the
introductory discussion of these macroeconomic factors.
Indian Economy
Overall GDP growth in the Indian economy has been in the range of 4.0-6.0%
in the last three years. In fiscal 2000, GDP grew at a rate of 6.1%. For fiscal
2001, the preliminary estimate of 5.2% GDP growth was revised downwards to 4.0%,
while preliminary estimates have pegged the growth rate for fiscal 2002 at 5.4%.
In fiscal 2002, growth was predominantly affected by the weakness in the
industrial sector. Agricultural growth, which was negative for the last two
years with production falling by 0.2% in fiscal 2001 and 0.7% in fiscal 2000,
saw a pick-up in fiscal 2002 with growth turning positive at 5.7%. Lower GDP
growth in fiscal 2001 was a result of negative growth in the agricultural sector
and weakness in the industrial sector. Growth in fiscal 2000 was affected by a
slowdown in the agricultural sector. The industrial sector has seen consistent
weakness over this period, particularly in the manufacturing and electricity
sectors. Growth in industrial production, which had slowed to 4.9% in fiscal
2001 from 6.7% in fiscal 2000, slowed further to 2.7% in fiscal 2002. Growth
between fiscal 1998 and 1999 was affected by a slowdown in the global economy
stemming from the economic crisis in Asia, Russia and elsewhere.
Average inflation, as measured by the wholesale price index, rose to 7.2%
in fiscal 2001 from 3.3% in fiscal 2000 mainly due to an increase of 28.5% in
prices of fuel products. Therefore, inflation during fiscal 2001 was a cost-push
driven phenomenon with the hardening of global crude oil prices feeding directly
into domestic prices. Inflation reduced to 3.3% in fiscal 2002, mainly on
account of a much lower increase of 9.1% in prices of fuel products in fiscal
2002. However, the continuing and possibly prolonged battle against terrorism by
the US or any attack or other action by the US or a US-led coalition on or in
relation to Iraq could result in lengthy regional hostilities in the Middle-East
countries where most of the world's oil production facilities are located. This
could lead to increases in oil prices or higher volatility in oil prices.
In fiscal 2002, the rupee depreciated vis-a-vis the US dollar in a
volatile currency market as international developments, after the events of
September 11, 2001, led to a sharp decline in equity prices and net capital
outflows of foreign institutional investors. The rupee has appreciated against
the US dollar in fiscal 2003 following buoyant dollar inflows into the country,
combined with the US currency's weakness in global markets. Foreign exchange
reserves were US$ 54.1 billion at March 30, 2002 and rose to US$ 61.5 billion at
August 30, 2002.
Industrial growth in April-July 2002 was 4.0% compared to a growth of 2.3%
in April-July 2001. The overall growth in industry during fiscal 2003 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 further, it
119
could affect the overall growth prospects of the merged entity's business,
including its ability to grow, the quality of its assets and its ability to
implement its strategy.
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. At
present, relations between India and Pakistan continue to be tense on the issues
of terrorism and Kashmir. These hostilities and tensions could lead to political
or economic instability in India and a possible adverse effect on the merged
entity's business, its future financial performance and the price of its equity
shares and its 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 continuing and possibly prolonged battle against terrorism by the US
or any attack or other action by the US or a US-led coalition on or in relation
to Iraq could result in lengthy regional hostilities and tensions thereby
affecting the Indian economy as well as the merged entity's business and the
price of the merged entity's equity shares and ADSs.
Possibility of Drought
A significant risk to the Indian economy's growth prospects also arises
from the cautious agricultural outlook due to an erratic monsoon. This year, the
June-September southwest monsoon, critical for the country's agricultural
sector, was 24.0% below normal (the worst in more than 15 years), affecting
crops in key grain-bowl states. Since agriculture accounts for 24.3% of GDP, the
possibility of a drought (which can be ascertained only after October) could
significantly affect the merged entity's business, including its ability to grow
and the quality of its assets.
Banking Sector
According to the Reserve Bank of India's data, total deposits of all
commercial banks increased by 13.9% in fiscal 2000, 18.4% in fiscal 2001 and
14.6% in fiscal 2002. In fiscal 2001, bank deposits increased mainly as a result
of the India Millennium Deposits (approximately Rs. 256.6 billion) raised by the
State Bank of India to augment overall foreign exchange reserves of the country.
These bonds increased the level of deposits in fiscal 2001 because they were
included in deposits. Excluding the India Millennium Deposits, bank deposits
would have risen by 15.2% in fiscal 2001. In fiscal 2002, excluding the India
Millennium Deposits outstanding at year-end fiscal 2001, the growth in deposits
was 15.0%. Bank credit grew by 18.2% in fiscal 2000, 17.3% in fiscal 2001 and
15.3% in fiscal 2002. In fiscal 2000, a recovery in industrial growth pushed up
the increase in credit growth rate.
In the last five fiscal years, there has been a downward movement in
interest rates, barring intra-year periods when interest rates were higher
temporarily due to extraneous circumstances. This movement was principally due
to the Reserve Bank of India's policy of assuring adequate liquidity in the
banking system and generally lowering the rate at which it would lend to Indian
banks to ensure that corporate borrowers have access to funding at competitive
rates. The Reserve Bank of India's primary motive has been to realign interest
rates with the market to facilitate a smooth transition from a
government-controlled regime in the early 1990s, when interest rates were
heavily regulated, to a more market-oriented interest rate regime. Banks have
generally followed the direction of interest rates set by the Reserve Bank of
India and adjusted both their deposit rates and lending rates downwards. On July
21, 2000, the Reserve Bank of India reversed the downward movement of the last
four fiscal years and announced an increase in the bank rate of 100 basis
points. However, on February 16, 2001, the bank rate was reduced to 7.5% and
then reduced to 7.0% on March 7, 2001, thus reversing the upward movements
initiated earlier. In October 2002, it was further reduced to 6.5%. 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.
120
Average deposit rate Average prime
Fiscal year for over one year term (range) lending rate (range)
----------- ------------------------------ --------------------
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....................... 8.0-8.5 11.0-12.0
2003(through August 23).... 7.0-8.0 11.0-12.0
---------
Source: Reserve Bank of India: Handbook of Statistics on Indian Economy, 2001,
Annual Report 2000-2001 and Weekly Statistical Supplements.
Results of Operations
In October 2001, the boards of directors of ICICI and ICICI Bank approved
a plan of combination whereby ICICI Bank acquired ICICI, ICICI Personal
Financial Services and ICICI Capital Services (otherwise referred to in this
annual report as the "amalgamation"). The amalgamation was approved by the
shareholders of ICICI Bank and ICICI at their extraordinary general meetings
held on January 25, 2002 and January 30, 2002, respectively. The amalgamation
was sanctioned by the High Court of Gujarat at Ahmedabad on March 7, 2002 and by
the High Court of Judicature at Bombay on April 11, 2002. The amalgamation was
approved by the Reserve Bank of India on April 26, 2002. The Statement on
Financial Accounting Standards No. 141 on business combinations requires that
business combinations be accounted for in the period in which the combination is
consummated, other than in exceptional circumstances. Accordingly, under US
GAAP, the amalgamation has not been reflected in the financial statements of
ICICI Bank for the year ended March 31, 2002, as it was consummated in April
2002. The effective date of the merger for accounting purposes under US GAAP was
April 1, 2002. ICICI Bank's financial statements for fiscal 2002, therefore, do
not include the assets, liabilities and results of operations of ICICI, ICICI
Personal Financial Services and ICICI Capital Services. Under US GAAP, the
amalgamation was accounted for as a reverse acquisition. This means that ICICI
was recognized as the accounting acquirer in the amalgamation, although ICICI
Bank was the legal acquirer. The amalgamation was accounted for by the purchase
method to reflect the increase in ownership interest of ICICI in ICICI Bank from
46.0%, ICICI's ownership interest in ICICI Bank at the time of the amalgamation,
to 100.0%.
Income statement data and balance sheet data for future periods will not
be comparable to ICICI Bank's historical results due to the amalgamation. See
"Unaudited Pro Forma Condensed Consolidated Financial Data for ICICI Bank and
ICICI" for the results of operations and financial condition of ICICI Bank for
the year ended March 31, 2002, reflecting the amalgamation as if it had occurred
on April 1, 2000. In ICICI Bank's annual report on Form 20-F for fiscal 2003, as
a result of the reverse merger accounting, ICICI Bank will be required to
present three years of ICICI's financial statements only. ICICI's financial
statements for fiscal 2003 will reflect the amalgamation, and ICICI's financial
statements for fiscal 2002 and 2001 will reflect the results of ICICI Bank as an
equity investment.
The consideration for the amalgamation was in the form of one equity share
of ICICI Bank, par value of Rs. 10 each, issued for two equity shares of ICICI,
par value of Rs. 10 each. The transaction was consummated by issuing
approximately 392 million shares of ICICI Bank to the shareholders of ICICI.
Consequent to the amalgamation, the businesses of ICICI became subject for
the first time to various regulations applicable to banks. These include the
prudential reserve and liquidity requirements, namely the statutory liquidity
ratio under Section 24 of the Banking Regulation Act, 1949, and the cash reserve
ratio under Section 42 of the Reserve Bank of India Act, 1934. The statutory
liquidity ratio is required to be maintained in the form of government of India
securities and other approved securities, while the cash reserve ratio is
required to be maintained in the form of cash
121
balances with the Reserve Bank of India. At present, the stipulated statutory
liquidity ratio is 25.0% of a bank's net demand and time liabilities in India
and the stipulated cash reserve ratio is 5.0% of a bank's net demand and time
liabilities in India. In addition to the above, the directed lending norms of
Reserve Bank of India require that every bank should extend 40.0% of net bank
credit to certain eligible sectors, which are categorized as "priority sector".
Considering that the advances of ICICI were not subject to the requirement
applicable to banks in respect of priority sector lending, the Reserve Bank of
India directed the merged entity to maintain an additional 10.0% over and above
the requirement of 40.0%, i.e., a total of 50.0% of its net bank credit on the
residual portion of its advances (total advances of the merged entity less
outstanding advances of ICICI at year-end fiscal 2002). Priority sectors are
specific sectors such as agriculture and small-scale industries. This
additional 10.0% priority sector lending requirement will apply until such time
as the aggregate priority sector advances of the merged entity reach a level of
40.0% of the total net bank credit of the merged entity. The Reserve Bank of
India's existing instructions on sub-targets under priority sector lending and
eligibility of certain types of investments/funds for reckoning as priority
sector advances will apply to the merged entity. See "Supervision and
Regulation - Directed Lending - Priority Sector Lending".
Subsequent to the announcement of the amalgamation in October 2001, ICICI
Bank started investing in government of India securities to comply with the
statutory liquidity ratio requirement for ICICI's outstanding liabilities. ICICI
Bank's total government of India securities portfolio increased 376.4% to Rs.
195.8 billion (US$ 4.0 billion) at year-end fiscal 2002 from Rs. 41.1 billion
(US$ 841 million) at year-end fiscal 2001. Further a large cash balance was
maintained by ICICI Bank towards the end of fiscal 2002 in order to meet the
cash reserve requirement on ICICI's outstanding liabilities following the
amalgamation. ICICI Bank also reduced its credit portfolio during the second
half of fiscal 2002 to direct resources towards meeting the statutory liquidity
ratio and cash reserve ratio requirements on ICICI's outstanding liabilities.
Effective March 10, 2001, Bank of Madura was acquired by ICICI Bank in an
all-stock merger. This acquisition was accounted for under the purchase method
of accounting. Accordingly, the balance sheet at year-end fiscal 2001 includes
the assets and liabilities of Bank of Madura and the income statement for fiscal
2001 includes the income and expenses of Bank of Madura from March 10, 2001. As
a result, the balance sheet at year-end fiscal 2001 was significantly affected
and the income statement for fiscal 2001 was not significantly affected by the
acquisition of Bank of Madura by ICICI Bank. Therefore, the balance sheet at
year-end fiscal 2001 was not comparable to balance sheet at year-end fiscal
2000. ICICI Bank's income statement for fiscal 2001 included the results of
operations of Bank of Madura for only 21 days. In fiscal 2002 the income
statement reflected the full year impact of merger with Bank of Madura.
Therefore, the income statement for fiscal 2002 was not comparable with the
income statement for fiscal 2001.
ICICI Bank's financial performance is analyzed in terms of interest
revenue earned from cash, cash equivalents, trading account assets (i.e.,
interest-earning liquid assets maintained by ICICI Bank's domestic treasury for
meeting reserve requirements), loans and securities as offset by interest
expense incurred from deposits, long-term debt and trading account liabilities.
ICICI Bank tracks its average cost of deposits, yield on loans and returns from
its trading portfolio and portfolio of available for sale securities on a
regular basis. Along with these measures, ICICI Bank also focuses on the gross
impaired loans, allowance for loan losses, non-interest revenue and non-interest
expense to study its profitability. These measures of financial performance are
discussed below.
Net Interest Revenue
Fiscal 2002 compared to Fiscal 2001
Net interest revenue increased 43.1% in fiscal 2002 compared to fiscal
2001 reflecting mainly the following factors:
o an increase of 97.0% in the average volume of interest-earning
assets, and
122
o a decrease of 103 basis points in the net interest margin to 2.75% in
fiscal 2002 from 3.78% in fiscal 2001 and decrease of 39 basis points
in spread to 2.11% in fiscal 2002 from 2.50% in fiscal 2001.
The increase in average volume of interest-earning assets was primarily
due to a large increase in ICICI Bank's government securities portfolio during
fiscal 2002. ICICI Bank's total government of India securities portfolio
increased 376.4% to Rs. 195.8 billion (US$ 4.0 billion) at year-end fiscal 2002
from Rs. 41.1 billion (US$ 841 million) at year-end fiscal 2001. As government
of India securities typically have lower yields than other loan assets, ICICI
Bank's average yield on interest earning assets, net interest margin and spread
were adversely impacted. Further, the high level of cash balances maintained by
ICICI Bank towards the end of fiscal 2002 also resulted in an adverse impact on
ICICI Bank's spreads for fiscal 2002. ICICI Bank also reduced its credit
portfolio, including by sell-down of some of its assets, during the second half
of fiscal 2002 to raise resources towards meeting the statutory liquidity ratio
and cash reserve ratio requirements on ICICI's outstanding liabilities. As a
result, ICICI Bank's net loans decreased 22.1% to Rs. 72.5 billion (US$ 1.5
billion) at year-end fiscal 2002 from Rs. 93.0 billion (US$ 1.9 billion) at
year-end fiscal 2001.
The following table sets forth, for the periods indicated, the principal
components of 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 for
ICICI Bank".
Year ended March 31,
-----------------------------------------------------------------------------
2002/2001
2001 2002 2002 % change
--------------------- ------------------- ---------------- ------------------
(in millions, except percentages)
Interest revenue
Cash, cash equivalents and trading
account assets................................... Rs. 2,978 Rs. 4,100 US$ 84 37.7%
Securities - available for sale................... 1,217 3,709 76 204.8
Securities - held to maturity..................... 543 2,006 41 269.5
Loans............................................. 7,419 10,327 211 39.2
Others............................................ 249 695 14 179.1
---------- ---------- --------
Total interest revenue............................ Rs. 12,406 Rs. 20,837 US$ 426 68.0
---------- ---------- --------
Interest expense
Savings account deposits.......................... Rs. 244 Rs. 649 US$ 13 166.0
Time deposits..................................... 7,017 12,932 265 84.3
Long-term debt.................................... 240 506 10 110.8
Trading account and other liabilities............. 907 1,029 21 13.5
---------- ---------- --------
Total interest expense............................ Rs. 8,408 Rs. 15,116 US$ 309 79.8
---------- ---------- --------
Net interest revenue.............................. Rs. 3,998 Rs. 5,721 US$ 117 43.1
========== =========== ========
Interest revenue increased 68.0% in fiscal 2002 compared to fiscal 2001
reflecting an increase in the average volume of interest-earning assets,
principally ICICI Bank's government of India securities portfolio, offset by a
decline in the gross yield on interest-earning assets. The average volume of
total interest-earning assets increased 97.0% to Rs. 208.3 billion (US$ 4.3
billion) in fiscal 2002 from Rs. 105.7 billion (US$ 2.2 billion) in fiscal
2001. Gross yield on interest-earning assets declined by 174 basis points to
10.00% in fiscal 2002 from 11.74% in fiscal 2001.
The average volume of loans increased by Rs. 27.5 billion (US$ 563
million) or 47.5% to Rs. 85.4 billion (US$ 1.7 billion) in fiscal 2002 compared
to fiscal 2001 despite the decline in net loans outstanding at year-end fiscal
2002 compared to fiscal 2001. The average volume of loans in fiscal 2001 is not
strictly comparable to fiscal 2002 as it did not include the loans of Bank of
Madura for the full year. Yield on loans declined by 72 basis points to 12.10%
in fiscal 2002 from 12.82% in fiscal
123
2001. Yields on advances were adversely impacted by the overall decline in
interest rates in the economy as well as by ICICI Bank's impaired loans on
which ICICI Bank does not accrue interest.
The average volume of the securities portfolio, consisting of available
for sale and held to maturity securities, increased 347.7% to Rs. 74.0 billion
(US$ 1.5 billion) in fiscal 2002 from Rs. 16.5 billion (US$ 339 million) in
fiscal 2001. This was primarily due to the acquisition of government of India
securities to comply with the statutory liquidity ratio requirement for ICICI's
outstanding liabilities prior to the effectiveness of the amalgamation. The
yield on securities declined by 293 basis points to 7.72% in fiscal 2002 from
10.65% in fiscal 2001 primarily due to the higher proportion of government of
India securities which typically earn lower yield and decline in the market
interest rates. Further, to reduce the interest rate risk in the portfolio,
ICICI Bank brought down the average maturity of its portfolio, which in turn
resulted in a reduction in the yield.
The average volume of cash, cash equivalents and trading account assets
increased by Rs. 17.6 billion (US$ 360 million) or 56.2% in fiscal 2002
compared to fiscal 2001 primarily due to the increase in the size of the
balance sheet. Further a large cash balance was maintained by ICICI Bank
towards the end of fiscal 2002 in order to meet the cash reserve requirement on
ICICI's outstanding liabilities following the amalgamation. ICICI Bank's
trading portfolio at year-end fiscal 2002 primarily consisted of government of
India securities and mutual fund units. The yield on cash, cash equivalents and
trading account assets decreased 113 basis points in fiscal 2002. This was
primarily caused by a general downtrend in the interest rates in the economy.
The average volume of interest-bearing liabilities increased 110.5% in
fiscal 2002 from fiscal 2001 primarily due to an increase in time deposits,
which were 80.2% of average interest-bearing liabilities in fiscal 2002. The
average volume of time deposits increased by Rs. 81.2 billion (US$ 1.7 billion)
or 112.1% to Rs. 153.6 billion (US$ 3.2 billion) in fiscal 2002 from Rs. 72.4
billion (US$ 1.5 billion) in fiscal 2001 primarily due to the mobilization of
deposits in the second half of fiscal 2002 to raise resources to meet the
reserve requirements on ICICI's outstanding liabilities. During fiscal 2002
ICICI Bank's corporate deposits increased 137.4% to Rs. 151.3 billion (US$ 3.1
billion) at year-end fiscal 2002 and retail deposits increased 73.0% to Rs.
173.9 billion (US$ 3.6 billion) at year-end fiscal 2002.
The average cost of interest-bearing liabilities declined to 7.89% in
fiscal 2002 from 9.24% in fiscal 2001 primarily due to the decrease in the
average cost of time deposits. The average cost of time deposits reduced 127
basis points to 8.42% in fiscal 2002 as compared to 9.69% in fiscal 2001. This
was achieved mainly due to the reduction in the deposit rates offered to
customers in fiscal 2002 in line with the overall decline in interest rates in
the economy. The interest rate offered for a one-year and above retail term
deposit fell by 75 basis points to 8.50% at year-end fiscal 2002 from 9.25% at
year-end fiscal 2001.
The average volume of trading account liabilities, consisting of
borrowings from the inter-bank money market and short-term borrowings from
institutions, increased 45.9% to Rs. 12.1 billion (US$ 247 million) in fiscal
2002 from Rs. 8.3 billion (US$ 169 million) in fiscal 2001 primarily due to the
overall growth in business. The cost of trading account liabilities decreased
to 8.53% in fiscal 2002 from 10.97% in fiscal 2001 in line with the lower
market rates prevalent in fiscal 2002.
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 spread to 2.50% in fiscal 2001 from 2.28% in fiscal 2000.
124
The increase in average volume of interest-earning assets was primarily
due to an increase in loans to higher rated corporate clients. During fiscal
2001, ICICI Bank 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, the net interest margin and 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 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).
Year ended March 31,
-----------------------------------------------------
2001/2000
2000 2001 % change
---- ---- ----------
(in millions, except percentages)
Interest revenue
Cash, cash equivalents and trading Rs. 3,184 Rs. 2,978 (6.5)%
account assets.........................................
Securities - available for sale......................... 684 1,217 77.9
Securities - held to maturity........................... - 543 -
Loans................................................... 4,437 7,419 67.2
Others.................................................. 129 249 93.0
----------- ------------
Total interest revenue.................................. Rs. 8,434 Rs. 12,406 47.1
----------- ------------
Interest expense
Savings account deposits................................ Rs. 118 Rs. 244 106.8
Time deposits........................................... 5,671 7,017 23.7
Long-term debt.......................................... 244 240 (1.6)
Trading account and other liabilities................... 623 907 45.6
----------- ------------
Total interest expense.................................. Rs. 6,656 Rs. 8,408 26.3
----------- ------------
Net interest revenue.................................... Rs. 1,778 Rs. 3,998 124.9
=========== ============
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$ 547
million) or 85.9% to Rs. 57.9 billion (US$ 1.2 billion) in fiscal 2001 compared
to fiscal 2000. The loan growth was due to an increase in working capital loans
and credit substitutes primarily to higher rated, large corporate clients
acquired through the joint marketing efforts with ICICI through the Major
Clients Group and the Growth Clients Group. 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 the increased
volume of loans to higher rated clients which, consistent with market
conditions, typically earn lower yields due to the lower credit risk associated
with these borrowers. The yield was also impacted by impaired loans on which
ICICI Bank does not accrue interest.
The average volume of cash, cash equivalents and trading account assets
decreased by Rs. 539 million (US$ 11 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.
The trading portfolio primarily consisted of government of India securities
which were held to meet ICICI Bank's statutory liquidity 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, ICICI Bank brought down the average maturity of the
portfolio, which in turn resulted in a reduction in the yield.
125
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 the securities portfolio, consisting of available
for sale and held to maturity securities, increased 174.7% to Rs. 16.5 billion
(US$ 339 million) in fiscal 2001 from Rs. 6.0 billion (US$ 123 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 purchase of lower yielding
securities during fiscal 2001 in view of the softening of interest rates in the
Indian economy.
The average volume of 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$ 329 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 retail deposits was driven
by ICICI Bank's increased focus on the retail segment. Corporate time deposits
decreased in fiscal 2001 to Rs. 42.3 billion (US$ 866 million) from Rs. 52.8
billion (US$ 1.1 billion) in fiscal 2000 registering a decline of 19.9%. This
was in line with ICICI Bank's policy to bring about stability by increasing its
retail time deposits and decreasing its 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 retail
deposits typically carry lower interest rates compared to its 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$ 169
million) from Rs. 5.3 billion (US$ 108 million) in fiscal 2000 primarily due to
the overall growth in 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.
126
Provisions for Loan Losses
The following table sets forth, for the periods indicated, certain
information regarding impaired loans.
At March 31,
----------------------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 % change
----------- ----------- ----------- -------------- -------- ---------
(in millions, except percentages)
Gross impaired loans.................... Rs. 1,418 Rs. 5,333 276.0% Rs. 5,457 US$ 112 2.3%
Allowance for impaired loans............ 748 2,844 280.0 2,774 57 (2.5)
Net impaired loans...................... 670 2,489 271.0 2,683 55 7.8
Gross impaired loans as a percentage of
gross loans(1)........................ 2.97% 5.56% 7.25%
Net impaired loans as a percentage of
net loans............................. 1.43 2.68 3.70
Allowances for loan losses as a
percentage of gross impaired loans.... 52.75 53.33 50.83
Allowances for loan losses as a
percentage of gross loans(1).......... 1.57 3.01 3.75
----------------------
(1) Gross loans are net of unearned income.
The following table sets forth, for the periods indicated, certain
information regarding provisions for loan losses.
Year ended March 31,
---------------------------------------------------------------
2000 2001 2002 2002
------------ -------------- ----------- ----------
(in millions, except percentages)
Provisions for loan losses..................................... Rs. 427 Rs. 1,082 Rs. 1,722 US$ 35
Provisions for loan losses as a percentage of net loans........ 0.91% 1.16% 2.38%
Provisions for loan losses as a percentage of total assets..... 0.33 0.49 0.43
For information on changes in the allowance for loan losses, see
"Business--Impaired Loans--Allowance for Loan Losses".
ICICI Bank's loan portfolio was composed largely of short-term working
capital loans where it had a security interest and first lien on all the current
assets of the borrower, typically inventory and accounts receivable. ICICI Bank
typically lent between 60.0% and 80.0% of the appraised value of collateral to
ensure that its loans were 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,
an allowance for the loans was made based on the time value of money or the
present value of expected realizations of collateral, which took into account
the delay ICICI Bank would experience before recovering its principal. The time
to recovery, expected future cash flows and realizable value for collateral
value were periodically reviewed in estimating the allowance.
An allowance for loan losses relating to an impaired loan is made by
comparing the net present value of the expected cash flows from the loan
discounted at the effective interest rate of the loan and ICICI Bank's carrying
value of the loan. The merged entity believes that ICICI Bank's process for
ascertaining the allowance for loan losses captures the expected losses on the
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 ICICI Bank's treatment of impaired loans,
see "Business - Loan Portfolio - Recognition of Impaired Loans".
Changes in ICICI Bank's provisions and allowance for loan losses as a
whole reflected economic trends in the key manufacturing, middle market
corporate segments in which many of its customers
127
operated. 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 changing economic and regulatory environment
led to reduced profitability for certain of ICICI Bank's borrowers. The impact
was, in particular, more on the middle market corporate segment due to their
lower resilience to external factors which, because of ICICI Bank's small
balance sheet in its first few years of operation were its target customers. As
a result of these adverse economic factors during fiscal 1999 and 2001, some of
ICICI Bank's loans to these borrowers became impaired. A process of
restructuring, including rationalization of capital structures and production
capacities, is taking place in several industries as companies reposition their
businesses in the new environment. During fiscal 2002, the slowdown in the
Indian economy continued and there was continued restructuring in several
industries such as iron and steel, man-made fibers and textiles.
Gross impaired loans increased by 2.3% at year-end fiscal 2002 to Rs. 5.5
billion (US$ 112 million) compared to Rs. 5.3 billion (US$ 109 million) at
year-end fiscal 2001. This was after charging off loans amounting to Rs. 1.8
billion (US$ 37 million) in fiscal 2002 compared to Rs. 512 million (US$ 10
million) in fiscal 2001. Gross impaired loans as a percentage of gross loans
increased to 7.25% at year-end fiscal 2002 from 5.56% at year-end fiscal 2001,
as gross loans decreased to Rs. 75.3 billion (US$ 1.5 billion) at year-end
fiscal 2002 from Rs. 95.9 billion (US$ 1.9 billion) at year-end fiscal 2001. As
a percentage of net loans, net impaired loans increased to 3.70% at year-end
fiscal 2002 from 2.68% at year-end fiscal 2001. Provisions for loan losses
increased 59.1% to Rs. 1.7 billion (US$ 35 million) in fiscal 2002 from Rs. 1.1
billion (US$ 22 million) in fiscal 2001. Allowance for impaired loans at
year-end fiscal 2002 was Rs. 2.7 billion (US$ 55 million) as compared to Rs. 2.8
billion (US$ 57 million) at year-end fiscal 2001 as the loans charged off
increased to Rs. 1.8 billion (US$ 37 million) in fiscal 2002 compared to Rs. 0.5
billion (US$ 10 million) in fiscal 2001.The coverage ratio for gross impaired
loans decreased to 50.83% at fiscal 2002 from 53.33% at fiscal 2001.
Gross impaired loans increased by 276.1% at year-end fiscal 2001 to Rs.
5.3 billion (US$ 109 million) compared to Rs. 1.4 billion (US$ 29 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 (US$ 45 million) and additions from
the mid corporate sector portfolio. This sector as detailed elsewhere was most
vulnerable to fluctuations in the economy. Gross impaired loans as a percentage
of gross loans increased to 5.56% at year-end fiscal 2001 from 2.97% at year-end
fiscal 2000. As a percentage of net loans, net impaired loans increased to 2.68%
at year-end fiscal 2001 from 1.43% at year-end fiscal 2000. Allowances for
impaired loans at year-end fiscal 2001 increased 280.2% to Rs. 2.8 billion (US$
58 million) from Rs. 748 million (US$ 15 million) at year-end fiscal 2000.
Allowance for loan losses on loans acquired from Bank of Madura amounted to Rs.
1.6 billion (US $ 32 million) at year-end fiscal 2001.The coverage ratio for
gross impaired loans increased to 53.33% at fiscal 2001 from 52.75% at fiscal
2000.
Management believes that several loans which became impaired over the last
few years are essentially loans to inherently viable companies. 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. 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 the current outstanding principal and require no
allowance for loan losses and, as a result no provisions have been made for
these loans. In all cases of impaired loans where no provisions have been made,
management believes that it has a strong collateral position. The merged entity
is
128
monitoring the situation of these loans and borrowers carefully and will make
allowances if its view of the situation changes.
The merged entity typically calculates the allowance for loan losses on a
loan-for-loan basis except smaller balance homogenous loans. 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. The merged entity
intends to review this policy annually based on historical delinquency and loan
loss experience.
Non-Interest Revenue
Fiscal 2002 compared to Fiscal 2001
The following table sets forth, for the periods indicated, the principal
components of ICICI Bank's non-interest revenue.
Year ended March 31,
----------------------------------------------------------------------------------
2002/2001
2001 2002 2002 % change
-------------------- ------------------- -------------------- --------------------
(in millions, except percentages)
Fees and commissions (1).................. Rs. 1,125 Rs. 1,733 US$ 36 54.0%
Trading account revenue(2)................ 602 2,196 45 264.8
Securities transactions(3) ............... (384) 872 18 -
Foreign exchange transactions(4) ......... 397 365 7 (8.1)
Other revenue............................. 14 47 1 235.7
-------------------- ------------------- --------------------
Total non-interest revenue, net........... Rs. 1,754 Rs. 5,213 US$ 107 197.2
==================== =================== ====================
---------------
(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 (losses) realized on the sale of
available for sale securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
ICICI Bank's corporate clients and trading for its own account.
Non-interest revenue increased by 197.2% in fiscal 2002 compared to fiscal
2001, primarily due to an increase in revenue on account of trading and
securities transactions and in fees and commissions, offset by a decrease in
revenue from foreign exchange transactions.
Fees and commissions increased 54.0% in fiscal 2002 primarily due to the
increase in income from remittances, cash management services and commissions
on bills and guarantees. In addition to these increases, income from depositary
share account services also increased in fiscal 2002. ICICI Bank continued its
focus on cash management services as one of the key areas of fee income
generation. The total volume handled under cash management services increased
to Rs. 1,720.0 billion (US$ 35.2 billion) in fiscal 2002 from Rs. 1,005.0
billion (US$ 20.6 billion) in fiscal 2001. Guarantees increased 56.3 % to Rs.
21.1 billion (US$ 432 million) at year-end fiscal 2002 from Rs. 13.5 billion
(US$ 276 million) at year-end fiscal 2001.
Trading account revenue, resulting largely from sales of government of
India securities, increased to Rs. 2.2 billion (US$ 45 million) in fiscal 2002
from Rs. 602 million (US$ 12 million) in fiscal 2001. ICICI Bank capitalized on
the market opportunities in a declining interest rate scenario. The yield on
10-year government of India securities fell by 287 basis points to 7.36% at
year-end fiscal 2002 from 10.23% at year-end fiscal 2001. Securities
transactions, which primarily reflect capital gains (losses) realized on the
sale of available for sale securities, showed a gain of Rs. 872 million (US$ 18
million) compared to a loss of Rs. 384 million (US$ 8 million) in fiscal 2001.
Gains on both trading account and securities transactions resulted from
short-term market opportunities created by a fall in interest rates during
fiscal 2002. The merged entity cannot assure you that interest rates will fall
any further as they change depending on the overall economic environment.
129
Income from foreign exchange transactions decreased to Rs. 365 million
(US$ 7 million) in fiscal 2002 compared to Rs. 397 million (US$ 8 million) in
fiscal 2001 due to the absence of gain realized in fiscal 2001 on the
remittance of the proceeds from ICICI Bank's ADS offering to India.
Fiscal 2001 compared to Fiscal 2000
The following table sets forth, for the periods indicated, the principal
components of ICICI Bank's non-interest revenue.
Year ended March 31,
---------------------------------------------------------
2001/2000
2000 2001 % change
---- ---- --------
(in millions, except percentages)
Fees and commissions (1)......................................... Rs. 607 Rs. 1,125 85.3%
Trading account revenue(2)....................................... 857 602 (29.8)
Securities transactions(3) ...................................... 75 (384) (612.0)
Foreign exchange transactions(4) ................................ 220 397 80.5
Other revenue.................................................... - 14 -
----------- -----------
Total non-interest revenue, net.................................. Rs. 1,759 Rs. 1,754 (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 (losses) realized on the sale of
available for sale securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
ICICI Bank's corporate clients and trading for its own account.
Non-interest revenue declined marginally by 0.3% in fiscal 2001 compared
to fiscal 2000. In fiscal 2001, fee and commission income and income from
foreign exchange transactions increased, which was offset by a decrease in
trading account revenue and losses on securities transactions.
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, income from depositary share
account services and commissions on investment and foreign exchange
transactions also increased in fiscal 2001. ICICI Bank continued to focus on
cash management services as one of the key areas of fee income generation. The
amount handled under cash management services increased significantly to Rs.
1,005.0 billion (US$ 20.6 billion) in fiscal 2001 from Rs. 656.2 billion (US$
13.4 billion) in fiscal 2000. Guarantees increased 77.9% to Rs. 13.5 billion
(US$ 277 million) at year-end fiscal 2001 from Rs. 7.6 billion (US$ 156
million) at year-end fiscal 2000 and acceptances, primarily consisting of
documentary credits, increased 51.6% to Rs. 12.9 billion (US$ 264 million) at
year-end fiscal 2001 from Rs. 8.5 billion (US$ 174 million) at year-end fiscal
2000. The number of depositary share accounts with ICICI Bank increased to
91,000 in fiscal 2001 from 60,000 in fiscal 2000.
Trading account revenue, resulting largely from sales of government of
India securities, decreased to Rs. 602 million (US$ 12 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
ICICI Bank's 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, ICICI Bank
re-classified trading assets amounting to Rs. 8.6 billion (US$ 176 million) to
securities available for sale and Rs. 10.2 billion (US$ 209 million) to
securities held to maturity. 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 the mutual
fund portfolio which was caused by the extreme volatility in Indian stock
markets in the beginning of fiscal 2001.
130
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 ICICI Bank's ADS
offering in March 2000 to India.
Non-Interest Expense
Fiscal 2002 compared to Fiscal 2001
The following table sets forth, for the periods indicated, the principal
components of ICICI Bank's non-interest expense.
Year ended March 31,
----------------- ----------------- ---------------- -----------------
2002/2001
2001 2002 2002 % change
----------------- ----------------- ---------------- -----------------
(in millions, except percentages)
Employee expense:
Salaries............................................. Rs. 412 Rs. 1,146 US$ 23 178.2%
Employee benefits.................................... 95 372 8 291.6
----------------- ----------------- ----------------
Total employee expense................................. 507 1,518 31 199.4
Occupancy expense:
Premises.............................................. 170 222 4 30.8
Rentals, taxes and electricity........................ 361 662 14 83.4
Computer and office equipment.......................... 640 1,282 26 100.3
----------------- ----------------- ----------------
Total occupancy expense................................ 1,171 2,166 44 85.0
----------------- ----------------- ----------------
Administration and other expenses:
Advertisement and publicity........................... 143 80 2 (44.1)
Communications expense............................... 206 377 8 83.0
Printing and stationery.............................. 242 353 7 45.9
Direct selling agents' expenses...................... 87 80 2 -
Bank charges......................................... 85 123 3 44.7
Amortization of goodwill and
other intangible assets............................. 12 244 5 1,933.3
Other................................................ 651 1,319 26 102.6
----------------- ----------------- ----------------
Total administration and other expense................. 1,426 2,576 53 80.7
----------------- ----------------- ----------------
Total non-interest expense............................. Rs. 3,104 Rs. 6,260 US$ 128 101.7
================= ================= ================
Non-interest expense increased 101.7% in fiscal 2002 to Rs. 6.3 billion
(US$ 128 million) from Rs. 3.1 billion (US$ 64 million) in fiscal 2001 primarily
due to the expenditure on the integration of the operations of Bank of Madura
and the expansion of ICICI Bank's retail banking business. Non-interest expense
as a percentage of average total assets increased to 2.45% in fiscal 2002 from
2.27% in fiscal 2001.
Employee expense increased 199.4% in fiscal 2002 to Rs. 1.5 billion (US$
31 million) from Rs. 507 million (US$ 10 million) in fiscal 2001. In March 2001,
ICICI Bank inducted 2,725 employees of Bank of Madura. The employee expense for
fiscal 2001 included expenses of these employees only for the period from March
10, 2001, the effective date of the merger, that is for 21 days of the fiscal
year. At year-end fiscal 2002, ICICI Bank had 4,820 employees, an increase from
4,491 employees at year-end fiscal 2001. Occupancy expense increased 85.0% in
fiscal 2002 compared to fiscal 2001, in keeping with the general growth in ICICI
Bank's business volumes and increased thrust on retail. ICICI Bank undertook
several initiatives on the retail front like an expansion of its credit card and
debit card businesses, an expansion of call center facilities and the setting up
of three additional regional processing centers. Rentals increased 83.4%
primarily due to additional rental payments resulting from the expansion of
ICICI Bank's ATM and branch network as well as ICICI Bank's credit card
operations and the setting up of additional call centers, data centers and
regional processing centers. The number of ATMs increased to 1,000 at year-end
fiscal 2002 from 510 at year-end fiscal 2001 primarily due to ICICI Bank's aim
of increasing electronic delivery channels for the convenience of customers.
During fiscal 2002, there was an increase of 100.3% in computer and office
equipment expenses primarily due to the depreciation on technology equipment
including servers, personal computers, ATMs and Very Small Aperture Terminals
(VSATs).
131
Administration and other expenses increased 80.7% in fiscal 2002 compared
to fiscal 2001. Communication expenses increased 83.0% in fiscal 2002, in line
with the general growth in business volumes and ICICI Bank's increased focus on
the retail segment. The 44.7% increase in bank charges in fiscal 2002 compared
to fiscal 2001 was largely on account of correspondent bank charges paid for
handling the larger volume of ICICI Bank's cash management services business.
During fiscal 2002, ICICI Bank amortized Rs. 244 million (US$ 5 million) of
goodwill and other intangible assets related to the acquisition of Bank of
Madura.
Fiscal 2001 compared to Fiscal 2000
The following table sets forth, for the periods indicated, the principal
components of ICICI Bank's non-interest expense.
Year ended March 31,
--------------------------------------------
2001/2000
2000 2001 % change
------------ ---------- -----------
(in millions, except percentages)
Employee expense:
Salaries.............................................................. Rs. 257 Rs. 412 60.3%
Employee benefits..................................................... 59 95 61.0
------------ ----------
Total employee expense.................................................. 316 507 60.4
Occupancy expense:
Premises............................................................... 57 170 198.2
Rentals, taxes and electricity......................................... 180 361 100.6
Computer and office equipment.......................................... 283 640 126.2
------------ ----------
Total occupancy expense................................................. 520 1,171 125.2
------------ ----------
Administration and other expenses:
Advertisement and publicity........................................... 39 143 266.7
Communications expense................................................ 69 206 198.6
Printing and stationery............................................... 82 242 195.1
Direct selling agents' expenses....................................... 10 87 770.0
Bank charges.......................................................... 33 85 157.6
Amortization of goodwill & other intangible assets..................... - 12 -
Other.................................................................. 260 651 150.4
------------ ----------
Total administration and other expense.................................. 493 1,426 189.2
------------ ----------
Total non-interest expense.............................................. Rs. 1,329 Rs. 3,104 133.6
============ ==========
Non-interest expense increased 133.6% in fiscal 2001 to Rs. 3.1 billion
(US$ 64 million) from Rs. 1.3 billion (US$ 27 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 ICICI Bank's products.
Other operating expenses, including postage, telephone and stationery, also
increased in line with the general growth in ICICI Bank's business volumes and
its increased focus on the retail segment, which typically entails higher
operational costs. During fiscal 2001, ICICI Bank 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 through its acquisition in March 2001.
ICICI Bank undertook several initiatives on the retail front such as an
expansion of its credit card business, the launch of debit cards, and the
setting up of 34 additional call centers and nine regional processing centers.
ICICI Bank also undertook two Smart Card pilot projects during fiscal 2001. As
ICICI Bank focused on increasing its retail deposits and expanding its credit
card operations, it 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 was on
account of correspondent bank charges paid for handling a larger volume of cash
management services business.
132
Occupancy expense increased 125.2% in fiscal 2001 compared to fiscal 2000,
primarily due to additional rental payments resulting from the expansion of the
ATM and branch network as well as the credit card operations and the setting up
of additional call centers, data centers and regional processing centers. The
number of ATMs increased to 510 at year-end fiscal 2001 from 175 at year-end
fiscal 2000 primarily due to ICICI Bank's 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 technology equipment including servers, personal computers,
ATMs and Very Small Aperture Terminals (VSATs).
Employee expense increased 60.4% in fiscal 2001 due to a 234.1% increase
in the number of employees to 4,491 at year-end fiscal 2001 from 1,344 at
year-end fiscal 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
induction of 2,716 employees of Bank of Madura taken over by ICICI Bank during
fiscal 2001. The employee expense at year-end fiscal 2001 included expenses of
these employees only for the period from March 10, 2001, the effective date of
the merger.
Income Tax Expense
Income tax expense increased 260.8% in fiscal 2002 to Rs. 931 million (US$
19 million) from Rs. 258 million (US$ 5 million) in fiscal 2001 primarily due to
a 88.5% increase in income before tax in fiscal 2002, lower level of income
exempt from income tax in fiscal 2002 and significantly higher amortization of
goodwill and other intangible assets, for which no tax benefit was available, in
fiscal 2002. As a result, effective tax rate was 31.5% in fiscal 2002 compared
to 16.5% in fiscal 2001. The effective tax rate was lower than the marginal tax
rate of 35.7% applicable to companies generally in India in fiscal 2002
primarily due to the tax-exempt income from certain investments of the treasury
department including bonds of certain public sector corporations and mutual
funds units. The government 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. This exemption will not be available in fiscal 2003 as the
government of India's budget for fiscal 2003 has deleted section 10(33) of
Indian Income-tax Act which exempted dividends from tax.
Income tax expense decreased 31.9% in fiscal 2001 to Rs. 258 million (US$
5 million) from Rs. 379 million (US$ 8 million) in fiscal 2000 primarily due to
a 12.1% decrease in income before tax in fiscal 2001 and a lower proportion of
tax-exempt income in the total income in fiscal 2001. The effective tax rate was
16.5% in fiscal 2001 compared to 21.3% in fiscal 2000.
133
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal
components of ICICI Bank's assets.
At March 31,
------------------------------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 % change
------------------------------------------------------------------------------------------
(in millions, except percentages)
Cash and cash equivalents............... Rs. 34,313 Rs. 44,896 30.8% Rs. 87,965 US$ 1,801 95.9%
Interest-bearing deposits with banks.... 2,048 2,410 17.7 1,406 29 (41.7)
Amount lent under reverse repurchase
transactions ......................... - - - 9,116 187 -
Trading account assets (1).............. 28,228 18,725 (33.7) 26,075 534 39.3
Securities- Available for sale(2)....... 4,709 24,787 426.4 155,758 3,190 528.4
Securities- Held to maturity............ - 10,944 - 24,294 498 122.0
Loans, net.............................. 46,986 93,030 98.4 72,474 1,484 (22.1)
Acceptances(3).......................... 8,490 12,869 51.6 12,608 258 (2.0)
Property and equipment.................. 2,097 3,920 86.9 4,831 99 23.2
Intangible assets....................... - 2,641 - 2,397 49 (9.2)
Other assets (4)........................ 3,515 6,316 79.7 7,881 161 24.8
------------------------------- ------------------------------
Total assets............................ Rs. 130,386 Rs. 220,538 69.1 Rs. 404,805 US$ 8,290 83.6
=============================== ==============================
---------
(1) Primarily includes government of India securities.
(2) Includes corporate debt securities, government of India securities and
mutual fund units.
(3) Includes documentary credits that are non-funded facilities.
(4) Includes deferred tax assets, interest accrued, staff loans, deposits in
leased premises and pre-paid expenses.
(5) Figures for fiscal 2000 and fiscal 2001 have been reclassified. Please see
Note 1.19 to ICICI Bank's financial statements for a more detailed
description.
ICICI Bank's total assets increased 83.6% to Rs. 404.8 billion (US$ 8.3
billion) at year-end fiscal 2002 from Rs. 220.5 billion (US$ 4.5 billion) at
year-end fiscal 2001. This was primarily due to the increase in available for
sale securities, primarily government of India securities, and cash and cash
equivalents offset in part by a decrease in net loans.
Subsequent to the announcement of the amalgamation in October 2001, ICICI
Bank started investing in government of India securities to comply with the
statutory liquidity ratio requirement for ICICI's outstanding liabilities. As a
result, available for sale securities, primarily, consisting of government of
India securities, increased 528.4% to Rs 155.8 billion (US$ 3.2 billion) at
year-end fiscal 2002 from Rs 24.8 billion (US$ 508 million) at year-end fiscal
2001. Net loans decreased 22.1% to Rs. 72.5 billion (US$ 1.5 billion) at
year-end fiscal 2002 from Rs. 93.0 billion (US$ 1.9 billion) at year-end fiscal
2001. Loans denominated in foreign currency were 5.9% of ICICI Bank's total
loans at year-end fiscal 2002.
Cash and cash equivalents increased by 95.9% during fiscal 2002. Cash and
cash equivalents at year-end fiscal 2002 included a balance of Rs. 14.6 billion
(US$ 299 million) maintained with the Reserve Bank of India in accordance with
the guidelines governing cash reserve requirements. This balance was subject to
withdrawal and usage restrictions. Trading assets at year-end fiscal 2002 which
primarily consisted of government of India securities and mutual fund units
increased 39.3% to Rs. 26.1 billion (US$ 534 million) compared to Rs. 18.7
billion (US$ 383 million) at year-end fiscal 2001. Held to maturity securities
which primarily consisted of government of India securities were Rs. 24.3
billion (US$ 498 million) at year-end fiscal 2002, an increase of 122.0% from
Rs. 10.9 billion (US$ 224 million) at year-end fiscal 2001.
134
ICICI Bank undertook reverse repurchase transactions in government of
India securities. Under these transactions, securities are purchased under
agreements to resell after a specified time. Such securities qualify as
approved securities for statutory liquidity ratio requirements. These
securities are generally of a low maturity and carry lower market risk while
yielding higher returns as compared to other short-term money market
instruments. These transactions are typically used for better liquidity
management. The reverse repurchase contracts outstanding at year-end fiscal
2002 were Rs. 9.1 billion (US$ 187 million). Acceptances were Rs. 12.6 billion
(US$ 258 million) at year-end fiscal 2002 compared to Rs. 12.9 billion (US$ 264
million) at year-end fiscal 2001. Property and equipment increased 23.2% to Rs.
4.8 billion (US$ 99 million) at year-end fiscal 2002 from Rs. 3.9 billion (US$
80 million) at year-end fiscal 2001, primarily due to the investments in
technology and in ATMs and other installations. Intangible assets represented
principally the goodwill arising in the acquisition of Bank of Madura. During
fiscal 2002, ICICI Bank amortized Rs. 215 million (US$ 4 million) of this
goodwill.
At year-end fiscal 2001, ICICI Bank's total assets increased 69.1%
compared to year-end fiscal 2000. Net loans increased 98.4% during fiscal 2001.
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%. Loan growth was driven primarily by additional loans to clients in the
top rated category as well as acquisition of the net loan portfolio of Bank of
Madura in the amount of Rs. 17.8 billion (US$ 364 million). Loans denominated
in foreign currency were 5.1% of ICICI Bank's total loans at year-end fiscal
2001. The decline in trading accounts assets was due to the transfer of
securities to other categories. In fiscal 2001, the Bank transferred certain
securities amounting to Rs. 8.6 billion (US$ 176 million) and Rs. 10.2 billion
(US$ 208 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 had increased primarily due to ICICI Bank's acquisition
of these assets of Bank of Madura in the amount of Rs. 10.0 billion (US$ 204.8
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 ICICI Bank's
acquisition of the securities portfolio of Bank of Madura in the amount of Rs.
11.5 billion (US$ 235.5 million) at year-end fiscal 2001. ICICI Bank's
marketing strategy helped it in increasing acceptances by 51.6% to Rs. 12.9
billion (US$ 264 million) at year-end fiscal 2001 from Rs. 8.5 billion (US$ 174
million) at year-end fiscal 2000. Property and equipment increased 86.9% in
fiscal 2001 compared to fiscal 2000 primarily due to acquisition of the
property and equipment of Bank of Madura in the amount of Rs. 693 million (US$
14million) 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.
135
Liabilities and Stockholders' Equity
The following table sets forth, at the dates indicated, the principal
components of ICICI Bank's liabilities and stockholders' equity.
At March 31,
----------------------------------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 % change
-------------- ------------ --------- ------------- ---------- ---------
(in millions, except percentages)
Deposits............................. Rs. 98,660 Rs. 164,254 66.5% Rs. 325,221 US$ 6,660 98.0%
Amount borrowed under repurchase
transactions......................... - 537 - 21,399 438 3,884.9
Trading account liabilities(1)....... 1,922 5,958 210.0 1,237 25 (79.2)
Short-term borrowings(2)............. 2,187 3,012 37.7 1,409 29 (53.2)
Acceptances.......................... 8,490 12,869 51.6 12,608 258 (2.0)
Other liabilities (3)................ 5,264 15,180 188.4 19,041 390 25.4
Long-term debt....................... 2,476 2,421 (2.2) 5,740 118 137.1
-------------- ------------ ------------- ----------
Total liabilities.................... 118,999 204,231 71.6 386,655 7,918 89.3
Stockholders' equity................. 11,387 16,307 43.2 18,150 372 11.3
-------------- ------------ ------------- ----------
Total................................ Rs. 130,386 Rs. 220,538 69.1 Rs. 404,805 US$ 8,290 83.6
============== ============ ============= ==========
-------------
(1) 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 ICICI
Bank's export credit.
(3) Includes interest accrued but not due on deposits and bills payable.
The following table sets forth, at the dates indicated, the components of
ICICI Bank's total deposits.
At March 31,
--------------------------------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 % change
-------------- -------------- --------- ------------- ----------- ----------
(in millions, except percentages)
Interest-bearing deposits:
Savings deposits................... Rs. 5,332 Rs. 18,786 252.3% Rs. 24,970 US$ 511 32.9%
Time deposits...................... 77,453 119,097 53.8 270,677 5,543 127.3
-------------- -------------- ------------- -----------
Total interest-bearing deposits....... 82,785 137,883 66.6 295,647 6,054 114.4
Non-interest-bearing deposits:
Demand deposits ................... 15,875 26,371 66.1 29,574 606 12.1
-------------- -------------- ------ ------------- ----------- ------
Total deposits........................ Rs. 98,660 Rs. 164,254 66.5 Rs. 325,221 US$ 6,660 98.0
============== ============== ====== ============= =========== ======
ICICI Bank's total deposits increased 98.0% to Rs 325.2 billion (US$ 7
billion) at year-end fiscal 2002 from Rs.164.3 billion (US$ 3.4 billion) at
year-end fiscal 2001. This growth was achieved through increased focus on
retail and corporate customers by offering a host of products designed to meet
varied individual and corporate needs and leveraging on ICICI Bank's network of
branches and extension counters. This focus on ICICI Bank's retail segment was
reflected in the 72.9% growth in retail deposits in fiscal 2002 which
constituted 53.4% of total deposits at year-end fiscal 2002. Time deposits
increased 127.3% to Rs. 270.7 billion (US$ 5.5 billion) at year-end fiscal 2002
from Rs. 119.1 billion (US$ 2.4 billion) at year-end fiscal 2001. Savings
account deposits increased 32.9% at year-end fiscal 2002 to Rs. 25.0 billion
from Rs. 18.8 billion at year-end fiscal 2001. Non-interest bearing deposits
increased 12.1% to Rs. 29.6 billion at year-end fiscal 2002 from Rs. 26.4
billion at year-end fiscal 2001.
During fiscal 2002, ICICI Bank undertook repurchase transactions in
government of India securities. The repurchase contracts outstanding at
year-end fiscal 2002 were Rs 21.4 billion (US$ 438 million). The repurchase
contracts outstanding were collateralized by a pledge of securities in the
available for sale portfolio with a fair value of Rs 21.4 billion (US$ 438
million). Short-term borrowings at year-end fiscal 2002 represented borrowings
from the Reserve Bank of India. These funds were in the nature of export
refinance with an interest rate of 6.5% per annum. Trading liabilities
decreased 79.2% to Rs. 1.2 billion (US$ 25 million) at year-end fiscal 2002
from Rs. 6.0
136
billion (US$ 122 million) at year-end fiscal 2001. Trading liabilities included
borrowings from banks in the inter-bank call money market of Rs. 274 million
(US$ 6 million) at year-end fiscal 2002 compared to Rs. 4.0 billion (US$ 81
million) at year-end fiscal 2001. Long-term debt representing debt with an
original maturity of greater than one year and net of unamortized debt issuance
costs at year-end fiscal 2002 was Rs. 5.7 billion (US$ 118 million), a growth
of 137.1% from Rs. 2.4 billion (US$ 50 million) at year-end fiscal 2001. In
fiscal 2002, long-term debt included Rs. 2.3 billion (US$ 46 million) raised by
ICICI Bank during the year for a period of 69 months at 9.75%. Other
liabilities at year-end fiscal 2002 increased 25.4% to Rs. 19.0 billion (US$
390 million) from Rs. 15.2 billion (US$ 311 million) at year-end fiscal 2001.
Other liabilities included primarily outward clearing suspense, accounts
payable and interest accrued but not due.
During fiscal 2001 ICICI Bank's total deposits increased 66.5%. This
increase was attributable to the deposits acquired through the acquisition of
Bank of Madura by ICICI Bank in the amount of Rs. 35.3 billion (US$ 723
million) as well as deposits obtained through ICICI Bank's 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 ICICI Bank's retail
deposits in fiscal 2001 compared to a negative growth of 5.8% in ICICI Bank's
more volatile corporate deposits in the same period. ICICI Bank's savings
account deposits increased 252.3% in fiscal 2001 primarily due to its continued
focus on building a strong retail depositor base as well as savings deposits
acquired through the acquisition of Bank of Madura by ICICI Bank in the amount
of Rs. 5.7 billion (US$ 117 million). ICICI Bank's time deposits increased
53.8% in fiscal 2001. ICICI Bank's non-interest-bearing deposits increased
66.1% due to ICICI Bank's specific focus on this segment, particularly through
the development and marketing of ICICI Bank's key corporate deposit products as
ICICI Bank significantly reduced its cost of funds. Trading account liabilities
increased by Rs. 4.0 billion (US$ 83 million) in fiscal 2001 over fiscal 2000.
ICICI Bank's short-term borrowings, which represented refinance from the
Reserve Bank of India primarily against ICICI Bank's export credit, increased
by Rs. 825 million (US$ 17 million). ICICI Bank's other liabilities increased
by Rs. 9.9 billion (US$ 203 million) primarily due to an increase of Rs. 2.4
billion (US$ 49 million) in bills payable and an increase of Rs. 4.0 billion
(US$ 83 million) in outward clearing suspense.
Off Balance Sheet Items, Commitments and Contingencies
Foreign Exchange and Derivative Contracts
ICICI Bank entered into foreign exchange forward contracts, swap
agreements and other derivative products, which enabled customers to transfer,
modify or reduce their foreign exchange and interest rate risks. ICICI Bank's
foreign exchange contracts arose out of forward foreign exchange transactions
with corporate and non-corporate customers and inter-bank foreign exchange
transactions. ICICI Bank earned profit by way of an exchange margin as a
mark-up over the exchange rate offered on customer transactions. ICICI Bank
earned profit on inter-bank foreign exchange transactions by way of differences
between the purchase rate and the sale rate. This income was booked as income
from foreign exchange transactions.
ICICI Bank's outstanding derivative contracts represented currency and
interest rate swaps for corporate customers. The income earned by ICICI Bank on
all such transactions was booked as trading account revenue.
137
The following table sets forth, at the dates indicated, the notional
amount and balance sheet credit exposure of ICICI Bank's derivative contracts.
Notional principal amounts Balance sheet credit exposure(1)
---------------------------------------------------------------------------------------
At March 31, At March 31,
---------------------------------------------------------------------------------------
2000 2001 2002 2000 2001 2002
------------ ----------- ------------ --------- --------- -------
(in millions) (in millions)
Interest rate products:
Swap agreements................. Rs. 900 Rs. 11,380 Rs. 46,687 - Rs. 12 Rs. 121
------------ ----------- ------------ --------- --------- -------
Total interest rate products.... Rs. 900 Rs. 11,380 Rs. 46,687 - Rs. 12 Rs. 121
============ =========== ============= ========= ========= =======
Foreign exchange products:
Forward contracts............... Rs. 62,892 Rs. 78,249 Rs. 127,699 Rs. 309 Rs. 120 Rs. 240
Swap agreements................. 7,658 8,710 4,545 - - 25
------------ ----------- ------------ --------- --------- -------
Total foreign exchange
Products...................... Rs. 70,550 Rs. 86,959 Rs. 132,244 Rs. 309 Rs. 120 Rs. 265
============ =========== ============ ========= ========= =======
---------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products at the indicated periods.
Loan Commitments
ICICI Bank had outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs. 27.7 billion (US$
567 million) at year-end fiscal 2002 compared to Rs. 13.7 billion (US$ 280
million) at year-end fiscal 2001. The interest rate on these commitments was
dependent on the lending rates on the date of the loan disbursement. Further,
the commitments had fixed expiry dates and may have been contingent upon the
borrowers' ability to maintain specific credit standards.
Guarantees
As a part of its commercial banking activities, ICICI Bank had issued
guarantees to enhance the credit standing of its customers. These generally
represented irrevocable assurances that ICICI Bank would make payments in the
event that the customer failed 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 were generally for a period not exceeding 18 months.
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 recognized over the term of the instruments.
The following table sets forth, at the dates indicated, ICICI Bank's
guarantees.
At March 31,
------------------------------------------------
2001 2002 2002
------------ ----------- ----------
(in millions)
Financial guarantees........... Rs. 7,511 Rs. 12,551 US$ 257
Performance guarantees......... 5,949 8,565 US$ 175
------------ ----------- ----------
Total guarantees............... Rs. 13,460 Rs. 21,116 US$ 432
============ =========== ==========
138
Lease Commitments
ICICI Bank had commitments under long-term operating leases principally
for premises. Lease terms for premises generally covered periods of nine years.
The following table sets forth, for the periods indicated, future minimum lease
rental commitments for non-cancellable leases.
Year ending March 31, (in millions)
-----------------------------------
2003................................... Rs. 174 US$ 4
2004................................... 180 4
2005................................... 183 4
2006................................... 190 4
2007................................... 197 4
Thereafter............................. 630 12
-----------------------------------
Total minimum lease requirements....... Rs. 1,554 US$ 32
===================================
Capital Contracts
Further, ICICI Bank was 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. 93 million (US$ 2 million) at year-end fiscal 2002 compared
to Rs. 60 million (US$ 1 million) at year-end fiscal 2001.
ICICI Bank had not created any special purpose entities which have not
been consolidated at year-end fiscal 2002.
Capital Resources
The merged entity is subject to the capital adequacy requirements of the
Reserve Bank of India, which are primarily based on the capital adequacy accord
reached by the Basle Committee of Banking Supervision, Bank of International
Settlements in 1988. For a detailed description of the Reserve Bank of India's
capital adequacy guidelines, see "Supervision and Regulation--Capital Adequacy
Requirements". The merged entity is 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 table sets forth, at the dates indicated, ICICI Bank's
risk-based capital, risk-weighted assets and risk-based capital adequacy ratios
computed in accordance with the applicable Reserve Bank of India guidelines and
based on ICICI Bank's financial statements prepared in accordance with Indian
GAAP.
Indian GAAP At March 31,
---------------------------------------------------------------------------------
2002/2001
2000 2001 2002 2002 % change
----------- ----------- ------------ ----------- ---------
(in millions, except percentages)
Tier 1 capital..................... Rs. 11,251 Rs. 13,024 Rs. 15,184 US$ 311 16.6%
Tier 2 capital..................... 1,437 1,450 3,415 70 135.5
----------- ----------- ------------- -----------
Total capital...................... Rs. 12,688 Rs. 14,474 Rs. 18,599 US$ 381 28.5
=========== =========== ============ ===========
On-balance sheet risk assets....... 51,611 101,982 91,089 1,865 (10.7)
Off-balance sheet risk assets...... 12,979 23,070 24,291 498 5.3
----------- ----------- ------------ -----------
Total risk assets.................. Rs. 64,590 Rs. 125,052 Rs. 115,380 US$ 2,363 (7.7)
=========== =========== ============ ===========
Tier 1 capital adequacy ratio...... 17.4% 10.4% 13.1%
Tier 2 capital adequacy ratio...... 2.2 1.2% 3.0%
----------- ----------- ------------
Total capital adequacy ratio....... 19.6% 11.6% 16.1%
=========== =========== ============
ICICI Bank's total capital adequacy ratio computed under the applicable
Reserve Bank of India guidelines and based on its financial statements prepared
in accordance with Indian GAAP was 16.1% at year-end fiscal 2002. Using the
same basis of computation, its Tier 1 capital adequacy ratio was 13.1% and its
Tier 2 capital adequacy ratio was 3.0% at year-end fiscal 2002.
139
The principal off-balance sheet items for ICICI Bank were loan
commitments, guarantees and lease commitments. As described in "- Financial
Condition - Off Balance Sheet Items, Commitments and Contingencies", these
items were entered into by ICICI Bank for normal business purposes. Capital
would have been required for the loan commitments as and when these converted
into loans and financing to customers in the normal course of business. Capital
was provided for guarantees based on the existing capital adequacy guidelines
of the Reserve Bank of India. See "Supervision and Regulation - Capital
Adequacy Requirements". Lease commitments were not expected to materially
affect ICICI Bank's capital requirements.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the
risk of unexpected increases in the cost of funding an asset portfolio at
appropriate maturities and the risk of being unable to liquidate a position in
a timely manner at a reasonable price. The goal of liquidity management is to
be able, even under adverse conditions, to meet all liability repayments on
time and fund all investment opportunities.
ICICI Bank
ICICI Bank maintained diverse sources of liquidity to facilitate
flexibility in meeting funding requirements. Operations were principally funded
by accepting deposits from retail and corporate depositors. It also borrowed in
the short-term inter-bank market. Loan maturities and sale of investments also
provided liquidity. Most of the funds raised were used to extend loans or
purchase securities. Generally, deposits were of a shorter average maturity
than loans or investments.
ICICI Bank maintained a substantial portfolio of liquid high quality
securities that could be sold on an immediate basis to meet liquidity needs.
ICICI Bank also had access to the inter-bank market, for meeting short-term
funding needs. While generally this market provides an adequate amount of
liquidity, the interest rates at which funds are available can sometimes be
volatile. ICICI Bank prepared a regular maturity gap analysis to review its
liquidity position.
ICICI
Most of ICICI's liabilities were fixed maturity liabilities where the
investors did not have the option of an early withdrawal. There were some
liabilities which had European call/put options, which could be exercised only
on specified dates, attached to them. Therefore ICICI did not face significant
liquidity risk on account of unforeseen withdrawals. In order to contain the
liquidity risk relating to requirements of funds for its lending operations,
ICICI sought to establish a continuous information flow and an active dialogue
between the funding and borrowing divisions of the organization.
Liquidity could also have been provided by the sale of liquid assets.
ICICI maintained liquid assets such as government of India securities and
short-maturity corporate paper. To ensure that sufficient liquid funds were
available to meet all the available investment needs, ICICI also maintained
liquid balances in the form of overnight and term bank deposits both in rupees
as well as in various foreign currencies. ICICI Securities, like ICICI Bank,
relied, for a certain proportion of its funding, on the inter-bank market for
overnight money and was hence also exposed to similar risk of volatile interest
rates. ICICI also uses the avenue of corporate paper sell-down and loan
securitization as a liquidity management tool.
Merged Entity
The merged entity maintains diverse sources of liquidity to facilitate
flexibility in meeting funding requirements. Incremental operations are
principally funded by accepting deposits from retail and corporate depositors.
The deposits are augmented by borrowings in the short-term inter-bank
140
market and through bonds. The majority of funds raised are utilized for
extending loans or purchasing securities. Generally, deposits are of a shorter
average maturity than loans or investments.
The merged entity will be required to maintain adequate liquidity, during
fiscal 2003 for servicing ICICI's long-term debt repayments amounting to Rs.
119.3 billion (US$ 2.4 billion) and short-term borrowings amounting to Rs.70.8
billion (US$ 1.4 billion) at year-end fiscal 2002. Most of the merged entity's
incremental funding requirements, including replacement of maturing liabilities
of ICICI which generally had longer maturities, are met through short-term
funding sources, primarily in the form of deposits including inter-bank
deposits. However, a large portion of its assets, primarily the assets of
ICICI, have medium or long-term maturities, creating a potential for funding
mismatches. At year-end fiscal 2002, savings deposits and non-interest-bearing
demand deposits together constituted 16.8% of ICICI Bank's total deposits and
14.1% of ICICI Bank's total liabilities. Although ICICI Bank's customer
deposits were generally of less than one year maturity, in ICICI Bank's
experience, a substantial portion of its customer deposits had been rolled over
upon maturity and had been a stable source of funding. During fiscal 2002,
ICICI Bank's corporate deposits increased 137.4% to Rs. 151.3 billion (US$ 3.1
billion) at year-end fiscal 2002 and retail deposits increased 73.0% to Rs.
173.9 billion (US$ 3.6 billion) at year-end fiscal 2002.
Another source of liquidity risk is the put options written by ICICI on
the loans which it securitized during the fiscal year 2002. These options are
binding on the merged entity and require the merged entity to purchase, upon
request of the holders, securities issued in such securitized transactions. The
options seek to provide liquidity to the security holders. If exercised, the
merged entity will be obligated to purchase the securities at the
pre-determined exercise price. All put options were out-of-the-money for the
holders. At year-end fiscal 2002, the carrying amount of such option-embedded
loan sell-downs was Rs. 13.2 billion (US$ 271 million) with an aggregate put
option exercise price of Rs. 13.1 billion (US$ 268 million).
The merged entity, like ICICI Bank, is required to maintain a certain
percentage of its demand and time liabilities, excluding specified liabilities,
in cash reserves with the Reserve Bank of India, which currently stands at
5.0%. In addition, it is also required to maintain a statutory liquidity
reserve by way of investments in government of India securities, which is 25.0%
at present.
The merged entity also has recourse to the liquidity adjustment facility
and the refinance window, which are short-term funding arrangements provided by
the Reserve Bank of India. The merged entity maintains a substantial portfolio
of liquid high quality securities that may be sold on an immediate basis to
meet its liquidity needs.
The merged entity also has the option of managing liquidity by borrowing
in the inter-bank market on a short-term basis. The overnight market which is a
significant part of the inter-bank market, is susceptible to volatile interest
rates. These interest rates on certain occasions, have touched historical highs
of 100% and above. To curtail reliance on such volatile funding, the merged
entity's liquidity management policy has stipulated daily limits for borrowing
and lending in this market. The limit on daily borrowing is in line with the
limit set by the Reserve Bank of India.
The merged entity, like ICICI Bank, is required to submit gap analysis on
a monthly basis to the Reserve Bank of India. Pursuant to the Reserve Bank of
India guidelines, the liquidity gap (if negative) must not exceed 20.0% of
outflows in the 1-14 day and the 15-28 day time category.
In line with the guidelines, the Asset-Liability Support Group of the
merged entity prepares fortnightly maturity gap analysis to review its
liquidity position. Static gap analysis is also supplemented by a dynamic
analysis for the short-term, to enable the liability raising units to have a
fair estimate of the short-term funding requirements. In addition, this group
monitors certain liquidity ratios on a fortnightly basis.
141
Capital Expenditure
The following table sets forth, for the periods indicated, the details of
ICICI Bank's capital expenditure.
Year ended March 31,
-------------------------------------------------
2000 2001 2002 2002
----------- ------------ ------------ --------
(in millions)
Premises:
Owned......................... Rs. 132 Rs. 294 Rs. 85 US$ 2
Leasehold..................... 30 289 81 2
----------- ------------ ------------ --------
Total premises................ 162 583 166 4
Computers and accessories..... 248 783 834 17
Other......................... 197 633 420 8
----------- ------------ ------------ --------
Total capital expenditure..... Rs. 607 Rs. 1,999 Rs. 1,420 US$ 29
=========== ============ ============ ========
Capital expenditure decreased 29.0% in fiscal 2002 compared to fiscal 2001
primarily due to a 71.5% decrease in capital expenditure on premises. Other
capital expenditure decreased 33.6% in fiscal 2002 and capital expenditure on
computers and accessories increased 6.5% in fiscal 2002.
Capital expenditure 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 expenditure, including furniture, air-conditioning
and office equipment. The increase was 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 ICICI Bank's existing
offices.
The merged entity plans to spend approximately Rs. 5.1 billion (US$ 104
million) in capital expenditure during fiscal 2003 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.
Significant Changes
No significant changes have occurred to the merged entity since the date
of the fiscal 2002 financial statements of ICICI Bank and ICICI.
Segment Revenues and Assets
ICICI Bank's operations were solely in the financial services industry and
consisted of providing traditional banking services, primarily commercial
lending activities, treasury operations and retail banking activities. ICICI
Bank carried out these activities through offices in India. Effective March 10,
2001, ICICI Bank acquired Bank of Madura Limited, a private sector bank in
India. Immediately following the merger, the results of the Bank of Madura were
being reviewed separately. During fiscal 2002 operations of Bank of Madura were
completely integrated with the operations of ICICI Bank and Bank of Madura was
no longer considered a segment.
Until the financial year ended March 31, 2000, ICICI Bank had been
analyzing its business information and making operating decisions based upon
reviews of the Bank's operations as a whole. However, with continued growth in
business, ICICI Bank reorganized its business in three strategic business
units, namely Retail Banking, Corporate Banking and Treasury. Each of these
strategic business units catered to different segments of customers and offered
different financial products and services. Retail Banking activity included the
mobilizing of funds from retail depositors by offering them a wide range of
financial products and providing services through various channels like
branches, ATMs, internet banking, phone banking and mobile banking. Retail
Banking also offered consumer lending services namely credit cards, loans
against deposits and securities. Corporate Banking provided financial products
and services to corporates, institutions and government
142
organizations. Corporate Banking provided medium and short-term credit, fee and
commission based services (e.g., documentary credits, stand-by letters of
credit and forward contracts.), accepted deposits from corporate customers and
also provided cash management services. The Treasury managed the treasury
operations of ICICI Bank through market operations. It also invested in various
money market instruments, debt instruments, shares and debentures.
The following table sets forth, for the periods indicated, segment-wise
net income of ICICI Bank.
Year ended March 31,
-------------------------------------------------------------------------------
2002/2001
2001 2002 2002 % change
-------------------------------------------------------------------------------
(in millions, except percentages)
Retail Banking segment............... Rs. (521) Rs. 390 US$ 8 -%
Corporate Banking segment............ 1,575 931 19 (40.9)
Treasury segment..................... 206 716 15 247.6
Bank of Madura....................... 48 - - -
-------------------------------------------------------
Total................................ Rs. 1,308 Rs. 2,037 US$ 42 55.7%
=======================================================
The following table sets forth, at the dates indicated, segment-wise
assets of ICICI Bank.
Year ended March 31,
-------------------------------------------------------------------------------
2002/2001
2001 2002 2002 % change
-------------------------------------------------------------------------------
(in millions, except percentages)
Retail Banking segment............... Rs. 32,602 Rs. 73,285 US$ 1,501 124.8%
Corporate Banking segment............ 116,054 126,541 2,591 9.0
Treasury segment..................... 37,944 204,979 4,198 440.2
Bank of Madura....................... 33,938 - - -
-------------------------------------------------------
Total................................ Rs. 220,538 Rs. 404,805 US$ 8,290 83.6%
=======================================================
Retail Banking Segment
The net income for the retail banking segment in fiscal 2002 was Rs. 390
million (US$ 8 million) compared to a net loss of Rs. 521 million (US$ 11
million) in fiscal 2001. The retail banking segment contributed 19.1% of the
total net income in fiscal 2002. The total assets increased 124.8% at year-end
fiscal 2002 to Rs. 73. 3 billion (US$ 1.5 billion) from Rs. 32.6 billion (US$
668 million) at year-end fiscal 2001. Total assets of the retail banking
segment were 18.1% of the total assets at year-end fiscal 2002 compared to
14.8% at year-end fiscal 2001.
Corporate Banking Segment
The net income for the corporate banking segment in fiscal 2002 decreased
40.9% in fiscal 2002 to Rs. 931 million (US$ 19 million) compared to Rs. 1.6
billion (US$ 32 million) in fiscal 2001. The corporate banking segment
contributed 45.7% of the total net income in fiscal 2002. The total assets
increased 9.0% at year-end fiscal 2002 to Rs. 126.5 billion (US$ 2.6 billion)
from Rs. 116.1 billion (US$ 2.4 billion) at year-end fiscal 2001. Total assets
of the corporate banking segment were 31.3% of the total assets at year-end
fiscal 2002 compared to 52.6% at year-end fiscal 2001.
Treasury Segment
The net income for the treasury segment in fiscal 2002 increased 247.6% in
fiscal 2002 to Rs. 716 million (US$ 15 million) compared to Rs. 206 million
(US$ 4 million) in fiscal 2001. The treasury segment contributed 35.1% of the
total net income in fiscal 2002. The total assets increased 440.2% at year-end
fiscal 2002 to Rs. 205.0 billion (US$ 4.2 billion) from Rs. 37.9 billion (US$
777 million) at year-end fiscal 2001. Total assets of the treasury segment were
50.6% of the total assets at year-end fiscal 2002 compared to 17.2% at year-end
fiscal 2001.
143
Related Party Transactions
ICICI Bank entered into transactions with the following related parties:
o affiliates of the ICICI Bank including ICICI;
o its Employees' Provident Fund Trust; and
o directors and employees of the group.
The related party transactions are described below.
Banking Services
ICICI Bank provided banking services to all the related parties on the
same terms that were offered to other customers. The following table sets
forth, for the periods indicated, the revenues earned from these related
parties.
Year ended March 31,
---------------------------------------------------
2002 2001
---------------------------------------------------
(in millions, except US$)
ICICI until the date of amalgamation...... Rs. 29 US$ 593,897 Rs. 45
Other Affiliates.......................... 4 81,917 27
---------------------------------------------------
Total..................................... Rs. 33 US$ 675,814 Rs. 72
===================================================
ICICI Bank paid related parties interest on deposits and borrowings in
call money markets amounting to Rs. 268 million (US$ 5 million) in fiscal 2002
compared to Rs. 203 million (US$ 4 million) in fiscal 2001. ICICI Bank paid no
brokerage to ICICI Brokerage Services in fiscal 2002 as compared to Rs. 1
million (US$ 20,479) in fiscal 2001.
Leasing of Premises and Infrastructural Facilities
ICICI Bank entered into lease agreements with ICICI for lease of certain
premises and infrastructural facilities to ICICI Bank, and paid rent until the
effective date of the amalgamation of Rs. 207 million (US$ 4 million) compared
to Rs. 177 million (US$ 4 million) in fiscal 2001. Similarly, ICICI Bank paid
Rs. 38 million (US$ 778,210) until the effective date of the amalgamation
towards lease rentals on certain equipment leased from ICICI date as compared
to Rs. 16 million (US$ 327,667) for fiscal 2001.
Acquisition of Equipment
ICICI Bank purchased equipment from ICICI and ICICI Infotech Services for
Rs. 11 million (US$ 225,271) in fiscal 2002 as compared to Rs. 99 million (US$
2 million) in fiscal 2001.
Forward Contracts
ICICI Bank entered into foreign exchange forward contracts with ICICI. The
outstanding contracts as on the effective date of the amalgamation in respect
of forward contracts amounted to Rs. 251 million (US$ 5 million) as compared to
Rs. 2.3 billion (US$ 46 million) at year-end fiscal 2001.
Derivative Transactions
ICICI Bank entered into foreign exchange currency swaps and interest rates
swaps with ICICI on a back-to-back basis. The outstanding contracts with ICICI
as on the effective date of the amalgamation in respect of cross currency swaps
amounted to Rs. 2.3 billion (US$ 47 million) compared to Rs. 4.4 billion (US$
89 million) at year-end fiscal 2001 and in respect of interest rate swap
contracts amounted to Rs. 2.7 billion (US$ 55 million). There were no
outstanding interest rate swap contracts with ICICI at year-end fiscal 2001.
ICICI Bank also entered into interest rate swaps
144
with other affiliates on a back-to-back basis. The outstanding contracts with
other affiliates at year-end fiscal 2002 in respect of interest rate swaps
amounted to Rs. 6.1 billion (US$ 124 million) as compared to Rs. 2.9 billion
(US$ 59 million) at year-end fiscal 2001.
Investments in Pass Through Certificates
ICICI Bank invested in certain securities issued by trusts formed by its
affiliate ICICI. The repayment of the principal amount of these certificates
and the payment of periodic interest at predetermined rates were from the
underlying securities held by the trusts transferred to ICICI Bank by ICICI.
The total investments by ICICI Bank in pass through certificates outstanding at
year-end fiscal 2002 were Rs. 9.1 billion (US$ 186 million). ICICI Bank had no
investments in pass through certificates at year-end fiscal 2001.
Repurchase Transactions
ICICI Bank entered into repurchase transactions with ICICI in fiscal 2002.
The amount of such transactions outstanding at year-end fiscal 2002 was Rs.
21.4 billion (US$ 438 million). ICICI Bank had no repurchase transactions
outstanding with ICICI at year-end fiscal 2001.
Expenses for Services Rendered
ICICI Bank paid Rs. 12 million (US$ 245,751) in fiscal 2002 to ICICI for
secondment of its employees compared to Rs. 4 million (US$ 81,917) in fiscal
2001.
ICICI Bank paid Rs. 47 million (US$ 1 million) in fiscal 2002 to ICICI
Personal Financial Services for secondment of its employees. No such amount was
paid in fiscal 2001.
Receipts for Services Rendered
ICICI Bank received Rs. 10 million (US$ 204,792) in fiscal 2002 from ICICI
and ICICI Personal Financial Services compared to Rs. 5 million (US$ 102,396)
in fiscal 2001 for secondment of its employees.
Share Transfer Activities
ICICI Bank paid Rs. 1 million (US$ 20,479) in fiscal 2002 compared to Rs.
3 million (US$ 61,438) in fiscal 2001, to ICICI Infotech Services for share
transfer services provided by them. ICICI Bank paid Rs. 2 million (US$ 40,958)
in fiscal 2002 for dematerialization services provided by ICICI Infotech
compared to Rs. 5 million (US$ 102,396) in fiscal 2001.
Dividend Payments
ICICI Bank declared and paid interim dividend at Rs. 2.00 per equity share
for fiscal 2002, out of which ICICI Bank paid Rs. 407 million (US$ 8 million)
to its affiliates in fiscal 2002 compared to Rs. 184 million (US$ 4 million) in
fiscal 2001.
Other Transactions with Related Parties
ICICI Bank entered into an agreement with ICICI Personal Financial
Services for telephone banking call center services and transaction-processing
services for its credit card related activities and paid Rs. 149 million (US$ 3
million) in fiscal 2002 compared to Rs. 99 million (US$ 2 million) in fiscal
2001.
ICICI Bank advanced concessional loans to employees, bearing interest
ranging from 3.5% to 6.0% per annum. The tenure of these loans ranges from five
to 20 years. The amount outstanding on account of such concessional loans to
employees was Rs. 865 million (US$ 18 million) at year-end fiscal 2002 compared
to Rs. 494 million (US$ 10 million) at year-end fiscal 2001.
145
ICICI undertook a corporate brand building advertising campaign of which
ICICI Bank's share was Rs. 29 million (US$ 593,897) in fiscal 2002 compared to
Rs. 15 million (US$ 307,188) in fiscal 2001.
ICICI set up common technology infrastructure for utilization by the ICICI
group. ICICI Bank paid its share of Rs. 37 million (US$ 757,731) and Rs. 18
million (US$ 368,626) in fiscal 2002 for communication expenses and backbone
infrastructure expenses, respectively. Similarly, it paid Rs. 124 million (US$
3 million) in fiscal 2002, as expenses for development of software and
providing support services by ICICI Infotech Services compared to Rs. 73
million (US$ 2 million) in fiscal 2001.
ICICI Bank paid Rs. 110 million (US$ 2 million) in fiscal 2002 as its
share of the operating costs of the common data center set up by ICICI compared
to Rs. 50 million (US$ 1 million) in fiscal 2001.
ICICI Bank hired the services of ICICI Capital Services for the setting up
of ATMs at various places and paid Rs. 7 million (US$ 143,354) for the above
services in fiscal 2002 compared to Rs. 8 million (US$ 163,834) in fiscal 2001.
ICICI Bank paid Rs. 9 million (US$ 184,313) in fiscal 2002 to ICICI e-Payments
towards payment gateway services rendered to internet merchants acquired by
ICICI Bank compared to Rs. 6 million (US$ 122,875) in fiscal 2001. ICICI Bank
hired the services of ICICI Web Trade for data compilation of the new accounts
acquired by ICICI Bank through its internet channel for which it paid Rs. 10
million (US$ 204,792) in fiscal 2002 compared to Rs. 2 million (US$ 40,958) in
fiscal 2001.
The following table sets forth, at the dates indicated, the balances
pertaining to receivables from and payable to related parties.
----------------------------- ---------------------------------------
ICICI Other Affiliates
----------------------------- ---------------------------------------
At March 31, 2001 (in millions)
Accounts receivable.............. Rs. 38 US$ 0.78 Rs. 17 US$ 0.35
Accounts payable................. 5,209 107 2,847 58
At March 31, 2002
Accounts receivable.............. 24 0.49 1 0.02
Accounts payable................. 4,680 96 893 18
Critical Accounting Policies
The notes to ICICI Bank's financial statements contain a summary of ICICI
Bank's accounting policies. Certain of these policies are considered to be
critical to the portrayal of ICICI Bank's and the merged entity's financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. The policies include valuation of derivatives and securities where
no ready market exists, determining the level of allowance for loan losses and
assessing the recoverability of goodwill and other intangible assets.
Additional information about these policies can be found in Note 1 to
ICICI Bank's financial statements. The statements below contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
See "Forward-Looking Statements".
ICICI Bank's financial statements were prepared in accordance with US
GAAP, which required ICICI Bank to make estimates and assumptions that affected
the reported amounts of assets and liabilities as of the date of the financial
statements and the reported income and expenses during the reported period. The
merged entity's financial statements will also be prepared in accordance with
US GAAP, which will require the merged entity to make similar estimates and
assumptions. ICICI Bank believed that of its significant accounting policies,
the following may have involved a higher degree of judgment and complexity.
146
Valuation of Securities and Derivatives Transactions
The ICICI Bank classified investments in fixed maturities and equity
securities into three categories based upon management's intention at the time
of purchase: securities held to maturity, trading securities and securities
available for sale. Securities that were held principally for resale in the
near term were recorded as trading securities. Trading securities, primarily
debt securities and foreign exchange products, were recorded at fair value with
realized and unrealized gains and losses included in non-interest income. The
fair value of trading securities was based upon quoted market prices or, if
quoted market prices were not available, the value was estimated as follows:
o The fair value of unquoted government of India securities was
estimated based on the yield to maturity rates of these securities,
as published by certain agencies approved by the Reserve Bank of
India.
o The fair value of other unquoted securities (excluding government of
India securities) and preference shares was computed based on a
mark-up over the yield to maturity rates for government of India
securities, as published by certain agencies approved by the Reserve
Bank of India. The mark-up was graded according to the ratings
assigned to the issuer of the securities by the rating agencies.
o The fair value of investments in unquoted mutual fund units was
estimated based on the latest repurchase price declared by the mutual
fund in respect of each particular scheme. If the repurchase price
was not available, the fair value was estimated based on the net
asset value of the respective scheme.
o The fair value of certain derivative contracts was derived from
pricing models that consider market and contractual prices for the
underlying financial instruments, as well as the time value of money,
the yield curve and any other volatility factors underlying the
positions.
Securities held to maturity were carried at cost, adjusted for
amortization of premiums and accretion of discounts. The merged entity no
longer classifies investments in debt securities as held to maturity, due to
the sale of certain held to maturity securities in fiscal 2002 by ICICI. In
fiscal 2002, ICICI sold debt securities classified as held to maturity for Rs.
640 million resulting in a realized gain of Rs. 102 million. As the securities
were sold for reasons other than those specified in SFAS No. 115, all remaining
held to maturity securities were reclassified as available for sale. Subsequent
to the sale, ICICI no longer classified debt securities as held to maturity.
All securities not classified as held to maturity or trading securities
were classified as securities available for sale. These include securities used
as part of the merged entity's asset-liability management strategy, which could
be sold in response to changes in interest rates, prepayment risk, liquidity
needs and similar factors. Securities available for sale were recorded at fair
value with unrealized gains and losses recorded net of tax as a component of
other comprehensive income. The fair value of the securities available for sale
was estimated on a similar basis to that of trading securities.
Changes in the fixed income, equity and foreign exchange markets would
impact the merged entity's estimate of fair value in the future, potentially
affecting principal trading revenues. Similarly, pricing models and their
underlying assumptions impact the amount and timing of unrealized gains and
losses recognized, and the use of different pricing models or assumptions could
produce different financial results.
Allowance for Loan Losses
ICICI Bank's allowance for loan losses represented management's estimate
of probable losses inherent in its loan portfolio. Loan losses deemed
uncollectible by management were charged off
147
against the reserve, while recoveries of amounts previously charged off were
credited to the reserve. Amounts were charged off after giving consideration to
factors such as the customer's financial condition, underlying collateral and
guarantees, and general and industry economic conditions. The allowance for
loan losses reflected management's estimate of probable 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. This evaluation process was subject to numerous estimates
and judgments. The frequency of default, risk ratings, and the loss recovery
rates, among other things, were considered in making this evaluation, as were
the size and diversity of individual large loans. Changes in these estimates
could have a different impact on the provision and could result in a change in
the allowance for loan losses.
Smaller balance homogeneous loans (including credit card receivables) were
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 was
maintained at levels considered adequate by management to also provide for
probable credit losses inherent in these portfolios. The use of different
estimates or assumptions could produce different provisions for smaller balance
homogeneous loan losses.
Goodwill and Intangible Assets
Goodwill and other intangible assets, such as tenancy rights, were assets,
which arose or had been acquired in business combinations. Values were assigned
to the identified intangible assets based on available evidence and were
amortized on a straight line basis over their estimated useful lives.
ICICI Bank assessed the recoverability of goodwill by determining whether
the amortization of its balance over its remaining life could be recovered
through undiscounted future operating cash flows of the acquired operations.
The amount of goodwill impairment, if any, was measured based on projected
discounted future operating cash flows using a discount rate reflecting ICICI
Bank's average cost of funds. The assessment of the recoverability of goodwill
would be impacted if estimated future operating cash flows were not achieved.
As described above, this evaluation process was subject to numerous
estimates and judgments.
Recently Issued Accounting Standards
Business Combination, Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations be accounted for
under a single method, the purchase method. Use of the pooling-of-interest
method is no longer permitted and is not effective for business combinations
initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment and is effective
for fiscal years beginning after December 15, 2001, with earlier application
permitted in certain instances.
The amalgamation was accounted for under SFAS No. 141 and goodwill and
other intangible assets for fiscal 2002 was accounted for in accordance with
SFAS No. 142.
148
Accounting for Asset Retirement Obligations and Impairment of Disposal of
Long-Lived Assets
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged.
In August 2001, the FASB also issued SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in discontinued
operations. Under this standard, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, are to be applied prospectively. Early application is
encouraged.
Based on management's estimates, the merged entity believes that the
adoption of SFAS No. 143 and SFAS No. 144 will not have a significant impact on
the financial statements of the merged entity. The provisions of the new
standards are generally to be applied prospectively.
Accounting for Costs Associated with Exit or Disposal Activities
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
No. 146 addresses significant issues regarding the recognition, measurement and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance that the Emerging Issues Task Force (EITF) has set forth in the
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). The scope of SFAS No. 146 also includes (1) costs related
to terminating a contract that is not a capital lease and (2) termination
benefits that employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The merged entity is currently evaluating the requirements
and impact of this statement on its consolidated results of operations and
financial position.
Others
In April 2002, the FASB issued SFAS No. 145 Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 provides for the rescission of several previously
issued accounting standards, new accounting guidance for the accounting for
certain lease modifications and various technical corrections that are not
substantive in nature to existing pronouncements The merged entity is currently
evaluating the requirements and impact of this statement on its consolidated
results of operations and financial position.
149
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA FOR ICICI
The selected financial and other data for ICICI for and at year-end fiscal
1998, 1999, 2000, 2001 and 2002 have been derived from ICICI's consolidated
financial statements, prepared in accordance with US GAAP. ICICI's consolidated
financial statements have been audited by KPMG, India, independent auditors.
In October 2001, the boards of directors of ICICI and ICICI Bank approved
a plan of combination whereby ICICI Bank acquired ICICI, ICICI Personal
Financial Services and ICICI Capital Services (otherwise referred to in this
annual report as the "amalgamation"). The amalgamation was approved by the
shareholders of ICICI Bank and ICICI at their extraordinary general meetings
held on January 25, 2002 and January 30, 2002, respectively. The amalgamation
was sanctioned by the High Court of Gujarat at Ahmedabad on March 7, 2002 and
by the High Court of Judicature at Bombay on April 11, 2002. The amalgamation
was approved by the Reserve Bank of India on April 26, 2002. The Statement on
Financial Accounting Standards No. 141 on business combinations requires that
business combinations be accounted for in the period in which the combination
is consummated, other than in exceptional circumstances. Accordingly, under US
GAAP, the amalgamation has not been reflected in the financial statements of
ICICI Bank for the year ended March 31, 2002, as it was consummated in April
2002. Under US GAAP, the amalgamation was accounted for as a reverse
acquisition. This means that ICICI was recognized as the accounting acquirer in
the amalgamation, although ICICI Bank was the legal acquirer. The amalgamation
was accounted for by the purchase method to reflect the increase in ownership
interest of ICICI in ICICI Bank from 46.0%, ICICI's ownership interest in ICICI
Bank at the time of the amalgamation, to 100.0%.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation. As ICICI Bank is
the surviving legal entity in the amalgamation, the other subsidiaries and
affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
ICICI continues to exist for accounting purposes as the accounting
acquirer in the amalgamation. This means that ICICI is no longer a reporting
company under the U.S. Securities Exchange Act of 1934, as amended (the
Exchange Act) and is no longer required to file annual reports on Form 20-F
like this annual report; however, in ICICI Bank's annual report on Form 20-F
for fiscal 2003, as a result of the reverse merger accounting, ICICI Bank will
be required to present three years of ICICI's financial statements only.
ICICI's financial statements for fiscal 2003 will reflect the amalgamation, and
ICICI's financial statements for fiscal 2002 and 2001 will reflect the results
of ICICI Bank as an equity investment.
ICICI's consolidated subsidiaries for and at year-end fiscal 2002 and
year-end fiscal 2001 did not include ICICI Bank. Effective March 10, 2001,
ICICI Bank acquired Bank of Madura, an old private sector bank in India, in an
all stock merger and, as a result, the ownership interest of ICICI was reduced
from 62.2% to 55.6%. In addition, during March 2001, ICICI reduced its interest
in ICICI Bank to 46% through sales of equity shares in the Indian secondary
markets to institutional investors. As a result of the foregoing, ICICI Bank
ceased to be one of ICICI's subsidiaries as of March 22, 2001 and was accounted
for under the equity method of accounting from April 1, 2000, the beginning of
the fiscal year in which ICICI's majority ownership interest in ICICI Bank was
deemed to be temporary. ICICI Bank continues to be reported on a consolidated
basis for the years ended March 31, 1998, 1999 and 2000. As a result, ICICI's
financial statements for fiscal 2001 are not strictly comparable with those for
fiscal 2000 and 1999.
You should read the following data with the more detailed information
contained in "Operating and Financial Review and Prospects for ICICI" and
ICICI's consolidated financial statements. You should also read the following
data in light of ICICI Bank's financial information contained in
150
"Operating and Financial Review and Prospects for ICICI Bank" and ICICI Bank's
financial statements in this annual report. Historical results do not
necessarily predict the results in the future.
Year ended March 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002 2002(1)
--------------------------------------------------------------------
(in millions, except per common share data)
Selected income statement data:
Interest revenue.................................. Rs. 54,387 Rs. 70,293 Rs. 79,296 Rs. 79,757 Rs. 78,570 US$ 1,609
Interest expense.................................. (42,431) (58,043) (67,492) (67,892) (69,509) (1,423)
--------------------------------------------------------------------
Net interest revenue.............................. 11,956 12,250 11,804 11,865 9,061 186
Dividends......................................... 553 676 1,502 406 467 10
--------------------------------------------------------------------
Net interest revenue, including dividends......... 12,509 12,926 13,306 12,271 9,528 195
Provisions for loan losses........................ (4,768) (6,067) (6,363) (9,892) (9,743) (200)
--------------------------------------------------------------------
Net interest revenue, including dividends, after
Provisions for loan losses..................... 7,741 6,859 6,943 2,379 (215) (4)
Non-interest revenue, net......................... 5,325 5,560 9,815 9,288 9,450 194
--------------------------------------------------------------------
Net revenue...................................... 13,066 12,419 16,758 11,667 9,235 189
--------------------------------------------------------------------
Non-interest expense.............................. (2,686) (3,795) (5,302) (5,808) (10,275) (210)
Equity in earnings of affiliate................... (9) (34) 20 856 975 20
Minority interest................................. (135) (170) (361) 34 289 6
--------------------------------------------------------------------
Income before taxes............................... 10,236 8,420 11,115 6,749 224 5
Income tax expense................................ (1,446) (1,194) (2,033) (119) (129) (3)
--------------------------------------------------------------------
Net income (before extraordinary items and
cumulative effect of change in accounting
principle, net of tax)......................... 8,790 7,226 9,082 6,630 95 2
Extraordinary items, net of tax(2)................ - 292 - - - -
Cumulative effect of change in accounting
principle, net of tax (3)...................... - - 249 - 1,265 26
--------------------------------------------------------------------
Net income/net income from continuing operations.. Rs. 8,790 Rs. 7,518 Rs. 9,331 Rs. 6,630 Rs. 1,360 US$ 28
====================================================================
Operating revenue (4) ............................ Rs. 59,770 Rs. 76,276 Rs. 90,360 Rs. 89,198 Rs. 88,487 US$ 1,812
====================================================================
Net operating income (5).......................... Rs. 8,430 Rs. 7,330 Rs. 9,377 Rs. 6,602 Rs. 96 US$ 2
====================================================================
Per common share:
Net income/net income from continuing operations--
Basic(6)...................................... Rs. 18.39 Rs. 15.66 Rs. 14.45 Rs. 8.44 Rs. 1.73 US$ 0.03
Net income/net income from continuing operations--
Diluted(7).................................... 15.74 13.52 13.77 8.41 1.73 0.03
Net operating income--basic........................ 17.64 15.27 14.52 8.41 0.12 0.003
Net operating income--diluted...................... 15.11 13.18 13.85 8.38 0.12 0.003
Dividends(8)...................................... 4.50 5.50 5.50 5.50 11.00 0.23
Book value........................................ 68.78 76.06 90.29 96.67 90.61 1.86
Common shares outstanding at end of period
(in millions of common shares)................. 478 480 785 785 785
Weighted average common shares outstanding
--basic (in millions of common shares).......... 478 480 646 785 785
Weighted average common shares outstanding
--diluted (in millions of common shares)........ 575 577 687 785 785
---------
(1) Rupee amounts for fiscal 2002 have been translated into US dollars using
the noon buying rate in effect on March 29, 2002 of Rs. 48.83 = US$ 1.00.
(2) Represents gains from extinguishment of debt, net of tax. In fiscal 1999,
ICICI realized a post-tax gain of Rs. 292 million (US$ 6 million) through
repurchase of certain of ICICI's outstanding foreign currency bonds which
resulted in extinguishment of debt.
(3) Effective April 1, 1999, ICICI changed the method of providing
depreciation on property and equipment from the written down value method
to the straight line method. The cumulative effect of the change
aggregating Rs. 405 million (US$ 8 million), net of the related income tax
effect of Rs. 156 million (US$ 3 million) has been included in the
statement of income for fiscal 2000. In June 2001, the FASB issued SFAS
No. 141, which requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS No. 141 also
specifies the criteria that intangible assets acquired in a purchase
method business combination must be recognized and reported apart from
goodwill, noting that any purchase price allocated to an assembled
workforce may not be accounted separately. As of April 1, 2001, ICICI had
an unamortized deferred credit of Rs. 1,265 million (US$ 26 million)
related to an excess of the fair value of assets acquired over the cost of
acquisition of SCICI. As required by SFAS No. 141, in
151
conjunction with the early adoption of SFAS No. 142, the unamortized
deferred credit as of April 1, 2001, has been written-off and recognized
as the effect of a change in accounting principle.
(4) Represents interest revenue, dividends and non-interest revenue, excluding
effect of business combinations on non-interest revenue of Rs. 253 million
(US$ 5 million) for each of fiscal 1999, 2000 and 2001 and Rs. 495 million
(US$ 10 million) for fiscal 1998.
(5) Represents net income (before extraordinary items and cumulative effect of
change in accounting principle, net of tax), minority interest, effect of
business combinations on non-interest revenue of Rs. 253 million (US$ 5
million) for each of fiscal 1999, 2000 and 2001 and Rs. 495 million (US$
10 million) for fiscal 1998 and effect of business combinations on
non-interest expense of Rs. 187 million (US$ 4 million) for each of fiscal
1999 and 2000, Rs. 259 million (US$ 5 million) for fiscal 2001 and Rs. 290
million (US$ 6 million) for fiscal 2002.
(6) Represents net income before dilutive impact.
(7) Represents net income adjusted for full dilution. All convertible
instruments are assumed to be converted to common shares at the beginning
of the year, at prices that are most advantageous to the holders of these
instruments. All series of convertible instruments are dilutive. For the
purpose of calculating diluted earnings per share, the net income was
adjusted for interest (after tax) on convertible instruments only for the
year ended March 31, 2000 as all convertible bonds were converted/redeemed
during the year ended March 31, 2001. Shares assumed to be issued have
been weighted for the period the convertible instruments are outstanding.
Options to purchase 2,323,750 equity shares, 2,922,500 equity shares and
8,391,250 equity shares granted to employees at a weighted average
exercise price of Rs. 85.5, Rs. 133.4 and Rs. 100.8 were outstanding
during the year ended March 31, 2000, 2001 and 2002, respectively, but
were not included in the computation of diluted earnings per share because
the exercise price of the options was greater than the average market
price of the equity shares during the period. See Note 25 to ICICI's
consolidated financial statements.
(8) In India, dividends for a fiscal year are normally declared and paid in
the following year. The same was true for ICICI until fiscal 2001.
However, in fiscal 2002 the dividend was paid by ICICI as an interim
dividend during fiscal 2002. The dividend per equity share shown above was
based on the total amount of dividends paid out on the equity shares
during the year, exclusive of dividend tax. This was different from the
dividend declared for the year. In US dollars, dividends were US$ 0.09 per
equity share in fiscal 1998 and US$ 0.11 in each of fiscal 1999, 2000 and
2001.
(9) Figures for fiscal 2001 have been reclassified.
152
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of ICICI's average total assets for
the respective period.
Year ended March 31,
-------------------------------------------------
1998 1999 2000 2001 2002
-------------------------------------------------
Selected income statement data:
Interest revenue.............................................. 12.51% 12.24% 11.23% 11.29% 10.51%
Interest expense.............................................. (9.76) (10.11) (9.56) (9.61) (9.30)
-------------------------------------------------
Net interest revenue.......................................... 2.75 2.13 1.67 1.68 1.21
Dividends..................................................... 0.13 0.12 0.21 0.06 0.06
-------------------------------------------------
Net interest revenue, including dividends..................... 2.88 2.25 1.88 1.74 1.27
Provisions for loan losses.................................... (1.10) (1.06) (0.90) (1.40) (1.30)
-------------------------------------------------
Net interest revenue, including dividends, after provisions
for Loan losses............................................. 1.78 1.19 0.98 0.34 (0.03)
Non-interest revenue, net..................................... 1.22 0.97 1.39 1.31 1.27
-------------------------------------------------
Net revenue................................................... 3.00 2.16 2.37 1.65 1.24
Non-interest expense.......................................... (0.62) (0.66) (0.75) (0.82) (1.38)
Equity in earnings of affiliate............................... - (0.01) - 0.12 0.13
Minority interest............................................. (0.03) (0.03) (0.05) - 0.04
-------------------------------------------------
Income before taxes........................................... 2.35 1.46 1.57 0.96 0.03
Income tax expense............................................ (0.33) (0.21) (0.29) (0.02) (0.02)
-------------------------------------------------
Net income (before extraordinary items and cumulative effect
of change in accounting principle, net of tax)............. 2.02 1.25 1.28 0.93 0.01
Extraordinary items and cumulative effect of change in
Accounting principle, net of tax.......................... - 0.05 0.04 - 0.17
-------------------------------------------------
Net income/net income from continuing operations.............. 2.02% 1.30% 1.32% 0.93% 0.18%
=================================================
Operating revenue ............................................ 13.74% 13.28% 12.80% 12.62% 11.84%
=================================================
Net operating income......................................... 1.94% 1.28% 1.33% 0.93% 0.01%
=================================================
At March 31,
-------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002(1)
-------------------------------------------------------------------------
(in millions, except percentages)
Selected balance sheet data:
Total assets........................... Rs. 489,799 Rs. 646,945 Rs. 774,279 Rs. 740,445 Rs. 745,830 US$ 15,274
Securities............................. 14,582 15,041 18,871 20,115 63,025 1,290
Loans, net(2).......................... 377,184 475,106 561,448 602,023 523,601 10,723
Troubled debt restructuring
(restructured loans), net........... 5,210 6,749 10,795 32,309 77,366 1,584
Other impaired loans, net.............. 17,456 23,214 24,240 20,081 33,187 680
Total liabilities...................... 455,476 609,661 699,073 664,027 674,070 13,804
Long-term debt......................... 347,956 435,521 436,320 492,880 511,423 10,474
Deposits............................... 29,295 60,605 96,682 6,072 7,380 151
Redeemable preferred stock(3).......... 3,366 10,897 10,207 698 772 16
Stockholders' equity................... 32,876 36,494 70,908 75,922 71,161 1,457
Common stock .......................... 4,781 4,801 7,832 7,848 7,848 161
Period average(4):
Total assets........................... 434,870 574,198 706,066 706,582 747,479 15,308
Interest-earning assets................ 367,646 500,966 612,452 615,867 643,150 13,171
Loans, net(2).......................... 334,465 430,830 513,421 570,989 591,398 12,111
Total liabilities(5)................... 403,168 538,213 650,794 631,563 671,937 13,761
Interest-bearing liabilities........... 356,489 483,636 583,609 576,474 613,377 12,561
Long-term debt......................... 311,601 383,286 436,718 462,916 504,081 10,323
Stockholders' equity................... Rs. 31,702 Rs. 35,985 Rs. 55,272 Rs. 75,019 Rs. 75,542 US$ 1,547
Profitability:
Net income as a percentage of:
Average total assets................ 2.02% 1.30% 1.32% 0.93% 0.18%
Average stockholders' equity........ 27.73 20.89 16.88 8.84 1.80
Average stockholders' equity
(including redeemable preferred
stock) (6).......................... 27.06 19.26 15.95 8.89 1.88
153
Dividend payout ratio(7)............... 22.3 34.8 28.3 52.9 635.2
Spread(8).............................. 2.89 2.03 1.39 1.17 0.89
Net interest margin(9)................. 3.25 2.44 1.93 1.93 1.41
Cost-to-income ratio(10)............... 15.49 19.79 22.37 26.04 52.61
Cost-to-average assets ratio(11)....... 0.62 0.63 0.72 0.79 1.34
Capital:
Total capital adequacy ratio
for ICICI(12)...................... 13.02 12.46 17.27 14.66 N.A.
Tier 1 capital adequacy ratio
for ICICI(12)....................... 8.78 8.25 11.52 9.65 N.A.
Tier 2 capital adequacy ratio
for ICICI(12)....................... 4.24 4.21 5.75 5.01 N.A.
Average stockholders' equity as a
percentage of average total assets.. 7.29 6.27 7.83 10.62 10.11
Average stockholders' equity
(including redeemable preferred
stock) as a percentage of average
total assets........................ 7.59 7.48 9.30 10.95 10.21
At or for the year ended March 31,
---------------------------------------------
1998 1999 2000 2001 2002
---------------------------------------------
(in percentages)
Asset quality:
Net restructured loans as a percentage of net loans.................. 1.38% 1.42% 1.92% 5.37% 14.78%
Net other impaired loans as a percentage of net loans................ 4.63 4.89 4.32 3.34 6.34
Allowance for loan losses on restructured loans as a percentage of
gross restructured loans ......................................... 45.48 48.76 41.79 26.03 18.64
Allowance for loan losses on other impaired loans as a percentage of
gross other impaired loans........................................ 50.92 48.77 52.07 51.89 34.61
Allowance for loan losses as a percentage of gross loans............. 5.62% 5.66% 5.72% 5.20% 6.54%
---------
(1) Rupee amounts for fiscal 2002 have been translated into US dollars using
the noon buying rate in effect on March 29, 2002 of Rs. 48.83 = US$ 1.00.
(2) Net of allowance for loan losses in respect of restructured and other
impaired loans and allowances for portfolio provisions on non-impaired
lending assets.
(3) In line with the existing regulatory requirements in India, preferred
stock issued by ICICI needs to be compulsorily redeemed within a specified
time period.
(4) For fiscal 1998, 1999, 2000 and 2002 the average balances are the average
of quarterly balances outstanding at the end of March of the previous
fiscal year, June, September, December and March of that fiscal year and
for fiscal 2001, the average balances are the average of quarterly
balances outstanding at the end of June, September, December and March of
that fiscal year.
(5) Represents the average of the quarterly balance of total liabilities and
minority interest.
(6) Represents the ratio of net income plus dividend on redeemable preferred
stock to the sum of average stockholders' equity and average redeemable
preferred stock. Under Indian tax laws, dividend on preferred stock was
not tax deductible.
(7) Represents the ratio of total dividends paid on common stock, exclusive of
dividend distribution tax, as a percentage of net income.
(8) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets was the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(9) Represents the ratio of net interest 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.
(10) Represents the ratio of non-interest expense, excluding amortization of
intangible assets, to the sum of net interest revenue, dividends and
non-interest revenue, excluding the effect of business combinations.
(11) Represents the ratio of non-interest expense, excluding amortization of
intangible assets, to average total assets.
154
(12) ICICI's capital adequacy was computed in accordance with the Reserve Bank
of India guidelines. For fiscal 1998, 1999, 2000 and 2001, the computation
was based on ICICI's unconsolidated financial statements prepared in
accordance with Indian GAAP. Under Indian GAAP, the amalgamation was
accounted for on March 30, 2002, the Appointed Date specified in the
Scheme of Amalgamation. At year-end fiscal 2002, ICICI had ceased to exist
for Indian GAAP reporting purposes, and consequently computation and
reporting of its capital adequacy on a standalone basis at that date were
not required. At December 31, 2001, ICICI's capital adequacy calculated in
accordance with the Reserve Bank of India guidelines and based on its
unconsolidated financial statements prepared in accordance with Indian
GAAP was 14.76%. Using the same basis of calculation, ICICI's Tier I
capital adequacy ratio at December 31, 2001 was 9.42% and its Tier II
capital adequacy ratio was 5.34%. See "Operating and Financial Review and
Prospects for ICICI--Financial Condition--Capital Resources".
155
OPERATING AND FINANCIAL REVIEW AND PROSPECTS FOR ICICI
You should read the following discussion and analysis of ICICI's financial
condition and results of operations together with ICICI's consolidated
financial statements. The following discussion is based on ICICI's audited
financial statements and accompanying notes, which have been prepared in
accordance with US GAAP. You should also read the discussion and analysis of
ICICI Bank's financial condition and results of operation contained in
"Operating and Financial Review and Prospects for ICICI Bank" together with
ICICI Bank's financial statements.
Introduction
Several factors relating to the macroeconomic environment had an impact on
ICICI's results of operations and financial condition for fiscal 2000, 2001 and
2002. For a discussion of these macroeconomic factors, see "Operating and
Financial Review and Prospects for ICICI Bank-Introduction". In addition, for a
meaningful comparison of ICICI's results of operations for these years, you
should analyze the deconsolidation of ICICI Bank and the effect of acquisitions
described below.
Deconsolidation of ICICI Bank
ICICI's consolidated subsidiaries at and for the years ended March 31,
2001 and 2002 did not include ICICI Bank. Effective March 10, 2001, ICICI Bank
acquired Bank of Madura, an old private sector bank in India, in an all stock
merger and, as a result, the ownership interest of ICICI was reduced from 62.2%
to 55.6%. In addition, during March 2001, ICICI reduced its interest in ICICI
Bank to 46.0% through sales of equity shares in the Indian secondary markets to
institutional investors. The sale of shares was made for a consideration of Rs.
3.5 billion (US$ 72 million) and the gain on sale was Rs. 2.0 billion (US$ 41
million) which is included in the statement of income for fiscal 2001. 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 one of ICICI's subsidiaries as
of March 22, 2001 and was accounted for under the equity method of accounting
from April 1, 2000, the beginning of the fiscal year in which ICICI's majority
ownership interest in ICICI Bank was deemed to be temporary. ICICI Bank
continued to be reported on a consolidated basis for the years ended March 31,
2000 and 1999. As a result, ICICI's financial statements for fiscal 2001 are
not strictly comparable with those for fiscal 2000 and 1999.
Effect of Acquisitions
ICICI adopted SFAS No. 142 on April 1, 2001, which resulted in
reclassification of existing goodwill and intangible assets. In fiscal 2002,
ICICI recorded goodwill of Rs. 354 million (US$ 7 million) relating to
acquisitions of certain software services companies of which goodwill of Rs. 70
million (US$ 1 million) had been recorded pending final allocation as of March
31, 2002. The revenues and total assets of the acquired companies were
immaterial to the consolidated results of operations and financial position of
ICICI. Substantially all goodwill at March 31, 2002, related to the software
development and services reporting unit of ICICI. No goodwill impairment loss
had been recorded during fiscal 2002. ICICI had an unidentifiable intangible
asset relating to the personal financial services reporting unit and it was
amortized over its useful life of five years. The balance unamortized asset of
Rs. 290 million (US$ 6 million) at March 31, 2002, will be amortized by the
merged entity in fiscal 2003. See Notes 1 and 17 of ICICI's consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 141, which requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also specifies the criteria that intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase price
allocated to an assembled workforce may not be accounted separately. As of
April 1, 2001, ICICI had an
156
unamortized deferred credit of Rs. 1,265 million (US$ 26 million) related to an
excess of the fair value of assets acquired over the cost of acquisition of
SCICI. As required by SFAS No. 141, in conjunction with the early adoption of
SFAS No. 142, the unamortized deferred credit as of April 1, 2001, has been
written-off and recognized as the effect of a change in accounting principle.
During fiscal 2001, ICICI acquired the following software development and
services companies based in the United States: Ivory International Inc.,
Objects Xperts Inc. and Command Systems Inc. ICICI also acquired Ajax Software
Solutions, a software development company based in India. The business
combinations were accounted for under the purchase method and the revenues and
total assets of the acquired companies were immaterial to ICICI's consolidated
results of operations and financial position for fiscal 2001. The business
combinations resulted in goodwill of Rs. 1.4 billion (US$ 29 million) which was
being amortized over a period of five years. This resulted in an expense of Rs.
52 million (US$ 1 million) for fiscal 2001. In addition, the workforce and
customer relationships of Objects Xperts Inc. valued at Rs. 135 million (US$ 3
million) were being amortized over a period of five years. This resulted in an
expense of Rs. 20 million (US$ 409,584) for fiscal 2001.
Effective April 1, 1998, ICICI acquired Anagram Finance Limited, a
non-bank finance company, principally to support its entry into the retail
asset financing market. The assets of Anagram Finance amounted to Rs. 9.6
billion (US$ 197 million), approximately 2.0% of ICICI's total assets at
year-end fiscal 1998. The business combination was accounted for by the
purchase method and accordingly the consolidated financial statements of ICICI
since fiscal 1999 include the results of operations of Anagram Finance. The
business combination resulted in a goodwill of Rs. 934 million (US$ 19
million), which was being amortized over a period of five years. This resulted
in an expense of Rs. 187 million (US$ 4 million) due to amortization of
goodwill in fiscal 1999, 2000 and 2001. This acquisition also resulted in an
increase in employee and administration expenses in fiscal 1999 because ICICI
was required to record various non-interest expenses and costs of Anagram
Finance from the effective date of acquisition.
Effective April 1, 1997, ICICI acquired ITC Classic Finance Limited, a
non-bank finance company, principally to support its efforts in diversifying
its retail funding base. The assets of ITC Classic Finance amounted to Rs. 14.0
billion (US$ 287 million), approximately 3.7% of ICICI's total assets at
year-end fiscal 1997. The business combination was accounted for by the
purchase method and accordingly the consolidated financial statements since
fiscal 1998 include the results of operations of ITC Classic Finance. The
business combination resulted in negative goodwill of Rs. 10 million (US$
204,792) as the purchase price was less than the fair value of the net assets
acquired. The negative goodwill was set-off against certain non-current,
non-monetary assets. The acquisition also resulted in an increase in employee
and administration expenses in fiscal 1998 because ICICI was required to record
various non-interest expenses and costs of ITC Classic Finance from the
effective date of acquisition.
Effective April 1, 1996, ICICI acquired SCICI Limited, a diversified
financial institution in which ICICI had an existing 19.9% equity interest.
ICICI acquired SCICI principally to benefit from the scale efficiencies of
being a larger entity. The assets of SCICI amounted to Rs. 50.4 billion (US$
1.0 billion), approximately 16.8% of ICICI's total assets at year-end fiscal
1996. The business combination was accounted for by the purchase method and
accordingly the consolidated financial statements since fiscal 1997 include the
results of operations of SCICI. The business combination resulted in negative
goodwill of Rs. 3.1 billion (US$ 63 million) as the purchase price was less
than the fair value of the net assets acquired. Of this amount, Rs. 0.6 billion
(US$ 12 million) was set-off against certain property and equipment and an
amount of Rs. 253 million (US$ 5 million) was accrued to income in each of the
years for fiscal 1997 to fiscal 2001. In addition, in fiscal 1998, income of
Rs. 242 million (US$ 5 million) was accrued from the sale of SCICI's
headquarters building in Mumbai.
157
Results of Operations
In October 2001, the boards of directors of ICICI and ICICI Bank approved
a plan of combination whereby ICICI Bank acquired ICICI, ICICI Personal
Financial Services and ICICI Capital Services (otherwise referred to in this
annual report as the "amalgamation"). The amalgamation was approved by the
shareholders of ICICI Bank and ICICI at their extraordinary general meetings
held on January 25, 2002 and January 30, 2002, respectively. The amalgamation
was sanctioned by the High Court of Gujarat at Ahmedabad on March 7, 2002 and
by the High Court of Judicature at Bombay on April 11, 2002. The amalgamation
was approved by the Reserve Bank of India on April 26, 2002. The Statement on
Financial Accounting Standards No. 141 on business combinations requires that
business combinations be accounted for in the period in which the combination
is consummated, other than in exceptional circumstances. Accordingly, under US
GAAP, the amalgamation has not been reflected in the financial statements of
ICICI Bank for the year ended March 31, 2002, as it was consummated in April
2002. Under US GAAP, the amalgamation was accounted for as a reverse
acquisition. This means that ICICI was recognized as the accounting acquirer in
the amalgamation, although ICICI Bank was the legal acquirer. The amalgamation
was accounted for by the purchase method to reflect the increase in ownership
interest of ICICI in ICICI Bank from 46%, ICICI's ownership interest in ICICI
Bank at the time of the amalgamation, to 100.0%.
Income statement data and balance sheet data for future periods will not
be comparable to ICICI Bank's historical results due to the amalgamation. See
"Unaudited Pro Forma Condensed Consolidated Financial Data for ICICI Bank and
ICICI" for the results of operations and financial condition of ICICI for the
year ended March 31, 2002, reflecting the amalgamation as if it had occurred on
April 1, 2000. ICICI continues to exist for accounting purposes as the
accounting acquirer in the amalgamation. This means that ICICI is no longer a
reporting company under the U.S. Securities Exchange Act of 1934, as amended
(the Exchange Act) and is no longer required to file annual reports on Form
20-F like this annual report; however, in ICICI Bank's annual report on Form
20-F for fiscal 2003, as a result of the reverse merger accounting, ICICI Bank
will be required to present three years of ICICI's financial statements only.
ICICI's financial statements for fiscal 2003 will reflect the amalgamation, and
ICICI's financial statements for fiscal 2002 and 2001 will reflect the results
of ICICI Bank as an equity investment.
The consideration for the amalgamation was in the form of one equity share
of ICICI Bank, par value of Rs. 10 each, issued for two equity shares of ICICI,
par value of Rs. 10 each. The transaction was consummated by issuing
approximately 392 million shares of ICICI Bank to the shareholders of ICICI.
Consequent to the amalgamation, the businesses of ICICI became subject for
the first time to various regulations applicable to banks. These include the
prudential reserve and liquidity requirements, namely the statutory liquidity
ratio under Section 24 of the Banking Regulation Act, 1949, and the cash
reserve ratio under Section 42 of the Reserve Bank of India Act, 1934. The
statutory liquidity ratio is required to be maintained in the form of
government of India securities and other approved securities, while the cash
reserve ratio is required to be maintained in the form of cash balances with
the Reserve Bank of India. At present, the stipulated statutory liquidity ratio
is 25.0% of a bank's net demand and time liabilities in India and the
stipulated cash reserve ratio is 5.0% of a bank's net demand and time
liabilities in India. In addition to the above, the directed lending norms of
Reserve Bank of India require that every bank should extend 40.0% of net bank
credit to certain eligible sectors, which are categorized as "priority sector".
Considering that the advances of ICICI were not subject to the requirement
applicable to banks in respect of priority sector lending, the Reserve Bank of
India directed the merged entity to maintain an additional 10.0% over and above
the requirement of 40.0%, i.e., a total of 50.0% of its net bank credit on the
residual portion of its advances (total advances of the merged entity less
outstanding advances of ICICI at year-end fiscal 2002). Priority sectors are
specific sectors such as agriculture and small-scale industries. This
additional 10.0% priority sector lending requirement will apply until such time
as the aggregate priority sector advances of the merged entity reach a level of
40.0% of the total net bank credit of the
158
merged entity. The Reserve Bank of India's existing instructions on sub-targets
under priority sector lending and eligibility of certain types of
investments/funds for reckoning as priority sector advances will apply to the
merged entity. See "Supervision and Regulation - Directed Lending - Priority
Sector Lending".
Subsequent to the announcement of the amalgamation in October 2001, ICICI
directed all its resources towards meeting the reserve requirements on its
outstanding liabilities following the amalgamation. A large cash balance was
maintained by ICICI towards the end of fiscal 2002 in order to meet the cash
reserve requirement on its outstanding liabilities following the amalgamation.
ICICI restricted its loan disbursements and also securitized and sold down its
loans in the second half of fiscal 2002 to raise additional resources. As a
result, ICICI's net loans decreased 13.0% to Rs. 523.60 billion (US$ 10.7
billion) at year-end fiscal 2002 from Rs. 602.0 billion (US$ 12.3 billion) at
year-end fiscal 2001.
Summary Fiscal 2002 to Fiscal 2001
Net income (before extraordinary items and cumulative effect of change in
accounting principles, net of tax) declined to Rs. 95 million (US$ 2 million)
in fiscal 2002 compared to Rs. 6.6 billion (US$ 136 million) in fiscal 2001
primarily due to lower net interest income, lower fees, commissions and
brokerage and higher non-interest expense. Net income after cumulative effect
of change in accounting principle declined to Rs. 1.4 billion (US$ 28 million)
in fiscal 2002 compared to Rs. 6.6 billion (US$ 136 million). As a result, the
return on average assets for fiscal 2002 declined to 0.18% compared to 0.93% in
fiscal 2001 and the return on average stockholders' equity declined to 1.80% in
fiscal 2002 compared to 8.84% in fiscal 2001.
o Net interest revenue decreased 23.6% to Rs. 9.1 billion (US$ 186
million) in fiscal 2002 from Rs. 11.9 billion (US$ 243 million) in
fiscal 2001 reflecting mainly the following factors:
- an increase of Rs. 40.0 billion (US$ 818 million) or 7.6% in the
average volume of interest-earning rupee assets;
- a decrease of Rs. 12.7 billion (US$ 260 million) or 13.7% in the
average volume of interest-earning foreign currency assets;
- a decrease in ICICI's rupee spread to 0.67% in fiscal 2002 from
0.87% in fiscal 2001; and
- a decrease in ICICI's foreign currency spread to 0.84% in fiscal
2002 from 2.20% in fiscal 2001.
o The spread declined by 28 basis points to 0.89% in fiscal 2002 from
1.17% in fiscal 2001 and net interest margin also decreased to 1.41%
in fiscal 2002 from 1.93% in fiscal 2001.
o Gross restructured loans increased by 117.7% to Rs. 95.1 billion (US$
1.9 million) at year-end fiscal 2002 from Rs. 43.7 billion (US$ 895
million) at year-end fiscal 2001, primarily due to an increase in
restructuring of loans to companies in the textiles, transport
equipment and iron and steel industries. Also, loans previously
categorized as other impaired loans amounting to Rs. 12.5 billion
(US$ 257 million) were restructured during fiscal 2002 and were
re-classified as restructured loans at year-end fiscal 2002. Gross
other impaired loans increased 21.6% to Rs. 50.8 billion (US$ 1.0
billion) at year-end fiscal 2002 from Rs. 41.7 billion (US$ 854
million) at year-end fiscal 2001. As a percentage of net loans, net
restructured loans were 14.8% at year-end fiscal 2002 compared to
5.4% at year-end fiscal 2001 and net other impaired loans were 6.3%
at year-end fiscal 2002 compared to 3.3% in year-end fiscal 2001.
o Non-interest revenue increased marginally by 1.7% in fiscal 2002 to
Rs. 9.5 billion (US$ 194 million), from Rs. 9.3 billion (US$ 190
million) in fiscal 2001. Though there was a significant increase in
trading account revenue, gain on sale of loans, insurance premiums
received and
159
income from software development and services in fiscal 2002, this
was offset by a decline in gain on sale of stock of subsidiaries and
affiliates, an other than temporary diminution on securities
portfolio and a decline in fees, commission and brokerage. In fiscal
2001, non-interest income included a gain on the sale of ICICI's
equity interest in ICICI Bank of Rs. 2.0 billion (US$ 41 million) and
in ICICI Infotech of Rs. 511 million (US$ 10 million).
o Non-interest expense increased 76.9% in fiscal 2002 to Rs. 10.3
billion (US$ 210 million) from Rs. 5.8 billion (US$ 119 million) in
fiscal 2001 primarily due to an increase in employee expenses and
other administrative costs for ICICI Infotech and ICICI Prudential
Life Insurance Company and administrative costs of ICICI. In fiscal
2002, non-interest expenses also included expense on policy holder's
benefits and claims of Rs. 1.4 billion (US$ 28 million), which was in
line with the increase in insurance premiums received in fiscal 2002.
o Provisions for loan losses decreased 1.5% to Rs. 9.7 billion (US$ 200
million) during fiscal 2002 from Rs. 9.9 billion (US$ 203 million) in
fiscal 2001 and reflected a result of management's estimation of the
recoverability of restructured and other impaired loans. ICICI
believed that several loans, which became restructured loans in
fiscal 2002, were essentially to inherently viable projects and
consequently resulted in lower impairment losses during fiscal 2002.
As a result, provisions for loan losses were lower in fiscal 2002
despite the large increase in restructured and other impaired loans.
Provisions for loan losses in fiscal 2002 included Rs. 1.4 billion
(US$ 28 million) of portfolio provisions on non-impaired lending
assets, which were based on ICICI's estimate of the probable losses
inherent in that portfolio. As a percentage of gross impaired loans
at year-end fiscal 2002, provisions for loan losses (excluding
portfolio provisions on non-impaired lending assets) were 5.7% in
fiscal 2002 compared to 11.6% in fiscal 2001. As a percentage of
gross loans at year-end fiscal 2002, the provisions for loan losses
were 1.7% in fiscal 2002 compared to 1.6% in fiscal 2001.
o Total assets increased marginally by 0.7% to Rs. 745.8 billion (US$
15.3 billion) at year-end fiscal 2002 from Rs. 740.4 billion (US$
15.2 billion) at year-end fiscal 2001. The net loans decreased 13.0%
to Rs. 523.60 billion (US$ 10.7 billion) at year-end fiscal 2002 from
Rs. 602.0 billion (US$ 12.3 billion) at year-end fiscal 2001.
Summary Fiscal 2001 to Fiscal 2000
ICICI Bank ceased to be one of ICICI's subsidiaries as of March 22, 2001
and was accounted for under the equity method of accounting from April 1, 2000.
ICICI Bank continued to be reported on a consolidated basis for the years ended
March 31, 2000 and 1999. As a result, ICICI's financial statements for fiscal
2001 are not strictly comparable with those for fiscal 2000 and 1999. See
"--Introduction--Deconsolidation of ICICI Bank".
Net income (before extraordinary items and cumulative effect of change in
accounting policies, net of tax) declined to Rs. 6.6 billion (US$ 136 million)
in fiscal 2001 compared to Rs. 9.1 billion (US$ 186 million) in fiscal 2000
primarily due to higher provisioning for loan losses, lower non-interest income
and higher non-interest expense. As a result, the return on average assets for
fiscal 2001 was 0.93% compared to 1.32% in fiscal 2000 and the return on
average stockholders' equity declined to 8.84% in fiscal 2001 compared to
16.88% in fiscal 2000.
o Net interest revenue increased 0.5% to Rs. 11.9 billion (US$ 243
million) in fiscal 2001 from Rs. 11.8 billion (US$ 242 million) in
fiscal 2000 reflecting mainly the following factors:
- an increase of Rs. 26.6 billion (US$ 544 million) or 5.4% in the
average volume of interest-earning rupee assets;
160
- a decrease of Rs. 23.1 billion (US$ 474 million) or 20.0% in the
average volume of interest-earning foreign currency assets;
- a decrease in ICICI's rupee spread to 0.87% in fiscal 2001 from
1.43% in fiscal 2000; and
- an increase in ICICI's foreign currency spread to 2.20% in
fiscal 2001 from 1.91% in fiscal 2000.
o The spread declined marginally by 22 basis points to 1.17% in fiscal
2001 from 1.39% in fiscal 2000 and net interest margin remained at
1.93% in fiscal 2001 compared to fiscal 2000.
o Gross restructured loans increased by 135.5% to Rs. 43.7 billion (US$
895 million) at year-end fiscal 2001 from Rs. 18.5 billion (US$ 380
million) at year-end fiscal 2000, primarily due to an increase in
restructuring of loans to companies in the textiles and iron and
steel industries. Loans previously categorized as other impaired
loans amounting to Rs. 6.6 billion (US$ 135 million) were
restructured during fiscal 2001 and were re-classified as
restructured loans at year-end fiscal 2001. As a result, gross other
impaired loans decreased 17.5% to Rs. 41.7 billion (US$ 855 million)
at year-end fiscal 2001 from Rs. 50.6 billion (US$ 1.0 billion) at
year-end fiscal 2000. As a percentage of net loans, net restructured
loans were 5.4% at year-end fiscal 2001 compared to 1.9% at year-end
fiscal 2000 and net other impaired loans were 3.3% at year-end fiscal
2001 compared to 4.3% in year-end fiscal 2000.
o Non-interest revenue declined 5.4% in fiscal 2001 to Rs. 9.3 billion
(US$ 190 million) from Rs. 9.8 billion (US$ 201 million) in fiscal
2000 primarily due to the deconsolidation of ICICI Bank. The decline
was primarily due to a decline in trading account revenue, income
from securities transactions and foreign exchange transactions
offset, in part, by an increase in income from fees, commissions and
brokerage and a gain on sale of stock in subsidiaries and affiliates.
If non-interest revenue of ICICI Bank for fiscal 2000 was excluded,
non-interest revenue would have increased to Rs. 9.3 billion (US$ 190
million) in fiscal 2001 from Rs. 8.1 billion (US$ 166 million) in
fiscal 2000.
o Non-interest expense increased 9.5% in fiscal 2001 to Rs. 5.8 billion
(US$ 119 million) from Rs. 5.3 billion (US$ 109 million) in fiscal
2000 primarily due to an increase in employee expense and premises
and equipment expense. If non-interest expense of ICICI Bank for
fiscal 2000 was excluded, non-interest expense would have increased
46.2% to Rs. 5.8 billion (US$ 119 million) in fiscal 2001 from Rs.
4.0 billion (US$ 82 million) in fiscal 2000.
o Provisions for loan losses on restructured and other impaired loans
(collectively referred to as impaired loans) increased 55.5% to Rs.
9.9 billion (US$ 203 million) in fiscal 2001 from Rs. 6.4 billion
(US$ 130 million) in fiscal 2000 primarily due to an increase in
gross restructured loans during fiscal 2001.
o Total assets decreased 4.4% to Rs. 740.4 billion (US$ 15.2 billion)
at year-end fiscal 2001 from Rs. 774.3 billion (US$ 15.9 billion) at
year-end fiscal 2000. However, if total assets of ICICI Bank at
year-end fiscal 2000 were excluded, total assets would have increased
15.2% to Rs. 740.4 billion (US$ 15.2 billion) at year-end fiscal 2001
compared to Rs. 642.9 billion (US$ 13.2 billion) at year-end fiscal
2000.
o ICICI's total capital adequacy ratio, computed in accordance with the
Reserve Bank of India guidelines and based on ICICI's unconsolidated
financial statements prepared in accordance with Indian GAAP, was
14.66% at year-end fiscal 2001. The Tier 1 capital adequacy ratio was
9.65% and the Tier 2 capital adequacy ratio was 5.01% at year-end
fiscal 2001. ICICI's total capital adequacy ratio, computed under the
applicable Reserve Bank of India guidelines and based on ICICI's
consolidated financial statements prepared in accordance with US
GAAP, was 14.03% at year-end fiscal 2001. Using the same basis for
calculation, the Tier 1
161
capital adequacy ratio was 9.35% and the Tier 2 capital adequacy
ratio was 4.68% at year-end fiscal 2001.
Average Balance Sheet
For fiscal 2000 and 2002, the average balances are the average of
quarterly balances outstanding at the end of March of the previous fiscal year,
June, September, December and March of that fiscal year and for fiscal 2001,
the average balances are the average of quarterly balances outstanding at the
end of June, September, December and March of that fiscal year. The amortized
portion of loan origination fees (net of loan origination costs) was 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 was the ratio of interest expense to average
interest-bearing liabilities. The average balances of loans include impaired
loans and are net of allowance for loan losses that have been allocated on a
pro-rata basis to rupee loans and foreign currency loans, based on the
proportion of impaired rupee loans and impaired foreign currency loans. ICICI
did not recalculate tax-exempt income on a tax-equivalent basis because it
believed that the effect of doing so would not be significant. Total interest
revenue also includes other interest revenue which was primarily interest on
refund of income tax.
The following table sets forth, for the periods indicated, the average
balances of ICICI's assets and liabilities outstanding, which are major
components of interest revenue, interest expense and net interest revenue. The
average balances of loans include impaired loans and are net of allowance for
loan losses.
Year ended March 31,
-----------------------------------------------------------------------------------------
2000 2001 2002
-----------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average revenue/ yield/ Average revenue/ yield/ Average revenue/ yield/
balance expense cost balance expense cost balance expense cost
-----------------------------------------------------------------------------------------
Assets: (in millions, except percentages)
Cash, cash equivalents and
Trading assets:
Rupee...................... Rs. 61,375 Rs. 7,962 12.97% Rs. 30,082 Rs. 3,179 10.57% Rs. 28,634 Rs. 1,882 6.57%
Foreign currency........... 33,361 1,418 4.25 13,136 567 4.32 9,422 200 2.12
-------------------- -------------------- --------------------
Total cash, cash equivalents
and Trading assets......... 94,736 9,380 9.90 43,218 3,746 8.67 38,056 2,082 5.47
Securities--debt:
Rupee...................... 4,295 420 9.78 1,660 154 9.28 13,696 1,151 8.40
Foreign currency........... - - - - - - - - -
-------------------- -------------------- --------------------
Total securities--debt........ 4,295 420 9.78 1,660 154 9.28 13,696 1,151 8.40
Loans, net:
Rupee...................... 431,313 62,016 14.38 491,792 67,494 13.72 521,168 69,725 13.38
Foreign currency........... 82,108 7,322 8.92 79,197 7,778 9.82 70,230 5,512 7.85
-------------------- -------------------- --------------------
Total loans, net............. 513,421 69,338 13.51 570,989 75,272 13.18 591,398 75,237 12.72
Other interest income........ - 158 - - 584 - - 100 -
Interest-earning assets:
Rupee...................... 496,983 70,556 14.20 523,534 71,412 13.64 563,498 72,858 12.93
Foreign currency........... 115,469 8,740 7.57 92,333 8,345 9.04 79,652 5,712 7.17
-------------------- -------------------- --------------------
Total interest-earning assets. 612,452 79,296 12.95 615,867 79,757 12.95 643,150 78,570 12.22
Securities--equity:
Rupee...................... 14,419 1,502 10.42 24,722 406 1.64 30,119 467 1.55
Foreign currency........... - - - - - - - - -
-------------------- -------------------- --------------------
Total securities--equity...... 14,419 1,502 10.42 24,722 406 1.64 30,119 467 1.55
Earning assets:
Rupee...................... 511,402 72,058 14.09 548,256 71,818 13.10 593,617 73,325 12.35
Foreign currency........... 115,469 8,740 7.57 92,333 8,345 9.04 79,652 5,712 7.17
-------------------- -------------------- --------------------
Total earning assets......... 626,871 80,798 12.89 640,589 80,163 12.51 673,269 79,037 11.74
Cash and cash equivalents.... 16,653 3,914 6,775
162
Acceptances.................. 11,224 4,048 3,552
Property and equipment....... 9,352 11,787 13,771
Other assets................. 41,966 46,244 50,112
Total non-earning assets..... 79,195 65,993 74,210
-------------------- -------------------- -------------------
Total assets................. Rs.706,066 80,798 Rs.706,582 80,163 Rs.747,479 79,037
==================== ==================== ===================
Year ended March 31,
-----------------------------------------------------------------------------------------
2000 2001 2002
-----------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average revenue/ yield/ Average revenue/ yield/ Average revenue/ yield/
balance expense cost balance expense cost balance expense cost
-----------------------------------------------------------------------------------------
Liabilities: (in millions, except percentages)
Savings account deposits:
Rupee.................Rs. 3,530 Rs. 118 3.34% Rs. - Rs. - -% Rs. - Rs. - -%
Foreign currency...... - - - - - - - - -
-------------------- -------------------- ----------------------
Total savings account
Deposits.............. 3,530 118 3.34 - - - - - -
Time deposits:
Rupee................. 61,252 5,828 9.51 3,682 490 13.31 6,618 744 11.24
Foreign currency...... 3,056 158 5.15 - - - - - -
Total time deposits..... 64,308 5,986 9.31 3,682 490 13.31 6,618 744 11.24
-------------------- -------------------- ----------------------
Long-term debt:
Rupee................. 340,461 46,277 13.59 373,603 50,337 13.47 424,723 54,387 12.81
Foreign currency...... 96,257 5,467 5.68 89,313 6,249 7.00 79,358 5,337 6.72
-------------------- -------------------- ----------------------
Total long-term debt.... 436,718 51,744 11.85 462,916 56,586 12.22 504,081 59,724 11.85
Redeemable preferred
Stock................. 10,427 1,149 11.02 2,321 244 10.51 735 74 10.07
Trading account and
other Liabilities:
Rupee................. 68,626 8,495 12.38 100,569 10,229 10.17 85,056 8,206 9.65
Foreign currency...... - - - 6,986 343 4.91 16,888 761 4.50
-------------------- -------------------- ----------------------
Total trading account
and Other liabilities. 68,626 8,495 12.38 107,555 10,572 9.83 101,944 8,967 8.80
Interest-bearing
liabilities:
Rupee................. 484,296 61,867 12.77 480,175 61,300 12.77 517,132 63,412 12.26
Foreign currency...... 99,313 5,625 5.66 96,299 6,592 6.84 96,246 6,097 6.34
-------------------- -------------------- ----------------------
Total interest-bearing
Liabilities........... 583,609 67,492 11.56 576,474 67,892 11.78 613,378 69,509 11.33
Non-interest-bearing
Deposits:
Rupee................. 7,180 - -
Foreign currency...... 263 - -
------------ -----------
Total non-interest-
bearing Deposits...... 7,443 - -
Other liabilities....... 59,742 55,089 58,560
------------ ----------- -----------
Total non-interest-
bearing Liabilities... 67,185 55,089 58,560
--------------------- -------------------- ----------------------
Total liabilities.......Rs. 650,794 Rs.67,492 Rs. 631,563 Rs.67,892 Rs. 671,938 Rs. 69,509
===================== ===================== ======================
Stockholders' equity....Rs. 55,272 Rs. 75,019 Rs. 75,541
----------- ----------- -----------
Total liabilities and
Stockholders' equity..Rs. 706,066 Rs. 706,582 Rs.747,479
============ ============ ==========
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 ICICI's net interest revenue. 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.
163
Fiscal 2001 vs. Fiscal 2000 Fiscal 2002 vs. Fiscal 2001
-------------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------------------------------------------------------------
Net change Change in Change in Net change Change in Change in
average average average average
volume rate volume rate
-------------------------------------------------------------------------------
(in millions)
Interest revenue:
Cash, cash equivalents and trading
assets:
Rupee............................... Rs. (4,783) Rs. (3,307) Rs. (1,476) Rs. (1,297) (95) (1,202)
Foreign currency.................... (851) (873) 22 (367) (79) (288)
---------- ---------- ---------- ---------- --- ------
Total cash, cash equivalents and trading
assets................................ (5,634) (4,180) (1,454) (1,664) (174) (1,490)
Securities:
Rupee............................... (266) (244) (22) 997 1,012 (15)
Foreign currency.................... -- -- -- -- -- --
----------------------------------------------------------------------------
Total securities........................ (266) (244) (22) 997 1,012 (15)
Loans:
Rupee............................... 5,478 8,300 (2,822) 2,231 3,930 (1,699)
Foreign currency.................... 456 (286) 742 (2,266) (704) (1,562)
----------------------------------------------------------------------------
Total loans............................. 5,934 8,014 (2,080) (35) 3,226 (3,261)
Other interest revenue.................. 427 427 -- (485) (485) --
----------------------------------------------------------------------------
Total interest revenue:
Rupee............................... 856 5,176 (4,320) 1,446 4,362 (2,916)
Foreign currency.................... (395) (1,159) 764 (2,633) (783) (1,850)
----------------------------------------------------------------------------
Total interest revenue.................. Rs. 461 Rs. 4,017 Rs. (3,556) Rs. (1,187) Rs. 3,579 Rs. (4,766)
============================================================================
Interest expense:
Savings account deposits:
Rupee............................... Rs. (118) Rs. (118) Rs. -- Rs. -- Rs. -- Rs. --
Foreign currency.................... -- -- -- -- -- --
----------------------------------------------------------------------------
Total savings account deposits.......... (118) (118) -- -- -- --
Time deposits:
Rupee............................... (5,338) (7,661) 2,323 254 330 (76)
Foreign currency.................... (158) (158) -- -- -- --
----------------------------------------------------------------------------
Total time deposits..................... (5,496) (7,819) 2,323 254 330 (76)
Long-term debt:
Rupee............................... 4,060 4,465 (405) 4,050 6,546 (2,496)
Foreign currency.................... 782 (486) 1,268 (912) (669) (243)
----------------------------------------------------------------------------
Total long-term debt.................... 4,842 3,979 863 3,138 5,877 (2,739)
Redeemable preferred stock(1)........... (905) (852) (53) (170) (160) (10)
Trading account and other liabilities:
Rupee............................... 1,734 3,249 (1,515) (2,023) (1,497) (526)
Foreign currency.................... 343 343 -- 418 446 (28)
----------------------------------------------------------------------------
Total trading account and other
liabilities............................. 2,077 3,592 (1,515) (1,605) (1,051) (554)
Total interest expense:
Rupee............................... (567) (917) 350 2,111 5,219 (3,108)
Foreign currency.................... 967 (301) 1,268 (494) (223) (271)
----------------------------------------------------------------------------
Total interest expense.................. Rs. 400 Rs. (1218) Rs. 1,618 Rs. 1,617 Rs. 4,996 Rs. (3,379)
============================================================================
Net interest revenue:
Rupee............................... 1,423 6,093 (4,670) (665) (858) 193
Foreign currency.................... (1,362) (858) (504) (2,138) (559) (1,579)
============================================================================
Total net interest revenue.............. Rs. 61 Rs. 5,235 Rs. (5,174) Rs. (2,803) Rs. (1,417) Rs. (1,386)
============================================================================
----------------------
(1) In line with the existing regulatory requirements in India, preferred
stock issued by ICICI needed to be compulsorily redeemed within a
specified time period. Accordingly, all series of preferred stock issued
by ICICI were redeemable in accordance with the terms of the issue.
Yields, Spreads and Margins
The following table sets forth, for the periods indicated, the yields,
spreads and net interest margins on ICICI's interest-earning assets.
164
Year ended March 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------------------------------------------------------------------
(in millions, except percentages)
Interest revenue.................................... Rs. 54,387 Rs. 70,293 Rs. 79,296 Rs. 79,757 Rs. 78,570
Average interest-earning assets..................... 367,646 500,966 612,452 615,867 643,150
Interest expense.................................... 42,431 58,043 67,492 67,892 69,509
Average interest-bearing liabilities................ 356,489 483,636 583,609 576,474 613,377
Average total assets................................ 434,870 574,198 706,066 706,582 747,479
Average interest-earning assets as a percentage of
average total assets............................. 84.54% 87.25% 86.74% 87.16% 86.04%
Average interest-bearing liabilities as a percentage
of average total assets......................... 81.98 84.23 82.66 81.59 82.10
Average interest-earning assets as a percentage of
average Interest-bearing liabilities................ 103.13 103.58 104.94 106.83 104.9
Yield............................................... 14.79 14.03 12.95 12.95 12.22
Rupee............................................ 16.74 15.67 14.20 13.64 12.93
Foreign currency................................. 9.23 8.63 7.57 9.04 7.17
Cost of funds....................................... 11.90 12.00 11.56 11.78 11.33
Rupee............................................ 13.98 13.64 12.77 12.77 12.26
Foreign currency................................. 6.42 6.07 5.66 6.84 6.34
Spread(1)........................................... 2.89 2.03 1.39 1.17 0.89
Rupee............................................ 2.76 2.03 1.43 0.87 0.67
Foreign currency................................. 2.81 2.56 1.91 2.20 0.83
Net interest margin(2).............................. 3.25 2.44 1.93 1.93 1.41
Rupee............................................ 3.46 2.23 1.75 1.93 1.68
Foreign currency................................. 2.65 3.16 2.70 1.90 (0.48)
------------------
(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.
(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.
Net Interest Revenue
The following table sets forth, for the periods indicated, the principal
components of ICICI's net interest revenue, excluding income from dividends.
Year ended March 31,
--------------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 % change
--------------------------------------------------------------------------
(in millions, except percentages)
Interest revenue................. Rs. 79,296 Rs. 79,757 0.6% Rs. 78,570 US$ 1,609 (1.5)%
Interest expense................. (67,492) (67,892) 0.6 (69,509) (1,423) 2.4
--------------------------- -----------------------
Net interest revenue............. Rs. 11,804 Rs. 11,865 0.5% Rs. 9,061 US$ 186 (23.6)%
=========================== =======================
Fiscal 2002 compared to Fiscal 2001
Net interest revenue decreased 23.6% in fiscal 2002 compared to fiscal
2001 reflecting mainly the following:
o an increase of Rs. 40.0 billion (US$ 818 million) or 7.6% in the
average volume of interest-earning rupee assets;
o a decrease of Rs. 12.7 billion (US$ 260 million) or 13.7% in the
average volume of interest-earning foreign currency assets;
165
o a decrease in ICICI's rupee spread to 0.67% in fiscal 2002 from 0.87%
in fiscal 2001; and to a decrease in ICICI's foreign currency spread
to 0.83% in fiscal 2002 from 2.20% in fiscal 2001.
The average volume of rupee loans increased by Rs. 29.4 billion (US$ 602
million) or 6.0% to Rs. 521.2 billion (US$ 10.7 billion) at year-end fiscal
2002 from Rs. 491.8 billion (US$ 10.1 billion) at year-end fiscal 2001. This
increase in average loans was principally due to increased disbursements of
retail finance loans in fiscal 2002. Gross retail finance loans at year-end
fiscal 2002 increased 168.5% to Rs. 72.8 billion (US$ 1.5 billion) from Rs.
27.1 billion (US$ 555 million) at year-end fiscal 2001. This increase in retail
loans was offset by securitization and sale of corporate loans in the second
half of fiscal 2002 to raise resources to meet reserve requirements on ICICI's
outstanding liabilities. As a result, ICICI's project finance and working
capital finance loans decreased 18.5% to Rs. 452.8 billion (US$ 9.3 billion) at
year-end fiscal 2002 compared to Rs. 555.8 billion (US$ 11.4 million) at
year-end fiscal 2001. The gross rupee loans at year-end fiscal 2002 declined
11.1% to Rs. 488.0 billion (US$ 10.0 billion) compared to Rs. 549.2 billion
(US$ 11.2 billion) at year-end fiscal 2001 and gross foreign currency loans
declined 15.9% to Rs. 72.2 billion (US$ 1.5 billion) compared to Rs. 85.9
billion (US$ 1.8 billion) at year-end fiscal 2001. The average volume of
foreign currency loans decreased to Rs. 70.2 billion (US$ 1.4 billion) in
fiscal 2002 from Rs. 79.2 billion (US$ 1.6 billion) in fiscal 2001.
Cash, cash equivalents and trading assets increased by 68.7% to Rs. 84.1
billion (US$ 1.7 billion) at year-end fiscal 2002 from Rs. 49.9 billion (US$
1.0 billion) at year-end fiscal 2001 as ICICI maintained larger cash balances
at year-end fiscal 2002 to have resources to comply with the reserve
requirements on ICICI's liabilities following the amalgamation. The average
volume of cash, cash equivalents and trading assets declined 11.9% in fiscal
2002 to Rs. 38.1 billion (US$ 780 million) compared to fiscal 2001 as the
average balance considered was only the average of quarterly balances
outstanding at the end of March of the previous fiscal year and June,
September, December and March of fiscal 2002 and not an average of daily
balances.
The spread declined by 29 basis points to 0.88% in fiscal 2002 from 1.17%
in fiscal 2001 as ICICI's rupee spread decreased by 20 basis points and ICICI's
foreign currency spread decreased by 137 basis points. Net interest margin
decreased by 52 basis points to 1.41% in fiscal 2002 from 1.93% in fiscal 2001.
This was primarily due to the decrease in spread and the average
interest-earning assets as a percentage of average interest-bearing liabilities
to 104.9% in fiscal 2002 from 106.8% in fiscal 2001.
The yield on interest-earning rupee assets decreased 71 basis points to
12.93% in fiscal 2002 from 13.64% in fiscal 2001 principally due to non-accrual
of income on loans recognized as impaired during the year, a decline in yield
on cash, cash equivalents and trading assets and a general decline in the
interest rates during fiscal 2002. The decline in yield on loans due to
non-accrual was offset by interest income of Rs. 3.3 billion (US$ 67 million)
which was recognized on impaired loans on a cash basis in fiscal 2002 compared
to Rs. 2.0 billion (US$ 41 million) in fiscal 2001. The average cost of ICICI's
rupee liabilities decreased 51 basis points to 12.26% in fiscal 2002 from
12.77% in fiscal 2001 in line with the general decline in interest rates in
fiscal 2002. While the average cost of long-term rupee debt decreased to 12.81%
from 13.47%, the average cost of short-term rupee borrowings declined to 9.65%
in fiscal 2002 from 10.17% in fiscal 2001. Though there was a decline in the
average cost, the decline in yield was higher, resulting in a decline in the
rupee spread by 20 basis points to 0.67% in fiscal 2002 from 0.87% in fiscal
2001.
ICICI's foreign currency loans were primarily floating rate US dollar
LIBOR-linked loans. The yield on ICICI's interest-earning foreign currency
assets decreased 187 basis points to 7.17% in fiscal 2002 from 9.04% in fiscal
2001, principally due to a decrease in LIBOR during fiscal 2002. The average
cost of ICICI's foreign currency liabilities decreased 50 basis points to 6.34%
in fiscal 2002 from 6.84% in fiscal 2001. The decrease in average cost of
foreign currency liabilities was significantly lower than the decrease in LIBOR
during fiscal 2002, since ICICI had swapped some of
166
its foreign currency liabilities to generate rupee funds for lending in rupees
during fiscal 2001 and fiscal 2002. The foreign currency interest expense
included forward premium expenses paid on forward contracts booked on ICICI's
foreign currency borrowings. The amount of foreign currency liabilities swapped
into rupee funds was significantly higher in fiscal 2002 compared to fiscal
2001, resulting in a higher expense of Rs. 1.7 billion (US$ 35 million)
compared to Rs. 549 million (US$ 11 million) in fiscal 2001. This additional
cost impacted the foreign currency spread by 120 basis points. As a result of
the foregoing, the foreign currency spread decreased 137 basis points to 0.83%
in fiscal 2002 from 2.20% in fiscal 2001. The adverse impact on the foreign
currency net interest margin, which was negative for fiscal 2002, was offset by
the rupee yield (which was higher than the foreign currency yield) earned on
the rupee assets created out of the swapped foreign currency liabilities.
In fiscal 2002, ICICI earned other interest income of Rs. 100 million (US$
2 million) compared to Rs. 584 million (US$ 12 million) in fiscal 2001. Other
interest income in fiscal 2001 included an amount of Rs. 470 million (US$ 10
million) of interest on income-tax refund, which was not there in fiscal 2002.
ICICI's net interest revenue continued to be primarily attributable to
ICICI's project financing activities. Investment banking represented a very
small proportion of total revenue. See Note 26 to ICICI's consolidated
financial statements. As a result, investment banking did not have a material
impact on spreads and ICICI did not expect this situation to change in the near
term.
Fiscal 2001 compared to Fiscal 2000
Net interest revenue increased 0.5% in fiscal 2001 compared to fiscal 2000
reflecting mainly the following:
o an increase of Rs. 26.6 billion (US$ 544 million) or 5.4% in the
average volume of interest-earning rupee assets;
o a decrease of Rs. 23.1 billion (US$ 474 million) or 20.0% in the
average volume of interest-earning foreign currency assets;
o a decrease in ICICI's rupee spread to 0.87% in fiscal 2001 from 1.43%
in fiscal 2000; and to an increase in ICICI's foreign currency spread
to 2.20% in fiscal 2001 from 1.91% in fiscal 2000.
The average volume of rupee loans increased by Rs. 60.5 billion (US$ 1.2
billion) or 14.0% to Rs. 491.8 billion (US$ 10.1 billion) in fiscal 2001 from
Rs. 431.3 billion (US$ 8.8 billion) in fiscal 2000. ICICI's average rupee loans
increased significantly in fiscal 2001 over fiscal 2000 thereby off-setting the
decline in average rupee loans due to the deconsolidation of ICICI Bank as of
April 1, 2000. This increase in average loans was principally due to increased
disbursements of corporate finance loans in fiscal 2001, through ICICI's
increased offerings of customized products and retail finance products to
ICICI's clients. ICICI's disbursements of corporate finance increased to Rs.
221.3 billion (US$ 4.5billion) in fiscal 2001 from Rs. 181.2 billion (US$ 3.7
billion) in fiscal 2000. Retail finance disbursements increased 388.9% to Rs.
34.6 billion (US$ 709 million) in fiscal 2001 from Rs. 7.1 billion (US$ 145
million) in fiscal 2000. The decrease in the average volume of foreign currency
loans to Rs. 79.2 billion (US$ 1.6 billion) in fiscal 2001 from Rs. 82.1
billion (US$ 1.7 billion) in fiscal 2000 was primarily due to reduced demand
from ICICI's customers.
The average volume of cash, cash equivalents and trading assets declined
54.4% in fiscal 2001 to Rs. 43.2 billion (US$ 885 million) compared to fiscal
2000 primarily due to the deconsolidation of ICICI Bank as of April 1, 2000.
ICICI Bank was statutorily required to maintain a specified percentage of its
demand and time liabilities, excluding specified liabilities, by way of a cash
reserve with the Reserve Bank of India. If ICICI excluded the average cash,
cash equivalents and trading assets of ICICI Bank in fiscal 2000, the average
volume of cash, cash equivalents and trading assets would have decreased by
31.3% to Rs. 43.2 billion (US$ 885 million) in fiscal 2001 from Rs. 62.9
167
billion (US$ 1.3 billion) in fiscal 2000. Further, ICICI maintained a low level
of trading assets due to limited capital market opportunities in fiscal 2001.
The spread declined by 22 basis points to 1.17% in fiscal 2001 from 1.39%
in fiscal 2000 as ICICI's rupee spread decreased by 56 basis points and ICICI's
foreign currency spread increased by 29 basis points. Net interest margin
remained the same at 1.93% in fiscal 2002 compared to fiscal 2001.
The yield on interest-earning rupee assets decreased 56 basis points to
13.64% in fiscal 2001 from 14.20% in fiscal 2000 principally due to ICICI's
continued focus on lower risk corporate finance loans to highly-rated clients
resulting in lower credit spreads, an increase in impaired rupee loans, a
decline in yield on cash, cash equivalents and trading assets and a general
decline in the interest rates during fiscal 2001. The increase in impaired
loans lowered ICICI's yield because interest on these loans did not continue to
accrue. The decline in yield in fiscal 2001 was partially offset by the
deconsolidation of ICICI Bank. ICICI Bank earned lower yields on
interest-earning assets than ICICI. The average cost of ICICI's rupee
liabilities remained at 12.77% in fiscal 2001, despite the lower borrowing
costs in fiscal 2001 compared to fiscal 2000 primarily due to the
deconsolidation of ICICI Bank, whose average cost of interest-bearing
liabilities was substantially lower than that of ICICI. As a commercial bank,
ICICI Bank was permitted to raise low-cost demand deposits, unlike ICICI. While
the average cost of long-term rupee debt decreased to 13.47%, the average cost
of short-term rupee borrowings declined to 10.17% in fiscal 2001 from 12.38% in
fiscal 2000. As a result, the rupee spread decreased 56 basis points to 0.87%
in fiscal 2001 from 1.43% in fiscal 2000.
Yield on ICICI's interest-earning foreign currency assets increased 147
basis points to 9.04% in fiscal 2001 from 7.57% in fiscal 2000 principally due
to an increase in LIBOR during fiscal 2001 and a 60.6% decline in the average
balance of foreign currency cash and cash equivalents which earn a lower yield.
The average cost of ICICI's foreign currency liabilities increased 118 basis
points to 6.84% in fiscal 2001 from 5.66% in fiscal 2000 primarily due to an
increase in LIBOR during fiscal 2001. Also the foreign currency interest
expense included forward premium expenses paid on forward contracts booked on
ICICI's foreign currency borrowings of Rs. 549 million (US$ 11 million). As a
result, the foreign currency spread increased 29 basis points to 2.20% in
fiscal 2001 from 1.91% in fiscal 2000.
Provisions for Loan Losses
The following table sets forth, at the dates indicated, certain
information regarding ICICI's restructured and other impaired loans.
At March 31,
---------------------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 % change
---------------------------------------------------------------------------------
(in millions except percentages)
Gross restructured loans........................... Rs. 18,546 Rs. 43,681 135.5% Rs. 95,088 US$ 1,947 117.7%
Allowance for loan losses on restructured loans.... (7,751) (11,372) 46.7 (17,722) (363) 55.8
--------------------------- ---------------------------
Net restructured loans............................. 10,795 32,309 199.3 77,366 1,584 139.5
--------------------------- ---------------------------
Gross other impaired loans......................... 50,574 41,744 (17.5) 50,754 1,039 21.6
Allowance for loan losses on other impaired loans... (26,334) (21,663) (17.7) (17,567) (360) (18.9)
--------------------------- ---------------------------
Net other impaired loans........................... 24,240 20,081 (17.2) 33,187 680 65.3
--------------------------- ---------------------------
Gross impaired loans............................... 69,120 85,425 23.6 145,842 2,987 70.7
Allowance for loan losses (1)...................... (34,085) (33,035) (3.1) (35,289) (723) 6.8
--------------------------- ---------------------------
Net impaired loans................................. 35,035 52,390 49.5 110,553 2,264 111.0
=========================== ===========================
Gross total loans.................................. 595,533 635,058 6.6 560,248 11,473 (11.8)
Net total loans.................................... 561,448 602,023 7.2 523,601 10,723 (13.0)
Gross restructured loans as a percentage of gross
loans................................................ 3.11% 6.88% 16.97%
168
Gross other impaired loans as a percentage of
gross loans.......................................... 8.49% 6.57 9.06
Net restructured loans as a percentage of net
loans................................................ 1.92 5.37 14.78
Net other impaired loans as a percentage of net
loans................................................ 4.32 3.34 6.34
Allowance for loan losses on restructured loans
as a percentage of gross restructured
loans....... 41.79 26.03 18.64
Allowance for loan losses on other impaired loans
as a percentage of gross other impaired loans........ 52.07 51.89 34.61
Allowance for loan losses as a percentage of
gross loans....................................... 5.72 5.20 6.54
-------------------
(1) Does not include portfolio provisions on non-impaired lending assets of
Rs. 1.4 billion (US$ 28 million) at March 31, 2002.
The following table sets forth, for the periods indicated, certain
information regarding ICICI's provisions for loan losses.
Year ended March 31,
-------------------------------------------------------------------------
2001/ 2000 2002/2001
2000 2001 % change 2002 %change
-------------------------------------------------------------------------
(in millions, except percentages)
Provisions for loan losses....................... Rs. 6,363 Rs. 9,892 55.5% Rs.8,385 US$ 172 (15.2)%
Portfolio provisions on non-impaired lending asset - - - 1,358 28 -
---------------------- -----------------
Total provisions for the year................... 6,363 9,892 55.5 9,743 200 (1.5)
Provisions for loan losses as a percentage of net
loans......................................... 1.13% 1.64% 1.86%
Provisions for loan losses as a percentage of
average total assets.......................... 0.90 1.40 1.30
Changes in ICICI's provisions and allowance for loan losses as a whole
reflected economic trends in the key manufacturing and infrastructure segments
in which many of its customers operated. 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 changing
economic and regulatory environment led to reduced profitability for certain of
ICICI's borrowers. As a result of these adverse economic factors during fiscal
1999 and 2001, some of ICICI's loans to these borrowers became impaired. A
process of restructuring, including rationalization of capital structures and
production capacities, is taking place in several industries as companies
reposition their businesses in the new environment. During fiscal 2002, the
slowdown in the Indian economy continued and there was continued restructuring
in several industries such as iron and steel, basic chemicals and textiles.
Gross restructured loans increased 117.7% during fiscal 2002 to Rs. 95.1
billion (US$ 1.9 billion) at year-end fiscal 2002, primarily due to an increase
in restructuring of loans to companies in the textiles, transport equipment and
iron and steel industries and restructuring of loans previously categorized as
other impaired loans amounting to Rs. 12.5 billion (US$ 257 million) during
fiscal 2002. Gross other impaired loans increased 21.6% to Rs. 50.8 billion
(US$ 1.0 billion) at year-end fiscal 2002 from Rs. 41.7 billion (US$ 855
million) at year-end fiscal 2001. As a percentage of net loans, net
restructured loans were 14.8% at year-end fiscal 2002 compared to 5.4% at
year-end fiscal 2001 and net other impaired loans were 6.3% at year-end fiscal
2002 compared to 3.3% in year-end fiscal 2001.
Provisions for loan losses decreased 1.5% to Rs. 9.7 billion (US$ 200
million) during fiscal 2002 from Rs. 9.9 billion (US$ 203 million) in fiscal
2001 and reflected a result of management's estimation of the recoverability of
restructured and other impaired loans. ICICI believed that several loans, which
became restructured loans in fiscal 2002 were essentially to inherently viable
projects and consequently resulted in lower impairment losses during fiscal
2002. As a result, provisions for loan losses were lower in fiscal 2002 despite
the large increase in restructured and other impaired loans. Provisions for
loan losses in fiscal 2002 included Rs. 1.4 billion (US$ 28 million) of
portfolio provisions on non-impaired lending assets, which were based on
ICICI's estimate of the probable losses inherent in that portfolio. As a result
of the lower provisions in fiscal 2002, the coverage ratio on gross
restructured loans decreased to 18.6% at year-end fiscal 2002 from 26.0% at
year-end fiscal
169
2001 and 41.8% at year-end fiscal 2000. The coverage ratio on other impaired
loans decreased to 34.6% at year-end fiscal 2002 from 51.9% at year-end fiscal
2001 and 52.1% at year-end fiscal 2000. Provisions for loan losses as a
percentage of average total assets decreased to 1.3% in fiscal 2002 from 1.4%
in fiscal 2001.
Until year-end fiscal 2000, ICICI followed a policy whereby loan balances
were not charged-off against the allowance for loan losses. This policy was in
response to the regulatory environment governing debt recovery proceedings in
India. During fiscal 2001, changes in the tax laws necessitated that loan
balances deemed unrecoverable be charged-off against the allowance for loan
losses. Accordingly, ICICI charged-off significant loan balances deemed
unrecoverable in fiscal 2001. The loans charged-off in fiscal 2002 were Rs. 6.1
billion (US$ 126 million) compared to Rs. 10.2 billion (US$ 209 million) in
fiscal 2002.
ICICI identified a commercial loan as impaired and placed it on
non-accrual status when it was probable that it would be unable to collect the
scheduled payments of principal and interest due under the contractual terms of
the loan agreement. A commercial loan was also considered to be impaired and
placed on a non-accrual basis if interest or principal was greater than 180
days overdue. Delays or shortfalls in loan payments were evaluated along with
other factors to determine if a loan should be classified as impaired. The
decision to classify a loan as impaired was also based on an evaluation of the
borrower's financial condition, collateral, liquidation value and other factors
that affected the borrower's ability to pay. ICICI classified a loan as a
troubled debt restructuring where it had made concessionary modifications, that
it would not otherwise consider, to the contractual terms of the loan to a
borrower experiencing financial difficulties. Such loans were placed on a
non-accrual status.
Generally, at the time a loan was placed on non-accrual status, interest
accrued and uncollected on the loan in the current fiscal year was reversed
from income, and interest accrued and uncollected from the prior year was
charged off against the allowance for loan losses. Thereafter, interest on
non-accrual loans was recognized as interest income only to the extent that
cash was received. When borrowers demonstrated 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 was returned to accrual
status. With respect to restructured loans, performance prior to the
restructuring or significant events that coincided with the restructuring were
evaluated in assessing whether the borrower could have met the rescheduled
terms and may result in the loan being returned to accrual status after a
performance period. Consumer loans were generally identified as impaired not
later than a predetermined number of days overdue on a contractual basis. The
number of days was set at an appropriate level by loan product. The policy for
suspending accruals of interest and impairment on consumer loans varied
depending on the terms, security and loan loss experience characteristics of
each product.
Allowance for loan losses on impaired loans was calculated by comparing
the net present value of the expected cash flows discounted at the effective
interest rate of the loan and the carrying value of the loan. See
"Business--Impaired Loans" for a description of ICICI's allowance for loan
losses.
ICICI conducted an analysis of its loan portfolio on a periodic basis. The
analysis considered both qualitative and quantitative criteria including the
account conduct, future prospects, repayment history, financial performance
amongst others. For impaired loans in excess of Rs. 100 million, which were
84.2% and 74.0% of the gross impaired loan portfolio at year-end fiscal 2002
and year-end fiscal 2001, respectively, ICICI followed a detailed process for
each loan to determine the allowance for loan losses to be provided. For the
balance of smaller loans in the impaired loan portfolio, ICICI followed the
classification detailed under "Business--Impaired Loans--Allowance for Loan
Losses" for determining the allowance for loan losses. ICICI's loan portfolio
was composed largely of project finance loans where ICICI had a security
interest and first lien on all the fixed assets and a second lien on all the
current assets of the borrower. ICICI typically lent between 60.0% and 80.0% of
the appraised value of collateral. Hence, all ICICI's loans had historically
been sufficiently over-collateralized so that once collateral was realized,
ICICI typically recovered the full principal along with a small portion of
interest claims. However, the recoveries were subject to delays, that could
170
have been several years, due to the long legal collection process in India. As
a result, ICICI made an allowance for the loans based on the time value of
money or the present value of expected realizations of collateral, which took
into account the delay ICICI would experience before recovering its principal.
The time to recovery, expected future cash flows and realizable value for
collateral value were periodically reviewed in estimating the allowance.
ICICI believed that the process for ascertaining allowance for loan losses
described above adequately captured the expected losses on its entire loan
portfolio.
Non-Interest Revenue
The following table sets forth, for the periods indicated, the principal
components of ICICI's non-interest revenue.
-----------------------------------------------------------------
Year-ended March 31,
----------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 % change
----------------------------------------------------------------------
(in millions, except percentages)
Fees, commission and brokerage............... Rs. 4,258 Rs. 5,317 24.9% Rs. 4,747 US$ 97 (10.7)%
Trading account revenue(1)................... 2,157 847 (60.7) 2,442 50 188.3
Securities transactions(2)................... 2,363 (1,709) (172.3) (3,447) (70) 101.7
Foreign exchange transactions(3)............. 428 (108) (125.2) 78 2 --
Gain on sale of loans ....................... -- 705 -- 1,979 41 180.7
Software development and services............ 5 701 -- 1,493 31 113.0
Insurance premium ........................... -- 60 -- 1,178 24 1863.3
Gain on the sale of
Equity interest in ICICI Bank............. -- 1,996 -- 57 1 (97.1)
Gain on sale of stock in other
Subsidiaries and affiliates............... -- 511 -- 108 2 (78.9)
Profit on the sale of certain premises and
equipment.................................... 212 (31) (114.6) 29 1 --
Effect of business combinations.............. 253 253 0.0 -- -- --
Other revenue................................ 139 1,511 987.1 786 16 (48.0)
----------- ---------- --------------------
Total non-interest revenue................. Rs. 9,815 Rs. 9,288 (5.4) Rs. 9,450 US$ 194 1.7%
=========== ========== ====================
-----------------
(1) Primarily reflects income from trading in government of India securities
and corporate debt securities.
(2) Primarily reflects capital gains realized on the sale of ICICI's long-term
equity securities and revenues from ICICI's investment banking subsidiary
less other than temporary diminution.
(3) Arises primarily from purchases and sales of foreign exchange on behalf of
ICICI's corporate clients and revaluation of ICICI's foreign currency
assets and liabilities and outstanding forward contracts.
Fiscal 2002 compared to Fiscal 2001
Non-interest revenue increased marginally by 1.7% in fiscal 2002 to Rs.
9.5 billion (US$ 194 million), from Rs. 9.3 billion (US$ 190 million) in fiscal
2001 primarily due to an increase in trading account revenue, a gain on sale of
loans and insurance premiums received offset, in part, by a decline in gain on
sale of stock of subsidiaries and affiliates, a loss on account of securities
transactions and a decline in fees, commission and brokerage. In fiscal 2001,
non-interest revenue included a gain on sale of ICICI's equity interest in
ICICI Bank of Rs. 2.0 billion (US$ 41 million).
The decrease of 10.7% in fees, commission and brokerage in fiscal 2002 was
primarily due to the decrease in fees from project appraisal and related
activities. As ICICI had limited its credit growth in the second half of fiscal
2002, the fee income linked to new business generation also decreased.
Trading account revenue primarily consisted of income from trading in
government of India securities and corporate debt securities. Trading account
revenue increased 188.3% during fiscal 2002 compared to fiscal 2001 as ICICI's
investment banking subsidiary capitalized on the market opportunities in a
declining interest rate environment. Gains on trading account resulted from
short-term market opportunities created by a fall in interest rates during
fiscal 2002. The merged entity cannot assure you that interest rates will fall
any further as they change depending on the overall economic environment.
171
Income from securities transactions primarily reflected capital gains
realized on the sale of ICICI's long-term equity securities less other than
temporary diminution. The income from securities transaction declined during
fiscal 2002 primarily due to an increase in the amount of other than temporary
diminution in securities in fiscal 2002. In fiscal 2002, as part of its ongoing
evaluation of its securities portfolio, ICICI recorded an impairment charge of
Rs. 3.5 billion (US$ 71 million) compared to Rs. 1.8 billion (US$ 38 million)
in fiscal 2001, for an other than temporary decline in the value of ICICI's
available for sale and non-readily marketable equity securities.
Income from foreign exchange transactions arose primarily from purchases
and sales of foreign exchange on behalf of ICICI's corporate clients and
revaluation of ICICI's foreign currency assets and liabilities and outstanding
forward contracts. Income from foreign exchange transactions in fiscal 2002 was
Rs. 78 million (US$ 2 million) compared to a loss of Rs. 108 million (US$ 2
million) in fiscal 2001.
During fiscal 2002, ICICI securitized and sold down some of its corporate
loans, primarily to provide resources towards meeting the reserve requirements
on ICICI's liabilities. This resulted in a gain on sale of loans of Rs. 2.0
billion (US$ 41 million) in fiscal 2002. The gain on sale of loans in fiscal
2001 was Rs. 705 million (US$ 14 million).
Income from software development and services increased 113.0% to Rs. 1.5
billion (US$ 31 million) in fiscal 2002 from Rs. 701 million (US$ 14 million)
in fiscal 2001 as ICICI Infotech and ICICI Infotech Inc, US diversified into a
range of software solutions covering banking, insurance, enterprise resource
planning, customer relationship management and information technology security
and continued their sustained marketing efforts in fiscal 2002.
ICICI's life insurance subsidiary, ICICI Prudential Life Insurance,
commenced business operations in December 2000 and substantially expanded its
business in fiscal 2002. ICICI Prudential Life Insurance sold about 98,000
policies in fiscal 2002, as a result of which insurance premiums received
increased to Rs. 1.2 billion (US$ 24 million) in fiscal 2002 from Rs. 60
million (US$ 1 million) in fiscal 2001.
In fiscal 2002, ICICI realized a gain of Rs. 57 million (US$ 1 million) on
the sale of 0.40% of its equity interest in ICICI Bank and a gain on sale of
stock in other subsidiaries and affiliates of Rs 108 million (US$ 2 million).
During fiscal 2001, ICICI reduced its equity interest in ICICI Bank to 46.0%
through sales of equity shares in the Indian secondary markets to institutional
investors. The sale of shares was made for a consideration of Rs. 3.5 billion
(US$ 72 million) and the gain on sale was Rs. 2.0 billion (US$ 41 million)
which is included in ICICI's statement of income for fiscal 2002. Non-interest
revenue also included a gain on sale of ICICI's stake in ICICI Infotech of Rs.
511 million (US$ 10 million).
Non-interest revenue also included a gain of Rs. 29 million (US$ 593,897)
on the sale of certain premises and equipment in fiscal 2002 compared to a loss
of Rs. 31 million (US$ 634,856) in fiscal 2001. Other revenue primarily
included rental income for fiscal 2002.
Fiscal 2001 compared to Fiscal 2000
Non-interest revenue declined 5.4% in fiscal 2001 to Rs. 9.3 billion (US$
190 million), from Rs. 9.8 billion (US$ 201 million) in fiscal 2000 primarily
due to the deconsolidation of ICICI Bank. If ICICI excluded the non-interest
revenue of ICICI Bank for fiscal 2000, non-interest revenue would have
increased to Rs. 9.3 billion (US$ 190 million) in fiscal 2001 from Rs. 8.1
billion (US$ 165 million) in fiscal 2000. This decline was primarily due to a
decline in trading account revenue, income from securities transactions and
foreign exchange transactions offset, in part, by an increase in income from
fees, commissions and brokerage and a gain on sale of stock in subsidiaries and
affiliates.
The increase in fees, commission and brokerage income in fiscal 2001 was
primarily due to the increase in fees from loan appraisal and structuring
activities. ICICI continued to target new client
172
segments and businesses for generating additional fee income to offset the
lower spreads on high quality assets.
Trading account revenue declined 60.7% during fiscal 2001 primarily due to
limited market opportunities during fiscal 2001 and due to the deconsolidation
of ICICI Bank. If ICICI excluded the trading account revenue of ICICI Bank for
fiscal 2000, trading account revenue would have declined 34.8% to Rs. 847
million (US$ 17 million) in fiscal 2001 from Rs. 1.3 billion (US$ 27 million)
in fiscal 2000.
The income from securities transaction declined during fiscal 2001
primarily due to limited market opportunities during fiscal 2001 and due to an
increase in the amount of other than temporary diminution in securities in
fiscal 2001.
The loss on foreign exchange transactions in fiscal 2001 was Rs. 108
million (US$ 2 million) compared to a gain on foreign exchange transactions of
Rs. 428 million (US$ 9 million) in fiscal 2000.
During fiscal 2001, ICICI reduced its equity interest in ICICI Bank to
46.0% through sales of equity shares in the Indian secondary markets to
institutional investors. The sale of shares was made for a consideration of Rs.
3.5 billion (US$ 72 million) and the gain on sale was Rs. 2.0 billion (US$ 41
million) which was included in ICICI's statement of income for fiscal 2001.
With a view to strengthen the existing relationship with Emirates Bank of the
United Arab Emirates, ICICI divested approximately 8.0% of ICICI's stake in
ICICI Infotech to the Emirates Bank in fiscal 2002. ICICI Infotech has a joint
venture with Emirates Bank, which is involved in marketing software products
and services in West Asia. The sale was made at a consideration of Rs. 576
million (US$ 12 million) and the gain on sale of Rs. 511 million (US$ 11
million) was included as a non-interest revenue item in fiscal 2001.
Income from software development and services increased to Rs. 701 million
(US$ 14 million) in fiscal 2001 from Rs. 5 million (US$ 102,396) primarily due
to income from ICICI's principal information technology subsidiaries, ICICI
Infotech and ICICI Infotech Inc., US. ICICI Infotech commenced its operations
in the US through its wholly owned subsidiary, ICICI Infotech Inc. in April
2000.
Non-interest revenue also included a loss of Rs. 31 million (US$ 634,856
million) on the sale of certain premises and equipment in fiscal 2001. Other
revenue primarily included rental income and also included revenue from ICICI's
life insurance subsidiary.
Non-Interest Expense
The following table sets forth, for the periods indicated, the principal
components of ICICI's non-interest expense.
Year ended March 31,
-------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 %change
-------------------------------------------------------------------
Employee expense: (in millions, except percentages)
Salaries...................................Rs. 1,386 Rs. 1,606 15.9% Rs. 2,824 US$ 58 75.8%
Employee benefits........................... 232 334 44.0 454 9 35.9
Total employee expense......................... 1,618 1,940 19.9 3,278 67 69.0
Premises and equipment expense................. 1,055 1,514 43.5 2,262 46 49.4
Administration and other expense............... 2,442 2,046 (16.2) 3,065 63 49.8
Policy holder benefits and claims - 49 - 1,379 28 2,714.3
Amortization of intangible assets.............. 187 259 38.5 290 6 12.0
---------------------- --------------------
Total non-interest expense....................Rs. 5,302 Rs. 5,808 9.5% Rs. 10,275 US$ 210 76.9%
====================== ====================
173
Fiscal 2002 compared to Fiscal 2001
Non-interest expense increased 76.9% in fiscal 2002 to Rs. 10.3 billion
(US$ 210 million) from Rs. 5.8 billion (US$ 119 million) in fiscal 2001
primarily due to an increase in employee expenses and other administrative
costs of ICICI Infotech and ICICI Prudential Life Insurance Company and
administrative costs of ICICI. In fiscal 2002, non-interest expenses also
included expense on policy holder's benefits and claims of Rs. 1.4 billion (US$
28 million), which was in line with the increase in insurance premiums received
in fiscal 2002.
Employee expenses increased 69.0% to Rs. 3.3 billion (US$ 67 million) in
fiscal 2002 from Rs. 1.9 billion (US$ 40 million) in fiscal 2001. The number of
employees increased to 5,954 employees at year-end fiscal 2002 from 3,782
employees, excluding ICICI Bank, at year-end fiscal 2001 primarily due to an
increase in the number of employees in ICICI's subsidiaries, ICICI Prudential
Life Insurance, ICICI Infotech, and ICICI Home Finance, which had been rapidly
growing their business and distribution infrastructure in fiscal 2002.
Premises and equipment expense increased 49.4% in fiscal 2002 compared to
fiscal 2001, primarily due to increased technology expenses and maintenance and
depreciation expenses for ICICI centers and computer and computer software.
Administrative and other expenses increased 49.8% in fiscal 2002 compared to
fiscal 2001 primarily due to an increase in the administration expense of ICICI
Infotech and its subsidiaries and of ICICI Prudential Life Insurance in fiscal
2002. In fiscal 2002, ICICI Infotech diversified its range of products and
increased its presence to all major cities of India through sustained business
development and marketing efforts. ICICI Prudential Life Insurance commenced
business operations in December 2000 and substantially expanded its business in
fiscal 2002. In its efforts to increase distribution and customer awareness,
ICICI Prudential Life expanded its branch network to 16 branches and grew its
advisor force to over 10,000.
Fiscal 2001 compared to Fiscal 2000
Non-interest expense increased 9.5% in fiscal 2001 to Rs. 5.8 billion (US$
119 million) from Rs. 5.3 billion (US$ 109 million) in fiscal 2000 primarily
due to an increase in employee expense and premises and equipment expense. If
ICICI excluded the non-interest expense of ICICI Bank for fiscal 2000,
non-interest expense would have increased 46.2% to Rs. 5.8 billion (US$ 119
million) in fiscal 2001 from Rs. 4.0 billion (US$ 82 million) in fiscal 2000.
Employee expenses increased 19.9% to Rs. 1.9 billion (US$ 39 million) in
fiscal 2001 from Rs. 1.6 billion (US$ 33 million) in fiscal 2000. For
comparison purposes, if ICICI excluded the employee expense of ICICI Bank for
fiscal 2000, employee expense would have increased 49.0% in fiscal 2001
compared to fiscal 2000. This increase of 49.0% was principally due to a 75.3%
increase in the number of ICICI's employees offset, in part, by the absence of
the cost of employee termination under the voluntary retirement scheme
completed in fiscal 2000. The number of employees increased to 3,782 employees
at year-end fiscal 2001 from 2,159 employees, excluding ICICI Bank, at year-end
fiscal 2000 primarily due to an increase in the number of employees in ICICI's
subsidiaries, ICICI Infotech, ICICI Personal Financial Services and ICICI Home
Finance, which had been rapidly growing their business and distribution
infrastructure during fiscal 2001.
Premises and equipment expense increased 43.5% in fiscal 2001 compared to
fiscal 2000, primarily due to increased technology expenses and maintenance and
depreciation expenses for ICICI centers and computer and computer software
offset, in part, by the deconsolidation of ICICI Bank in fiscal 2001. If ICICI
excluded the premises and equipment expense of ICICI Bank for fiscal 2000,
premises and equipment expense would have increased 111.7% to Rs. 1.5 billion
(US$ 31 million) in fiscal 2001 from Rs. 715 million (US$ 15 million) in fiscal
2000. Administrative and other expenses decreased 14.2% in fiscal 2001 compared
to fiscal 2000 primarily due to the deconsolidation of ICICI Bank in fiscal
2001 offset, in part, by an increase in the administration expense of ICICI's
information technology subsidiary in the US and ICICI Prudential Life Insurance
which commenced their operations or were acquired in fiscal 2001. If ICICI
excluded the administrative and other expenses of
174
ICICI Bank for fiscal 2000, administrative and other expenses would have
increased 18.4% to Rs. 2.1 billion (US$ 43 million) in fiscal 2001 from Rs. 1.8
billion (US$ 37 million) in fiscal 2000.
Amortization of intangible assets increased 38.5% in fiscal 2001 compared
to fiscal 2000, primarily due to the acquisition of the software development
and services companies by ICICI Infotech in fiscal 2001. The business
combinations were accounted for under the purchase method which resulted in
goodwill of Rs. 1.4 billion (US$ 29 million). The goodwill was being amortized
over a period of five years. This resulted in an expense of Rs. 52 million (US$
1 million) for fiscal 2001. In addition, the workforce and customer
relationships of Objects Xperts Inc. valued at Rs. 135 million (US$ 3 million)
were being amortized over a period of five years. This resulted in an expense
of Rs. 20 million (US$ 409,584) for fiscal 2001.
Income Tax Expense
Income tax expense increased 8.4% in fiscal 2002 to Rs. 129 million (US$ 3
million) compared to Rs. 119 million (US$ 2 million) in fiscal 2001 despite a
sharp decline in income before taxes. The effective tax rate was 57.6% in
fiscal 2002 compared to 1.76% in fiscal 2001. The significant increase in
effective tax rate was primarily due to additional tax payable in respect of
prior year tax assessment of Rs. 175 million (US$ 4 million) and a decrease in
recognition of deferred tax assets due to the decline in statutory tax rate to
35.70% in fiscal 2001 compared to 39.55% in fiscal 2001.
Income tax expense decreased significantly by 94.1% to Rs 119 million (US$
2 million) in fiscal 2001 compared to Rs. 2.0 billion (US$ 42 million) in
fiscal 2000. The effective tax rate in fiscal 2001 was 1.76% compared to 18.29%
in fiscal 2000. The significant reduction in the effective tax rate in fiscal
2001 was primarily due to an increase in recognition of deferred tax assets on
other than temporary diminution in securities available for sale of earlier
years. The statutory rate of tax decreased to 35.70% in fiscal 2002 from 39.55%
in fiscal 2001 and 38.50% in fiscal 2000. In fiscal 2001, an additional 3.0%
surcharge was imposed on income tax. ICICI's effective tax rate was lower in
fiscal 2000 and fiscal 2001 than the statutory tax rate in those respective
years due to the special benefits granted to ICICI as a long-term lending
institution under the Indian Income-tax Act, 1961, namely the tax-free status
of the income from infrastructure financing and dividends, capital gains and
losses on sale of investments charged to tax at a rate lower than the statutory
tax rate and other than temporary diminution on securities available for sale.
As a long-term lending institution, ICICI was allowed a deduction of up to
40.0% of its taxable income derived from the business of long-term financing.
This benefit was available on ICICI's income derived from loans of a maturity
greater than five years. The merged entity cannot be sure that these tax
benefits as per the Income-tax Act, 1961 will not be changed by tax authorities
in the future.
A retrospective change was effected in the local tax laws in India's
budget for fiscal 2002, whereby provisions for loan losses are not allowed as a
deduction from taxable income unless the corresponding loan is written off in
the accounts. As a result, a higher current tax liability was recognized
against provisions for loan losses claimed in earlier years which was offset by
recognition of a deferred tax asset in respect of the same. See Note 30 of
ICICI's consolidated financial statements for a further discussion on income
tax.
175
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal
components of ICICI's assets.
At March 31,
---------------------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 %change
---------------------------------------------------------------------------------
(in millions, except percentages)
Cash and cash equivalents............ Rs. 71,131 Rs. 30,987 (56.4)% Rs. 41,760 US$ 855 34.8%
Trading account assets(1)............ 57,396 18,878 (67.1) 42,376 868 124.5
Securities, excluding venture
capital investments(2).......... 18,335 16,346 (10.8) 59,104 1,210 261.6
Venture capital investments.......... 536 3,769 -- 3,921 80 4.0
Investments in affiliates............ 264 7,899 -- 8,590 176 8.7
Loans, net:
Rupee............................. 502,196 549,195 9.4 488,025 9,994 (11.1)
Foreign currency.................. 93,337 85,863 (8.0) 72,223 1,479 (15.9)
Less: Allowances.................. (34,085) (33,035) (3.1) (36,647) (751) 10.9
---------------------------- ------------------------------------
Total loans, net..................... 561,448 602,023 7.2 523,601 10,723 (13.0)
Acceptances.......................... 12,333 2,715 (78.0) 4,783 98 76.2
Property and equipment............... 11,775 12,039 2.2 12,949 265 7.6
Other assets......................... 41,061 45,789 11.5 48,746 998 6.5
--------------------------- ------------------------------------
Total assets......................... Rs. 774,279 Rs. 740,445 (4.4) Rs. 745,830 US$ 15,274 0.7
=========================== ====================================
-----------------
(1) Primarily includes government of India securities and corporate debt
securities.
(2) Primarily includes government of India securities, equity securities and
corporate debt securities.
Fiscal 2002 compared to Fiscal 2001
ICICI's total assets increased 0.7% to Rs. 745.8 billion (US$ 15.3
billion) at year-end fiscal 2002 from Rs. 740.4 billion (US$ 15.2 billion) at
year-end fiscal 2001, primarily due to an increase in cash and cash
equivalents, trading account assets and securities, excluding venture capital
investments offset, in part by a decrease in net loans.
Subsequent to the announcement of the amalgamation in October 2001, ICICI
directed all its resources towards meeting the reserve requirements on its
outstanding liabilities following the amalgamation. ICICI limited its loan
disbursements and also securitized and sold down its loans in the second half
of fiscal 2002 to raise additional resources. As a result, ICICI's net loans
decreased by 13.0% to Rs. 523.60 billion (US$ 10.7 billion) at year-end fiscal
2002 from Rs. 602.0 billion (US$ 12.3 billion) at year-end fiscal 2001,
reflecting a 11.1% decrease in gross rupee loans and a 15.9% decrease in gross
foreign currency loans, offset by an increase in allowances for loan losses.
The decrease in ICICI's corporate loan portfolio was offset by an increase in
retail finance disbursements in fiscal 2002. Gross retail finance loans at
year-end fiscal 2002 increased 168.5% to Rs. 72.8 billion (US$ 1.5 billion)
from Rs. 27.1 billion (US$ 555 million) at year-end fiscal 2001.
Cash and cash equivalents which included interest-bearing deposits with
banks, increased to Rs. 41.8 billion (US$ 855 million) at year-end fiscal 2002
from Rs. 31.0 billion (US$ 635 million) at year-end fiscal 2001, as a large
cash balance was maintained by ICICI towards the end of fiscal 2002 in order to
meet the cash reserve requirement on its outstanding liabilities following the
amalgamation. Trading assets increased significantly to Rs. 42.4 billion (US$
868 million) at year-end fiscal 2002 compared to Rs. 18.9 billion (US$ 387
million) at year-end fiscal 2001. Trading assets at year-end fiscal 2002
included Rs. 21.4 billion (US$ 438 million) of reverse repurchase transactions.
Under these transactions securities were purchased under agreements to resell
after a specified time. Such securities qualified as approved securities for
statutory liquidity ratio requirements, and were of
176
short maturity, carrying lower risk while yielding higher returns as compared
to other short-term money market instruments. These transactions were typically
used for better liquidity management.
Securities, excluding venture capital investments at year-end fiscal 2002
increased to Rs. 59.1 billion (US$ 1.2 billion) compared to Rs. 16.3 billion
(US$ 335 million) at year-end fiscal 2001 primarily due to the increase in
government of India securities. Venture capital investments at year-end fiscal
2002 remained almost the same at Rs. 3.9 billion (US$ 80 million) compared to
Rs. 3.8 billion (US$ 77 million) at year-end fiscal 2001. ICICI's investment in
affiliates increased to Rs. 8.6 billion (US$ 176 million) at year-end fiscal
2002 from Rs. 7.9 billion (US$ 162 million) at year-end fiscal 2001 due to
addition of ICICI Bank's retained earnings. Acceptances increased to Rs. 4.8
billion (US$ 98 million) at year-end fiscal 2002 from Rs. 2.7 billion (US$ 56
million) at year-end fiscal 2001. Acceptances, primarily included letters of
credit issued on behalf of customers.
Other assets at year-end fiscal 2002, included advance taxes of Rs. 16.6
billion (US$ 339 million, deferred tax assets of Rs. 7.4 billion (US$ 152
million), intangible assets of Rs. 2.1 billion (US$ 43 million) and Rs. 2.0
billion (US$ 43 million) of assets held for sale, which were primarily acquired
through foreclosure of loans.
Fiscal 2001 compared to Fiscal 2000
ICICI's total assets decreased 4.4% to Rs. 740.4 billion (US$ 15.2
billion) at year-end fiscal 2001 from Rs. 774.3 billion (US$ 15.86 billion) at
year-end fiscal 2000. This was primarily due to the deconsolidation of ICICI
Bank as of April 1, 2000. If ICICI excluded ICICI Bank at year-end fiscal 2000,
total assets would have increased 15.2% to Rs. 740.4 billion (US$ 15.2 billion)
at year-end fiscal 2001 compared to Rs. 642.9 billion (US$ 13.2 billion) at
year-end fiscal 2000 primarily due to an increase in net loans at year-end
fiscal 2001.
Net loans increased 7.2% in fiscal 2001 reflecting a 9.4% increase in
gross rupee loans and a 8.0% decrease in gross foreign currency loans. ICICI's
rupee loans increased significantly in fiscal 2001 over fiscal 2000 offsetting
the decline in rupee loans due to the deconsolidation of ICICI Bank as of April
1, 2000. The increase in rupee loans was principally due to increased
disbursements of corporate finance loans, loans to the infrastructure sector
and personal finance in fiscal 2001. ICICI's disbursements to the manufacturing
sector decreased as a percentage of ICICI's total disbursements to 10.8% in
fiscal 2001 from 14.5% in fiscal 2000.
The decline in cash, cash equivalents and trading account assets from Rs.
128.5 billion (US$ 2.6 billion) in fiscal 2000 to Rs. 49.9 billion (US$ 1.0
billion) in fiscal 2001 was principally due to the deconsolidation of ICICI
Bank, which is subject to regulatory reserve requirements. ICICI Bank had cash,
cash equivalents and trading account assets of Rs. 64.6 billion (US$ 1.3
billion) at year-end fiscal 2000. Lower trading account assets were also
attributable to limited market opportunities caused by depressed market
conditions in fiscal 2001 compared to fiscal 2000. Venture capital investments
increased to Rs. 3.8 billion (US$ 77 million) at year-end fiscal 2001 from Rs.
536 million (US$ 11 million) at year-end fiscal 2000 primarily due to
investment in new venture funds established during fiscal 2001. Investment in
affiliates increased to Rs. 7.9 billion (US$ 162 million) at year-end fiscal
2001 from Rs. 264 million (US$ 5 million) primarily due to the inclusion of
ICICI's investment in ICICI Bank of Rs. 7.6 billion (US$ 156 million) under the
equity method of accounting as of April 1, 2000. Acceptances declined to Rs.
2.7 billion (US$ 56 million) at year-end fiscal 2001 from Rs. 12.3 billion (US$
253 million) at year-end fiscal 2000 primarily due to the deconsolidation of
ICICI Bank in fiscal 2001. ICICI Bank had acceptances of Rs. 8.5 billion (US$
174 million) at year-end fiscal 2000.
Liabilities and Stockholders' Equity
The following table sets forth, at the dates indicated, the principal
components of ICICI's liabilities and stockholders' equity.
177
At March 31,
---------------------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 %change
---------------------------------------------------------------------------------
(in millions, except percentages)
Deposits................................. Rs. 96,682 Rs. 6,072 (93.7)% Rs. 7,380 US$ 151 21.5%
Trading account liabilities.............. 19,263 12,483 (35.2) 17,095 350 36.9
Short-term borrowings.................... 68,495 99,656 45.5 70,804 1,450 (29.0)
Acceptances.............................. 12,333 2,715 (78.0) 4,783 98 76.2
Long-term debt:
Rupee................................. 342,816 404,015 17.9 438,529 8,984 8.5
Foreign currency...................... 93,504 88,865 (5.0) 72,894 1,490 (18.0)
--------------------------- -------------------------
Total long-term debt..................... 436,320 492,880 13.0 511,423 10,473 3.8
Other liabilities........................ 43,023 39,024 (9.3) 50,763 1,040 30.1
Taxes and dividends payable.............. 12,750 10,498 (17.7) 11,050 226 5.3
Redeemable preferred stock(1)............ 10,207 698 (93.2) 772 16 10.6
--------------------------- -------------------------
Total liabilities........................ 699,073 664,027 (5.0) 674,070 13,804 1.5
Minority interest........................ 4,298 496 (88.5) 599 12 20.8
Stockholders' equity..................... 70,908 75,922 7.1 71,161 1,457 (6.3)
Total liabilities and stockholders'
Equity................................ Rs. 774,279 Rs. 740,445 (4.4)% Rs. 745,830 US$ 15,274 0.7%
======================= =========================
------------------
(1) In line with the existing regulatory requirements in India, preferred
stock issued by ICICI needed to be compulsorily redeemed within a
specified time period. Accordingly, all series of preferred stock issued
by ICICI were redeemable in accordance with the terms of the issue.
Fiscal 2002 compared to Fiscal 2001
ICICI's long-term debt increased 3.8% to Rs. 511.4 billion (US$ 10.5
billion) at year-end fiscal 2002 from Rs. 492.9 billion (US$ 10.1 billion) at
year-end fiscal 2001, reflecting a 8.5% increase in long-term rupee debt offset
by a decrease of 18.0% in long-term foreign currency debt. Deposits increased
to Rs. 7.4 billion (US$ 151 million) at year-end fiscal 2002 from Rs. 6.1
billion (US$ 124 million) at year-end fiscal 2001, primarily due to the
deposits raised by ICICI Home Finance in fiscal 2002. In fiscal 2002 ICICI Home
Finance launched a fixed deposit program to mobilize resources to meet the
growing business needs and diversify its resource base. Trading account
liabilities increased 36.9% at year-end fiscal 2002 compared to year-end fiscal
2001 due to increased market opportunities in a declining interest rate
environment and an increase in trading account assets. ICICI's short-term
borrowings decreased 29.0% at year-end fiscal 2002 compared to year-end fiscal
2001. Short-term borrowings included foreign currency non-repatriable
borrowings, which increased at year-end fiscal 2002. This was offset by a
decrease in rupee short-term borrowings. The carrying amount of the redeemable
preferred stock increased to Rs. 772 million (US$ 16 million) at year-end
fiscal 2002 from Rs 698 million (US$ 14 million) at year-end fiscal 2001.
Minority interest increased 20.8% at year-end fiscal 2002 due to an increase in
the capital of ICICI's life insurance and general insurance subsidiaries.
Stockholders' equity declined 6.3% at year-end fiscal 2002 to Rs. 71.2 billion
(US$ 1.5 billion). At year-end fiscal 2002, stockholders' equity was net of the
dividend paid by ICICI as an interim dividend during fiscal 2002.
Fiscal 2001 compared to Fiscal 2000
ICICI's long-term debt increased 13.0% to Rs. 492.9 billion (US$
10.1billion) at year-end fiscal 2001 from Rs. 436.3 billion (US$ 8.9 billion)
at year-end fiscal 2000, reflecting a 17.9% increase in long-term rupee debt
and an decrease of 5.0% in long-term foreign currency debt. Deposits declined
to Rs. 6.1 billion (US$ 124 million) at year-end fiscal 2001 from Rs. 96.7
billion (US$ 2.0 billion) at year-end fiscal 2000 primarily due to the
deconsolidation of ICICI Bank as of April 1, 2000. Substantially all of ICICI's
deposits at year-end fiscal 2000 represented deposits of ICICI Bank. As a
commercial bank, ICICI Bank could raise low-cost demand deposits, unlike ICICI.
Trading account liabilities declined 35.2% in fiscal 2001 due to limited market
opportunities caused by depressed capital markets during fiscal 2001 and a
decline in trading account assets. ICICI's short-term borrowings increased
45.5% as ICICI increased its short-term borrowings in line with its view of
declining interest rates. Redeemable preferred stock decreased 93.2% during
fiscal 2001 to Rs. 698 million (US$ 14 million) as ICICI redeemed a substantial
portion of preferred stock during fiscal 2001
178
consequent to the increase in the dividend distribution tax rate. Minority
interest decreased 88.5% primarily due to the deconsolidation of ICICI Bank as
of April 1, 2000. Stockholders' equity increased 7.1% at year-end fiscal 2001
to Rs. 75.9 billion (US$ 1.6 billion).
Off Balance Sheet Items, Commitments and Contingencies
Foreign Exchange and Derivative Contracts
ICICI entered into foreign exchange forwards, options, swaps and other
derivative products, which enabled customers to transfer, modify or reduce
their foreign exchange and interest rate risks. These instruments were used to
manage foreign exchange and interest rate risk relating to specific groups of
on-balance sheet assets and liabilities. In fiscal 2002, on adoption of SFAS
No. 133 and SFAS No. 138, all derivatives were recorded as assets or
liabilities on the balance sheet at their respective fair values with
unrealized gains and losses recorded either in accumulated other comprehensive
income or in the statement of income, depending on the purpose for which the
derivative is held. Derivatives that did not meet the criteria for designation
as a hedge under SFAS No. 133 at inception, or failed to meet the criteria
thereafter, were accounted for in other assets with changes in fair value
recorded in the statement of income. See Note 1 - "Derivative instruments and
hedging activities" to ICICI's consolidated financial statements.
The following table sets forth, at the dates indicated, the notional
amount of ICICI's derivative contracts.
At March 31,
--------------------------------------------------------------------------------------------
Notional principal amounts Balance sheet credit exposure(1)
--------------------------------------------------------------------------------------------
2000 2001 2002 2002 2000 2001 2002 2002
--------------------------------------------------------------------------------------------
(in millions)
Interest rate products:
Swap agreements..................... Rs. 40,201 Rs. 50,430 Rs. 87,824 US$ 1,799 Rs. -- Rs (5) Rs. 620 US$ 13
Others.............................. -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------
Total interest rate products........... Rs. 40,201 Rs. 50,430 Rs. 87,824 US$ 1,799 Rs. -- Rs (5) Rs. 620 US$ 13
===========================================================================================
Foreign exchange products:
Forward contracts................... Rs. 104,514 Rs. 21,091 Rs. 41,873 US$ 858 Rs. 309 Rs (159) Rs. (41) US$ (1)
Swap agreements..................... 30,552 23,429 20,395 418 -- -- Rs. 328 7
-------------------------------------------------------------------------------------------
Total foreign exchange products........ Rs. 135,066 Rs. 44,520 Rs. 62,268 US$ 1,275 Rs. 309 Rs. (159) Rs. 287 US$ 6
===========================================================================================
-----------------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products on the reporting date.
In fiscal 2002 there was an increase in the volumes of forward contracts
and interest rate swaps carried out by ICICI on behalf of its customers. In
addition ICICI also booked forward exchange contracts on its External
Commercial borrowings. As a result, the notional principal amount of foreign
exchange products at year-end fiscal 2002 increased to Rs. 62.3 billion (US$
1.3 billion) from Rs. 44.5 billion (US$ 912 million) at year-end fiscal 2001
and the notional principal amount of interest rate swap agreements at year-end
fiscal 2002 increased to Rs.87.8 billion (US$ 1.8 billion) from Rs. 50.4
billion (US$ 1.0 billion) at year-end fiscal 2001.
The decline in notional principal on forward contracts on foreign exchange
products in fiscal 2001 was primarily due to the deconsolidation of ICICI Bank
as of April 1, 2000. ICICI Bank had notional principal on forward contracts on
foreign exchange products of Rs. 62.9 billion (US$ 1.3 billion) at fiscal 2001.
Securitization
ICICI primarily securitized commercial loans through 'pass-through'
securitizations. In fiscal 2002, ICICI securitized loans with a carrying value
of Rs. 40.8 billion (US$ 837 million) compared to Rs. 5.5 billion (US$ 113
million) in fiscal 2001, which resulted in gains of Rs. 1.1 billion (US$ 22
million) in fiscal 2002 compared to Rs. 434 million (US$ 9 million) in fiscal
2001. The gains were reported as a component of gain on sale of loans. After
the securitization, ICICI generally continued to maintain customer account
relationships and serviced loans transferred to the securitization trust.
Generally, the securitizations were without recourse and ICICI did not provide
any credit enhancement. In a few cases, ICICI may enter into derivative
transactions such as written put options and interest rate swaps with the
transferees. Generally, ICICI did not retain any beneficial interests in the
assets sold.
In fiscal 2002, ICICI wrote put options, which required ICICI to purchase,
upon request of the holders, securities issued in certain securitization
transactions. The put options sought to provide liquidity to holders of such
instruments. If exercised, ICICI would have been obligated to purchase the
securities at the predetermined exercise price. All put options were
out-of-the-money for the holders.
179
At year-end fiscal 2002, ICICI sold loans with a carrying value of Rs. 13.3
billion (US$ 271 million) and an aggregate put option exercise price of Rs.
13.1 billion (US$ 268 million). Subsequent to their initial issuance, such
options were recorded at fair values with changes reported in ICICI's statement
of income for fiscal 2002.
Loan Commitments
ICICI had outstanding undrawn commitments to provide loans and financing
to customers. These loan commitments aggregated Rs. 68.2 billion (US$ 1.4
billion) at year-end fiscal 2002 compared to Rs. 71.0 billion (US$ 1.5 billion)
at year-end fiscal 2001. The interest rate on these commitments was dependent
on the lending rates on the date of the loan disbursement. Further, the
commitments had fixed expiration dates and were contingent upon the borrower's
ability to maintain specific credit standards.
Capital Commitments
ICICI was obligated under a number of capital contracts. Capital contracts
are job orders of a capital nature, which have been committed. Estimated
amounts of contracts remaining to be executed on capital account aggregated Rs.
756 million (US$ 15 million) at year-end fiscal 2002 compared to Rs. 681
million (US$ 14 million) at year-end fiscal 2001 signifying the unpaid amount
for acquisition of fixed assets as per contracts entered into with suppliers.
Operating Lease Commitments
ICICI had commitments under long-term operating leases principally for
premises. The following table sets forth, a summary of future minimum lease
rental commitments as of March 31, 2002, for non-cancelable leases.
Lease rental commitments for the year ending March 31, Rs. in millions
------------------------------------------------------ ---------------
2003............................................................................... Rs. 252
2004............................................................................... 187
2005............................................................................... 66
2006............................................................................... 47
2007............................................................................... 29
Thereafter......................................................................... 31
----------------------
Total minimum lease commitments.................................................... Rs. 612
======================
Guarantees
As a part of ICICI's financing activities, ICICI issued guarantees to
enhance the credit standing of ICICI's customers. The guarantees were generally
for a period not exceeding 10 years. The credit risk associated with these
products, as well as the operating risks, were similar to those in other loan
products. ICICI had the same appraisal process, pricing methodology and
collateral requirement for guarantees as that for any other loan product.
Guarantees increased by 25.4% at year-end fiscal 2002 compared to year-end
fiscal 2001, which in turn increased marginally by 2.0% compared to year-end
fiscal 2000.
180
The following table sets forth, at the dates indicated, ICICI's guarantees
outstanding.
At March 31,
----------------------------------------------------------------------
2001/2000 2002/2001
2000 2001 % change 2002 2002 % change
----------------------------------------------------------------------
(in millions, except percentages)
Financial guarantees(1)................. Rs. 46,253 Rs. 53,167 14.9% Rs. 53,037 US$ 1,086 (0.2)%
Performance guarantees(2)............... 11,811 6,083 (48.5) 21,266 436 249.6
------------------------ -------------------------
Total guarantees........................ Rs. 58,064 Rs. 59,250 2.0% Rs. 74,303 US$ 1,522 25.4%
======================== =========================
-----------------
(1) Consists of instruments guaranteeing the timely contractual payment of
loan obligations, primarily to foreign lenders on behalf of project
companies.
(2) Consists of instruments guaranteeing the performance by a company of an
obligation, such as exports.
Capital Resources
ICICI was subject to the capital adequacy requirements of the Reserve Bank
of India, which are primarily based on the capital adequacy accord reached by
the Basle Committee of Banking Supervision, Bank of International Settlements
in 1988. ICICI was required to maintain a minimum ratio of total capital to
risk adjusted assets of 9.0%, at least half of which must be Tier 1 capital.
Under Indian GAAP, ICICI was amalgamated into ICICI Bank with effect from March
30, 2002 pursuant to the terms of the Scheme of Amalgamation approved by the
Reserve Bank of India. At year-end fiscal 2002 ICICI ceased to exist for Indian
GAAP reporting purposes, and consequently computation and reporting of its
capital adequacy on a standalone basis at that date were not required. At
December 31, 2001, ICICI's capital adequacy ratio calculated in accordance with
the Reserve Bank of India guidelines and based on its unconsolidated financial
statements prepared in accordance with Indian GAAP was 14.76%. Using the same
basis of calculation, its Tier I capital adequacy ratio at December 31, 2001
was 9.42% and its Tier II capital adequacy ratio was 5.34%.
The following table sets forth, at the dates indicated, ICICI's risk-based
capital, risk-weighted assets and risk-based capital adequacy ratios computed
in accordance with the applicable Reserve Bank of India guidelines and based on
ICICI's unconsolidated financial statements prepared in accordance with Indian
GAAP.
Indian GAAP At March 31, At December 31,
--------------------------------------------------------------------
2001/2000
2000 2001 % change 2002
--------------------------------------------------------------------
(in millions, except percentages)
Tier 1 capital............................ Rs. 74,700 Rs. 72,212 (3.3)% Rs. 69,404 US$ 1,421
Tier 2 capital............................ 37,350 37,526 0.5 3,933 81
------------------------------ -------------------------
Total capital............................. Rs. 112,050 Rs. 109,738 (2.1) Rs. 108,737 2,227
============================= =========================
On- balance sheet risk weighted assets.... Rs. 587,810 682,353 16.1 Rs. 664,232 13,603
Off-balance sheet risk weighted assets.... 60,820 66,007 8.5 72,283 1,480
------------------------------ -------------------------
Total risk weighted assets................ Rs. 648,630 Rs. 748,360 15.4 Rs. 736,515 15,083
============================= =========================
Tier 1 capital adequacy ratio............. 11.52% 9.65% 9.42%
Tier 2 capital adequacy ratio............. 5.75 5.01% 5.34%
----------------------------- ------------
Total capital adequacy ratio.............. 17.27% 14.66% 14.76%
============================= ============
The principal off-balance sheet items for ICICI were loan commitments,
guarantees, put options and lease and capital commitments. As described in "-
Financial Condition - Off Balance Sheet Items, Commitments and Contingencies",
these items were entered into by ICICI for normal business purposes. Capital
would have been required for the loan commitments as and when these converted
into loans and financing to customers in the normal course of business. Capital
was provided for guarantees based on the existing capital adequacy guidelines
of the Reserve Bank of India. See "Supervision and Regulation - Capital
Adequacy Requirements". Lease commitments were not expected to materially
affect ICICI's capital requirements. Capital was provided on the put options
outstanding and forward contracts and derivatives contracts outstanding at
year-end fiscal 2002 by the merged entity as per existing capital adequacy
guidelines of the Reserve Bank of India.
181
Liquidity Risk
See "Operating and Financial Review and Prospects for ICICI Bank -
Financial Condition - Liquidity Risk" for a discussion of liquidity risk of
ICICI, ICICI Bank and the merged entity.
Capital Expenditure
The following tables set forth, for the periods indicated, certain
information related to ICICI's capital expenditure by category of fixed assets.
Fiscal 2001
------------- ------------- ------------- -------------- -----------------------
Cost at
March 31, Additions/ Deletions/ Depreciation Net assets at March
2000 transfers transfers 31, 2001
------------- ------------- ------------- -------------- -----------------------
(in millions)
Land.............................Rs. 1,328 Rs. 18 Rs. 4 Rs. 77 Rs. 1,265 US$ 26
Buildings........................... 4,248 2,450 30 327 6,341 130
Equipment and furniture............. 3,053 1,512 235 1,011 3,319 68
Construction in progress............ 1,815 156 1,169 -- 802 16
Others.............................. 161 219 25 43 312 7
------------- ------------- ------------- -------------- ------------ ----------
Total.............................Rs. 10,605 Rs. 4,355 Rs. 1,463 Rs. 1,458 Rs. 12,039 US$ 247
============= ============= ============= ============== ============ ==========
Fiscal 2002
-------------- ------------ ------------- -------------- -----------------------
Cost at
March 31, Additions/ Deletions/ Depreciation Net assets at March
2001 transfers transfers 31, 2002
-------------- ------------ ------------- -------------- -----------------------
(in millions)
Land........................ Rs. 1,342 Rs. - Rs. 6 Rs. 103 Rs. 1,233 US$ 25
Buildings................... 6,668 731 83 439 6,877 141
Equipment and furniture..... 4,330 1,479 242 1,664 3,903 80
Construction in progress.... 802 - 319 6 477 10
Others...................... 355 144 9 31 459 9
-------------- ------------ ------------- -------------- ------------ -----------
Total....................... Rs. 13,497 Rs. 2,354 Rs. 659 Rs. 2,243 Rs. 12,949 US$ 265
============== ============ ============= ============== ============ ===========
ICICI's capital expenditure on property and equipment for fiscal 2002 was
Rs. 2.4 billion (US$ 48 million), for fiscal 2001 was Rs. 4.4 billion (US$ 89
million) and for fiscal 2000 was Rs. 4.3 billion (US$ 89 million). Out of the
capital expenditure in fiscal 2002, Rs. 731 million (US$ 15 million) was
primarily on account of office premises purchased, and Rs. 1.5 billion (US$ 30
million) was on account of capitalized expenditure on software and hardware in
fiscal 2002. The capital expenditure on equipment and furniture for fiscal 2001
was primarily attributable to significant upgrades to ICICI's computer and
software systems.
Segment Revenues and Assets
The varied financial services activities of ICICI were carried out by a
number of legal entities. Thus, while the parent company focused primarily on
medium-term and long-term project financing, other activities such as
commercial banking, investment banking, broking, venture capital financing and
insurance were conducted by subsidiaries/affiliates. Each subsidiary/affiliate
focused on specific activities and represented an operating segment for ICICI.
The project financing segment provided medium-term and long-term project
and infrastructure financing, securitization and factoring and lease financing.
The commercial banking segment provided working capital finance and foreign
exchange services to clients. Further, it provided deposit and loan products to
retail customers. The investment banking segment dealt in the debt, equity and
money markets and provided corporate advisory products such as mergers and
acquisition advice, loan syndication advice and issue management services. The
life insurance segment provided life insurance products to individuals. The
personal financial services segment provided consumer loan products such as
automobile loans and home mortgages to individuals.
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Operating segments were defined as components of an enterprise for which
separate financial information was available that was regularly evaluated by
the Chief Operating Decision Maker (CODM) in deciding how to allocate resources
and in assessing performance. The CODM evaluated ICICI's performance and
allocated resources based on an analysis of various performance indicators for
each of the above reportable segments. Components of profit and loss are
evaluated for project financing, commercial banking and investment banking
segments.
The results of ICICI Bank, which represented the commercial banking
segment, were reported under the equity method of accounting as of April 1,
2000. However, for management reporting, the entire results of ICICI Bank
continued to be reported as if the business were a consolidated entity. The
segment-wise information presented below was consistent with the management
reporting.
Project Financing Segment
ICICI's project financing segment engaged in providing medium-term and
long-term project finance, corporate finance and lease finance to Indian
businesses and largely represented the activities of ICICI, the parent company.
Fiscal 2002 compared to Fiscal 2001
ICICI's project financing segment made a net loss of Rs. 436 million (US$
9 million) in fiscal 2002 compared to a net gain of Rs. 5.6 billion (US$ 114
million) in fiscal 2001, primarily due to a decline in net-interest income and
non-interest income. Net income in fiscal 2002 included an amount of Rs. 1.3
billion (US$ 26 million), net of tax, on account of change in accounting
principle in respect of SFAS No. 141 and SFAS No. 142.
Net interest revenue, including dividends, decreased by 40.0% to Rs. 6.7
billion (US$ 137 million) in fiscal 2002 from Rs. 11.1 billion (US$ 227
million) in fiscal 2001, primarily due to non accrual of interest on loans
recognised as impaired during fiscal 2002 and a reduction in the loan
portfolio. Provision for loan losses decreased by 2.4% to Rs. 9.6 billion (US$
197 million) in fiscal 2002 from Rs. 9.8 billion (US$ 202 million) in fiscal
200l. Non-interest revenue decreased by 42.6% to Rs. 4.1 billion (US$ 84
million) in fiscal 2002 from Rs. 7.2 billion (US$ 146 million) in fiscal 2001
primarily due to a decline in gain on sale of stock of subsidiaries/affiliates,
loss on account of securities transactions and decline in fees, commission and
brokerage. Non-interest expense decreased by 4.1% to Rs. 3.2 billion (US$ 66
million) in fiscal 2002 from Rs. 3.4 billion (US$ 69 million) in fiscal 2001.
Total assets decreased by 6.2% to Rs. 643.7 billion (US$ 13.2 billion) at
year-end fiscal 2002 from Rs. 686.0 billion (US$ 14.0 billion) at year-end
fiscal 2001. The project finance segment accounted for 86.1% of the total
assets at year-end fiscal 2002 compared to 92.6% at year-end fiscal 2001.
Fiscal 2001 compared to Fiscal 2000
Net income for the project financing segment was Rs. 5.6 billion (US$ 114
million) in fiscal 2001 compared to Rs. 6.1 billion (US4 126 million) in fiscal
2000, primarily on account of increased provisioning requirements in fiscal
2001, offset, in part, by an increase in net interest revenue, decrease in
non-interest expense and write-back of income-tax expense. Net income for
fiscal 2000 included an amount of Rs. 249 million (US$ 5 million), net of tax,
on account of the effect of a change in the method of accounting for
depreciation on property and equipment.
Net interest revenue, including dividends, increased by 7.8% to Rs. 11.1
billion (US$ 227 million) in fiscal 2001 from Rs. 10.3 billion (US$ 211
million) in fiscal 2000. This increase was possible, despite ICICI's continued
focus on lower risk loans to highly-rated clients that resulted in lower credit
spreads and an increase in ICICI's impaired loans, primarily due to a
significant increase in average rupee loans in fiscal 2001 compared to fiscal
2000.
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Provision for loan losses increased by 68.3% to Rs. 9.8 billion (US$ 202
million) in fiscal 2001 from Rs. 5.8 billion (US$ 120 million) in fiscal 2000
primarily due to an increase in restructured loans in fiscal 2001.
Non-interest revenue increased by 12.4% to Rs. 7.2 billion (US$ 146
million) in fiscal 2001 from Rs. 6.4 billion (US$ 130 million) in fiscal 2000
primarily due to a gain on sale of stock in subsidiaries and affiliates offset,
in part, by the decline in trading account revenue, income from securities
transactions and foreign exchange transactions due to limited market
opportunities on account of depressed capital markets in fiscal 2001.
Non-interest expense decreased by 16.9% to Rs. 3.4 billion (US$ 69
million) in fiscal 2001 from Rs. 4.0 billion (US$ 83 million) in fiscal 2000.
primarily due to the absence of the cost of employee termination under the
voluntary retirement scheme which resulted in an expense of Rs. 232 million
(US$ 5 million) in fiscal 2000 and reduction in investment management fees paid
to a group company in fiscal 2001. The write-back of income-tax expense was
primarily due to an increase in recognition of deferred tax assets in respect
of provision for loan losses and other than temporary diminution in securities
available for sale offset, in part, by an increase in creation of deferred tax
liability in respect of property and equipment.
Total assets increased by 8.9% to Rs. 686.0 billion (US$ 14.0 billion) at
year-end fiscal 2001 from Rs. 629.8 billion (US$ 12.8 billion) at year-end
fiscal 2000. The project finance segment accounted for 92.6% of the total
assets at year-end fiscal 2001 compared to 81.3% at year-end fiscal 2000.
Commercial Banking Segment
Fiscal 2002 compared to Fiscal 2001
Net income for the commercial banking segment increased by 55.7% to Rs.
2.0 billion (US$ 42 million) in fiscal 2002 compared to Rs. 1.3 billion (US$ 27
million) in fiscal 2001, primarily due to an increase in net interest income
and non-interest income offset by an increase in provisions for loan losses and
in non-interest expense.
Net interest revenue, including dividends, increased 43.1% to Rs. 5.7
billion (US$ 117 million) in fiscal 2002 from Rs. 4.0 billion (US$ 82 million)
in fiscal 2001, reflecting mainly an increase of 97.0% in the average volume of
interest earning assets and decrease of 39 basis points in the spread to 2.11%
in fiscal 2002 from 2.50% in fiscal 2001. Provision for loan losses increased
59.1% to Rs. 1.7 billion (US$ 35 million) in fiscal 2002 from Rs. 1.1 billion
(US$ 22 million) in fiscal 2001.
Non-interest revenue increased by 197.2% to Rs. 5.2 billion (US$ 107
million) in fiscal 2002 from Rs. 1.8 billion (US$ 36 million) in fiscal 2001,
primarily due to increase in revenue on account of trading and securities
transactions and fees offset by a decrease in revenue from foreign exchange
transactions. Non-interest expense increased 101.7% to Rs. 6.3 billion (US$ 128
million) in fiscal 2002 from Rs. 3.1 billion (US$ 64 million) in fiscal 2001,
primarily due to the expenditure on the integration of the operations of Bank
of Madura and the expansion of ICICI Bank's retail banking business.
Total assets increased 84.0% to Rs. 404.8 billion (US$ 8.3 billion) at
year-end fiscal 2002 from Rs. 220.0 billion (US$ 4.5 billion) at year-end
fiscal 2001 primarily due to increase in available for sale securities,
primarily government of India securities and cash and cash equivalents offset,
in part, by a decrease in loans. Net loans decreased 22.1% to Rs. 72.5 billion
(US$ 1.5 billion) at year-end fiscal 2002 from Rs. 93.0 billion (US$ 1.9
billion) at year-end fiscal 2001
Fiscal 2001 compared to Fiscal 2000
Net income was Rs. 1.3 billion (US$ 27 million) in fiscal 2001
representing a 6.7% decrease from Rs. 1.4 billion (US$ 29 million) in fiscal
2000 primarily due to a significant increase in non-interest
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expense, and an increase in provision for loan losses offset, in part, by an
increase in net interest revenue.
Net interest revenue, including dividends, increased 124.9% to Rs. 4.0
billion (US$ 82 million) in fiscal 2001 from Rs. 1.8 billion (US$ 36 million)
in fiscal 2000, reflecting an increase in the average volume of
interest-earning assets, principally loans, and an increase in net interest
margins. The loan growth was due to an increase in the working capital loans
primarily to highly-rated large corporate clients acquired through the joint
marketing efforts of ICICI's commercial banking segment with ICICI. Net
interest margins increased primarily due to a decline in the cost of
interest-bearing liabilities, partially offset by a decline in yield on
interest-earning assets on account of a shift towards loans to highly rated
clients, which earn lower yields due to the lower credit risk associated with
these borrowers.
Provision for loan losses increased 153.4% to Rs. 1.1 billion (US$ 22
million) in fiscal 2001 from Rs. 427 million (US$ 9 million) in fiscal 2000 due
to an increase in impaired assets primarily due to the acquisition of impaired
loans of Bank of Madura.
Non-interest revenue declined marginally by 0.3% to Rs. 1.8 billion (US$
36 million) in fiscal 2001 compared to fiscal 2000. The increase in fees and
commissions and income from foreign exchange transactions was offset by a
decline in trading account revenue and losses on securities transactions. The
increase in fee income was principally on account of additional corporate
clients acquired by ICICI Bank during fiscal 2001. The income from foreign
exchange transactions increased primarily due to the gain on remittance of ADS
proceeds to India. Trading account revenue decreased in fiscal 2001 primarily
due to the mark to market impact on trading account assets. 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
mutual fund units portfolio which was caused by the extreme volatility in
Indian stock markets in the beginning of fiscal 2001.
Non-interest expense increased 133.6% to Rs. 3.1 billion (US$ 64 million)
in fiscal 2001 from Rs. 1.3 billion (US$ 27 million) in fiscal 2000 primarily
due to a significant increase in occupancy expenses, administration and other
expenses on account of aggressive retail and technology initiatives undertaken
by ICICI Bank during fiscal 2001. These initiatives included rapid expansion of
their ATM network, setting up of call centers, expansion of their credit card
business and consolidation of technology infrastructure including data centers.
Total assets increased 68.7% to Rs. 220.0 billion (US$ 4.5 billion) at
year-end fiscal 2001 from Rs. 131.4 billion (US$ 2.7 billion) at year-end
fiscal 2000 primarily due to the acquisition of Bank of Madura effective March
10, 2001.
Investment Banking Segment
ICICI's investment banking segment engaged in corporate advisory, fixed
income and equities trading and represented the activities of ICICI Securities.
Fiscal 2002 compared to Fiscal 2001
Net income for the investment banking segment increased 152.2% to Rs. 1.3
billion (US$ 26 million) in fiscal 2002 compared to Rs. 506 million (US$ 10
million) in fiscal 2001, primarily due to an increase in non-interest revenue.
Net interest revenue, including dividends, decreased by 8.1% to Rs. 365
million (US$ 7 million) in fiscal 2002 from Rs. 397 million (US$ 8 million) in
fiscal 2001. Provision for loan losses decreased 38.5% to Rs. 8 million (US$
163,833) in fiscal 2002 from Rs. 13 million (US$ 266,230) in fiscal 2001.
185
Non-interest revenue increased by 126.8% to Rs. 2.2 billion (US$ 44
million) in fiscal 2002 from Rs. 954 million (US$ 20 million) in fiscal 2001
primarily due to increase in income from trading transactions. Non-interest
expense increased by 19.7% to Rs. 553 million (US$ 11 million) in fiscal 2002
from Rs. 462 million (US$ 9 million) in fiscal 2001.
Total assets increased 29.0% to Rs. 22.7 billion (US$ 465 million) at
year-end fiscal 2002 from Rs. 17.6 billion (US$ 361 million) at year-end fiscal
2001. The investment banking segment accounted for 3.0% of the total assets at
year-end fiscal 2001 compared to 2.4% at year-end fiscal 2000.
Fiscal 2001 compared to Fiscal 2000
Net income for the investment banking segment decreased by 34.3% to Rs.
506 million (US$ 10 million) in fiscal 2001 compared to Rs. 770 million (US$ 16
million) in fiscal 2000 primarily due to limited market opportunities in the
debt and equity markets.
Net interest revenue, including dividends, decreased by 55.4% to Rs. 397
million (US$ 8 million) in fiscal 2001 compared to Rs. 890 million (US$ 18
million) in fiscal 2000 primarily due to a decrease in interest revenue and
dividends on trading assets. Provision for loan losses decreased 82.9% to Rs.
13 million (US$ 266,229) in fiscal 2001 from Rs. 76 million (US$ 2 million) in
fiscal 2000 primarily due to a reduction in impaired assets. Non-interest
revenue increased 25.9% to Rs. 954 million (US$ 20 million) in fiscal 2001 from
Rs. 758 million (US$ 16 million) in fiscal 2000 primarily due to an increase in
trading account revenue. Non-interest expenses increased 15.2% to Rs. 462
million (US$ 9 million) in fiscal 2001 from Rs. 401 million (US$ 8 million) in
fiscal 2000 primarily due to an increase in premises and equipment expense and
employee expense offset, in part, by a decrease in other administrative cost.
Total assets decreased 24.2% to Rs. 17.6 billion (US$ 361 million) at the
year-end fiscal 2001 from Rs. 23.3 billion (US$ 476 million) at year-end fiscal
2000.
Related Party Transactions
ICICI had transactions with its affiliates and directors and employees.
The following represent the significant transactions between ICICI and such
related parties:
Banking Services
ICICI utilized banking services of ICICI Bank on terms that equated those
offered to other customers. Non-interest expense of ICICI relating to such
services during fiscal 2002, amounted to Rs. 32 million (US$ 655,335) as
compared to Rs. 72 million (US$ 2 million) in fiscal 2001.
Derivative Transactions
ICICI entered into interest rate swap contracts with ICICI Bank
aggregating Rs. 10.3 billion (US$ 211 million) in fiscal 2002, as compared to
Rs. 3.4 billion (US$ 69 million) in fiscal 2001.The interest rate contracts
outstanding at year-end fiscal 2002 were Rs. 8.8 billion (US$ 179 million),
compared to Rs. 2.9 billion (US$ 59 million) at year-end fiscal 2001. Currency
swaps outstanding at year-end fiscal 2002 were Rs. 2.3 billion (US$ 47 million)
compared to Rs. 4.4 billion (US$ 89 million) at year-end fiscal 2001. Net
interest income in respect of these swaps amounted to Rs. 275 million (US$ 6
million) during fiscal 2002 as compared to Rs. 189 million (US$ 4 million) in
fiscal 2001.
Similarly, ICICI entered into forward foreign exchange contracts with
ICICI Bank aggregating Rs 22.5 billion (US$ 460 million) and Rs. 47.9 billion
(US$ 980 million) in fiscal 2002 and fiscal 2001, respectively. Contracts
aggregating Rs. 251 million (US$ 5 million) were outstanding at year-end fiscal
2002 compared to Rs. 2.3 billion (US$ 46 million) at year-end fiscal 2001.
186
Reverse Repurchase Transactions
ICICI had entered into reverse repurchase transactions with ICICI Bank
amounting to Rs. 52.8 million (US$ 1 billion) in fiscal 2002. At year-end
fiscal 2002, ICICI had reverse repurchase transactions outstanding with ICICI
Bank of Rs. 21.4 billion (US$ 438 million).
Software Development Services
ICICI provided software development services to Tricolor and Pru-ICICI and
earned fees of Rs. 19 million (US$ 389,105) in fiscal 2002 compared to Rs. 8
million (US$ 163,834) in fiscal 2001.
ICICI developed software and provided software and hardware support
services to ICICI Bank, and earned fees of Rs. 124 million (US$ 3 million) and
Rs. 73 million (US$ 2 million) in fiscal 2002 and fiscal 2001, respectively.
Back-office Support Services
ICICI set up a common technology infrastructure platform for the group,
and ICICI Bank was charged Rs. 182 million (US$ 4 million) and Rs. 94 million
(US$ 2 million) in fiscal 2002 and fiscal 2001, respectively, towards
communication expenses, backbone infrastructure expenses and data center costs.
ICICI provided telephone banking call-center services and transaction
processing services for the credit card operations of ICICI Bank, and earned
fees of Rs. 149 million (US$ 3 million) in fiscal 2002) compared to Rs. 99
million (US$ 2 million) in fiscal 2001.
Indian Rupee Debt
At year-end fiscal 2002, certain members of management held bonds issued
by ICICI amounting to Rs. 2 million (US$ 40,958) compared to Rs. 8 million (US$
163,834) at year-end fiscal 2001.
Asset Management Services
ICICI provided asset management services to TCW and earned fees of Rs. 21
million (US$ 430,063) in fiscal 2002 compared to Rs. 31 million (US$ 634,856)
during fiscal 2001.
Deposits and Borrowings
In fiscal 2002 ICICI received interest on deposits and call borrowings of
Rs. 268 million (US$ 6 million) compared to Rs. 202 million (US$ 4 million) in
fiscal 2001 from ICICI Bank.
Transfer of Financial Assets
In fiscal 2002 ICICI transferred loans of Rs. 11.2 billion (US$ 228
million) in pass-through securitization transactions, where the beneficial
interests were purchased by ICICI Bank compared to Rs. 438 million (US$ 9
million) at year-end fiscal 2001. A gain of Rs. 98 million (US$ 2 million) was
recorded on the sale in fiscal 2002. The gain on the same was Rs. 50 million
(US$ 1 million) in fiscal 2001. Subsequently, due to a change in the status of
the qualifying special purpose entity used in the transactions, ICICI regained
control of the assets sold. Obligations of Rs. 3.5 billion (US$ 72 million)
relating to such repurchases were reflected as a component of the other
borrowings at year-end fiscal 2002.
Lease of Premises and Facilities
In fiscal 2002 ICICI received rentals of Rs. 256 million (US$ 5 million)
compared to Rs. 193 million (US$ 4 million) in fiscal 2001 from ICICI Bank for
lease of premises, facilities and
187
other equipment. Similarly, in fiscal 2002 ICICI paid rentals of Rs. 11 million
(US$ 225,271) to ICICI Bank for lease of premises. No rentals were paid in
fiscal 2001.
Sale of Assets
In fiscal 2002 ICICI sold certain assets for Rs. 11 million (US$ 225,271)
compared to Rs. 99 million (US$ 2 million) to ICICI Bank.
Expenses/Revenue for Services Rendered
ICICI received Rs. 55 million (US$ 1 million) in fiscal 2002 compared to
Rs. 4 million (US$ 81,917) in fiscal 2001 from ICICI Bank for seconded
employees. Similarly, ICICI paid Rs. 8 million (US$ 163,834) in fiscal 2002
compared to Rs. 5 million (US$ 102,396) in fiscal 2001 to ICICI Bank for
employees seconded to ICICI.
Share Transfer Activities
ICICI provided share transfer services and dematerialization services to
ICICI Bank and earned fees of Rs. 3 million (US$ 61,438) in fiscal 2002
compared to Rs. 8 million (US$ 163,834) in fiscal 2001.
Other Transactions
ICICI undertook a corporate brand advertising campaign for the group, out
of which an amount of Rs. 29 million (US$ 593,897) has been recovered from
ICICI Bank in fiscal 2002 compared to Rs. 15 million (US$ 307,188) in fiscal
2001.
Related party balances
The following balances payable to/receivable from related parties are
included in the balance sheet:
As of March 31,
2001 2002
--------------------------
(in millions)
Cash and cash equivalents.................................................... Rs. 4,882 Rs. 4,360
Loans........................................................................ 192 209
Other assets................................................................. 147 320
Other liabilities............................................................ 55 24
Employee loans
ICICI had advanced housing, vehicle and general-purpose loans to
employees, bearing preferential rates of interest ranging from 2.5% to 3.5%.
The tenure of these loans ranged from five years to 25 years. The loans were
generally secured by the assets acquired by the employees. Employee loan
balances outstanding at year-end fiscal 2002, of Rs. 949 million (US$ 19
million) are included in other assets at year-end fiscal 2002 compared to Rs.
762 million (US$ 16 million) at year-end fiscal 2001.
Critical Accounting Policies
The notes to ICICI's financial statements contain a summary of ICICI's
significant accounting policies. Certain of these policies were considered to
be important to the portrayal of ICICI's financial condition, since they
required the management to make difficult, complex or subjective judgements,
some of which may relate to matters that were inherently uncertain. The
policies included valuation of derivatives and securities where no ready market
existed, identification and measurement of other
188
than temporary diminution in the value of securities, valuation of
securitization transactions, accounting for income tax, deferred tax assets and
deferred tax liabilities and determining the level of allowance for credit
losses.
Additional information about these policies can be found in Note 1 to
ICICI's financial statements. The statements below contain forward looking
statements within the meaning of the Private Securities Litigation reform Act.
See "Forward-Looking Statements".
ICICI's financial statements were prepared in accordance with US GAAP,
which required ICICI to make estimates and assumptions that affected the
reported amounts of assets and liabilities as of the date of the financial
statements and the reported income and expenses during the reported period.
ICICI believed that of its significant accounting policies, the following may
involve a higher degree of judgement and complexity.
Valuation of Securities, Derivatives Transactions and Hedging activities
ICICI classified investments in debt and readily marketable equity
securities, other than venture capital subsidiary investments, into two
categories based upon management's intention at the time of purchase: trading
securities and securities available for sale.
Trading assets, primarily debt securities and foreign exchange products,
were recorded at fair value with realized and unrealized gains and losses
included in non-interest income. The fair value of trading assets was based
upon quoted market prices or, if quoted market prices were not available, the
value was estimated as follows:
o The fair value of the unquoted government of India securities was
estimated based on the yields to maturity rates of these securities put by
the agencies approved by the Reserve Bank of India.
o The fair value of the unquoted securities (excluding government of India
securities) and preference shares was computed based on the mark-up over
the yield to maturity rates for government of India securities, as
published by certain agencies approved by the Reserve Bank of India. The
mark up was graded according to the ratings assigned to the issuer of the
securities by the rating agencies.
o The fair values of investments in unquoted mutual fund units were
estimated based on the latest repurchase price declared by the mutual fund
in respect of each particular scheme. If the repurchase price is not
available, the fair value was estimated based on the net asset value of
the respective scheme.
o The fair values of certain derivative contracts were derived from pricing
models that consider market and contractual prices for the underlying
financial instruments, as well as the time value of money, the yield curve
or any other volatility factors underlying the positions.
ICICI no longer classified investments in debt securities as held to
maturity, due to sale of certain held to maturity securities during the year
ended March 31, 2002. During the year ended March 31, 2002, ICICI sold debt
securities classified as held to maturity. The debt securities were sold for
Rs. 640 million (US$ 13 million) resulting in a realized gain of Rs. 102
million (US$ 2 million). As the securities were sold for reasons other than
those specified in SFAS No. 115, all remaining held to maturity securities were
reclassified as available for sale.
Securities not classified as trading securities were classified as
available for sale. These included securities used as part of ICICI's asset
liability management strategy, which may have been sold in
189
response to changes in interest rates, prepayment risk, liquidity needs and
similar factors. Securities available for sale were recorded at fair value with
unrealized gains and losses recorded, net of tax, as a component of accumulated
other comprehensive income.
Equity securities, which were traded on a securities exchange within six
months of the balance sheet date were considered as publicly traded. The last
quoted price of such securities was taken as their fair value. Non-readily
marketable equity securities for which there was no readily determinable fair
value were recorded at cost.
Securities on which there was an unrealized loss that was deemed to be
other than temporary were written down to fair value with the loss recorded in
non-interest income as a loss on other securities. Other than temporary decline
was identified by management based on an evaluation of all significant factors
including the length of time and the extent to which the fair value had been
less than the cost, the financial condition and prospects of the issuer and the
extent and ability of ICICI to retain the investment for a period of time
sufficient to allow for any probable recovery in fair value.
Securities acquired through conversion of loans in a troubled debt
restructuring were recorded at fair value on the date of conversion and
subsequently accounted for as if acquired for cash.
ICICI's venture capital subsidiaries carried their investments at fair
value, with changes in fair value recognized in gain or loss on venture capital
investments. The fair values of publicly traded venture capital investments
were generally based upon quoted market prices. In certain situations,
including thinly traded securities, large-block holdings, restricted shares or
other special situations, the quoted market price was adjusted to produce an
estimate of the attainable fair value for the securities. For securities that
were not publicly traded, fair value was determined in good faith pursuant to
procedures established by the board of directors of the venture capital
subsidiaries. In determining the fair value of these securities, consideration
was given to the financial conditions, operating results and prospects of the
underlying companies, and any other factors deemed relevant. Generally, these
investments were carried at cost during the first year, unless a significant
event occurred that effected the long-term value of the investment. Because of
the inherent uncertainty of the valuations, those estimated values may have
differed significantly from the values that would have been used had a ready
market for the investments existed.
SFAS No. 133 and SFAS No. 138 require that all derivative instruments be
recorded on the balance sheet at their respective fair values with unrealized
gains and losses recorded either in accumulated other comprehensive income or
in the statement of income, depending on the purpose for which the derivative
was held. At the inception of a hedge transaction, ICICI formally documented
the hedge relationship and the risk management objective and strategy for
undertaking the hedge. This process included identification of the hedging
instrument, hedged item, risk being hedged and the methodology for measuring
effectiveness. In addition, ICICI assessed, both at the inception of the hedge
and on an ongoing quarterly basis, whether the derivative used in the hedging
transaction had been highly effective in offsetting changes in fair value or
cash flows of the hedged item, and whether the derivative was expected to
continue to be highly effective. Derivatives that did not meet the criteria for
designation as a hedge under SFAS No. 133 at inception, or failed to meet the
criteria thereafter, were accounted for in other assets with changes in fair
value recorded in the statement of income.
ICICI discontinued hedge accounting prospectively when either it was
determined that the derivative was no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item; the derivative
expired or was sold, terminated or exercised; the derivative was de-designated
because it was unlikely that a forecasted transaction would occur; or
management determined that designation of the derivative as a hedging
instrument was no longer appropriate.
Changes in the fixed income, equity , foreign exchange markets would have
impacted ICICI's estimate of fair value in the future, potentially affecting
principle trading revenues. Similarly, pricing models and their underlying
assumptions impacted the amount and timing of unrealized gains and
190
losses
recognized, and the use of different pricing models or assumptions could have
produced different financial results.
Allowance for loan losses
The allowance for loan losses represents management's estimate of probable
losses inherent in the portfolio. Larger balance, non-homogenous exposures
representing significant individual credit exposures were evaluated based upon
the borrower's overall financial condition, resources and payment record and
the realizable value of any collateral. Within the allowance of loan losses, a
valuation allowance was maintained for larger-balance, non-homogenous loans
that had been individually determined to be impaired. This estimate considered
all available evidence including the present value of the expected future cash
flows discounted at the loan's contractual effective rate and the fair value of
collateral. This evaluation process was subject to numerous estimates and
judgements.
Each portfolio of smaller-balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, was
individually evaluated for impairment. The allowance for loan losses attributed
to these loans was established via a process that included an estimate of
probable losses inherent in the portfolio, based upon various statistical
analysis. These included migration analysis, in which historical delinquency
and credit loss experience was applied to the current aging of the portfolio,
together with an analysis that reflects current trends and conditions. The use
of different estimates or assumptions could have produced different provisions
for smaller balance homogeneous loan losses.
While determining the adequacy of the allowance for loan losses,
management also considered overall portfolio indicators including historical
credit losses, delinquent and non-performing loans, and trends in volumes and
terms of loans; an evaluation of overall credit quality and the credit process,
including lending policies and procedures; consideration of economic,
geographical, product, and other environmental factors; and model imprecision.
This evaluation process was subject to numerous estimates and judgements.
Securitization
ICICI transferred commercial and consumer loans through securitization
transactions. The provisions of SFAS No. 140 relating to transfer and servicing
of financial assets were effective for transactions after March 31, 2001. The
transferred loans were de-recognized and gains/losses were recorded only if the
transfer qualifies as a sale under SFAS No. 140. Recourse and servicing
obligations and put options written were recorded as proceeds of the sale.
Retained beneficial interests in the loans and servicing rights were measured
by allocating the carrying value of the loans between the assets sold and the
retained interest, based on the relative fair value at the date of
securitization. The fair values were determined using either financial models,
quoted market prices or sales of similar assets.
Financial models and their underlying assumptions impacted the amount and
timing of gains and losses recognized, and the use of different financial
models or assumptions could have produced different financial results.
Goodwill and intangible assets
On April 1, 2001, ICICI early-adopted SFAS No. 142, Goodwill and Other
Intangible Assets. As required by SFAS No. 142, ICICI reclassified existing
goodwill and intangible assets to conform with the new criteria in SFAS No.
141, Business Combinations, for recognition apart from goodwill. This resulted
in reclassification of previously recorded intangible assets of Rs. 115 million
(US$ 2 million)
191
as goodwill and a reclassification of previously recorded goodwill of Rs. 373
million (US$ 8 million) as a separate unidentifiable intangible asset.
As required by SFAS No. 142, ICICI identified its reporting units and
assigned assets and liabilities, including goodwill to the reporting units on
the date of adoption. Subsequently, ICICI compared the fair value of each
reporting unit to its carrying value, to determine whether goodwill was
impaired at the date of adoption. This transitional impairment evaluation did
not indicate an impairment loss.
Subsequent to the adoption of SFAS No. 142, ICICI did not amortize
goodwill but instead tested goodwill for impairment at least annually. The
annual impairment test under SFAS No. 142 did not indicate an impairment loss.
The unidentifiable intangible asset relates to the acquisition of a
financial service company in 1998 and continues to be amortized.
As described above, this impairment evaluation process was subject to
numerous estimates and judgements. Changes in these estimates could have had a
direct impact on the impairment charge.
Income taxes
ICICI accounted for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. Deferred tax assets and liabilities were
determined based on the difference between the financial reporting and tax
basis of assets and liabilities, using enacted tax rates expected to apply to
taxable income in the years the temporary differences were expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates was recognized in the statement of income in the period of
change. Deferred tax assets were recognized subject to a valuation allowance
based upon management's judgment as to whether realization was considered more
likely than not.
The process of evaluating the realizability of deferred tax assets was
subject to numerous estimates and judgments. Changes in these estimates could
have had a direct impact on the valuation allowance for deferred tax assets and
could result in a change in the valuation allowance.
Recently Issued Accounting Standards
ICICI had already adopted SFAS No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. See "Operating and Financial Review
and Prospects for ICICI Bank - Recently Issued Accounting Standards".
192
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
FOR ICICI BANK AND ICICI
The respective boards of directors of ICICI and ICICI Bank in their
meetings held on October 25, 2001 approved the amalgamation of ICICI, ICICI
Personal Financial Services and ICICI Capital Services with ICICI Bank. The
consummation date of the amalgamation was the date on which all the required
permits and consents for the amalgamation were obtained including the approval
of the shareholders of ICICI and ICICI Bank, approval of the High Courts at
Mumbai and Ahmedabad and the approval of the Reserve Bank of India.
The boards of directors of ICICI and ICICI Bank approved the issue and
allotment of equity shares of ICICI Bank to the shareholders of ICICI in the
ratio of one ICICI Bank equity share, par value of Rs. 10 each, fully paid-up,
for every two ICICI equity shares, par value of Rs. 10 each, fully paid up.
All requisite approvals for the amalgamation were obtained by ICICI and
ICICI Bank by April 26, 2002. Subsequently, the transaction was consummated by
issuing shares as stated above.
Under US GAAP, pursuant to the provisions of SFAS 141, the acquisition is
a reverse merger wherein ICICI is the accounting acquirer and ICICI Bank is the
accounting acquiree. ICICI held 46.0% of the outstanding equity shares of ICICI
Bank. The balance of 54.0% of the outstanding equity shares was held by others.
This acquisition of 54% of the outstanding equity shares of ICICI Bank is being
accounted for as a step acquisition and accordingly, 54% of the assets and
liabilities of ICICI Bank are being recorded at fair value and the operations
of ICICI Bank will be reflected in the operations of the merged entity from the
date of consummation, April 26, 2002. For convenience purposes, the
amalgamation is being accounted for on April 1, 2002.
The unaudited pro forma condensed consolidated balance sheet and
statements of income have been prepared to illustrate the acquisition of ICICI
Bank by ICICI which is being accounted for, under US GAAP, as a step
acquisition.
The unaudited pro forma condensed consolidated balance sheet and
statements of income are based on information obtained from the audited
historical balance sheets and statements of income of ICICI and ICICI Bank.
The unaudited pro forma condensed consolidated balance sheet has been
prepared to give effect to the acquisition transaction, which includes the
issuance of shares, as though such transaction had occurred as of March 31,
2002. The unaudited pro forma condensed consolidated statements of income have
been prepared to give effect to the acquisition transaction, which includes the
issuance of shares, as though such transaction had occurred as of April 1, 2000
for both the unaudited pro forma condensed consolidated statement of income for
the year ended March 31, 2001 and the unaudited pro forma condensed
consolidated statement of income for the year ended March 31, 2002.
These unaudited pro forma condensed consolidated balance sheet and
statements of income and accompanying notes should be read in conjunction with
this annual report and the audited financial statements of ICICI and ICICI Bank
and the notes thereto included elsewhere in this annual report.
ICICI has adopted the provisions of SFAS No. 141 and SFAS No. 142,
effective April 1, 2001. Therefore, amortization of goodwill and intangibles
with indefinite lives has ceased, and such assets will be tested for impairment
annually (or more frequently if impairment indicators arise). The excess of the
cost of acquisition of ICICI Bank over 54.0% of the fair value of the net
assets acquired is accounted for as deposit and customer relationships.
193
The unaudited pro forma condensed consolidated balance sheet and
statements of income do not purport to be indicative of either future results
or results of operations, as completed on or as of the indicated date.
Unaudited Pro Forma Condensed Consolidated Balance Sheet at March 31, 2002
--------------------------- ---------------------------------- ---------------
Pro Forma
Historical Pro Forma Adjustments Combined
--------------------------- ---------------------------------- ---------------
ICICI ICICI Bank Elimination Step acquisition
method & other
of equity adjustments
------------- ------------- --------------- ------------------ ---------------
(in millions)
Assets
Cash and cash equivalents........... Rs. 41,760 Rs. 98,487 Rs. - Rs. (25,676) (a) Rs. 114,571
Securities.......................... 105,401 206,127 - 2,416 (b) 313,944
Investment in equity affiliates..... 8,590 - (8,204) (e) - 386
Loans, net of allowance for
Loan losses .................... 523,601 72,474 - (6,104) (a) 590,083
112 (b)
Goodwill and other intangible
assets, net...................... 2,098 2,397 - 5,739 (c) 8,963
(1,271) (c)
Other assets........................ 64,380 25,320 - (1,454) (a) 88,256
10 (b)
------------- ------------- --------------- ------------------ ---------------
Total assets........................ Rs. 745,830 Rs. 404,805 Rs. (8,204) (26,228) Rs. 1,116,20
============= ============= =============== ================== ===============
--------------------------- ---------------------------------- ----------------
Historical Pro Forma Adjustments Pro Forma
Combined
------------- ------------- ---------------- ----------------- ----------------
Step acquisition
ICICI ICICI Bank Elimination method & other
of equity adjustments
------------- ------------- ---------------- ----------------- ----------------
(in millions)
Liabilities
Deposits............................ Rs. 7,380 Rs. 325,221 - Rs. (4,277)(a) Rs. 328,723
399 (b)
Borrowings and trading
Liabilities...................... 605,881 29,785 - (27,186) (a) 608,570
90 (b)
Other liabilities................... 60,809 31,649 - (1,772) (a) 93,632
2,946 (b)
------------- ------------- ---------------- ----------------- ----------------
Total liabilities................... Rs. 674,070 Rs. 386,655 Rs. - Rs. (29,800) Rs. 1,030,925
Minority interest................... 599 - - - 599
Stockholders' equity................
Common stock at Rs. 10 par value.... 7,848 2,203 - (3,927) (d) 6,125
Additional paid-in capital.......... 38,110 10,926 - 12,520 (d) 61,556
Retained earnings................... 26,042 4,040 - (4,040) (d) 26,042
Deferred stock compensation......... (7) (5) - 5(d) (7)
Accumulated other comprehensive
income........................... (832) 986 - (986) (d) (832)
Treasury stock...................... - - (8,204) (e) - (8,204)
Total stockholders' equity.......... 71,161 18,150 (8,204) 3,572 84,679
------------- ------------- ---------------- ----------------- ----------------
Total liabilities and
Stockholders' equity............. Rs. 745,830 Rs. 404,805 Rs. (8,204) Rs. (26,228) Rs. 1,116,203
============= ============= ================ ================= ================
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
194
Unaudited Pro Forma Condensed Consolidated Statements of Income for Fiscal 2002
-------------------------------------------------------------------------------
Historical Pro Forma Adjustments Pro Forma
-------------------------------------------------------------- Combined
Step acquisition
Elimination method & other
ICICI ICICI Bank of equity adjustments
-------------------------------------------------------------------------------
(in millions)
Interest income..................... Rs. 79,037 Rs. 20,837 Rs. - Rs. (582) (a) Rs. 98,277
(1,015) (k)
Interest expense.................... 69,509 15,116 - (582) (a) 84,127
84 (k)
-------------------------------------------------------------------------------
Net interest income................. 9,528 5,721 - (1,099) 14,150
Provision for loan losses........... 9,743 1,722 - - 11,465
-------------------------------------------------------------------------------
Net interest income after provision
for loan losses................... (215) 3,999 - (1,099) 2,685
Non-interest income.................
Fees, commission and brokerage.... 4,747 1,733 - (29) (a) 6,451
Other non-interest income......... 4,703 (j) 3,480 - (549) (a) 7,747
113 (k)
Total non-interest income........... 9,450 5,213 - (465) 14,198
Non-interest expense................ 10,275 6,260 - (431) (a) 16,561
(215) (f)
672 (l)
Earnings in equity of affiliates.... 975 - (929) - 46
Minority Interest................... 289 - - - 289
-------------------------------------------------------------------------------
Income before income taxes.......... 224 2,952 (929) (1,590) 657
Income tax expense.................. 129 931 - (438)(I) 622
-------------------------------------------------------------------------------
Net income before cumulative
effect of accounting changes...... Rs. 95 Rs. 2,021 Rs. (929) Rs. (1,152) Rs. 35
Cumulative effect of accounting
changes........................... 1,265 16 - - 1,281
-------------------------------------------------------------------------------
Net income after cumulative effect
of accounting changes............. Rs. 1,360 Rs. 2,037 Rs. (929) Rs. (1,152) Rs. 1,316
===============================================================================
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
195
Unaudited Pro Forma Condensed Consolidated Statements of Income for fiscal 2001
-------------------------------------------------------------------------------
Historical Pro Forma Adjustments Pro Forma
--------------------------------------------------------------- Combined
ICICI ICICI Bank Elimination Step acquisition
method & other
of equity adjustments
-------------------------------------------------------------------------------
(in millions)
Interest income..................... Rs. 80,163 Rs. 12,406 Rs. - Rs. (366) (a) Rs. 91,879
(324) (k)
Interest expense.................... 67,892 8,408 - (366) (a) 75,652
(282) (k)
-------------------------------------------------------------------------------
Net interest income................. 12,271 3,998 - (42) 16,227
Provision for loan losses........... 9,892 1,082 - - 10,974
-------------------------------------------------------------------------------
Net interest income after
provision
for loan losses................... 2,379 2,916 - (42) 5,253
Non-interest income
Fees, commission and brokerage... 5,317 1,125 - (58) (a) 6,384
Other non-interest income........ 3,971 (j) 629 - (505) (a) 4,095
-------------------------------------------------------------------------------
Total non-interest income........... 9,288 1,754 - (563) 10,479
Non-interest expense................ 5,808 3,104 - (563) (a) 9,023
(12) (m)
686 (l)
Earnings in equity of affiliates.... 856 - (814) - 42
Minority interest................... 34 - 34
-------------------------------------------------------------------------------
Income before income taxes.......... 6,749 1,566 (814) (716) 6,785
Income tax expense.................. 119 258 - (260)(i) 117
-------------------------------------------------------------------------------
Net income from continuing
Operations....................... Rs. 6,630 Rs. 1,308 Rs. (814) Rs. (456) Rs. 6,668
==============================================================================
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
The unaudited pro forma condensed consolidated balance sheet and
statements of income reflect the accounting impact of the acquisition
transaction, which includes the issuance of shares, as though it had occurred
on March 31, 2002 and April 1, 2000, respectively.
Accordingly, the unaudited pro forma condensed consolidated statement of
income for the year ended March 31, 2001 includes ICICI's results of operations
for the year ended March 31, 2001 and ICICI Bank's results of operations for
the year ended March 31, 2001 and the pro forma adjustments discussed below and
the unaudited pro forma condensed consolidated statement of income for the year
ended March 31, 2002 includes ICICI's results of operations for the year ended
March 31, 2002 and ICICI Bank's results of operations for the year ended March
31,2002, as well as the pro forma adjustments discussed below.
Purchase consideration
The purchase consideration for the reverse merger has been determined
based on the average market price of ICICI Bank shares, prevailing at the date
of announcement of the reverse merger and two days before and after that date.
The purchase consideration is determined based on the step acquisition of 54.0%
of the equity shares of ICICI Bank held other than by ICICI and is as follows:
196
Rs. million
Particulars (except share data)
----------- -------------------
Number of shares held other than by ICICI (54% of 220 million shares)........ 118.99
Value per share.............................................................. 101.11
Purchase consideration (1)*(2)............................................... 12,032
Add: Merger costs (g)........................................................ 1,331
Fair value of ICICI Bank stock options (h)................................... 27
Total purchase consideration................................................. 13,390
Allocation of fair valuation of net assets
The allocation of fair value of net assets of ICICI Bank at March 31, 2002
is as follows:
--------------------------------------------------------------------
Adjustments to
reflect step
acquisition of
Book Value Fair Value Difference 54%
--------------------------------------------------------------------
(in millions)
Cash and cash equivalents................. Rs. 98,487 Rs. 98,487 Rs. - Rs. -
Securities................................ 206,127 210,601 4,474 2,416
Loans..................................... 72,474 72,681 207 112
Goodwill and other intangibles............ 2,398 44 (2,354) (1,271)
Other assets.............................. 25,319 25,204 (115) (62)
Total assets.............................. 404,805 407,017 2,212 1,195
Deposits.................................. 325,221 325,959 738 398
Borrowings................................ 29,785 29,951 166 90
Other liabilities......................... 31,649 31,649 - -
Total liabilities......................... 386,655 387,559 904 488
Net assets................................ Rs. 18,150 Rs. 19,458 Rs. 1,308 Rs. 707
Intangible assets
The resulting excess of the cost over the fair value of the net assets
acquired were accounted for as deposit and customer relationships. The deposit
and customer relationships were determined as follows:
Particulars (in millions)
----------- -------------
Purchase consideration..................................................................... Rs. 13,390
Less: Net assets taken over (54.0%)........................................................ 10,508
Less: Deferred tax liability created on fair value differences............................. (352)
--------------
Intangible asset on step acquisition of 54.0%.............................................. Rs. 3,232
Add:46.0% of existing ICICI Bank goodwill ................................................ 1,083
Intangible asset before gross up for deferred tax.................................. 4,315
Deferred taxes (36.75%)............................................................ 2,506
--------------
Intangible asset after gross up for deferred tax (deposit and customer relationships)....... Rs. 6,821
==============
These unaudited pro forma condensed consolidated balance sheet and
statements of income include adjustments to reflect the impact of the above
preliminary purchase price allocations to the fair value of the acquired net
assets of ICICI Bank. However, they do not reflect any adjustments resulting
from benefits or synergies, resulting from the operations of the merged entity.
197
Pro forma adjustments
(a) Reflects elimination of all intercompany transactions and balances between
ICICI and ICICI Bank.
(b) Reflects fair value adjustments on net assets (inclusive of tax impact) of
ICICI Bank to the extent of 54% of common stock.
(c) Reflects customer and deposit intangibles of Rs. 5,110 million on step
acquisition of 54% of ICICI Bank common stock and write-down of historical
goodwill of ICICI Bank to the extent of 54% (Rs. 1,271 million).
(d) Reflects adjustments to the capital of ICICI to reflect the par value of
the outstanding stock of ICICI Bank post amalgamation. The difference
between the capital stock of ICICI and the capital stock of ICICI Bank is
recorded as an adjustment to the additional paid-in capital of the merged
entity. Also reflects changes to stockholders' equity to account for the
step acquisition.
(e) Reflects elimination of investment in equity affiliate by transfer to
treasury stock at carrying value.
(f) Reflects reversal of amortization of goodwill of ICICI Bank of Rs. 215
million for the year ended March 31, 2002, due to adoption of SFAS No. 141
and SFAS No. 142 by ICICI, with effect from April 1, 2001. This goodwill
is non-deductible for tax purposes.
(g) Transaction costs to be incurred by ICICI in connection with the
acquisition transaction are estimated at Rs. 1,331 million. These costs
are considered as part of the purchase price allocation. Transaction costs
to be incurred by ICICI Bank have not been considered as part of the
purchase price allocation.
(h) Stock options of ICICI Bank have been assumed by ICICI. Consequently, the
fair value of the options of ICICI Bank have been included as part of the
purchase consideration.
(i) Reflects the reversal of the deferred tax charge created with respect to
undistributed earnings of ICICI Bank as subsequent to the acquisition,
this would not represent taxable temporary difference. This also reflects
the reversal of the deferred tax liability on intangible assets (customer
and deposit relationships) created on the step acquisition of ICICI Bank
in line with the amortization of intangible asset arising on step
acquisition of ICICI Bank.
(j) Includes gain on sale of stock of ICICI Bank amounting to Rs. 1,996
million and Rs. 57 million during the the year ended March 31, 2001 and
March 31, 2002, respectively.
(k) Reflects accretion and amortization of fair value adjustments on loans,
securities, deposits and borrowings.
(l) Reflects amortization of intangible asset arising on step acquisition of
ICICI Bank.
(m) Reflects reversal of amortization of goodwill on account of acquisition of
Bank of Madura by ICICI Bank.
Pro forma earnings per share:
Year ended March 31, 2001 Year ended March 31, 2002
------------------------------------------------------
Fully Fully
Basic diluted Basic diluted
------------------------------------------------------
(millions, except per share data)
Pro forma earnings
Income from continuing operations.................... Rs. 6,668 Rs. 6,668 Rs. 1,316 Rs. 1,316
Contingent issuances of subsidiaries/affiliates...... - (25) - -
------------------------------------------------------
Income (adjusted for full dilution).................. 6,668 6,643 1,316 1,316
======================================================
Common stock
Common stock of legal acquirer....................... 613 613 613 613
Treasury stock....................................... (101) (101) (101) (101)
Dilutive effect of employee stock options (1) ....... - - - -
------------------------------------------------------
Total................................................ 512 512 512 512
======================================================
Pro forma earnings per share
Income from continuing operations ................... Rs. 13.02 Rs. 12.97 Rs. 2.57 Rs. 2.57
======================================================
---------
(1) Options granted to employees to purchase equity shares were not included
in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of the
equity shares during the period.
198
MANAGEMENT
Directors and Executive Officers
The board of directors of the merged entity, consisting of 17 members at
August 31, 2002, is responsible for the management of the merged entity's
business. The organizational documents of the merged entity provide for a
minimum of three directors. In connection with the amalgamation and pursuant to
the terms of the Scheme of Amalgamation, the organizational documents of the
merged entity have been amended to increase the maximum number of directors on
the board from 12 to 21, excluding the government director and the debenture
director (defined below), if any. The amendment of the merged entity's
organizational documents was approved by the Reserve Bank of India, as required
under the Indian Banking Regulation Act. The merged entity may, subject to the
provisions of its organizational documents and the Indian Companies Act, change
the minimum or maximum number of directors by a resolution, which is passed at a
general meeting by a majority of 75.0% of the present and voting shareholders.
In addition, under the Indian Banking Regulation Act, the Reserve Bank of India
may require the merged entity to convene a meeting of its shareholders for the
purposes of appointing new directors to its board of directors.
Subsequent to the amalgamation, the board of directors was reconstituted in
view of the increase in the merged entity's scale of operations consequent to
the amalgamation, and in compliance with the provisions of the Indian Banking
Regulation Act, the Indian Companies Act, and the listing agreements with the
Indian stock exchanges. The Indian Banking Regulation Act requires that not less
than 51% of the directors should have special knowledge or practical experience
in areas relevant to banking including accounting, finance, agriculture, banking
and small scale industry. Accordingly, all of the merged entity's directors are
professionals with special knowledge of one or more of the above areas. Of the
17 directors, seven are executive directors. Under the terms of the loan and
guarantee facilities provided by the government of India to ICICI that have been
transferred to the merged entity consequent to the amalgamation, the government
of India is entitled to appoint and has appointed one representative to the
board, currently Mr. D. C. Gupta. Of the remaining nine independent directors,
the Chairman of the board, Mr. N. Vaghul, is the former chairman of ICICI, two
directors are experts in the areas of agriculture and small-scale industries
respectively as required by the Indian Banking Regulation Act, one is a
consultant, one is a practicing chartered accountant, one is a professor of
finance, one is a retired executive and two are from industrial companies.
The merged entity's organizational documents also provide that the merged
entity may execute trust deeds securing its debentures under which the trustee
or trustees may appoint a director, known as the debenture director. The
debenture director is not subject to retirement by rotation and may only be
removed as provided in the relevant trust deed. There is no debenture director
on the board of directors.
The board of directors has appointed Mr. K.V. Kamath and Ms. Lalita D.
Gupte, previously non-executive directors on the board, as Managing Director &
CEO and Joint Managing Director, respectively, effective May 3, 2002. Mr. K. V.
Kamath and Ms. Lalita D. Gupte were Managing Director & CEO and Joint Managing
Director & Chief Operating Officer - International Business, respectively, of
ICICI. The board has re-designated Mr. H.N. Sinor as Joint Managing Director and
appointed Ms. Kalpana Morparia and Mr. S. Mukherji as Executive Directors
effective May 3, 2002.
Pursuant to the provisions of the Indian Companies Act, at least two-thirds
of the total number of directors, excluding the government director and the
debenture director, are subject to retirement by rotation. One-third of these
directors must retire from office at each annual meeting of shareholders. A
retiring director is eligible for re-election. Pursuant to the provisions of the
Indian Banking Regulation Act, none of the directors other than executive
directors may hold office continuously for a period exceeding eight years. The
tenures of appointment of Mr. K. V. Kamath, Ms. Lalita D. Gupte, Ms. Kalpana
Morparia and Mr. S. Mukherji are until the dates on which their respective
tenures as
199
executive directors of ICICI would have expired, i.e. April 30, 2006 for Mr. K.
V. Kamath, Ms. Kalpana Morparia and Mr. S. Mukherji and June 23, 2004 for Ms.
Lalita D. Gupte. However, in order to comply with the Indian Companies Act and
the merged entity's organizational documents, Ms. Lalita D. Gupte, Ms. Kalpana
Morparia and Mr. S. Mukherji will be subject to retirement by rotation if at
any time the number of non-rotational directors exceeds one-third of the total
number of directors. If they are re-appointed as directors immediately upon
retirement by rotation, they will continue to hold their offices of Joint
Managing Director and Executive Directors, as applicable, and the retirement by
rotation and re-appointment shall not be deemed to constitute a break in their
appointment. The appointment of executive directors requires the approval of
the Reserve Bank of India. The approval of the Reserve Bank of India for the
appointment of Mr. K. V. Kamath as Managing Director & CEO, Ms. Lalita D. Gupte
as Joint Managing Director and Ms. Kalpana Morparia and Mr. S. Mukherji as
Executive Directors has been obtained. The tenure of appointment of Mr. H. N.
Sinor is until May 31, 2003 and the tenures of appointment of Ms. Chanda D.
Kochhar and Dr. Nachiket Mor are until March 31, 2006. The merged entity's
other executive officers may hold office until they retire, unless they are
discharged earlier by the merged entity.
The board of directors of the merged entity at August 31, 2002 had the
following members:
-------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
-------------------------------------------------------------------------------------------------------------------------
Mr. Narayanan Vaghul 66 March 27, 2002 Chairman
Chairman ICICI Knowledge Park
Intercommercial Bank, West Indies
Chairman: Mahindra Industrial Park Limited
Board Governance and Remuneration Committee Director
Business Strategy Committee Air India Limited
Credit Committee Apollo Hospitals Enterprise Limited
Risk Committee Azim Premji Foundation
Himatsingka Seide Limited
Profession: Ispat International N.V., The Netherlands
Development Banker Ispat Mexicana, S.A. de C.V., Mexico
Mahindra & Mahindra Limited
Nicholas Piramal India Limited
Technology Network (India) Private Limited
Wipro Limited
Chairman - Board of Governors
Institute for Financial Management and
Research
India, Chennai
Member - Governing Body
National Institute of Public Finance and
Policy,
Delhi
Trustee
GIVE Foundation
LNM Foundation
Pratham, Mumbai
Pratham, USA
-------------------------------------------------------------------------------------------------------------------------
Mr. Uday Madhav Chitale 52 August 21,1997 Partner
M.P. Chitale and Company
Chairman: M.P. Chitale and Associates
Share Transfer and Shareholders'/Investors' Director
Grievance Committee Crossdomain Solutions Private Limited
D2K Technologies Private Limited
Profession: DFK Consulting Services (India) Private
Chartered Accountant Limited
DFK International (the Netherlands)
Indian Council for Dispute Resolution
Member - Executive Committee
Shishu Vihar Mandal
Member - Governing Council
Maharashtra Chamber of Commerce and Industry
-------------------------------------------------------------------------------------------------------------------------
200
-------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
-------------------------------------------------------------------------------------------------------------------------
Mr. Dinesh Chandra Gupta 57 July 19, 2002 Director
Industrial Development Bank of India
Secretary (Banking & Insurance) Infrastructure Development Finance Company
Ministry of Finance & Company Affairs Limited
Government of India Life Insurance Corporation of India
National Bank for Agriculture and Rural
Profession: Development
Government Service State Bank of India
-------------------------------------------------------------------------------------------------------------------------
Dr. Satish Chandra Jha 68 May 2, 1997 Director
Phillips India Limited
Profession: Walchand Capital Limited
Development Economist
-------------------------------------------------------------------------------------------------------------------------
Mr. Lakshmi Niwas Mittal 52 May 3, 2002 Director
Artha Limited
Profession: Caribbean Ispat Limited
Industrialist Consorcio Minero Benito Juarez Pena Colorada
S.A. de C.V.
Dunmurray Company Unlimited
Galmatias Limited
Grupo Ispat International S.A. de C.V.
Irish Ispat Limited
Iscor Limited, South Africa
Ispat Annaba Spa
Ispat Canada Inc.
Ispat Europe Group S.A.
Ispat Germany GmbH
Ispat Hamburger Stahlwerke GmbH
Ispat Inland Holdings Inc.
Ispat Inland Inc.
Ispat Inland L.P.
Ispat Inland S.A.
Ispat International Limited
Ispat International N.V.
Ispat Karmet JSC
Ispat Mexicana S.A. de C.V.
Ispat Shipping Limited
Ispat Sidbec Inc.
Ispat Sidex Holdings B.V.
Ispat Stahlwerk Ruhrort GmbH
Ispat Tebessa Spa
Ispat Unimetal S.A.
Ispat US Holdings B.V.
Ispat (US) Holdings Inc.
Ispat US Investments B.V.
Kent Wire (Ispat) Limited
LNM Capital Limited
LNM Holdings B.V.
LNM Holdings N.V.
LNM Holdings S.L.
LNM International Ventures Limited
LNM Internet Ventures Limited
Lucre Limited
Nestor Limited
Nuav Limited
Penna Colarada Servicios S.A.De C.V.
PT Ispat Indo
SC Ispat Sidex S.A.
Tecvest Corporation N.V.
Tommyfield Limited
Trefileurope S.A.
Walker Wire (Ispat) Inc.
3019693 Nova Scotia ULC
9064-4816 Quebec Inc.
-------------------------------------------------------------------------------------------------------------------------
201
-------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
-------------------------------------------------------------------------------------------------------------------------
Mr. Anupam Pradip Puri 56 May 3, 2002 Director
Dr. Reddy's Laboratories Limited
Profession: Godrej Consumer Products Limited
Management Consultant HCL Technologies Limited
Mahindra & Mahindra Limited
-------------------------------------------------------------------------------------------------------------------------
Mr. Somesh Ramchandra Sathe 57 January 29, 1998 Managing Director
Arbes Tools Private Limited
Profession: ESSP Meditek Private Limited
Technocrat Entrepreneur Sukeshan Equipments Private Limited
-------------------------------------------------------------------------------------------------------------------------
Mr. Ramaswamy Seshasayee 54 May 3, 2002 Managing Director
Ashok Leyland Limited
Chairman
Chairman: Irizar TVS Pvt. Limited
Audit Committee Director
Ashley Holdings Limited
Profession: Ashley Investments Limited
Company Executive Ashok Leyland Finance Limited
EID Parry (India) Limited
Ennore Foundries Limited
Sundaram Newton Asset Management Company
Limited
-------------------------------------------------------------------------------------------------------------------------
Mr. Priya Mohan Sinha 62 January 22, 2002 Director
Azim Premji Foundation
Bharti Televentures Limited
Profession: Lafarge India Limited
Professional Manager Wipro Limited
Member - Board of Governors
Management Development Institute
Member - Steering Committee
Federation of Indian Chamber of Commerce &
Industry
-------------------------------------------------------------------------------------------------------------------------
Prof. Marti Gurunath Subrahmanyam 56 May 3, 2002 Director
Infosys Technologies Limited
Nexgen Financial Holdings Limited
Profession: Nexgen Re Limited
Professor of Finance, Economics and Nomura Asset Management (U.S.A.), Inc.
International Business Supply Chainge Inc.
Usha Communication Inc.
-------------------------------------------------------------------------------------------------------------------------
Mr. Kundapur Vaman Kamath 54 April 17, 1996 Chairman
Managing Director & CEO ICICI Lombard General Insurance Company
(Managing Director Limited
Chairman: and Chief ICICI Prudential Life Insurance Company
Committee of Directors Executive Officer Limited
effective May 3, ICICI Securities and Finance Company Limited
Profession: 2002) ICICI Venture Funds Management Company
Company Executive Limited
Vice-Chairman - Governing Board
Indian School of Business
Director
Indian Institute of Management, Ahmedabad
Director - Asia Pacific
Visa International Asia-Pacific Regional
Board,
Singapore
Director - Board of Governors
Indian Institute of Information Technology,
Bangalore
Member - Board
Confederation of Indian Industry
-------------------------------------------------------------------------------------------------------------------------
202
-------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
-------------------------------------------------------------------------------------------------------------------------
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
National Institute of Bank Management
Trustee - Board of Trustees
Dr. T.M.A. Pai Foundation
-------------------------------------------------------------------------------------------------------------------------
Mr. Hoshang Noshirwan Sinor 57 August 21, 1997 Director
Joint Managing Director ICICI Lombard General Insurance Company
Limited
ICICI Venture Funds Management Company
Profession: Limited
Company Executive Chairman
Committee on Swadhan Network constituted by
The Indian Banks' Association
Confederation of Indian Industry - Banking
Committee
Confederation of Indian Industry - The
National
Committee on Banking (2002-03)
Member
ASSOCHAM - Corporate Governance Committee
The Indian Institute of Bankers - Committee
on Education and Training
The Indian Institute of Bankers - Governing
Council
The Indian Banks' Association - Finance
Committee
The Indian Banks' Association - Managing
Committee
Narsee Monjee Institute of Management Studies
- Governing Council
Reserve Bank of India - Committee on the
Payment Systems in India
Reserve Bank of India - National Payments
Council
-------------------------------------------------------------------------------------------------------------------------
Ms. Lalita Dileep Gupte 53 September 12, 1994 Director
Joint Managing Director (Joint Managing ICICI Lombard General Insurance Company
Director effective Limited
Chairperson: May 3, 2002) ICICI Prudential Life Insurance Company
Asset Liability Management Committee Limited
ICICI Securities and Finance Company Limited
Profession: ICICI Venture Funds Management Company
Company Executive Limited
-------------------------------------------------------------------------------------------------------------------------
Ms. Kalpana Morparia 53 May 3, 2002 Chairperson
Executive Director ICICI Investment Management Company Limited
Director
Profession: ICICI Home Finance Company Limited
Company Executive ICICI Lombard General Insurance Company
Limited
ICICI Prudential Life Insurance Company
Limited
ICICI Venture Funds Management Company
Limited
ICICI Securities and Finance Company Limited
-------------------------------------------------------------------------------------------------------------------------
203
-------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
-------------------------------------------------------------------------------------------------------------------------
Mr. Subrata Mukherji 49 May 3, 2002 Director
Executive Director ICICI Lombard General Insurance Company
Limited
Profession: ICICI Securities and Finance Company Limited
Company Executive
-------------------------------------------------------------------------------------------------------------------------
Ms. Chanda Kochhar 40 April 1, 2001 Chairperson
Executive Director ICICI Home Finance Company Limited
Director
Profession: ICICI Prudential Life Insurance Company
Company Executive Limited
Member
E-Visa Advisory Board for Asia Pacific
-------------------------------------------------------------------------------------------------------------------------
Dr. Nachiket Mor 38 April 1, 2001 Chairman
Executive Director Fixed Income Money Market and Derivatives
Association of India
Profession: Regional Director
Company Executive Global Association of Risk Professionals
Board Member & Chairman
(Programmes Committee)
Institute for Financial Management and
Research
Director
Azim Premji Foundation
ICICI Home Finance Company Limited
ICICI Venture Funds Management Company
Limited
Member
National Dairy Development Board Investment
Committee
NSE Executive Committee for Futures & Options
Segment
RBI Technical Advisory Committee on Money and
Government Securities Markets
Member - Review Group
Society for Education, Action & Research in
Community Health (SEARCH) - ANKUR Project
Member- Steering Committee
NCFM- National Stock Exchange of India
-------------------------------------------------------------------------------------------------------------------------
204
The executive officers of the merged entity at August 31, 2002 were as follows:
-------------------------------------------------------------------------------------------------------------------------------
Total
Stock stock
options options
Years of Total Shareholdings granted granted at
Designation and work remuneration in at September in fiscal June 30,
Name Age Responsibilities experience fiscal 2002(1) 5, 2002 (2) 2002 (3) 2002
-------------------------------------------------------------------------------------------------------------------------------
Mr. K.V. Kamath (4) 54 Managing Director and 31 Rs. 15,248,667 18,500 120,000 375,000
(5) Chief Executive
Officer
Mr. H.N. Sinor 57 Joint Managing 36 Rs. 9,670,600 1,100 100,000 276,250
Director
- Domestic Banking
Ms. Lalita D. 53 Joint Managing 31 Rs. 12,928,725 6,041 110,000 327,500
Gupte (4) (5) Director
- International Banking
Ms. Kalpana Morparia 53 Executive Director 26 Rs. 7,651,439 16,190 100,000 215,000
(4) (5) - Corporate Centre
Mr. S. Mukherji (4) (5) 49 Executive Director 24 Rs. 8,429,909 2,504 100,000 208,000
- Project Finance and
Special Assets
Ms. Chanda D. 40 Executive Director 18 Rs. 7,825,151 (6) 3,881 80,000 155,000
Kochhar - Retail Banking
Dr. Nachiket Mor 38 Executive Director 15 Rs. 7,546,530 (6) - 80,000 152,000
- Wholesale Banking
Mr. Sanjiv 51 Senior General 26 Rs. 7,264,421 4,289 40,000 148,000
Kerkar (4) (5) Manager
Ms. Ramni Nirula(4) (5) 50 Senior General 26 Rs. 5,656,332 2,066 60,000 132,000
Manager
Mr. P. H. Ravikumar 51 Senior General 29 Rs. 3,971,686 1,070 50,000 110,700
(4) (5) Manager
Mr. Devdatt Shah (4) 47 Senior General 23 Rs. 5,737,506 - - 60,000
(5) (7) Manager
Mr. Balaji 37 Chief Financial 13 Rs. 3,073,622 - 75,000 105,000
Swaminathan (4) (5) Officer
(1) Including bonuses as described under "-Compensation and Benefits to
Directors and Officers- Bonus" and the merged entity's contribution to the
gratuity, superannuation fund and provident fund as described under
"-Compensation and Benefits to Directors and Officers- Gratuity,
Superannuation Fund and Provident Fund."
(2) Executive officers and directors (executive and non executive) as a group
held less than 0.1% of the merged entity's equity shares as of this date.
(3) Each stock option, once exercised, is equivalent to one equity share of the
merged entity. ICICI Bank and ICICI granted these stock options to its
executive officers at no cost. See "-Compensation and Benefits to Directors
and Officers- Employee Stock Option Scheme" for a description of the other
terms of these stock options. In fiscal 2002, Mr. K. V. Kamath, Ms. Lalita
D. Gupte, Ms. Kalpana Morparia, Mr. S. Mukherji, Mr. Sanjiv Kerkar, Ms.
Ramni Nirula, Mr. P. H. Ravikumar and Mr. Balaji Swaminathan received stock
options from ICICI and the number of stock options mentioned above is the
equivalent number of ICICI Bank stock options received by them pursuant to
the Scheme of Amalgamation.
(4) Remuneration paid by ICICI for fiscal 2002, except salary for two days from
March 30, 2002, as they were employees of ICICI in fiscal 2002.
205
(5) In accordance with the Scheme of Amalgamation, directors and employees of
ICICI have received stock options in ICICI Bank equal to half the number of
the outstanding unexercised stock options they held in ICICI. The stock
options mentioned above include ICICI stock options converted into ICICI
Bank stock options on this basis.
(6) Ms. Chanda Kochhar and Dr. Nachiket Mor were executive directors of ICICI
Bank during fiscal 2002. Ms. Kochhar's total remuneration in fiscal 2002
was Rs. 7,825,151 of which Rs. 1,928,283 (being bonus and leave encashment
for fiscal 2001) was paid by ICICI and Dr. Mor's total remuneration in
fiscal 2002 was Rs. 7,546,530 of which Rs. 1,896,971 (being bonus and leave
encashment for fiscal 2001) was paid by ICICI.
(7) Mr. Devdatt Shah has expressed his desire to resign from office due to
personal reasons and is expected to step down as Managing Director and
Chief Executive Officer of ICICI Securities by the end of 2002.
Mr. K.V. Kamath is a mechanical engineer and a post-graduate in business
management from the Indian Institute of Management, Ahmedabad. He joined ICICI
in 1971 and gained experience in project finance, leasing, resources and
corporate planning. In 1988, he left ICICI to join the Asian Development Bank,
where he worked for six years. In January 1995, he joined a major private sector
group in Indonesia as advisor to the Chairman. Mr. Kamath joined the board of
ICICI in October 1995. He was appointed Managing Director and Chief Executive
Officer of ICICI in May 1996 and was re-appointed in May 2001. Mr. Kamath was a
non-executive director on the board of ICICI Bank since April 1996. Effective
May 3, 2002 the board appointed Mr. Kamath as Managing Director & CEO.
Mr. H. N. Sinor holds Bachelor's degrees in commerce and law. Mr. Sinor
started his career with the Central Bank 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 ICICI Bank on July 1, 1997 and ICICI Bank's
board on August 21, 1997 and was appointed ICICI Bank's Managing Director and
Chief Executive Officer with effect from June 1, 1998. The board redesignated
Mr. Sinor as Joint Managing Director with effect from May 3, 2002. He is
currently in charge of domestic banking.
Ms. Lalita D. Gupte has a Bachelor of Arts degree and also holds a Masters
degree in management science from the Jamnalal Bajaj Institute of Management
Studies, University of Mumbai. She joined ICICI in 1971 where she worked in the
areas of project finance, leasing, resources and treasury, and credit
operations. She joined the board of directors of ICICI in June 1994 as an
executive director and was designated as the Deputy Managing Director in 1996.
In April 1999, she was designated as the Joint Managing Director and Chief
Operating Officer of ICICI. From July 2001, she was designated as Joint Managing
Director and Chief Operating Officer - International Business. Ms. Lalita D.
Gupte was a non-executive director on the board of ICICI Bank since September
1994. Effective May 3, 2002, the board appointed Ms. Gupte as Joint Managing
Director. She is currently in charge of international business.
Ms. Kalpana Morparia holds Bachelor's degrees in science and law. She
worked in the legal department of ICICI from 1975 to 1994. From 1996, when she
was designated as General Manager, she was in charge of the legal, planning,
treasury and corporate communications departments. In 1998, she was designated
as a Senior General Manager of ICICI. She joined the board of directors of ICICI
in May 2001. Effective May 3, 2002 the board appointed Ms. Morparia as an
Executive Director. She is currently in charge of the merged entity's Corporate
Centre which includes the strategy, risk management, legal, accounts, taxation,
planning, management information systems, investor relations, secretarial, human
resources management, corporate communications and facilities management and
administration departments.
Mr. S. Mukherji holds a management degree from the Jamnalal Bajaj Institute
of Management Studies, University of Mumbai and a Master's degree from the
London School of Economics. Mr. Mukherji worked in the projects and operations
department of ICICI at Mumbai between 1978 and 1992. He was Zonal Manager of
ICICI's Kolkata zonal office between 1992 and 1997. During 1997,
206
he headed the western regional office of ICICI. He was designated as Senior
General Manager of ICICI in 1998. He joined the board of directors of ICICI in
May 2001. Effective May 3, 2002 the board appointed Mr. Mukherji as an Executive
Director. He is currently in charge of the project finance and special assets
management groups.
Ms. Chanda D. Kochhar holds a management degree from the Jamnalal Bajaj
Institute of Management Studies, Mumbai and has wide experience in the fields of
corporate credit, infrastructure financing, e-commerce strategy and retail
business. She started her career in 1984 at ICICI in its projects department.
Ms. Kochhar was designated a Senior General Manager of ICICI in 2000 and was in
charge of its retail business. She was appointed to the board of directors of
ICICI Bank as an Executive Director in April 2001. She is currently responsible
for retail banking.
Dr. Nachiket Mor holds a post-graduate diploma in finance management from
the Indian Institute of Management, Ahmedabad and a Doctorate of Philosophy in
Financial Economics from the University of Pennsylvania, Philadelphia, USA. He
started his career as an officer in the Corporate Planning and Policy Cell of
ICICI in 1987. He has specialized knowledge in project finance, corporate
planning and treasury. Dr. Mor was designated a Senior General Manager of ICICI
in 2000 and was in charge of treasury and the social initiatives group. He was
appointed to the board of directors of ICICI Bank as an Executive Director in
April 2001. He is currently responsible for wholesale banking.
Mr. Sanjiv Kerkar is a chemical engineer and holds a management degree from
the Jamnalal Bajaj Institute of Management Studies, University of Mumbai. He
worked with ICICI from 1979 until 1993, when he joined Asian Finance and
Investment Company Limited (AFIC), an affiliate of the Asian Development Bank.
Mr. Kerkar worked with AFIC from 1993 to 1996. In 1996, he re-joined ICICI as a
General Manager and was in charge of the risk management department in ICICI. In
1998 he was designated as a Senior General Manager of ICICI. Currently, Mr.
Kerkar heads the Organizational Excellence Group which is responsible for the
merged entity's quality initiatives.
Ms. Ramni Nirula is a post-graduate in management studies from a reputed
Indian University. She joined ICICI in 1975 and held various positions in the
northern regional office of ICICI. Ms. Nirula became General Manager in 1998 and
was the Zonal Manager of the Delhi zonal office for the period 1998 to 2000. She
was designated as Senior General Manager of ICICI in fiscal 2000. Currently, she
is in charge of the Corporate Solutions Group in the Wholesale Banking Group.
She is also responsible for ICICI Securities concurrently with Mr. Devdatt Shah.
Mr. P.H. Ravikumar is a graduate from Osmania University. Mr. Ravikumar
started his career with Bank of India in 1972. He joined ICICI Bank in 1994. He
became Senior Executive Vice-President in 1998 and was in charge of treasury,
foreign exchange and credit. Mr. Ravikumar joined ICICI in April 2001 as Senior
General Manager. Currently, he is in charge of the Emerging Corporates Group and
Agri-Business Group in the Wholesale Banking Group.
Mr. Devdatt Shah is an electrical engineer from the Indian Institute of
Technology, Mumbai and holds a Masters degree in Business Administration from
the State University of New York. From 1979 to 1981, Mr. Shah was an associate
consultant with Policy Planning and Evaluation Inc. Mr. Shah joined J.P. Morgan
& Co. in 1981 and worked in various departments including equity research,
structured products and financial advisory services. He left J.P. Morgan in 1995
to join India Capital Advisors, Toronto. In 1996, Mr. Shah joined the Canadian
Imperial Bank of Commerce as Managing Director (India). Mr. Shah joined ICICI in
1999 and was appointed Managing Director and Chief Executive Officer of ICICI
Securities. In July 2002, Mr. Shah expressed his desire to resign from office
due to personal reasons and is expected to step down as Managing Director and
Chief Executive Officer of ICICI Securities by the end of 2002.
Mr. Balaji Swaminathan is a graduate in commerce from Calcutta University,
a chartered accountant and a cost and works accountant. Mr. Balaji Swaminathan
started his career with KPMG International in 1989. He worked in KPMG India as
Partner/Director from 1994 to 2001. He joined
207
ICICI in August 2001 as its Chief Financial Officer. He is the Chief Financial
Officer of the merged entity.
Corporate Governance
The merged entity's corporate governance policies recognize the
accountability of the board and the importance of making the board transparent
to all its constituents, including employees, customers, investors and the
regulatory authorities, and to demonstrate that the shareholders are the
ultimate beneficiaries of the merged entity's economic activities.
The merged entity's corporate governance framework is based on an effective
independent board, the separation of the board's supervisory role from the
executive management and the constitution of board committees, comprising a
majority of independent directors and chaired by an independent director, to
oversee critical areas and functions of executive management.
The merged entity's corporate governance philosophy encompasses not only
regulatory and legal requirements, such as the terms of listing agreements with
stock exchanges, but also several voluntary practices aimed at a high level of
business ethics, effective supervision and enhancement of value for all
shareholders.
The board's role, functions, responsibility and accountability are clearly
defined. In addition to its primary role of monitoring corporate performance,
the functions of the board include:
o approving corporate philosophy and mission;
o participating in the formulation of strategic and business plans;
o reviewing and approving financial plans and budgets;
o monitoring corporate performance against strategic and business plans,
including overseeing operations;
o ensuring ethical behavior and compliance with laws and regulations;
o reviewing and approving borrowing limits;
o formulating exposure limits; and
o keeping shareholders informed regarding plans, strategies and
performance.
To enable the board of directors to discharge these responsibilities
effectively, executive management gives detailed reports on the performance of
the merged entity on a quarterly basis.
The board functions either as a full board or through various committees
constituted to oversee specific operational areas. These board committees meet
regularly.
During fiscal 2002, there were eight committees constituted by the board of
ICICI Bank, namely the Audit & Risk Committee, the Committee of Directors, the
Compensation Committee, the Nomination Committee, the Share Transfer Committee,
the Shareholders' Grievance Committee, the Steering Committee and the Settlement
Committee. Subsequent to the amalgamation and the re-constitution of the board
of directors, the merged entity's board has with effect from May 3, 2002,
dissolved the old committees and constituted new committees of the board in
order to create an effective corporate governance model, commensurate with the
scale and complexity of the merged entity's operations. The constitution and
main functions of the various committees are given below.
208
Audit Committee
The Audit Committee consists of three independent directors - Mr. R.
Seshasayee and Mr. Uday M. Chitale, who are chartered accountants, and Mr.
Somesh R. Sathe, and is chaired by Mr. R. Seshasayee.
The Audit Committee provides direction to the audit and risk management
function and monitors the quality of the internal and statutory audits. The
responsibilities of the Audit Committee include overseeing the financial
reporting process to ensure financial statements are fair, sufficient and
credible, recommending appointment and removal of central and branch statutory
auditors and fixing their remuneration, reviewing the annual financial
statements before submission to the board, reviewing adequacy of internal
control systems and the internal audit function, reviewing compliance with the
inspection and audit reports of the Reserve Bank of India and reports of
statutory auditors, reviewing findings of internal investigations, discussing
the scope of audit with external auditors and investigating reasons for
substantial defaults, if any, of non-payment to stakeholders.
Board Governance & Remuneration Committee
The Board Governance & Remuneration Committee consists of three independent
directors - Mr. N. Vaghul, Mr. R. Seshasayee and Mr. P. M. Sinha, and is chaired
by Mr. N. Vaghul.
The functions of the Board Governance & Remuneration Committee include
recommending appointments to the board, evaluating the performance of the
Managing Director and Chief Executive Officer, the board and individual members
on pre-determined parameters, recommending to the board the remuneration
(including performance bonus and perquisites) to executive directors, approving
the policy for and amount of bonus payable to employees, framing guidelines for
the employees stock option scheme and recommending the grant of stock options to
the merged entity's employees and executive directors and employees and
executive directors of the merged entity's subsidiary companies and formulating
a code of ethics and governance.
Business Strategy Committee
The Business Strategy Committee consists of five directors - Mr. N. Vaghul,
Mr. Anupam Puri, Mr. R. Seshasayee, Mr. P. M. Sinha and Mr. K. V. Kamath. The
majority of the members of this Committee are independent directors and it is
chaired by Mr. N. Vaghul.
The functions of this committee are to approve the annual income and
expenditure and capital expenditure budgets for presentation to the board for
final approval and to review and recommend to the board the business strategy of
the merged entity.
Credit Committee
The Credit Committee consists of four directors - Mr. N. Vaghul, Dr. Satish
C. Jha, Mr. Somesh R. Sathe, and Mr. K. V. Kamath. The majority of the members
of the committee are independent directors and it is chaired by Mr. N. Vaghul.
The functions of this Committee include reviewing developments in key
industrial sectors and approving credit proposals in accordance with the
authorization approved by the board.
Risk Committee
The Risk Committee consists of four directors - Mr. N. Vaghul, Mr. Uday M.
Chitale, Mr. Marti G. Subrahmanyam and Mr. K. V. Kamath. The majority of the
members of this committee are independent directors and it is chaired by Mr. N.
Vaghul.
209
This committee reviews the merged entity's risk management policies in
relation to various risks including portfolio, liquidity, interest rate,
off-balance sheet and operational risks, investment policies and strategy, and
regulatory and compliance issues in relation thereto.
Share Transfer & Shareholders'/Investors' Grievance Committee
The Share Transfer & Shareholders'/Investors' Grievance Committee consists
of four directors - Mr. Uday M. Chitale, Mr. Somesh R. Sathe, Mr. H. N. Sinor
and Ms. Kalpana Morparia, and is chaired by an independent director, Mr. Uday M.
Chitale.
The functions and powers of this Committee include approving and rejecting
transfers or transmissions of equity and preference shares, bonds, debentures
and securities, including under stock options, issuance of duplicate
certificates, allotment of shares and securities issued from time to time,
review and redressal of shareholders' and investors' complaints, opening and
operating of bank accounts for payment of interest and dividend and the listing
of securities on stock exchanges.
Committee of Directors
The Committee of Directors consists of all the executive directors and is
chaired by the Managing Director and Chief Executive Officer.
The functions and powers of this committee include reviewing performance
against targets for various business segments and credit approvals in accordance
with authorization approved by the board, borrowing and treasury operations and
premises and property related matters.
Asset Liability Management Committee
The Asset Liability Management Committee consists of five executive
directors and is chaired by Ms. Lalita D. Gupte.
The functions of this committee include managing the balance sheet,
reviewing the asset-liability profile with a view to managing the market risk
exposure and determining the deposit and lending rates.
Compensation and Benefits to Directors and Officers
Remuneration
Under the merged entity's organizational documents, each director, except
the government director, is entitled to receive remuneration for attending each
meeting of the board or of a board committee. The amount of remuneration is set
by the board from time to time in accordance with limitations prescribed by the
Indian Companies Act or the government of India. The remuneration for each board
or committee meeting is currently fixed at Rs. 5,000 (US$ 102). In addition, the
merged entity reimburses directors for travel and related expenses in connection
with board and committee meetings and related matters. If a director is required
to perform services for the merged entity beyond attending meetings, the merged
entity may remunerate the director as determined by the board of directors and
this remuneration may be either in addition to or as substitution for the
remuneration discussed above. Non-executive directors are not entitled to the
payment of any benefits at the end of their term of office.
At its meeting held on April 26, 2002, the board of directors appointed Mr.
K. V. Kamath as Managing Director and Chief Executive Officer, Ms. Lalita D.
Gupte as Joint Managing Director and Ms. Kalpana Morparia and Mr. S. Mukherji as
Executive Directors effective May 3, 2002, and approved their remuneration
effective that date. The board also revised the remuneration payable to Mr. H.
N. Sinor, Ms. Chanda D. Kochhar and Dr. Nachiket Mor effective May 3, 2002. This
was approved at the annual general meeting of the shareholders on September 16,
2002. The remuneration of executive directors requires the approval of the
Reserve Bank of India. Approval of the Reserve
210
Bank of India for the remuneration of Mr. K. V. Kamath, Ms. Lalita D. Gupte,
Ms. Kalpana Morparia and Mr. S. Mukherji and for the revision in remuneration
of Mr. Sinor, Ms. Chanda D. Kochhar and Dr. Nachiket Mor has been received.
The board or any committee thereof may in its exclusive discretion fix
within the range stated below the salary payable to the executive directors:
Mr. K. V. Kamath, Managing Director and Chief Executive
Officer................................................. Rs. 400,000 to Rs. 650,000 (US$ 8,192 to US$ 13,311) per month
Mr. H. N. Sinor, Joint Managing Director.................. Rs. 200,000 to Rs. 400,000 (US$ 4,096 to US$ 8,192) per month
Ms. Lalita D. Gupte, Joint Managing Director.............. Rs. 200,000 to Rs. 400,000 (US$ 4,096 to US$ 8,192) per month
Ms. Kalpana Morparia, Executive Director.................. Rs. 200,000 to Rs. 400,000 (US$ 4,096 to US$ 8,192) per month
Mr. S. Mukherji, Executive Director....................... Rs. 200,000 to Rs. 400,000 (US$ 4,096 to US$ 8,192) per month
Ms. Chanda D. Kochhar, Executive Director................. Rs. 150,000 to Rs. 400,000 (US$ 3,072 to US$ 8,192) per month
Dr. Nachiket Mor, Executive Director....................... Rs. 150,000 to Rs. 400,000 (US$ 3,072 to US$ 8,192) per month
The executive directors are entitled to perquisites (evaluated pursuant to
Indian Income-Tax Rules, wherever applicable, and otherwise at actual cost to
the merged entity), such as furnished accommodation, gas, electricity, water and
furnishings, club fees, personal insurance, use of car and telephone at
residence or reimbursement of expenses in lieu thereof, payment of income-tax on
perquisites by the merged entity to the extent permissible under the Indian
Income-tax Act, 1961, medical reimbursement, leave and leave travel concession,
education benefits, provident fund, superannuation fund, gratuity and other
retirement benefits, in accordance with the scheme(s) and rule(s) applicable to
employees of the merged entity from time to time.
Where accommodation is not provided, each of the executive directors is
eligible for a house rent allowance of Rs. 50,000 (US$ 1,024) per month and
maintenance of accommodation including furniture, fixtures and furnishings, as
may be provided by the merged entity.
The total compensation paid by ICICI Bank to its executive directors, Mr.
H.N. Sinor, Ms. Chanda D. Kochhar and Dr. Nachiket Mor in fiscal 2002 was Rs. 21
million (US$ 430,063).
The total compensation paid by ICICI to its executive directors and
executive officers, Mr. K.V. Kamath, Ms. Lalita D. Gupte, Ms. Kalpana Morparia,
Mr. S. Mukherji, Ms. Chanda D. Kochhar, Dr. Nachiket Mor, Mr. Sanjiv Kerkar, Mr.
Ramni Nirula, Mr. P.H. Ravikumar, Mr. Devdatt Shah and Mr. Balaji Swaminathan in
fiscal 2002 was Rs. 65.7 million (US$ 1.3 million). Prior to their appointment
as executive directors of ICICI Bank effective April 1, 2001, Ms. Chanda D.
Kochhar and Dr. Nachiket Mor were employees of ICICI. During fiscal 2002, they
received bonus and leave benefits for fiscal 2001 from ICICI in addition to
their remuneration from ICICI Bank.
Bonus
Each year, the board of directors awards discretionary bonuses to
employees, including executive directors, on the basis of performance and
seniority. The performance of each employee is judged by a performance
management appraisal system. The aggregate amount paid by ICICI Bank for bonuses
to all eligible employees in fiscal 2002 was Rs. 198 million (US$ 4 million).
The aggregate amount paid by ICICI towards bonuses to all eligible
employees in fiscal 2002 was Rs. 298 million (US$ 6 million).
Employee Stock Option Scheme
On January 24, 2000, ICICI Bank's board approved an employee stock option
scheme to attract, encourage and retain high performing employees. ICICI Bank's
shareholders approved this scheme at the extraordinary general meeting on
February 21, 2000. This scheme was drafted in accordance with guidelines issued
by the Securities and Exchange Board of India. Under this scheme, up to 5.0% of
ICICI Bank's issued equity shares at March 31, 2000 could be allocated to
employee stock options.
211
The employee stock option scheme as amended by the Scheme of Amalgamation
limits the maximum number of options granted to any eligible employee (as
defined below) to 0.05% of the merged entity's issued equity shares at the time
of the grant, and the aggregate of all such options is limited to 5% of the
merged entity's issued equity shares following the amalgamation. The stock
options entitle the merged entity's eligible employees, and eligible employees
of the merged entity's subsidiary companies to apply for equity shares. The
options vest annually in a graded manner over a three-year period, with 20.0%,
30.0% and 50.0% of the grants vesting each year, commencing not earlier than 12
months from the date of grant. The options can be exercised within 10 years from
the date of grant or five years from the date of vesting, whichever is later.
The exercise price of the options is the closing market price on the stock
exchange, which records the highest trading volume on the date of grant. An
eligible employee is a permanent employee or a director of the merged entity or
of its subsidiaries or its holding company. The merged entity has no holding
company.
The following table sets forth certain information regarding the stock
option grants ICICI Bank has made under its employee stock option scheme. ICICI
Bank granted all of these stock options at no cost to its employees. ICICI Bank
has not granted any stock options to its non-executive directors.
-------------------------------------------------------------------------------
Number of
Date of grant options granted Exercise price (1)
-------------------------------------------------------------------------------
February 21, 2000............ 1,713,000 Rs. 171.90 US$ 3.52
April 26, 2001............... 1,580,200 170.00 3.48
March 27, 2002............... 3,155,000 120.35 2.46
---------------
(1) The exercise price is equal to the market price of ICICI Bank's equity
shares on the date of grant.
ICICI also had an employee stock option scheme for its directors and
employees and the directors and employees of its subsidiary companies, the terms
of which were substantially similar to the employee stock option scheme of ICICI
Bank. The following table sets forth certain information regarding the stock
option grants made by ICICI under its employee stock option scheme prior to the
amalgamation. ICICI granted all of these stock options at no cost to its
employees. ICICI had not granted any stock options to its non-executive
directors.
-------------------------------------------------------------------------------
Number of
Date of grant options granted Exercise price (1)
-------------------------------------------------------------------------------
August 3, 1999............... 2,323,750 Rs. 85.55 US$ 1.75
April 28, 2000............... 2,902,500 133.40 2.73
November 14, 2000............ 20,000 82.90 1.70
May 3, 2001.................. 3,145,000 82.00 1.68
August 13, 2001.............. 60,000 52.50 1.08
March 27, 2002............... 6,473,700 60.25 1.23
--------------
(1) The exercise price is equal to the market price of ICICI's equity shares on
the date of grant. However, the share options granted on August 3, 1999
were accounted as a variable plan resulting in a compensation cost of Rs.
97 million (US$ 2 million) which is being amortized over the vesting
period.
212
The following table sets forth particulars of options granted by ICICI Bank
(not including options granted by ICICI) and ICICI to date.
----------------------------------------------------------------------------------------------------------
Particulars ICICI Bank ICICI
----------------------------------------------------------------------------------------------------------
Options granted....................................... 6,448,200 14,924,950
Options vested........................................ 1,172,540 3,035,750
Options exercised..................................... - 33,900
Options forfeited/lapsed.............................. 248,225 984,750
Extinguishment or modification of options............. - -
Amount realized by sale of options.................... - Rs. 3 million (US $ 61,438)
Total number of options in force...................... 6,199,975 13,906,300
In accordance with the Scheme of Amalgamation, directors and employees of
ICICI and its subsidiary companies have received stock options in the merged
entity equal to half the number of their outstanding unexercised stock options
in ICICI. The exercise price for these options is equal to twice the exercise
price for the ICICI stock options. All other terms and conditions of these
options are similar to those applicable to ICICI Bank's stock options pursuant
to its employee stock option scheme.
In April 2000, ICICI Infotech approved an employee stock option plan. Under
the plan, ICICI Infotech is authorized to issue up to 5.0% of its issued equity
shares at the time of grant of the options to an eligible employee and 25.0% of
its issued equity shares at the time of grant of the options, in aggregate, to
all the eligible employees. Eligible employees are granted an option to purchase
shares subject to vesting conditions. The options vest in a graded manner over a
three-year period with 20.0%, 30.0% and 50.0% of the options vesting at the end
of each year from the date of grant of the options. The options can be exercised
within 10 years from the date of grant or five years from the date of vesting,
whichever is later. ICICI Infotech granted 2,044,800 options during fiscal 2002
at the fair value of the underlying shares on the grant date of Rs. 68 (US$
1.39) per equity share. ICICI Infotech granted 2,347,800 stock options during
fiscal 2001 at the fair value of the underlying shares on the grant date of Rs.
37.50 (US$ 0.77) per equity share. As shares of ICICI Infotech are not quoted on
stock exchanges, the fair value represents management's best estimates
considering all available factors. Of the stock options granted, 449,360 were
forfeited by year-end fiscal 2002. Of the stock options granted, 1,125,900 were
granted to the merged entity's directors and executive officers.
In July 2000, ICICI Venture approved an employee stock option plan under
which ICICI Venture was authorized to issue up to 125,000 equity shares to its
employees and employees of ICICI and ICICI group companies. Eligible employees
were granted an option to purchase shares subject to vesting conditions. The
options vest over a period of three years with 20.0%, 30.0% and 50.0% of the
options vesting at the end of each year. The options can be exercised within 10
years from the date of the grant. ICICI Ventures granted 81,400 stock options
during fiscal 2001 at the fair value of the underlying shares on the grant date
of Rs. 835 (US$ 17.10) per equity share. As shares of ICICI Venture are not
quoted on exchanges, the fair value represents management's best estimates
considering all available factors. Of the above, 2,500 stock options were
forfeited by year-end fiscal 2001. ICICI Venture's employee stock option plan
was withdrawn in February 2002. ICICI Venture did not grant any stock options
in fiscal 2002. Of the stock options, 20,425 were granted to the merged
entity's directors and executive officers.
Loans
ICICI Bank had, and the merged entity has, internal rules and regulations
to grant loans to employees to acquire certain assets such as property, vehicles
and other consumer durables. ICICI Bank's loans to employees were 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. ICICI Bank had given loans to its employees for purchasing its shares
in the offering made by ICICI in June 1997 at the public offering price. Bank of
Madura had also given loans to
213
employees for purchasing preferential shares in the offering made by Bank of
Madura in August 1995. At year-end fiscal 2002, there were loans of Rs. 792
million (US$ 16 million) outstanding to employees of ICICI Bank. Pursuant to the
Indian Banking Regulation Act, ICICI Bank's non-executive directors were not
eligible for any loans. There was no outstanding loan from ICICI Bank to its
directors as of March 31, 2002.
ICICI had internal rules and regulations to grant loans to employees to
acquire certain assets such as property or vehicles. ICICI's loans to employees
were made at interest rates ranging from 2.5% to 3.5% per annum and are
repayable over fixed periods of time. The loans are generally secured by the
assets acquired by the employees. At year-end fiscal 2002, there were loans of
Rs. 745 million (US$ 15 million) outstanding to ICICI's employees, including Rs.
11 million (US$ 225,271) to certain of its directors and executive officers.
ICICI Personal Financial Services had similar internal rules and
regulations and granted loans at interest rates ranging from 2.5% to 3.5% per
annum, repayable over fixed periods of time. These loans are generally secured
by assets acquired by the employees. At year-end fiscal 2002, there were loans
of Rs. 155 million (US$ 3 million) outstanding to employees of ICICI Personal
Financial Services.
ICICI Capital Services had internal rules and regulations to grant loans to
employees to acquire certain assets such as property or vehicles. These loans to
employees were made at interest rates ranging from 2.5% to 3.5% per annum and
were repayable over fixed periods of time. The loans are generally secured by
the assets acquired by the employees. At year-end fiscal 2002, there were loans
of Rs. 11 million (US$ 225,271) outstanding to employees of ICICI Capital
Services.
Gratuity
Under Indian law, the merged entity is required to pay a gratuity to
employees who retire or resign after at least five years of continuous service.
The merged entity makes contributions to five separate gratuity funds, for ICICI
Bank employees (other than employees inducted from Bank of Madura), employees
inducted from ICICI, Bank of Madura, ICICI Personal Financial Services and ICICI
Capital Services.
The gratuity funds for employees of ICICI Bank and ICICI Personal Financial
Services are administered by the Life Insurance Corporation of India. In
accordance with the gratuity fund's rules, actuarial valuation of gratuity
liability is calculated based on certain assumptions regarding rate of interest,
salary growth, mortality and staff turnover. The total corpus of the funds at
year-end fiscal 2002 for employees of ICICI Bank and ICICI Personal Financial
Services was Rs. 50 million (US$ 1 million) and Rs. 4 million (US$ 81,917)
respectively.
In respect of employees inducted from ICICI, Bank of Madura and ICICI
Capital Services, separate gratuity funds are managed by in-house trustees.
Actuarial valuation of the funds is done by an independent actuary. The
investments of the funds are made according to rules prescribed by the
government of India. The accounts of the funds are audited by independent
auditors. The total corpuses of the funds for employees inducted from ICICI,
Bank of Madura and ICICI Capital Services based on the latest unaudited figures,
at year-end fiscal 2002 were Rs. 221 million ( US$ 4.5 million), Rs. 360 million
(US$ 7 million), and Rs. 5 million (US$ 102,396) respectively.
Superannuation Fund
The merged entity contributes 15.0% of the total annual salary of each
employee to two separate superannuation funds, for ICICI Bank employees and
employees inducted from ICICI respectively. The funds are administered by the
Life Insurance Corporation of India. The merged entity's employees get an option
on retirement or resignation to receive one-third of the total balance and a
monthly pension based on the remaining two-third balance. In the event of death
of an employee, his or her beneficiary receives the remaining accumulated
balance of 66.7%. The merged entity also gives
214
a cash option to its employees, allowing them to receive the amount contributed
by the merged entity in their monthly salary during their employment. The total
corpus of the superannuation fund for ICICI Bank employees was Rs. 510 million
(US$ 10 million) at year-end fiscal 2002. The total corpus of the superannuation
fund for employees inducted from ICICI was Rs. 400 million (US$ 8 million) at
year-end fiscal 2002.
Provident Fund
The merged entity is statutorily required to maintain a provident fund as a
part of its retirement benefits to its employees. There are separate provident
funds for ICICI Bank employees (other than employees inducted from Bank of
Madura), and employees inducted from ICICI, Bank of Madura (other than those
employees who have opted for pensions), ICICI Personal Financial Services and
ICICI Capital Services. These funds are managed by in-house trustees. Each
employee, contributes 12.0% of his or her salary and the merged entity
contributes an equal amount to the funds. The investments of the funds are made
according to rules prescribed by the government of India. The accounts of the
funds are audited by independent auditors. The total corpuses of the funds for
ICICI Bank employees (other than employees inducted from Bank of Madura), and
the employees inducted from ICICI and Bank of Madura, based on the latest
unaudited figures, at year-end fiscal 2002 were Rs. 178 million (US$ 4 million),
Rs. 444 million (US$ 9 million) and Rs. 610 million (US$ 12 million)
respectively. The total corpuses of the funds for employees inducted from ICICI
Personal Financial Services and ICICI Capital Services based on the latest
audited figures at year-end fiscal 2002 were Rs. 12 million (US$ 245,751) and Rs
18 million (US$ 368,626) respectively. ICICI Bank made contributions of Rs. 33
million (US$ 675,814) and Rs. 21 million (US$ 430,063) to the funds for ICICI
Bank employees (other than employees inducted from Bank of Madura) and employees
inducted from Bank of Madura, respectively, during fiscal 2002. ICICI made a
contribution of Rs. 31 million (US$ 634,856) to the provident fund for its
employees during fiscal 2002. ICICI Personal Financial Services and ICICI
Capital Services made contributions of Rs. 6 million (US$ 122,875) and Rs. 2
million (US$ 40,958), respectively, to the provident funds for their employees
during fiscal 2002.
Pension Fund
Out of the employees inducted from Bank of Madura, 1,162 employees have
opted for pensions and 1,499 employees have opted for a provident fund. For
employees who have opted for a provident fund, the merged entity's contribution
of 10.0% of his or her salary is credited to the provident fund every month. For
employees who have opted for pensions, the merged entity's contribution of 10.0%
of his or her salary is credited to the pension fund every month. These funds
are managed by in-house trustees. The investments of the funds are made
according to rules prescribed by the government of India. The accounts of the
fund are audited by independent auditors. The employees who have opted for
pensions are entitled to a monthly pension from the day after their retirement.
The merged entity also gives a cash option to employees, allowing them to
receive the present value of one-third of their monthly pension in total
satisfaction. Upon death of an employee, family members are entitled to payment
of a family pension pursuant to the rules in this regard. The corpus of the fund
at year-end fiscal 2002 was Rs. 823 million (US$ 17 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 the merged entity's directors or executive
officers.
215
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 the merged entity. This
is the latest available information to the merged entity's knowledge at year-end
fiscal 2002.
Introduction
The Reserve Bank of India, the central banking and monetary authority of
India, is the central regulatory and supervisory authority for the Indian
financial system. A variety of financial intermediaries in the public and
private sectors participate in India's financial sector, including the
following:
o commercial banks;
o long-term lending institutions;
o non-bank finance companies, including housing finance companies; 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 asset
allocation, and strict controls limited entry into and expansion within the
financial sector. The government of India's economic reform program, which began
in 1991, encompassed the financial sector. The first phase of the reform process
began with the implementation of the recommendations of the Committee on the
Financial System, the Narasimham Committee I. The second phase of the reform
process began in 1999. See "--Banking Sector Reform--Committee on Banking Sector
Reform (Narasimham Committee II)".
This discussion presents an overview of the role and activities of the
Reserve Bank of India and of each of the major participants in the Indian
financial system, with a focus on the commercial banks and the long-term lending
institutions. This is followed by a brief summary of the banking reform process
along with the recommendations of various committees that have played a key role
in the reform process. A brief discussion on the impact of the liberalization
process on long-term lending institutions and commercial banks is then
presented. Finally, reforms in the non-banking financial sector are briefly
reviewed.
Reserve Bank of India
The Reserve Bank of India, established in 1935, is the central banking and
monetary authority in India. The Reserve Bank of India manages the country's
money supply and foreign exchange and also serves as a bank for the government
of India and for the country's commercial banks. In addition to these
traditional central banking roles, the Reserve Bank of India undertakes certain
developmental and promotional roles.
The Reserve Bank of India issues guidelines on exposure standards, income
recognition, asset classification, provisioning for impaired assets, investment
valuation and capital adequacy standards for commercial banks, long-term lending
institutions and non-bank finance companies. The Reserve Bank of India requires
these institutions to furnish information relating to their businesses to the
Reserve Bank of India on a regular basis. For further discussion regarding the
Reserve Bank of India's role as the regulatory and supervisory authority of
India's financial system and its impact on the merged entity, see "Supervision
and Regulation".
216
Commercial Banks
Commercial banks in India have traditionally focused only on meeting the
short-term financial needs of industry, trade and agriculture. At year-end
fiscal 2002, there were 299 scheduled commercial banks in the country, with a
network of 66,276 branches serving approximately Rs. 10.97 trillion (US$ 225
billion) 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 71.1% of bank
branches located in rural or semi-urban areas of the country. A large number of
these branches belong to the public sector banks.
Public Sector Banks
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India and its associate banks, 19
nationalized banks and 196 regional rural banks. Excluding the regional rural
banks, the remaining public sector banks have 46,316 branches, and account for
72.5% of the outstanding gross bank credit and 77.2% 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 2002, the State Bank of India and its seven associate banks had
13,556 branches. They accounted for 24.7% of aggregate deposits and 26.9% of
outstanding gross bank credit of all scheduled commercial banks.
Regional rural banks were established from 1976 to 1987 by the central
government, state governments and sponsoring commercial banks jointly with a
view to develop the rural economy. Regional rural banks provide credit to small
farmers, artisans, small entrepreneurs and agricultural laborers. There were 196
regional rural banks at year-end fiscal 2002 with 14,486 branches, accounting
for 4.0% of aggregate deposits and 2.7% 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 ICICI Bank effective March 10, 2001.
At year-end fiscal 2002, private sector banks accounted for approximately
13.7% of aggregate deposits and 17.5% of gross bank credit outstanding of the
scheduled commercial banks. Their network of 5,290 branches accounted for 8.0%
of the total branch network of scheduled commercial banks in the country.
Foreign Banks
At year-end fiscal 2002, there were approximately 40 foreign banks with 184
branches operating in India. Foreign banks accounted for 5.1% of aggregate
deposits and 7.3% of outstanding gross bank credit of scheduled commercial banks
at year-end fiscal 2002. As part of the liberalization process, the Reserve Bank
of India has permitted foreign banks to operate more freely, subject to
requirements largely similar to those imposed on domestic banks. Foreign banks
operate in India through branches
217
of the parent bank. While presenting its budget for fiscal 2003, the government
of India announced that foreign banks would be permitted to incorporate
subsidiaries in India. Subsidiaries of foreign banks will have to adhere to all
banking regulations, including priority sector lending norms, applicable to
domestic banks. The primary activity of most foreign banks in India has been in
the corporate segment. However, in recent years, some of the larger foreign
banks have started to make consumer financing a larger part of their portfolios
based on the growth opportunities in this area in India. These banks offer
products such as automobile finance, home loans, credit cards and household
consumer finance.
Cooperative Banks
Cooperative banks cater to the financing needs of agriculture, small
industry and self-employed businessmen in urban and semi-urban areas of India.
The state land development banks and the primary land development banks provide
long-term credit for agriculture. In the light of liquidity and insolvency
problems experienced by some cooperative banks in fiscal 2001, the Reserve Bank
of India undertook several interim measures, pending formal legislative changes,
including measures related to lending against shares, borrowings in the call
market and term deposits placed with other urban cooperative banks. Presently
the Reserve Bank of India is responsible for supervision and regulation of urban
co-operative societies, and the National Bank for Agriculture and Rural
Development (NABARD) for State Co-operative Banks and District Central
Co-operative Banks. In its monetary and credit policy for fiscal 2002, the
Reserve Bank of India proposed the setting up of 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 included ICICI,
Industrial Development Bank of India, IFCI Limited and Industrial Investment
Bank of India. ICICI has now been amalgamated into ICICI Bank, which is a
private sector commercial bank.
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, the
218
investment-banking subsidiary of the merged entity, 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 such as bill discounting for small and medium-sized
companies, and fee-based services such as investment banking and underwriting.
Over the past few years, certain non-bank finance companies have defaulted
to investors and depositors, and consequently actions (including bankruptcy
proceedings) have been initiated against them, many of which are currently
pending.
Housing Finance Companies
Housing finance companies form a distinct sub-group of the non-bank finance
companies. As a result of the various incentives given by the government for
investing in the housing sector in recent years, the scope of this business has
grown substantially. Until recently, Housing Development Finance Corporation
Limited was the premier institution providing housing finance in India. In
recent years, several other players including banks have entered the housing
finance industry. The merged entity is a major housing finance provider and also
has a subsidiary housing finance company, ICICI Home Finance Company Limited.
The National Housing Bank and the Housing and Urban Development Corporation
Limited are the two government-controlled financial institutions created to
improve the availability of housing finance in India. The National Housing Bank
Act provides for securitization of housing loans, foreclosure of mortgages and
setting up of the Mortgage Credit Guarantee Scheme. The Reserve Bank of India
has directed commercial banks to lend at least 3.0% of their incremental
deposits in the form of housing loans. Further, the Reserve Bank of India has
reduced the risk weight for loans for residential properties to 50.0% for the
purpose of determining capital adequacy. Housing loans up to certain limits
prescribed by the Reserve Bank of India as well as mortgage-backed securities
qualify as priority sector lending under the Reserve Bank of India's directed
lending rules. See also "Supervision and Regulation - Capital Adequacy
Requirements" and "Supervision and Regulation - Directed Lending - Priority
Sector Lending."
Other Financial Institutions
Specialized Financial Institutions
In addition to the long-term lending institutions, there are various
specialized financial institutions which cater to the specific needs of
different sectors. They include the National Bank for Agricultural and Rural
Development, Export Import Bank of India, Small Industries Development Bank of
India, ICICI Venture Funds Management Company Limited, Risk Capital and
Technology Finance Corporation Limited, Tourism Finance Corporation of India
Limited, National Housing Bank, Power Finance Corporation Limited and the
Infrastructure Development Finance Corporation Limited.
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-
219
economic objectives, including balanced industrial growth and employment
creation, especially in areas requiring development. Long-term lending
institutions were extended access to long-term funds at subsidized rates through
loans and equity from the government of India and from funds guaranteed by the
government of India originating from commercial banks in India and foreign
currency resources originating from multilateral and bilateral agencies.
The focus of the commercial banks was primarily to mobilize household
savings through demand and time deposits and to use these deposits to meet the
short-term financial needs of borrowers in industry, trade and agriculture. In
addition, the commercial banks provided a range of banking services to
individuals and business entities.
However, since 1991, there have been comprehensive changes in the Indian
financial system. Various financial sector reforms, implemented since 1991, have
transformed the operating environment of the banks and long-term lending
institutions. In particular, the deregulation of interest rates, emergence of a
liberalized domestic capital market, and entry of new private sector banks,
along with the broadening of long-term lending institutions' product portfolios,
have progressively intensified the competition between banks and long-term
lending institutions. The Reserve Bank of India has permitted the transformation
of long-term lending institutions into banks subject to compliance with the
prudential norms as applicable to banks.
Banking Sector Reform
Most large banks in India were nationalized in 1969 and thereafter were
subject to a high degree of control until reform began in 1991. In addition to
controlling interest rates and entry into the banking sector, these regulations
also channeled lending into priority sectors. Banks were required to fund the
public sector through the mandatory acquisition of low interest-bearing
government securities or statutory liquidity ratio bonds to fulfill statutory
liquidity requirements. As a result, bank profitability was low, impaired assets
were comparatively high, capital adequacy was diminished, and operational
flexibility was hindered.
Committee on the Financial System (Narasimham Committee I)
The Committee on the Financial System (The Narasimham Committee I) was set
up in August 1991 to recommend measures for reforming the financial sector. Many
of the recommendations made by the committee, which addressed organizational
issues, accounting practices and operating procedures, were implemented by the
government of India. The major recommendations that were implemented included
the following:
o with fiscal stabilization and the government increasingly resorting to
market borrowing to raise resources, the statutory liquidity ratio or
the proportion of the banks' net demand and time liabilities that were
required to be invested in government securities was reduced from
38.5% in the pre-reform period to 25.0% in October 1997. This meant
that the significance of the statutory liquidity ratio shifted from
being a major instrument for financing the public sector in the
pre-reform era to becoming a prudential requirement;
o similarly, the cash reserve ratio or the proportion of the bank's net
demand and time liabilities that were required to be deposited with
the Reserve Bank of India was reduced from 15.0% in the pre-reform
period to 5.0% currently;
o special tribunals were created to resolve bad debt problems;
o most of the restrictions on interest rates for deposits were removed.
Commercial banks were allowed to set their own level of interest rates
for all deposits except savings bank deposits;
o substantial capital infusion to several state-owned banks was approved
in order to bring their capital adequacy closer to internationally
accepted standards. By the end of fiscal 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
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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", describing the future of the financial system.
Recent Structural Reforms
Universal Banking Guidelines
Universal banking in the Indian context means the transformation of
long-term lending institutions into banks. Pursuant to the recommendations of
the Narasimham Committee II and the Khan Working Group, the Reserve Bank of
India, in its mid-term review of monetary and credit policy for fiscal 2000,
announced that long-term lending institutions would have the option of
transforming themselves into banks subject to compliance with the prudential
norms as applicable to banks. If a long-term lending institution chose to
exercise the option available to it and formally decided to convert itself into
a universal bank, it could formulate a plan for the transition path and a
strategy for smooth conversion into a universal bank over a specified time
frame. In April 2001, the Reserve Bank of India issued guidelines on several
operational and regulatory issues which were required to be addressed in
evolving the path for transition of a long-term lending institution into a
universal bank. The salient features of the guidelines included the following.
Reserve requirements. Following conversion into a universal bank, a
long-term lending institution would have to comply with the cash reserve ratio
and statutory liquidity ratio requirements under the provisions of the Reserve
Bank of India Act and the Indian Banking Regulation Act;
Priority sector lending. Following conversion of a long-term lending
institution into a universal bank, the obligation to lend to the priority sector
up to a prescribed percentage of net bank credit would apply;
Permissible activities. Any activity currently undertaken by a long-term
lending institution but not permissible for a bank under the provisions of the
Banking Regulation Act would have to cease or be divested after the conversion
of a long-term lending institution into a universal bank;
Nature of subsidiaries. If any of the existing subsidiaries of a long-term
lending institution were engaged in an activity not permitted under the
provisions of the Indian Banking Regulation Act, then on conversion of the
long-term lending institution into a universal bank, such subsidiary or activity
would have to be separated from the operations of the universal bank since the
provisions of the Indian Banking Regulation Act permit a bank to have
subsidiaries only for specified activities;
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Restriction on investments. A long-term lending institution with an equity
investment in a company in excess of 30.0% of the paid up share capital of that
company or 30.0% of its own paid-up share capital and reserves, whichever is
less, following its conversion into a universal bank, would be required to
divest such excess holding to comply with the provisions of the Indian Banking
Regulation Act.
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. While presenting its budget for fiscal 2002, the
government of India announced measures for the setting up of more debt recovery
tribunals and the eventual repeal of the Sick Industrial Companies (Special
Provision) Act, 1985. This Act, however, has not been repealed to date.
In June 2002, the President of India promulgated the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Ordinance, 2002,
which was re-promulgated in August 2002. The ordinance provides that a secured
creditor may, in respect of loans classified as non-performing in accordance
with Reserve Bank of India guidelines, give notice in writing to the borrower
requiring it to discharge its liabilities within 60 days, failing which the
secured creditor may take possession of the assets constituting the security for
the loan, and exercise management rights in relation thereto, including the
right to sell or otherwise dispose of the assets. This ordinance is yet to be
approved by legislation passed by the Indian parliament.
As part of its effort to continue bank reform, the Reserve Bank of India
has announced a series of measures in its monetary and credit policy statements
aimed at deregulating and strengthening the financial system.
Credit Policy for Fiscal 2002
In the monetary and credit policy for fiscal 2002, the Reserve Bank of
India introduced 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 (currently 180 days).
o Banks were 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 Lending below the prime lending rate by banks was allowed.
o The minimum term for term deposits of Rs.1.5 million and above was
reduced to seven days from 15 days.
o The interest rate on cash reserve balances maintained with the Reserve
Bank of India was raised to 6.0% from the existing level of 4.0%.
o Inter-bank term liabilities for terms from 15 days up to one year were
freed from the computation of the minimum 3% cash reserve requirement.
o The exposure ceiling is computed uniformly in relation to total
capital as defined under International Capital Adequacy Standards
effective March 31, 2002. Total capital now includes both Tier-1 and
Tier-2 capital.
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o Non fund-based exposures will be reckoned at 100.0% in computing
exposure limits effective April 1, 2003.
o The ceiling on exposure for a single borrower was brought down to
15.0% of total capital from 20.0% and the group exposure ceiling was
brought down to 40.0% of total capital from 50.0% effective March 31,
2002.
The mid-term review of monetary and credit policy for fiscal 2002
introduced the following major changes in the banking and financial sector:
o The bank rate, the rate at which the Reserve Bank of India provides
refinance to the banking system, was reduced from 7.0% to 6.5%.
o The minimum cash reserve balances required to be maintained by banks
with the Reserve Bank of India were reduced from 7.5% to 5.5% of their
demand and time liabilities in India, excluding inter-bank
liabilities.
Credit Policy for Fiscal 2003
In the monetary and credit policy for fiscal 2003, the Reserve Bank of
India introduced the following major changes applicable to the banking and
financial sector:
The minimum cash reserve balances required to be maintained by banks with
the Reserve Bank of India were further reduced from 5.5% to 5.0% of their demand
and time liabilities in India, excluding inter-bank liabilities, effective June
15, 2002.
To impart flexibility to the interest rate structure, banks have been
encouraged to introduce a flexible interest rate system for all new deposits
with reset at six-monthly intervals, and to devise schemes for encouraging
depositors to convert their existing long-term fixed rate deposits into variable
rate deposits.
Banks are now required to announce the maximum spread over the prime
lending rate for all advances other than consumer credit, as well as provide
information on maximum and minimum interest rates charged to their borrowers and
deposit rates for various maturities.
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 November 1, 2001, the Reserve Bank of
India stipulated a cap of 12.5% on interest rates on the deposits raised from
the public by 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.
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The focus of supervision has now shifted to non-bank finance companies
accepting public deposits. This is because these companies are subject to
deposit regulations and standards. Companies accepting public deposits are
required to comply with all the directions relating to public deposits,
prudential norms and liquid assets. A task force on non-bank finance companies
set up by the government of India submitted its report in October 1998, and
recommended several steps to rationalize the regulation of non-bank finance
companies. Accepting these recommendations, the Reserve Bank of India issued new
guidelines for non-bank finance companies, which were as follows:
o a minimum net owned fund of Rs. 2.5 million 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 the government of India's budget for fiscal 2002, the
procedures for foreign direct investment in non-bank finance companies were
substantially liberalized.
Proposed Measures for Reform of Unit Trust of India
Unit Trust of India, a large investment institution in India, with a high
level of investment in equity securities, is currently facing difficulties in
meeting redemption and assured return obligations due to a significant decline
in the market value of its securities portfolio. The government of India has
announced a package of reform measures for Unit Trust of India, including
guaranteeing redemption and assured return obligations to the unit holders,
subject to restrictions on the maximum permissible redemption amount. The reform
package also provides for the division of Unit Trust of India into two mutual
funds structured in accordance with the regulations of the Securities and
Exchange Board of India, one comprising assured return schemes and the other
comprising net asset value based schemes. In view of the significance of Unit
Trust of India in the Indian financial system, the difficulties faced by Unit
Trust of India and the Indian government's reforms package may have an impact on
the Indian financial sector.
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:
o the entry of the private sector in the insurance industry should be
allowed;
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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 government of India's
budget for fiscal 1996 indicated that an independent regulatory authority would
be set up for the insurance industry, and the Insurance Regulatory Authority was
set up in 1996.
In December 1999, the parliament 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. The Insurance Regulatory and
Development Authority was established to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of the
insurance industry and for matters connected therewith.
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 the prescribed criteria are allowed
to enter the insurance business as strategic investors, without risk
participation, to the extent of 10.0% of their net worth or Rs. 500 million,
whichever is lower. Approval from the Reserve Bank of India is mandatory in all
cases. Currently, 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.
The merged entity, being licensed as a banking company, is regulated and
supervised by the Reserve Bank of India. The Reserve Bank of India requires the
merged entity to furnish statements, information and certain details relating to
its business. It has issued guidelines for commercial banks on recognition of
income, classification of assets, valuation of investments, maintenance of
capital adequacy and provisioning for impaired assets. The Reserve Bank of India
has set up a Board for Financial Supervision, under the chairmanship of the
Governor of the Reserve Bank of India. The appointment of the auditors of 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 ICICI Bank by the Reserve Bank of
India, the merged entity is required to have at least 25.0% of its branches
located in rural and semi-urban areas. A rural area is defined as a center with
a population of less than 10,000. A semi-urban area is defined as a center with
a population of greater than 10,000 but less than 100,000. These population
figures relate to the 1991 census conducted by the government of India.
Capital Adequacy Requirements
The merged entity is subject to the capital adequacy requirements of the
Reserve Bank of India, which, based on the guidelines of the Basle Committee on
Banking Regulations and Supervisory Practices, 1998, require the merged entity
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.
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Tier 2 capital consists of undisclosed reserves, revaluation reserves (at a
discount of 55.0%), general provisions and loss reserves (allowed up to a
maximum of 1.25% of weighted risk assets), hybrid debt capital instruments
(which combine certain features of both equity and debt securities) and
subordinated debt. Any subordinated debt is subject to progressive discounts
each year for inclusion in Tier 2 capital and total subordinated debt considered
as Tier 2 capital cannot exceed 50.0% of Tier 1 capital. Tier 2 capital cannot
exceed Tier 1 capital.
Risk adjusted assets and off-balance sheet items considered for determining
the capital adequacy ratio are the risk weighted total of specified funded and
non-funded exposures. Degrees of credit risk expressed as percentage weighting
have been assigned to various balance sheet asset items and conversion factors
to off-balance sheet items. The value of each item is multiplied by the relevant
weight or conversion factor to produce risk-adjusted values of assets and
off-balance-sheet items. Standby letters of credit/ guarantees and documentary
credits are treated as similar to funded exposure and are subject to similar
risk weight. All foreign exchange open position limits of the bank carry a
100.0% risk weight. Capital requirements have also been prescribed for open
foreign currency exposures and open positions in gold. In respect of banks and
financial institutions, a risk weight of 2.5% to cover market risk has to be
assigned in respect of the entire investment portfolio effective March 31, 2001
over and above the existing risk weights for credit risk in non-government and
non-approved securities. Banks and financial institutions are required to assign
a 100.0% risk weight for all state government guaranteed securities issued by
defaulting entities. The aggregate risk weighted assets are taken into account
for determining the capital adequacy ratio.
Loan Loss Provisions and Impaired Assets
In April 1992, the Reserve Bank of India issued formal guidelines on income
recognition, asset classification, provisioning standards and valuation of
investments applicable to banks, which are revised from time to time. These
guidelines are applied for the calculation of impaired assets under Indian GAAP.
The discussion of asset quality in this annual report is under US GAAP and the
US GAAP standards applied are set forth in "Business--Impaired Loans."
The principal features of these Reserve Bank of India guidelines, which
have been implemented with respect to the merged entity's loans, debentures,
lease assets, hire purchases and bills are set forth below.
Impaired Assets
An impaired asset (also called non-performing assets pursuant to the
Reserve Bank of India guidelines) is an asset in respect of which any amount of
interest or principal is overdue for more than two quarters. In particular, an
advance will be an impaired asset where:
o interest and/or instalment of principal remains overdue for a period
of more than 180 days in respect of a term loan;
o the account remains "out-of-order" for a period of more than 180 days
in respect of an overdraft or cash credit;
o the bill remains overdue for a period of more than 180 days in case of
bills purchased and discounted;
o interest and/or principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance
granted for agricultural purposes; and
o any amount to be received remains overdue for a period of more than
180 days in respect of other accounts.
With effect from fiscal 2004, banks will be required to classify an asset
as impaired when principal or interest has remained overdue for more than 90
days. Interest in respect of impaired assets is not recognized or credited to
the income account unless collected.
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Asset Classification
In line with the Reserve Bank of India master circular on income
recognition, asset classification and provisioning pertaining to advances
portfolio of banks, issued in July 2002 for banks, non-performing assets are
classified as described below:
Sub-Standard Assets. Assets that are non-performing assets for a period not
exceeding 18 months (12 months effective fiscal 2004). In such cases, the
current net worth of the borrower / guarantor or the current market value of the
security charged is not enough to ensure recovery of dues to the banks in full.
Such an asset has well-defined credit weaknesses that jeopardize the liquidation
of the debt and are characterized by the distinct possibility that the bank will
sustain some loss, if deficiencies are not corrected.
Doubtful Assets. Assets that are non-performing assets for more than 18
months. A loan classified as doubtful has all the weaknesses inherent in assets
that are classified as sub-standard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
known facts, conditions and values, highly questionable and improbable. With
effect from year-end fiscal 2004, an asset will be classified as doubtful if it
remains in the sub-standard category for 12 months.
Loss Assets. Assets on which losses have been identified by the bank or
internal or external auditors or the Reserve Bank India inspection but the
amount has not been written off fully.
There are separate guidelines for projects under implementation which are
based on the achievement of financial closure and the date of approval of the
project financing.
The Reserve Bank of India also has separate guidelines for the treatment of
restructured assets. A rescheduling of the instalments of principal alone does
not cause a standard asset to be classified in the sub-standard category
provided the loan or credit facility is fully secured. A rescheduling of
interest element does not cause an asset to be downgraded to the sub- standard
category subject to the condition that the amount of sacrifice, if any, in the
element of interest, measured in present value terms, is either written off or
provision is made to the extent of the sacrifice involved. In respect of
restructured sub-standard accounts, a rescheduling of the instalments of
principal alone renders a sub-standard asset eligible to be continued in the
sub-standard category for the specified period, provided the loan/credit
facility is fully secured. A rescheduling of interest element renders a
sub-standard asset eligible to be continued to be classified in the sub-standard
category for the specified period subject to the condition that the amount of
sacrifice, if any, in the element of interest, measured in present value terms,
is either written off or provision is made to the extent of the sacrifice
involved. The sub-standard accounts which have been subjected to restructuring,
whether in respect of principal installment or interest amount, by whatever
modality, are eligible to be upgraded to the standard category only after the
specified period, i.e., a period of one year after the date when first payment
of interest or of principal, whichever is earlier, falls due, subject to
satisfactory performance during the period.
To put in place an institutional mechanism for the restructuring of
corporate debt, the Reserve Bank of India has devised a corporate debt
restructuring system. The objective of the this framework is to ensure a timely
and transparent mechanism for the restructuring of the corporate debts of viable
entities facing problems, outside the purview of the Board of Industrial and
Financial Rehabilitation, debt recovery tribunals and other legal proceedings.
In particular, this framework aims to preserve viable corporates that are
affected by certain internal and external factors and minimize the losses to the
creditors and other stakeholders through an orderly and coordinated
restructuring program. The corporate debt restructuring system is a
non-statutory mechanism and a voluntary system based on debtor-creditor and
inter-creditor agreements.
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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 indicated above are mandatory, a higher provision in a
loan amount would be required if considered necessary.
Regulations relating to Making Loans
The provisions of the Banking Regulation Act govern the making of loans by
banks in India. The Reserve Bank of India issues directions covering the loan
activities of banks. Some of the major guidelines of Reserve Bank of India,
which are now in effect, are as follows:
o The Reserve Bank of India has prescribed norms for bank lending to
non-bank financial companies.
o Banks are free to determine their own lending rates but each bank must
declare its prime lending rate as approved by its board of directors.
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 lend at a rate below the prime lending rate
in respect of creditworthy borrowers and exposures. Interest rates for
certain categories of advances are regulated by the Reserve Bank of
India.
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 the 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.
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With respect to cash credit facilities (revolving asset-backed overdraft
facilities for meeting working capital needs), up to 80.0% of the facility can
be in the form of a demand loan.
Penalty interest represents additional interest charged over and above the
base rate of interest on certain events, including default in the repayment of
loans. Penalty interest is not chargeable for loans up to Rs. 25,000. 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 requirement and purpose.
Directed Lending
Priority Sector Lending
The Reserve Bank of India requires commercial banks to lend a certain
percentage of their net bank credit to specific sectors (the priority sectors),
such as agriculture, small-scale industry, small businesses and housing finance.
Total priority sector advances should be 40.0% of net bank credit with
agricultural advances required to be 18.0% of net bank credit and advances to
weaker sections required to be 10.0% of net bank credit, and 1% of the previous
year's net bank credit required to be lent under the Differential Rate of
Interest scheme. Any shortfall in the amount required to be lent to the priority
sectors may be required to be deposited with government sponsored developmental
banks like the National Bank for Agriculture and the Rural Development and Small
Industries Development Bank of India. These deposits can be for a period of one
year or five years.
The Reserve Bank of India requires banks to lend up to 3.0% of their
incremental deposits in the previous fiscal year towards housing finance. This
can be in the form of home loans to individuals or subscription to the
debentures and bonds of the National Housing Bank and housing development
institutions recognized by the government of India.
Prior to the amalgamation, the advances of ICICI were not subject to the
requirement applicable to banks in respect of priority sector lending. Pursuant
to the terms of the Reserve Bank of India's approval of the amalgamation, the
merged entity is required to maintain a total of 50.0% of its net bank credit on
the residual portion of its advances (i.e., the portion of its total advances
excluding advances of ICICI at year-end fiscal 2002) in the form of priority
sector advances. This additional requirement of 10.0% by way of priority sector
advances will apply until such time as the aggregate priority sector advances
reach a level of 40.0% of the total net bank credit of the merged entity.
Export Credit
The Reserve Bank of India also requires commercial banks to make loans to
exporters at concessional rates of interest. This enables exporters to have
access to an internationally competitive financing option. Pursuant to existing
guidelines, 12.0% of a bank's net bank credit is required to be in the form of
export credit. The merged entity provides export credit for pre-shipment and
post-shipment requirements of exporter borrowers in rupees and foreign
currencies.
Credit Exposure Limits
As a prudent measure aimed at better risk management and avoidance of
concentration of credit risk, the Reserve Bank of India has prescribed credit
exposure limits for banks and long-term lending institutions in respect of their
lending to individual borrowers and to all companies in a single group (or
sponsor group).
The limits set by the Reserve Bank of India are as follows:
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
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defined under capital adequacy standards for determining the exposure
ceiling uniformly both for 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 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 Tier 2), the Reserve Bank of India adjusted the
exposure ceiling for single borrowers from 20.0% to 15.0% effective
from March 31, 2002. Similarly, the group exposure limits have been
adjusted to 40.0% of capital funds effective from March 31, 2002. In
case of financing for infrastructure projects, the limit is extendable
by another 10.0%, i.e., up to 50.0% of capital funds.
Credit exposure is the aggregate of:
o all types of funded and non-funded credit limits,
o facilities extended by way of equipment leasing, hire purchase finance
and factoring services,
o advances against shares, debentures, bonds and units of mutual funds
to stock brokers and market makers,
o bank loan for financing promoters' contributions, and
o bridge loans against equity flows/issues.
The merged entity is in compliance with these limits, except in the case of
two borrowers to whom its exposures are in excess of the single borrower
exposure limit. This is mainly due to the write-down of reserves pursuant to the
fair valuation of ICICI's assets for the purpose of accounting for the
amalgamation under Indian GAAP. ICICI had not exceeded the limit at the time of
providing the assistance. Subsequent to the amalgamation, the merged entity has
applied to the Reserve Bank of India for its approval for exceeding the exposure
limit in respect of these two borrowers.
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. The merged entity has
fixed a ceiling of 15.0% on its exposure to any one industry and monitors its
exposures accordingly.
Capital Market Exposure Limits
Pursuant to the Reserve Bank of India guidelines, the exposure of banks to
capital markets by way of investments in shares, convertible debentures, units
of equity oriented mutual funds and loans to brokers, should not exceed 5.0 % of
outstanding domestic credit (excluding inter-bank lending and advances outside
India) at March 31 of the previous fiscal year and investments in shares,
convertible debentures and units of equity oriented mutual funds should not
exceed 20.0% of the bank's net worth.
These guidelines were revised on May 11, 2001 specifying the types of
capital market exposure that could be undertaken by banks. Further, the 5.0%
ceiling is now required to be computed in relation to the total advances
(including commercial paper) at March 31 of the previous fiscal year.
Pursuant to the terms of the Reserve Bank of India's approval for the
amalgamation, ICICI's project finance related investments are excluded from the
computation of these limits for a period of five years.
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Banks' Investment Classification and Valuation Norms
Based on the comments to the Report of the Informal Group on Banks'
Investment Portfolio, the Reserve Bank of India finalized its guidelines on
categorization and valuation of banks' investment portfolio. These guidelines
were effective from September 30, 2000. The salient features of the guidelines
are given below:
o The entire investment portfolio is required to be classified under
three categories: (a) held to maturity, (b) held for trading and (c)
available for sale. Held to maturity includes securities acquired with
the intention of being held up to maturity; held for trading includes
securities acquired with the intention of being traded to take
advantage of the short-term price/interest rate movements; and
available for sale includes securities not included in held to
maturity and held for trading. Banks should decide the category of
investment at the time of acquisition.
o Held to maturity investments compulsorily include (a) recapitalization
bonds, (b) investments in subsidiaries and joint ventures and (c)
investments in debentures deemed as advance. Held to maturity
investments also include any other investment identified for inclusion
in this category subject to the condition that such investments cannot
exceed 25.0% of the total investment excluding recapitalization bonds
and debentures.
o Profit on the sale of investments in the held to maturity category is
appropriated to the capital reserve account after being taken in the
income statement. Loss on any sale is recognized in the income
statement.
o The market price of the security available from the stock exchange,
the price of securities in subsidiary general ledger transactions, the
Reserve Bank of India price list or prices declared by Primary Dealers
Association of India (PDAI) jointly with the Fixed Income Money Market
and Derivatives Association of India (FIMMDA) serves as the "market
value" for investments in available for sale and held for trading
securities.
o Investments under the held for trading category should be sold within
90 days; in the event of inability to sell due to adverse factors
including tight liquidity, extreme volatility or a unidirectional
movement in the market, the unsold securities should be shifted to the
available for sale category.
o Profit or loss on the sale of investments in both held for trading and
available for sale categories is taken in the income statement.
o Shifting of investments from or to held to maturity may be done with
the approval of the board of directors once a year, normally at the
beginning of the accounting year; shifting of investments from
available for sale to held for trading may be done with the approval
of the board of directors, the Asset Liability Management Committee or
the Investment Committee; shifting from held for trading to available
for sale is generally not permitted.
o The Reserve Bank of India no longer announces the yield to maturity
rates on unquoted government of India securities for the purpose of
valuation of investments by banks.
Held to maturity securities are not marked to market and are carried at
acquisition cost or at an amortized cost if acquired at a premium over the face
value.
Available for sale and held for trading securities are valued at market or
fair value as at the balance sheet date. Depreciation or appreciation for each
basket within the available for sale and held for trading categories is
aggregated. Net appreciation in each basket, if any, that is not realized is
ignored, while net depreciation is provided for.
With a view to the building up of adequate reserves to guard against any
possible reversal of interest rate environment in the future due to unexpected
developments, the Reserve Bank of India has
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advised banks to build up an investment fluctuation reserve of a minimum of 5.0%
of the bank's investment portfolio within a period of five years This reserve
should be computed with respect to investments in held for trading and available
for sale categories. It will not be necessary to include investments under the
held to maturity category for the purpose of building up this reserve.
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.
Restrictions on Investments in a Single Company
No bank may hold shares in any company exceeding 30.0% of the paid up share
capital of that company or 30.0% of its own paid up share capital and reserves,
whichever is less.
Limit on Transactions through Individual Brokers
Guidelines issued by the Reserve Bank of India require banks to empanel
brokers for transactions in securities. These guidelines also require that a
disproportionate part of the bank's business should not be transacted only
through one broker or a few brokers. The Reserve Bank of India specifies that
not more than 5.0% of the total transactions through empanelled brokers can be
transacted through one broker. If for any reason this limit is breached, the
Reserve Bank of India has stipulated that the board of directors of the bank
concerned should ratify such action.
Prohibition on Short-Selling
The Reserve Bank of India does not permit short selling of securities by
banks.
Regulations relating to Deposits
The Reserve Bank of India has permitted banks to independently determine
rates of interest offered on term deposits. However, banks are not permitted to
pay interest on current account deposits. Further, banks may pay interest of up
to 4.0% per annum on savings deposits. In respect of savings and time deposits
accepted from employees, the merged entity is permitted by the Reserve Bank of
India to pay an additional interest of 1.0% over the interest payable on
deposits from the public.
Domestic time deposits have a minimum maturity of 15 days (seven days in
respect of deposits over Rs. 1.5 million with effect from April 19, 2001) and a
maximum maturity of 10 years. Time deposits from non-resident Indians
denominated in foreign currency have a minimum maturity of one year and a
maximum maturity of three years.
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 on deposits is paid in accordance with the schedule of
interest rates disclosed in advance by the bank and not pursuant to
negotiation between the depositor and the bank.
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Deposit Insurance
Demand and time deposits of up to Rs. 100,000 (US$ 2,048) accepted by
Indian banks have to be mandatorily insured with the Deposit Insurance and
Credit Guarantee Corporation, a wholly-owned subsidiary of the Reserve Bank of
India. Banks are required to pay the insurance premium for the eligible amount
to the Deposit Insurance and Credit Guarantee Corporation on a semi-annual
basis. The cost of the insurance premium cannot be passed on to the customer.
Regulations relating to Knowing the Customer
The Reserve Bank of India requires banks to open accounts only after
verifying the identity of customers as to their name, residence and other
details to ensure that the account is being opened by the customer in his own
name. To open an account, a prospective customer is required to be introduced
by:
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, the prospective
customer is required to submit documents like his identity card, passport or
details of bank accounts with other banks.
Legal Reserve Requirements
Cash Reserve Ratio
A banking company such as the merged entity is required to maintain a
specified percentage of its demand and time liabilities, excluding inter-bank
deposits, by way of cash reserve with itself and by way of balance in current
account with the Reserve Bank of India. The cash reserve ratio can be a minimum
of 3.0% and a maximum of 20.0% pursuant to section 42 of the Reserve Bank of
India Act. At present, the cash reserve ratio is 5.0%.
The following liabilities are excluded from the calculation of the cash
reserve ratio:
o inter-bank liabilities;
o liabilities to primary dealers; and
o refinancing from the Reserve Bank of India and other institutions
permitted to offer refinancing to banks.
The Reserve Bank of India pays no interest on the cash reserves up to 3.0%
of the demand and time liabilities and pays interest at the bank rate on the
balance.
The cash reserve ratio has to be maintained on an average basis for a
fortnightly period and should not be below 50.0% of the required cash reserve
ratio for the first seven days of the fortnight and 65.0% for any day of the
rest of the fortnight, except the last business day of the fortnight. On the
last business day of the fortnight, no restrictions apply.
Ever since the Reserve Bank of India introduced the financial sector
reforms, its 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%.
Statutory Liquidity Ratio
In addition to the cash reserve ratio, a banking company such as the merged
entity is required to maintain a specified percentage of its net demand and time
liabilities by way of liquid assets like cash, gold or approved securities. The
percentage of this liquidity ratio is fixed by the Reserve Bank of
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India from time to time, and it can be a minimum of 25.0% and a maximum of 40.0%
pursuant to section 24 of the Banking Regulation Act. At present, the Reserve
Bank of India requires banking companies to maintain a liquidity ratio of 25.0%.
Regulations on Asset Liability Management
At present, the Reserve Bank of India's regulations for asset liability
management require banks to draw up asset-liability gap statements separately
for rupee and for four major foreign currencies. These gap statements are
prepared by scheduling all assets and liabilities according to the stated and
anticipated re-pricing date, or maturity date. These statements have to be
submitted to the Reserve Bank of India on a quarterly basis. The Reserve Bank of
India has advised banks to actively monitor the difference in the amount of
assets and liabilities maturing or being re-priced in a particular period and
place internal prudential limits on the gaps in each time period, as a risk
control mechanism. Additionally, the Reserve Bank of India has asked banks to
manage their asset-liability structure such that the negative liquidity gap in
the 1-14 day and 15-28 day time periods does not exceed 20.0% of cash outflows
in these time periods. This 20.0% limit on negative gaps has been made mandatory
with effect from April 1, 2000.
Foreign Currency Dealership
The Reserve Bank of India has granted the merged entity a full-fledged
authorized dealers' license to deal in foreign exchange through its designated
branches. Under this license, the merged entity has been granted permission to:
o engage in foreign exchange transactions in all currencies;
o open and maintain foreign currency accounts abroad;
o raise foreign currency and rupee denominated deposits from non
resident Indians;
o grant foreign currency loans to on-shore and off-shore corporations;
o open documentary credits;
o grant import and export loans;
o handle collection of bills, funds transfer services;
o issue guarantees; and
o enter into derivative transactions and risk management activities that
are incidental to its normal functions authorized under its
organizational documents.
The merged entity's foreign exchange operations are subject to the
guidelines specified by the Reserve Bank of India in the exchange control
manual. As an authorized dealer, the merged entity is required to enroll as a
member of the Foreign Exchange Dealers Association of India, which prescribes
the rules relating to foreign exchange business in India.
Authorized dealers, like the merged entity, are required to determine their
limits on open positions and maturity gaps in accordance with the Reserve Bank
of India's guidelines and these limits are approved by the Reserve Bank of
India. At present, the limit for the merged entity's over-night open positions
is Rs. 3 billion. Further, the merged entity is permitted to hedge foreign
currency loan exposures of Indian corporations in the form of interest rate
swaps, currency swaps and forward rate agreements, subject to certain
conditions.
Statutes Governing Foreign Exchange and Cross-Border Business Transactions
The foreign exchange and cross border transactions undertaken by banks are
subject to the provisions of the Foreign Exchange Management Act. All branches
should monitor all non-resident accounts to prevent money laundering.
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Requirements of the Banking Regulation Act
Prohibited Business
The Banking Regulation Act specifies the business activities in which a
bank may engage. Banks are prohibited from engaging in business activities other
than the specified activities.
Reserve Fund
Any bank incorporated in India is required to create a reserve fund to
which it must transfer not less than 25.0% of the profits of each year before
dividends. If there is an appropriation from this account, the bank is required
to report the same to the Reserve Bank of India within 21 days, explaining the
circumstances leading to such appropriation. The government of India may, on the
recommendation of the Reserve Bank of India, exempt a bank from requirements
relating to its reserve fund.
Restrictions on Payment of Dividends
Pursuant to the provisions of the Banking Regulation Act, a bank can pay
dividends on its shares only after all its capitalized expenses (including
preliminary expenses, organization expenses, share selling commission,
brokerage, amounts of losses and any other item of expenditure not represented
by tangible assets) have been completely written off. The government of India
may exempt banks from this provision by issuing a notification on the
recommendation of the Reserve Bank of India. ICICI Bank obtained approval to
write off, over a period of three years including fiscal 2002, its issue
expenses incurred in respect of its ADS program for preparing its accounts as
provided under the Banking Regulation Act.
Prior approval of the Reserve Bank of India is required for a dividend
payment above 25.0% of face value of a company's shares or for an interim
dividend payment.
The government of India may, on the recommendation of the Reserve Bank of
India, exempt a bank from the restrictions on dividend payment.
Restriction on Share Capital and Voting Rights
Banks can issue only ordinary shares. The Banking Regulation Act specifies
that no shareholder in a banking company can exercise voting rights on poll in
excess of 10.0% of total voting rights of all the shareholders of the banking
company.
Only banks incorporated before January 15, 1937 can issue preferential
shares. Prior to the amalgamation, ICICI had preference share capital of Rs.
3.50 billion (US$ 72 million). The government of India, on the recommendation of
the Reserve Bank of India, has granted an exemption to the merged entity which
allows the inclusion of preference capital in the capital structure of the
merged entity for a period of five years, though the merged entity is a bank
incorporated after January 15, 1937.
Regulatory Reporting and Examination Procedures
The Reserve Bank of India is empowered under the Banking Regulation Act to
inspect a bank. The Reserve Bank of India monitors prudential parameters at
quarterly intervals. To this end and to enable off-site monitoring and
surveillance by the Reserve Bank of India, banks are required to report to the
Reserve Bank of India on aspects such as:
o assets, liabilities and off-balance sheet exposures;
o the risk weighting of these exposures, the capital base and the
capital adequacy ratio;
o the unaudited operating results for each quarter;
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o asset quality;
o concentration of exposures;
o connected and related lending and the profile of ownership, control
and management; and
o other prudential parameters.
The Reserve Bank of India also conducts periodical on-site inspections on
matters relating to the bank's portfolio, risk management systems, internal
controls, credit allocation and regulatory compliance, at intervals ranging from
one to three years. ICICI Bank has been, and the merged entity is, subject to
the on-site inspection by the Reserve Bank of India at yearly intervals. The
inspection report, along with the report on actions taken by the merged entity,
has to be placed before the board of directors. On approval by the board of
directors, the merged entity is required to submit the report on actions taken
by it to the Reserve Bank of India. The Reserve Bank of India also discusses the
report with the management team including the Managing Director and Chief
Executive Officer.
The Reserve Bank of India also conducts on-site supervision of selected
branches of the merged entity with respect to their general operations and
foreign exchange related transactions.
Appointment and Remuneration of the Chairman, Managing Director and Other
Directors
The merged entity is required to obtain prior approval of the Reserve Bank
of India before it appoints its chairman and managing director and any other
executive directors and fixes 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 merged entity.
Further, the Reserve Bank of India may order meetings of the merged entity's
board of directors to discuss any matter in relation to the merged entity,
appoint observers to such meetings and in general may make such changes to the
management as it may deem necessary and may also order the convening of a
general meeting of the shareholders of the merged entity to elect new directors.
Penalties
The Reserve Bank of India may impose penalties on banks and its employees
in case of infringement of regulations under the Banking Regulation Act. The
penalty may be a fixed amount or may be related to the amount involved in any
contravention of the regulations. The penalty may also include imprisonment.
Restriction on Transfer of Shares
The Reserve Bank of India's approval is required for the transfer of shares
of the merged entity to an individual or a group which acquires 5.0% or more of
the merged entity's total paid up capital.
Assets to be Maintained in India
Every bank is required to ensure that its assets in India (including
import-export bills drawn in India and Reserve Bank of India approved
securities, even if the bills and the securities are held outside India) are not
less than 75.0% of its demand and time liabilities in India.
Secrecy Obligations
The merged entity's obligations relating to maintaining secrecy arise out
of common law principles governing its relationship with its customers. The
merged entity 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;
237
o where the merged entity needs to disclose information in its interest;
and
o where disclosure is made with the express or implied consent of the
customer.
The merged entity is required to comply with the above in furnishing any
information to any parties. The merged entity is also required to disclose
information if ordered to do so by a court. The Reserve Bank of India may, in
the public interest, publish the information obtained from the bank. Under the
provisions of the Banker's Books Evidence Act, a copy of any entry in a bankers'
book, such as ledgers, day books, cash books and account books certified by an
officer of the bank may be treated as prima facie evidence of the transaction in
any legal proceedings.
Regulations and Guidelines of the Securities and Exchange Board of India
The Securities and Exchange Board of India was established to protect the
interests of public investors in securities and to promote the development of,
and to regulate, the Indian securities market. The merged entity is subject to
Securities and Exchange Board of India regulations for its capital issuances, as
well as its underwriting, custodial, depositary participant, investment banking,
registrar and transfer agents, brokering and debenture trusteeship activities.
These regulations provide for its registration with the Securities and Exchange
Board of India for each of these activities, functions and responsibilities. The
merged entity is required to adhere to a code of conduct applicable for these
activities.
Public Financial Institution Status
ICICI was a public financial institution under the Indian Companies Act,
1956. The special status of public financial institutions is also recognized
under other statutes including the Indian Income Tax Act, 1961, Sick Industrial
Companies (Special Provisions) Act, 1985 and Recovery of Debts Due to Banks and
Financial Institutions Act, 1993. The merged entity is not a public financial
institution. As a public financial institution, ICICI was entitled to certain
benefits under various statutes. These benefits included the following:
o For income tax purposes, ICICI's deposits and bonds were prescribed
modes for investing and depositing surplus money by charitable and
religious trusts. Since the merged entity is a scheduled bank, its
deposits and bonds are also prescribed modes for investment by
religious and charitable trusts.
o The government of India had permitted non-government provident,
superannuation and gratuity funds to invest up to 40.0% of their
annual accretion of funds in bonds and securities issued by public
financial institutions. Further, the trustees of these funds could at
their discretion invest an additional 20.0% of such accretions in
these bonds and securities. These funds can invest up to only 10.0% of
their annual accretion in bonds and securities issued by private
sector banks, such as the merged entity.
o Indian law provides that a public financial institution cannot, except
as provided by law or practice, divulge any information relating to,
or to the affairs of, its customers. The merged entity has similar
obligations relating to maintaining secrecy arising out of common law
principles governing its relationship with its customers.
o The Recovery of Debts Due to Banks and Financial Institutions Act,
1993 provides for establishment of debt recovery tribunals for
recovery of debts due to any bank or public financial institution or
to a consortium of banks and public financial institutions. Under this
Act, the procedures for recoveries of debt were simplified and time
frames were fixed for speedy disposal of cases. Upon establishment of
the debt recovery tribunal, no court or other authority can exercise
jurisdiction in relation to matters covered by this Act, except the
higher courts in India in certain circumstances. This Act applies to
banks as well as public financial institutions and therefore applies
to the merged entity.
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ICICI's cessation as a public financial institution would have constituted
an event of default under certain of ICICI's loan agreements related to its
foreign currency borrowings. Prior to the amalgamation becoming effective, such
event of default was waived by the respective lenders pursuant to the terms of
such foreign currency borrowing agreements.
Income Tax Benefits
As a banking company, the merged entity is entitled to certain tax benefits
under the Indian Income-tax Act including the following:
o The merged entity is allowed a deduction of up to 40.0% of its taxable
business income derived from the business of long-term financing
(defined as loans and advances extended for a period of not less than
five years) which is transferred to a special reserve, provided that
the total amount of this reserve does not exceed two times the paid-up
share capital and general reserves. The merged entity is entitled to
this benefit because it is a financial corporation. Effective fiscal
1998, if a special reserve is created, it must be maintained and if it
is utilized, it is treated as taxable income in the year in which it
is utilized.
o The merged entity is entitled to a tax deduction on the provisioning
towards bad and doubtful debts equal to 7.5% of the merged entity's
total business income, computed before making any deductions permitted
pursuant to the Indian Income-tax Act, to the extent of 10.0% of the
aggregate average advances made by its rural branches computed in the
manner prescribed. The merged entity has the option of claiming a
deduction in respect of the provision made by it for any assets
classified pursuant to the Reserve Bank of India's guidelines as
doubtful or loss assets to the extent of 10.0% of the amount of such
assets as on the last day of the year.
o The merged entity is eligible to issue tax saving bonds approved in
accordance with the provisions of Indian Income-tax Act. The
subscription to such bonds by certain categories of investors is a
prescribed mode of investing for the purposes of availing of a tax
rebate.
o For income tax purposes, the merged entity's deposits and bonds are
prescribed modes of investing and depositing surplus money by
charitable and religious trusts.
o The income of non-resident persons and persons not ordinarily resident
in India, by way of interest on the merged entity's deposits in a
foreign currency is exempt from tax.
Regulations governing Insurance Companies
ICICI Prudential Life Insurance Company and ICICI Lombard General Insurance
Company, the subsidiaries of the merged entity offering life insurance and
non-life insurance respectively, are subject to the provisions of the Insurance
Act, 1938 and the various regulations prescribed by the Insurance Regulatory and
Development Authority. These regulations regulate and govern, among other
things, registration as an insurance company, investment, licensing of insurance
agents, advertising, sale and distribution of insurance products and services
and protection of policyholders' interests. In May 2002, the parliament approved
the Insurance (Amendment) Bill 2001, which facilitates the appointment of
corporate agents by insurance companies and prohibits intermediaries and brokers
from operating as surrogate insurance agents.
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EXCHANGE CONTROLS
Restrictions on Conversion of Rupees
There are restrictions on the conversion of rupees into dollars. Before
February 29, 1992, the Reserve Bank of India determined the official value of
the rupee in relation to a weighted basket of currencies of India's major
trading partners. In the February 1992 budget, a new dual exchange rate
mechanism was introduced by allowing conversion of 60.0% of the foreign
exchange received on trade or current account at a market-determined rate and
the remaining 40.0% at the official rate. All importers were, however, required
to buy foreign exchange at the market rate except for certain specified
priority imports. In March 1993, the exchange rate was unified and allowed to
float. In February 1994 and again in August 1994, the Reserve Bank of India
announced relaxations in payment restrictions in case of a number of
transactions. Since August 1994, the government of India has substantially
complied with its obligations owed to the 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 regulates transactions involving
foreign exchange and provides that certain transactions cannot be carried out
without the general or special permission of the Reserve Bank of India. The
Foreign Exchange Management Act, 1999 has eased restrictions on current account
transactions. However, the Reserve Bank of India continues to exercise control
over capital account transactions (i.e., those which alter the assets or
liabilities, including contingent liabilities, of persons). The Reserve Bank of
India has issued regulations under the Foreign Exchange Management Act, 1999 to
regulate the various kinds of capital account transactions, including certain
aspects of the purchase and issuance of shares of Indian companies.
Restrictions on Sale of the Equity Shares underlying the ADSs and 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 by a non-resident of India to a resident of India as well as for
renunciation of rights to a resident of India. However sale of such shares
under the portfolio investment scheme prescribed by the Reserve Bank of India,
does not require the approval of the Reserve Bank of India provided the same is
made on a recognized stock exchange and through a registered stock broker.
If the prior approval of the Reserve Bank of India has been obtained for
the sale of the equity shares underlying the ADSs, then the sale proceeds may
be remitted in terms of such an approval. However, if the equity shares
underlying the ADSs are sold under the portfolio investment scheme then the
sale proceeds may be remitted through an authorized dealer, without the
approval of the Reserve Bank of India provided that the equity shares are sold
on a recognized stock exchange through a registered broker and a no objection/
tax clearance certificate from the income-tax authority has been produced.
240
After the announcement of India's budget for fiscal 2002, the Reserve Bank
of India issued certain notifications for the liberalization of the capital
account. Pursuant to the notifications, in contrast to prior regulations,
two-way fungibility in ADS/GDR issues of Indian companies has been introduced,
subject to sectoral caps, wherever applicable.
An Indian company may sponsor an issue of ADSs with an overseas depository
against shares held by its shareholders at a price to be determined by the lead
manager. The proceeds of the issue shall be repatriated to India within a
period of one month. The sponsoring company must comply with the provisions of
the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time. The sponsoring company
must also furnish full details of the issue in the prescribed forms to the
Reserve Bank of India within 30 days from the date of closure of the issue.
The Reserve Bank of India has issued a notification under the provisions
of the Foreign Exchange Management Act, 1999 permitting a registered broker in
India to purchase shares of any Indian company on behalf of a person resident
outside India, for the purpose of converting the shares so purchased into ADSs
provided that:
o the shares are purchased on a recognized stock exchange;
o the Indian company has issued ADSs;
o the shares are purchased with the permission of the custodian of the
ADSs of the concerned Indian company and are deposited with the
custodian;
o the number of shares so purchased shall not exceed the number of ADSs
converted into underlying shares and shall be subject to sectoral
caps as applicable;
o the non-resident investor, broker, custodian and the overseas
depository comply with the provisions of the Scheme for Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time.
241
MARKET PRICE INFORMATION
Equity Shares
The outstanding equity shares of the merged entity are listed and traded on
the Chennai, Delhi, Kolkata and Vadodara Stock Exchanges, the Bombay Stock
Exchange or the BSE and on the National Stock Exchange of India Limited or the
NSE. At September 2, 613.03 million equity shares were outstanding (including
392.67 million shares issued to shareholders of ICICI pursuant to the
amalgamation) and 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 equity share(1)
----------------------------------------------------
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
Fiscal 2002 ................................ 193.50 66.75 3.96 1.37
Quarterly prices:
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.............................. 140.00 66.75 2.92 1.39
Third Quarter .............................. 114.55 71.50 2.37 1.48
Fourth Quarter.............................. 144.90 85.95 2.97 1.76
Fiscal 2003:
First Quarter............................... 164.40 111.00 3.36 2.27
Second Quarter (through August 30).......... 158.40 130.10 3.26 2.68
Monthly prices:
March 2002.................................. 139.85 118.50 2.86 2.43
April 2002.................................. 131.50 111.00 2.68 2.27
May 2002.................................... 154.95 111.50 3.16 2.27
June 2002................................... 164.40 133.15 3.36 2.72
July 2002................................... 158.40 134.30 3.25 2.76
August 2002................................. 145.85 130.10 3.01 2.68
---------------
(1) Data from the NSE. The prices quoted on the BSE and other stock exchanges
may be different.
On August 30, 2002, the closing price of equity shares on the NSE was Rs.
143.60 equivalent to US$ 2.96 per equity share (US$ 5.92 per ADS on an imputed
basis) translated at the noon buying rate of Rs. 48.52 per US$ 1.00 on August
30, 2002.
242
At September 2, 2002, there were approximately 602,324 holders of record of
equity shares, of which 120 had registered addresses in the United States and
held an aggregate of approximately 98,851 equity shares.
During the past three years, there were no suspensions in the trading of
equity shares by any of the stock exchanges on which the equity shares were
listed.
ADSs
ICICI Bank's ADSs, each representing two equity shares, were originally
issued in March 2000 in a public offering and are listed and trade on the New
York Stock Exchange under the symbol IBN. The equity shares underlying the ADSs
have been listed on the Calcutta, Chennai, Delhi and Vadodara Stock Exchanges,
the BSE and the NSE.
At September 2, 2002, the merged entity had approximately 78.80 million
ADSs, equivalent to 157.61 million equity shares, outstanding (including 64.10
million ADSs issued to the ADS holders of ICICI pursuant to the amalgamation).
At this date, there were 23 record holders of the merged entity's ADSs, all of
which have registered addresses in the United States.
The following table sets forth, for the periods indicated, the reported
high and low closing prices on the New York Stock Exchange for the outstanding
ADSs traded under the symbol IBN.
Price per ADS
--------------------------
High Low
--------------------------
Fourth Quarter (from March 28, 2000)......... US$ 15.38 US$ 14.38
Annual prices:
Fiscal 2001.................................. 18.75 4.62
Fiscal 2002.................................. 7.50 2.50
Quarterly prices:
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 5.00
Second Quarter............................... 5.85 2.50
Third Quarter................................ 5.30 2.80
Fourth Quarter............................... 6.80 4.00
Fiscal 2003:
First Quarter................................ 8.31 4.89
Second Quarter (through August 30)........... 7.54 5.40
Monthly prices:
March 2002................................... 6.60 5.75
April 2002................................... 6.60 4.92
May 2002..................................... 8.06 4.89
June 2002.................................... 8.31 6.28
July 2002.................................... 7.54 5.74
August 2002.................................. 6.80 5.40
243
RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
India strictly regulates ownership of Indian companies by foreigners.
Foreign investment in Indian securities, including the equity shares
represented by the ADSs, is generally regulated by the Foreign Exchange
Management Act, 1999, which permits transactions involving the inflow or
outflow of foreign exchange and empowers the Reserve Bank of India to prohibit
or regulate such transactions.
The Foreign Exchange Management Act, 1999 regulates transactions involving
foreign exchange and provides that certain transactions cannot be carried out
without the general or special permission of the Reserve Bank of India. The
Foreign Exchange Management Act, 1999 has eased restrictions on current account
transactions. However, the Reserve Bank of India continues to exercise control
over capital account transactions (i.e., those which alter the assets or
liabilities, including contingent liabilities, of persons). The Reserve Bank of
India has issued regulations under the Foreign Exchange Management Act, 1999 to
regulate the various kinds of capital account transactions, including certain
aspects of the purchase and issuance of shares of Indian companies.
An Indian company may sponsor an issue of ADSs with an overseas depositary
against shares held by its shareholders at a price to be determined by the lead
manager. The proceeds of the issue must be repatriated to India within a period
of one month. The sponsoring company must comply with the provisions of the
Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time. The sponsoring company
must also furnish full details of the issue in the prescribed forms to the
Reserve Bank of India within 30 days from the date of closure of the issue.
The Reserve Bank of India has issued a notification under the provisions
of the Foreign Exchange Management Act, 1999 permitting a registered broker in
India to purchase shares of any Indian company on behalf of a person resident
outside India, for the purpose of converting the shares so purchased into ADSs,
provided that:
o the shares are purchased on a recognized stock exchange;
o the Indian company has issued ADSs;
o the shares are purchased with the permission of the custodian of the
ADSs of the concerned Indian company and are deposited with the
custodian;
o the number of shares so purchased shall not exceed the number of ADSs
converted into underlying shares and shall be subject to sectoral
caps as applicable;
o the non-resident investor, broker, custodian and the overseas
depository comply with the provisions of the Scheme for Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the Central Government from time to time.
Under the foreign investment rules, the following are the applicable
restrictions on foreign ownership:
o Under the foreign direct investment scheme, foreign investors may own
up to 49.0 % of the merged entity's equity shares subject to
conformity with guidelines issued by the Reserve Bank of India from
time to time.
o Under the Issue of Foreign Currency Convertible Bonds and Equity
Shares (through Depositary Receipt Mechanism) Scheme, 1993, foreign
investors may purchase ADSs or
244
GDRs, subject to the receipt of all necessary government approvals at
the time the depositary receipt program is set up;
o Under the portfolio investment scheme, foreign institutional
investors, subject to registration with the Securities and Exchange
Board of India and the Reserve Bank of India, and non-resident
Indians and overseas corporate bodies may hold in aggregate up to
49.0% of the paid-up equity capital of the merged entity. Provided
that (i) no single foreign institutional investor may own more than
10.0% of the merged entity's total paid-up equity capital; and (ii) no
single non-resident Indian or overseas corporate body may own more
than 5.0% of the merged entity's total paid-up equity capital.
Pursuant to a circular dated November 29, 2001, the Reserve Bank of India
notified that, as of that date, overseas corporate bodies are not permitted to
invest under the portfolio investment scheme, though they may continue to hold
investments that have already been made under the portfolio investment scheme
until such time as these investments are sold on the stock exchange.
ICICI Bank obtained the approval of the Foreign Investment Promotion Board
for its ADS offering in March 2000 which was a foreign direct investment. The
investments through the portfolio investment scheme in the secondary market in
India by foreign institutional investors, non-resident Indians and overseas
corporate bodies and investments through the foreign direct investment scheme
are distinct. As of September 2, 2002, foreign investors owned approximately
46.6% of the merged entity's equity in total, of which 25.7% was through the
ADS program.
As an investor in ADSs, you do not need to seek the specific approval from
the government of India to purchase, hold or dispose of your ADSs. In the ADS
offering, ICICI Bank obtained the approval of the Department of Company Affairs
and the relevant stock exchanges.
Equity shares which have been withdrawn from the depositary facility and
transferred on the merged entity's register of shareholders to a person other
than the depositary or its nominee may be voted by that person provided the
necessary procedural requirements have been met. However, you may not receive
sufficient advance notice of shareholder meetings to enable you to withdraw the
underlying equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the ADS program, its investment in the equity shares would be
subject to the general restrictions on foreign ownership noted above and may be
subject to the portfolio investment restrictions. Secondary purchases of
securities of a banking company in India by foreign direct investors or
investments by non-resident Indians, overseas corporate bodies and foreign
institutional investors above the ownership levels set forth above require
government of India approval on a case-by-case basis. It is unclear whether
similar case-by-case 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 the merged entity exceeds 15.0% of its total equity under
the Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeover) Regulations, 1997.
ADSs issued by Indian companies to non-residents have free transferability
outside India. However, under Indian regulations and practice, the approval of
the Reserve Bank of India is required for the sale of equity shares underlying
the ADSs by a non-resident of India to a resident of India as well as for
renunciation of rights to a resident of India. However sale of such shares
under the the portfolio investment scheme prescribed by the Reserve Bank of
India, does not require the approval of the Reserve Bank of India provided the
same is made on a recognized stock exchange and through a registered stock
broker.
245
Any new issue of equity shares of a banking company, either through the
automatic route or with the specific approval of the Foreign Investment
Promotion Board, does not require further approval of the Reserve Bank of
India, but must comply with certain reporting requirements.
246
DIVIDENDS
Under Indian law, a company pays dividends upon a recommendation by its
board of directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each fiscal
year. The shareholders have the right to decrease but not increase the dividend
amount recommended by the board of directors. Dividends may be paid out of the
company's profits for the fiscal year in which the dividend is declared or out
of undistributed profits of prior fiscal years. ICICI Bank has paid dividends
consistently every year since fiscal 1996, the second year of its operations.
The following table sets forth, for the periods indicated, the dividend per
equity share and the total amount of dividends paid out on the equity shares
during the year, each exclusive of dividend tax. This may be different from the
dividend declared for the year.
Dividend per Total amount of
equity share dividends paid
---------------- --------------
(in millions)
For fiscal year
1998 ..................................... Rs. 1.00 Rs. 150
1999 ..................................... 1.20 162
2000 ..................................... 1.20 198
2001 ..................................... 1.50 247
2002(1)................................... 4.00(1) 881
--------------
(1) Includes dividend of Rs. 2.00 per share declared for each of the fiscal
years 2001 and 2002.
Until May 1997, investors were required to pay tax on dividend income. From
June 1997, dividend income was made tax-exempt. However, ICICI Bank was required
to pay a 10.0% tax on distributed profits. From fiscal 1999, this tax rate rose
to 11.0% because of a 10.0% surcharge imposed on all taxes by the government.
For all distributions subsequent to May 2000, ICICI Bank was required to pay a
22.6% tax on distributed profits which included a 20.0% tax and a 13.0%
surcharge on such tax. The tax rate was then reduced and ICICI Bank was required
to pay a 10.2% tax on distributed profits for all distributions subsequent to
May 2001 which included a 10.0% tax and a 2.0% surcharge on such tax. The
government of India's budget for fiscal 2003 has now abolished this tax on
distributed profits, but investors are required to pay tax on dividend income.
ICICI Bank declared an interim dividend at Rs. 2.00 per equity share in
January 2002. ICICI also declared an interim dividend at Rs. 5.50 per equity
share in January 2002. Future dividends will depend upon the merged entity's
revenues, cash flow, financial condition and other factors. Owners of ADSs will
be entitled to receive dividends payable in respect of the equity shares
represented by such ADSs. The equity shares represented by ADSs rank pari passu
with existing equity shares. At present, the merged entity has equity shares
issued in India and equity shares represented by ADSs.
Pursuant to guidelines issued by the Securities and Exchange Board of India
in February 2000, with respect to equity shares issued by the merged entity
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 its shares, the merged entity is required
under the 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, the
merged entity is required to transfer at least 20.0% of the balance of profits
of each year before payment of dividend to a reserve fund. The government of
India may, however, on the recommendation of the Reserve Bank of India, exempt
the merged entity from such a requirement. The merged entity requires prior
247
approval from the Reserve Bank of India to pay a dividend of more than 25.0% of
the par value of its shares. The merged entity also requires prior approval from
the Reserve Bank of India to pay an interim dividend.
For a description of the tax consequences of dividends paid to
shareholders, see "Taxation -- Indian Tax -- Taxation of Distributions".
The following table sets forth, for the periods indicated, the dividend per
equity share and the total amount of dividends paid out on the equity shares
during the year, each exclusive of dividend tax, for ICICI. This may be
different from the dividend declared for the year.
Dividend per Total amount of
equity share dividends paid
---------------- --------------
(in millions)
For fiscal year
1998...................................... Rs. 4.50 Rs. 1,959
1999...................................... 5.50 2,618
2000...................................... 5.50 2,641
2001...................................... 5.50 3,505
2002(1)................................... 11.00(1) 8,639
-----------------
(1) Includes dividend of Rs. 5.50 per share declared for each of the fiscal
years 2001 and 2002.
248
TAXATION
Indian Tax
The following discussion of Indian tax consequences for investors in ADSs
and equity shares received upon redemption of ADSs who are not resident in
India whether of Indian origin or not is based on the provisions of the Indian
Income-Tax Act, 1961 (the "Income-Tax Act"), including the special tax regime
for ADSs contained in Section 115AC, which has been extended to cover
additional ADSs that an investor may acquire in an amalgamation or
restructuring of the company, and certain regulations implementing the Section
115AC regime. The Income Tax Act is amended every year by the Finance Act of
the relevant year. Some or all of the tax consequences of the Section 115AC
regime may be amended or modified by future amendments to the 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 115AC regime.
Residence
For the purpose of the Income-Tax Act, an individual is a resident of
India during any fiscal year, if he (i) is in India in that year for 182 days
or more or (ii) having 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 a
period or periods amounting in all to 60 days or more in that year. The period
of 60 days is substituted by 182 days in the case of an Indian citizen or
person of Indian origin who being resident outside India comes on a visit to
India during the financial year or an Indian citizen who leaves India for the
purposes of his employment during the financial year. A company is resident in
India in any fiscal year if it is registered in India or the control and
management of its affairs is situated wholly in India in that year. A firm or
other association of persons is resident in India except where the control and
the management of its affairs are situated wholly outside India.
Taxation of Distribution
Dividends distributed by an Indian company after March 31, 2002 are now
subject to tax in the hands of ADR holders and shareholders at the rate of
10.0% in accordance with the provisions of Section 115 AC of the Income-Tax
Act. The Indian company making such distribution will be required to withhold
tax at the rate of 10.2% (inclusive of surcharge) upon the distribution of the
dividend, and credit for such deduction may be claimed by the ADR holder or the
shareholder, as the case may be, in the country of residence of such holder in
accordance with the applicable double taxation treaty between India and such
country. In the event that dividend income is taxable at a rate lower than
10.0% under the applicable treaty, the provisions of such treaty shall be
applicable and tax may be deducted in accordance with the provisions thereof.
United States holders are not entitled to a rate lower than 10.0% under the
double taxation treaty between the United States and India.
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.
249
Taxation on Sale of Equity Shares or ADSs
Any transfer of ADSs outside India by a non-resident investor to another
non-resident investor does not give rise to Indian capital gains tax in the
hands of the transferor.
Subject to any relief under any relevant double taxation treaty, a gain
arising on the sale of an equity share will generally give rise to a liability
for Indian capital gains tax in the hands of the transferor. Such tax is
required to be withheld at source. Where the equity share has been held for
more than 12 months (measured from the date of notice of redemption of the ADS
by the Depositary as specified below), the rate of tax is 10.5% (inclusive of
surcharge). Where the equity share has been held for 12 months or less, the
rate of tax varies and the gain will be subject to tax at normal rates of
income-tax applicable to non-residents under the provisions of the Income-Tax
Act, subject to a maximum of 42.0% (inclusive of surcharge) in the case of
foreign companies. The actual rate depends on a number of factors, including
without limitation the nature of the non-resident investor. During the period
the underlying equity shares are held by non-resident investors on a transfer
from the depository upon redemption of ADSs, the provisions of the double
taxation treaty entered into by the government of India with the country of
residence of the non-resident investors will be applicable in the matter of
taxation of any capital gain arising on a transfer of the equity shares. The
double taxation treaty between the United States and India does not provide US
residents with any relief from Indian tax on capital gains.
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 the rights are deemed by the Indian tax authorities to be
situated within India, as the merged entity's situs is in India, the gains
realized on the sale of rights will be subject to customary Indian taxation as
discussed above.
Stamp Duty
Upon the issuance of the equity shares underlying the ADSs, the merged
entity is 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 in
physical form by an investor would also be subject to Indian stamp duty at the
rate of 0.5% of the market value of the equity shares on the trade date,
although customarily such tax is borne by the transferee, that is, the
purchaser. However, the merged entity's 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.
250
Other Taxes
At present, there are no taxes on wealth, gifts and inheritance which
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:
(1) a citizen or resident of the United States under US federal income
tax laws;
(2) a corporation,or other entity taxable as a corporation, organized
under the laws of the United States or of any political subdivision
of the United States; or
(3) an estate or trust the income of which is includable in gross income
for US federal income tax purposes regardless of its source.
This discussion only applies to ADSs or equity shares that you own as
capital assets.
Please note that this discussion does not discuss all of the tax
consequences that may be relevant in light of your particular circumstances. In
particular, it does not address investors subject to special rules, including:
(1) insurance companies;
(2) tax-exempt entities;
(3) dealers in securities;
(4) financial institutions;
(5) persons who own the ADSs as part of an integrated investment
(including a straddle, hedging or conversion transaction) comprised
of the ADS, and one or more other positions for tax purposes;
(6) persons whose functional currency is not the US dollar; or
(7) persons who own, actually or constructively, 10.0% or more of the
merged entity's voting stock.
This discussion is based on the tax laws of the United States currently in
effect (including the Internal Revenue Code of 1986, as amended, referred to as
"the Code"), Treasury Regulations, Revenue Rulings and judicial decisions.
These laws may change, possibly with retroactive effect.
For US federal income tax purposes, if you own an ADS, you will generally
be treated as the owner of the equity shares underlying the ADS.
Please consult your tax advisor with regard to the application of the US
federal income tax laws to the ADSs or equity shares in your particular
circumstances, including the passive foreign investment company rules described
below, as well as any tax consequences arising under the laws of any state,
local or other taxing jurisdiction.
251
Taxation of Dividends
Subject to the discussion under "Passive Foreign Investment Company Rules"
below, dividends you receive on the ADSs or equity shares, other than certain
pro rata distributions of 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 (in the case of ADS) or by you (in the case of equity shares)
regardless of whether the payment is converted into US dollars. If you realize
gain or loss on a sale or other disposition of rupees, it will be US source
ordinary income or loss. You will not be entitled to claim a dividends-received
deduction for dividends paid by the merged entity.
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 or equity shares in the same manner as
you would on the sale or exchange of any other shares held as capital assets.
The gain or loss will generally be 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, and upon certain
management estimates, the merged entity does not expect itself or ICICI Bank to
be considered a passive foreign investment company for their most recent
taxable year or in the foreseeable future. In general, a foreign corporation is
a passive foreign investment company for any taxable year in which (i) 75.0% or
more of its gross income consists of passive income (such as dividends,
interest, rents and royalties) or (ii) 50.0% or more of the average quarterly
value of its assets consists of assets that produce, or are held for the
production of, passive income. The merged entity has based the expectation that
it or ICICI Bank is not a passive foreign investment company on, among other
things, provisions in the proposed regulations that provide that certain
restricted reserves (including cash and securities) of banks are assets used in
connection with banking activities and are not passive assets, as well as the
composition of 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 the merged entity's income and assets will vary over time, there
can be no assurance that the merged entity or ICICI Bank will not be considered
a passive foreign investment company for any fiscal year.
If ICICI Bank is treated as a passive foreign investment company for any
year during your holding period and you have not made the mark-to-market
election, as described below, you will be subject to special rules generally
intended to eliminate any benefits from the deferral of U.S. federal income tax
that a holder could derive from investing in a foreign corporation that does
not distribute all of its earnings on a current basis. Upon a disposition of
equity shares or ADSs, including, under certain circumstances, a disposition
pursuant to an otherwise tax-free reorganization, gain reorganized by you would
be allocated ratably over your holding period for the ADS or equity share. The
amounts allocated to the taxable year of the sale or other exchange and to any
year before the merged entity or ICICI Bank became a passive foreign investment
company would be taxed as ordinary income. The amount allocated to each other
taxable year would be subject to tax at the highest rate in effect for
individuals or corporations, as appropriate, and an interest charge would be
imposed on the amount allocated to such taxable year. Further, any distribution
in respect of ADSs or equity shares in excess of 125 per cent of the average of
the annual distributions on ADSs or 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.
252
If the equity shares or ADSs are regularly traded on a "qualified
exchange", you may make a mark-to-market election. A "qualified exchange"
includes a foreign exchange that is regulated by a governmental authority in
which the exchange is located and with respect to which certain other
requirements are met. The Internal Revenue Service has not yet identified
specific foreign exchanges that are "qualified" for this purpose. The New York
Stock Exchange on which the ADSs are traded is a qualified exchange for US
federal income tax purposes.
If you make the election, you generally will include each year as ordinary
income the excess, if any, of the fair market value of the ADSs at the end of
the taxable year over their adjusted basis, and will be permitted an ordinary
loss in respect of the excess, if any, of the adjusted basis of the ADSs over
their fair market value at the end of the taxable year (but only to the extent
of the net amount of previously included income as a result of the
mark-to-market election). If you make the election, your basis in the ADSs will
be adjusted to reflect any such income or loss amounts. Any gain recognized on
the sale or other disposition of ADSs will be treated as ordinary income.
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 the
merged entity or ICICI Bank is a passive foreign investment company, you must
file Internal Revenue Service Form 8621.
253
USE OF PROCEEDS
Pursuant to ICICI's Registration Statement on Form F-1 (File No.
333-10792), which was declared effective by the Securities and Exchange
Commission on September 21, 1999, ICICI registered US$ 315 million of its
equity shares, par value Rs. 10 per share, each represented by 0.2 ADSs, and
offered and sold 32,142,857 ADSs, each representing five equity shares, at the
public offering price of US$ 9.80 per ADS or aggregating US$ 314,999,999. ICICI
received net proceeds of US$ 302,400,000 from the sale of these ADSs, after
deducting the underwriting discount and actual offering expenses of US$
12,599,999. The joint global coordinators of this offering were Merrill Lynch
(Singapore) Pte. Limited and Morgan Stanley & Co. International Limited.
From September 21, 1999 to May 3, 2002, ICICI had used net offering
proceeds of US$ 302,400,000 for financing purposes. This use of proceeds was in
line with the use of proceeds described in ICICI's Registration Statement.
PRESENTATION OF FINANCIAL INFORMATION
ICICI Bank and ICICI prepared their historical financial statements in
accordance with Indian generally accepted accounting principles. Starting in
fiscal 2000, ICICI Bank published in its annual shareholders' report its
financial statements in US GAAP as well as in Indian GAAP. Starting in fiscal
1999, ICICI published in its annual shareholders' report its financial
statements in US GAAP as well as in Indian GAAP.
The financial information in this annual report has been prepared in
accordance with US GAAP, unless indicated otherwise. The merged entity's fiscal
year, like ICICI Bank's and ICICI's 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. ICICI Bank's and ICICI's 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 amalgamation, which was consummated in April 2002, was not accounted
for in the financial statements of ICICI Bank for fiscal 2002, as the Statement
on Accounting Standards No. 141 on business combinations requires that business
combinations be accounted for in the period in which they are consummated.
ICICI Bank's financial statements for fiscal 2002, therefore, do not include
the assets, liabilities and results of operations of ICICI, ICICI Personal
Financial Services and ICICI Capital Services. The unaudited pro forma
condensed consolidated financial data for ICICI Bank and ICICI have been
prepared to illustrate the amalgamation which is being accounted for, under US
GAAP, as a step acquisition. Under US GAAP, the acquisition is a reverse merger
wherein ICICI is the accounting acquirer and ICICI Bank is the accounting
acquiree. The unaudited pro forma condensed consolidated balance sheet has been
prepared to give effect to the acquisition transaction as though such
transaction had occurred as of March 31, 2002. The unaudited pro forma
condensed consolidated statements of income have been prepared to give effect
to the acquisition transaction as though such transaction had occurred as of
April 1, 2000 for both the unaudited pro forma condensed consolidated statement
of income for the year ended March 31, 2001 and the unaudited pro forma
condensed consolidated statement of income for the year ended March 31, 2002.
The acquisition of Bank of Madura by ICICI Bank effective March 10, 2001
was accounted for under the purchase method of accounting. Accordingly, ICICI
Bank's income statement for fiscal 2001 includes the income and expenses of
Bank of Madura from March 10, 2001, the effective date of the acquisition, to
March 31, 2001, and ICICI Bank's 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 ICICI Bank's
management based on information then available and on assumptions made at that
time as to future operations.
254
Although the merged entity has 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, 2002. 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 29, 2002 was Rs. 48.83 per US$1.00. The exchange
rates used for convenience translations differ from the actual rates used in
the preparation of ICICI Bank's and ICICI's financial statements and the
unaudited pro forma condensed consolidated financial data for ICICI Bank and
ICICI.
ADDITIONAL INFORMATION
Memorandum and Articles of Association
Objects and Purposes
Pursuant to Clause III. A. 1 of the merged entity's Memorandum of
Association, the merged entity's main objective is to carry on the business of
banking in any part of India or outside India.
Directors' Powers
The merged entity's directors' powers include the following:
o Article 140 of the Articles of Association provides that no director
of the merged entity shall, as a director, take any part in the
discussion of or vote on any contract or arrangement if such director
is directly or indirectly concerned or interested.
o Directors have no powers to vote in absence of a quorum.
o Article 83 of the Articles of Association provides that the directors
may raise and secure the payment of amounts in a manner and upon such
terms and conditions in all respects as they think fit and in
particular by the issue of bonds, debenture stock, or any mortgage or
charge or other security on the undertaking or the whole or any part
of the property of the merged entity (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 the merged entity has 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 the merged entity, exceed 1% of the paid up equity
share capital of the merged entity or if the board of directors is satisfied
that as a result of such transfer, it would result in the change in the board
of directors or change in the controlling interest of the merged entity and
that such change would be prejudicial to the interests of the merged entity.
However, under the Indian Companies Act, the enforceability of such transfer
restrictions is unclear.
255
Material Contracts
Scheme of amalgamation of Bank of Madura with ICICI Bank
Pursuant to the scheme of amalgamation between ICICI Bank and Bank of
Madura, approved by the Reserve Bank of India on February 27, 2002, ICICI Bank
acquired Bank of Madura in an all-stock acquisition effective March 10, 2001.
ICICI Bank issued equity shares to the equity shareholders of Bank of Madura in
the ratio of two equity shares of ICICI Bank, par value Rs. 10 each, fully paid
up, for one equity share of Bank of Madura, par value Rs. 10 each, fully paid
up. This scheme of amalgamation is attached as an exhibit to this annual
report.
Scheme of Amalgamation of ICICI, ICICI Personal Financial Services and
ICICI Capital Services with ICICI Bank
Pursuant to the Scheme of Amalgamation among ICICI, ICICI Personal
Financial Services, ICICI Capital Services and ICICI Bank, sanctioned by the
High Court of Gujarat at Ahmedabad on March 7, 2002 and by the High Court of
Judicature at Bombay on April 11, 2002 and approved by the Reserve Bank of
India on April 26, 2002, ICICI, ICICI Personal Financial Services and ICICI
Capital Services were merged with ICICI Bank in an all-stock merger. ICICI Bank
is the surviving legal entity in the amalgamation. ICICI Bank issued equity
shares to the equity shareholders of ICICI in the ratio of one equity share of
ICICI Bank, par value Rs. 10 each, fully paid up, for two equity shares of
ICICI, par value Rs. 10 each, fully paid up. As there were five equity shares
of ICICI underlying each ADR of ICICI and two equity shares of ICICI Bank
underlying each ADR of ICICI Bank, ICICI Bank issued ADRs of ICICI Bank to ADR
holders of ICICI in the ratio of five ADRs of ICICI Bank for two ADRs of ICICI.
For more information about the amalgamation, see "Business-History". This
Scheme of Amalgamation is attached as an exhibit to this annual report.
Incorporation by Reference
The merged entity incorporates by reference the information disclosed
under "Description of Equity Shares" in ICICI Bank's Registration Statement on
Form F-1 (File No. 333-30132).
256
INDEX TO ICICI BANK US GAAP FINANCIAL STATEMENTS
Contents Page
Independent Auditors' Report................................................ F-2
Balance Sheets as at March 31, 2001 and 2002................................ F-3
Statements of Income for the years ended March 31, 2000, 2001 and 2002...... F-4
Statements of Changes in Stockholders' Equity and Other
Comprehensive Income for the years ended March 31, 2000, 2001 and 2002...... F-5
Statements of Cash Flows for the years ended March 31, 2000, 2001 and 2002.. 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, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows
for each of the years in the three-year period ended March 31, 2002, in
conformity with accounting principles generally accepted in the United States.
As discussed in note 1.20.1 to the financial statements, on April 1, 2001
the Bank adopted the provisions of Statement of Financial Accounting Standard
No. 133 "Accounting for Derivative Instruments and Hedging Activities", as
amended.
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 1.4.1.
KPMG
Mumbai, India
May 2, 2002
F-2
ICICI Bank Limited
Balance sheets
In millions, except share data
Convenience
translation
into US$
At March 31, At March 31, At March 31,
2001 2002 2002(1)
----------- ----------- -----------
(unaudited)
-----------------------------------------
Rs Rs US$
Assets
Cash and cash equivalents .............................................................. 44,896 87,965 1,801
Interest-bearing deposits with banks ................................................... 2,410 1,406 29
Amounts lent under reverse repurchase transactions ..................................... - 9,116 187
Trading assets ......................................................................... 18,725 26,075 534
Securities:
Available for sale ................................................................ 24,787 155,758 3,190
Held to maturity (fair value Rs 11,524 million and Rs 28,768 million at March 31,
2001 and 2002 respectively) .................................................... 10,944 24,294 498
Loans (net of allowance for loan losses and unearned income) ........................... 93,030 72,474 1,484
Customers' liability on acceptances .................................................... 12,869 12,608 258
Property and equipment, net ............................................................ 3,920 4,831 99
Intangible assets ...................................................................... 2,641 2,397 49
Other assets ........................................................................... 6,316 7,881 161
----------- ----------- -----------
Total assets ........................................................................... 220,538 404,805 8,290
=========== =========== ===========
Liabilities
Interest bearing deposits .............................................................. 137,883 295,647 6,054
Non-interest bearing deposits .......................................................... 26,371 29,574 606
----------- ----------- -----------
Total deposits ......................................................................... 164,254 325,221 6,660
Amounts borrowed under repurchase transactions ......................................... 537 21,399 438
Trading liabilities .................................................................... 5,958 1,237 25
Short-term borrowings .................................................................. 3,012 1,409 29
Bank acceptances outstanding ........................................................... 12,869 12,608 258
Other liabilities ...................................................................... 15,180 19,041 390
Long-term debt ......................................................................... 2,421 5,740 118
----------- ----------- -----------
Total liabilities ...................................................................... 204,231 386,655 7,918
----------- ----------- -----------
Commitments and contingencies (Note 20)
Stockholders' equity:
Common stock (Rs 10 par value, Authorized shares: 300 million Issued shares March 31,
2001: 220,358,680 shares and March 31, 2002: 220,358,680 shares) .................. 2,203 2,203 45
Additional paid-in capital ............................................................. 10,927 10,926 224
Retained earnings ...................................................................... 2,974 4,040 83
Deferred compensation .................................................................. (20) (5) -
Accumulated other comprehensive income ................................................. 223 986 20
----------- ----------- -----------
Total stockholders' equity ............................................................. 16,307 18,150 372
----------- ----------- -----------
Total liabilities and stockholders' equity ............................................. 220,538 404,805 8,290
=========== =========== ===========
See accompanying notes to financial statements.
(1) Exchange Rate: Rs 48.83 = US$ 1.00 at March 30, 2002
F-3
ICICI Bank Limited
Statements of income
In millions, except share data
Convenience
translation
into US$
Year ended
Years ended March 31, March 31,
----------------------------------- ---------
2000 2001 2002 2002 (1)
--------- --------- --------- ---------
(unaudited)
Rs Rs Rs US$
Interest and dividend income
Interest and fees on loans ................................................. 4,437 7,419 10,327 211
Interest and dividends on securities, available for sale ................... 684 1,217 3,709 76
Interest and dividends on securities held to maturity ...................... - 543 2,006 41
Interest and dividends on trading assets ................................... 3,073 2,833 3,965 81
Interest on deposits with banks ............................................ 233 298 467 10
Other interest income ...................................................... 7 96 363 7
--------- --------- --------- ---------
Total interest and dividend income ......................................... 8,434 12,406 20,837 426
--------- --------- --------- ---------
Interest expense
Interest on deposits ....................................................... 5,789 7,261 13,582 278
Interest on long term debt ................................................. 244 240 505 10
Interest on trading liabilities ............................................ 542 784 723 15
Other interest expense ..................................................... 81 123 306 6
--------- --------- --------- ---------
Total interest expense ..................................................... 6,656 8,408 15,116 309
--------- --------- --------- ---------
Net interest income ........................................................ 1,778 3,998 5,721 117
Provision for loan losses .................................................. (427) (1,082) (1,722) (35)
--------- --------- --------- ---------
Net interest income after provision for loan losses ........................ 1,351 2,916 3,999 82
--------- --------- --------- ---------
Non-interest income
Fees and commissions ....................................................... 607 1,125 1,733 36
Net gain on trading activities ............................................. 857 602 2,196 45
Net gain/(loss) on sales of available for sale securities .................. 75 (384) 872 18
Foreign exchange income .................................................... 220 397 365 7
Other revenue .............................................................. - 14 47 1
--------- --------- --------- ---------
Total non-interest income .................................................. 1,759 1,754 5,213 107
--------- --------- --------- ---------
Non-interest expense
Salaries and employee benefits ............................................. 316 507 1,518 31
Occupancy and equipment .................................................... 520 1,171 2,166 44
Advertising and publicity .................................................. 39 143 80 2
Administration and other expense ........................................... 454 1,271 2,252 46
Amortization of goodwill and other intangible assets ....................... - 12 244 5
--------- --------- --------- ---------
Total non-interest expense ................................................. 1,329 3,104 6,260 128
--------- --------- --------- ---------
Income before income taxes and cumulative effect of accounting changes ..... 1,781 1,566 2,952 61
Income tax expense ......................................................... 379 258 931 19
--------- --------- --------- ---------
Income before cumulative effect of accounting changes ...................... 1,402 1,308 2,021 42
Cumulative effect of accounting changes (net of tax of Rs 9 million) ...... - - 16 -
--------- --------- --------- ---------
Net income ................................................................. 1,402 1,308 2,037 42
--------- --------- --------- ---------
Basic earnings per share
Before cumulative effect of accounting changes .......................... 8.49 6.60 9.17 0.19
Cumulative effect of accounting changes, net of tax ..................... - - 0.07 -
--------- --------- --------- ---------
8.49 6.60 9.24 0.19
Weighted average number of common shares (in millions) .................. 165.09 198.24 220.36 220.36
Diluted earnings per share
Before cumulative effect of accounting changes .......................... 8.49 6.60 9.17 0.19
Cumulative effect of accounting changes, net of tax ..................... - - 0.07 -
--------- --------- --------- ---------
8.49 6.60 9.24 0.19
Weighted average number of common shares (in millions) .................. 165.11 198.24 220.36 220.36
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
(1) Exchange Rate: Rs 48.83 = US$ 1.00 at March 30, 2002
F-4
ICICI Bank Limited
Statements of changes in stockholders' equity and other comprehensive income
for the years ended March 31, 2000, 2001 and 2002
In millions except share data
Common stock Additional
----------------------------- Paid-In Retained
Shares Amount Capital Earnings
------------ ---------- ---------- --------
Balance as of March 31, 1999 .................................... 165,000,700 1,650 375 756
-----------------------------------------------------------------------------------------------------------------------------------
Common stock issued ............................................. 31,818,180 318 7,020 -
Compensation related to employee stock option plan .............. - - 40 -
Amortization of deferred compensation ........................... - - - -
Comprehensive income
Net income ................................................... - - - 1,402
Unrealized gain on securities, (net of tax Rs 15 million) .... - - - -
Comprehensive income ......................................... - - - -
Dividend paid (Rs 1.2 per common share) ......................... - - - (218)
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2000 .................................... 196,818,880 1,968 7,435 1,940
-----------------------------------------------------------------------------------------------------------------------------------
Common stock issued ............................................. 23,539,800 235 3,502 -
Compensation related to employee stock option plan .............. - - (10) -
Amortization of deferred compensation ........................... - - - -
Comprehensive income
Net income ................................................... - - - 1,308
Unrealized gain on securities, (net of tax Rs 91 million) .... - - - -
Comprehensive income ......................................... - - - -
Dividend paid (Rs 1.5 per common share) ......................... - - - (274)
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001 .................................... 220,358,680 2,203 10,927 2,974
-----------------------------------------------------------------------------------------------------------------------------------
Compensation related to employee stock option plan .............. - - (1) -
Amortization of deferred compensation ........................... - - - -
Comprehensive income
Net income ................................................... - - - 2,037
Unrealized gain on securities, (net of tax Rs 466 million) ... - - - -
Comprehensive income ......................................... - - - -
Dividend paid (Rs 4.0 per common share) ......................... - - - (971)
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2002 .................................... 220,358,680 2,203 10,926 4,040
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31,2002 ..................................... 45 224 83
(US $ (1)) (unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Total
Deferred Income, Stockholders'
Compensation net of tax Equity
------------ ------------- -------------
Balance as of March 31, 1999 .................................... - 49 2,830
-------------------------------------------------------------------------------------------------------------------
Common stock issued ............................................. - - 7,338
Compensation related to employee stock option plan .............. (40) - -
Amortization of deferred compensation ........................... 1 - 1
Comprehensive income
Net income ................................................... - - 1,402
Unrealized gain on securities, (net of tax Rs 15 million) .... - 34 34
---------
Comprehensive income ......................................... - - 1,436
Dividend paid (Rs 1.2 per common share) ......................... - - (218)
-------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2000 .................................... (39) 83 11,387
-------------------------------------------------------------------------------------------------------------------
Common stock issued ............................................. - - 3,737
Compensation related to employee stock option plan .............. 10 - -
Amortization of deferred compensation ........................... 9 - 9
Comprehensive income
Net income ................................................... - - 1,308
Unrealized gain on securities, (net of tax Rs 91 million) .... - 140 140
---------
Comprehensive income ......................................... - - 1,448
Dividend paid (Rs 1.5 per common share) ......................... - - (274)
-------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001 .................................... (20) 223 16,307
-------------------------------------------------------------------------------------------------------------------
Compensation related to employee stock option plan .............. 1 - -
Amortization of deferred compensation ........................... 14 - 14
Comprehensive income
Net income ................................................... - - 2,037
Unrealized gain on securities, (net of tax Rs 466 million) ... - 763 763
---------
Comprehensive income ......................................... - - 2,800
Dividend paid (Rs 4.0 per common share) ......................... - - (971)
-------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2002 .................................... (5) 986 18,150
-------------------------------------------------------------------------------------------------------------------
Balance as of March 31,2002 ..................................... - 20 372
(US $ (1)) (unaudited)
-------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
(1) Exchange Rate: Rs 48.83 = US$ 1.00 at March 30, 2002
F-5
ICICI Bank Limited
Statements of cash flows
In millions except share data
Convenience
translation
into US$
Year ended
Years ended March 31, March 31,
--------------------------------------- ---------
2000 2001 2002 2002(1)
--------- --------- --------- ---------
(unaudited)
------------------------------------------------------
Rs Rs Rs US$
Operating activities
Net income ................................................. 1,402 1,308 2,037 42
Adjustments to reconcile net income to net cash (used in)
/ provided by operating activities:
Provision for loan losses .................................. 427 1,082 1,722 35
Depreciation ............................................... 201 352 636 13
Amortization ............................................... 173 253 1,032 21
Loss on sale of property and equipment ..................... 1 2 1 -
Deferred income tax expense/(benefit) ...................... 113 (442) (240) (5)
Realized (gain) / loss on sales of available for sale
securities, net ......................................... (75) 384 (872) (18)
Net change in:
Trading assets ........................................ (12,509) (6,091) (7,413) (152)
Other assets .......................................... (1,608) (120) (1,745) (36)
Other liabilities ..................................... 1,661 7,490 3,418 71
Trading liabilities ................................... 1,503 4,048 (4,720) (96)
--------- --------- --------- ---------
Net cash (used in) / provided by operating activities ...... (8,711) 8,266 (6,144) (125)
--------- --------- --------- ---------
Investing activities
Changes in interest bearing deposits with banks ............ (2,048) 1,129 1,004 21
Activity in held to maturity securities
Purchases ............................................. - (1,174) (13,466) (276)
Activity in available for sale securities
Purchases ............................................. (10,714) (15,050) (145,141) (2,972)
Sales ................................................. 10,020 11,517 15,955 327
Loan originations and principal collections, net ........... (19,843) (29,288) 18,951 388
Purchases of property and equipment ........................ (528) (1,153) (1,556) (32)
Sales of property and equipment ............................ 2 1 9 -
Amounts lent under reverse repurchase transactions ......... (256) - (9,116) (187)
Cash equivalents acquired net of purchase acquisitions ..... - 5,649 - -
--------- --------- --------- ---------
Net cash used in investing activities ...................... (23,367) (28,369) (133,360) (2,731)
--------- --------- --------- ---------
F-6
ICICI Bank Limited
Statements of cash flows
In millions except share data
Convenience
translation
into US$
Year ended
Years ended March 31, March 31,
--------------------------------------------- -----------
2000 2001 2002 2002(1)
----------- ----------- ----------- -----------
(unaudited)
--------------------------------------------------------------
Rs Rs Rs US$
Financing activities
Increase in deposits, net ..................................... 37,931 30,368 160,967 3,296
Proceeds from issuances of long term debt ..................... 710 - 4,331 89
Repayment of long term debt ................................... - (771) (1,012) (21)
Amounts borrowed under repurchase transactions ................ - 537 20,862 427
Issuances of short term borrowings, net ....................... 702 826 (1,604) (33)
Issuance of common stock, net ................................. 7,338 - - -
Cash dividends paid on common stock ........................... (218) (274) (971) (20)
----------- ----------- ----------- -----------
Net cash provided by financing activities ..................... 46,463 30,686 182,573 3,738
----------- ----------- ----------- -----------
Net increase /(decrease) in cash and cash equivalents ......... 14,385 10,583 43,069 882
Cash and cash equivalents at beginning of the year ............ 19,928 34,313 44,896 919
----------- ----------- ----------- -----------
Cash and cash equivalents at end of the year .................. 34,313 44,896 87,965 1,801
=========== =========== =========== ===========
Non-cash items
Non-cash investing and financing activities were as follows:
Convenience
translation
into US$
Year ended
Years ended March 31, March 31,
--------------------------------------------- -----------
2000 2001 2002 2002
----------- ----------- ----------- -----------
(unaudited)
--------------------------------------------------------------
Rs Rs Rs US$
Acquisitions
Fair value of net assets acquired, excluding cash and cash
equivalents ................................................ - (4,381) - -
Shares issued ................................................. - 23,539,800 - -
Transfer to held to maturity from trading assets .............. - 10,178 - -
Transfer to available for sale from trading assets ............ - 8,575 - -
Change in unrealized gain /loss on securities available for
sale, net .................................................. 34 140 763 16
Foreclosed assets ............................................. - - 105 2
Cash paid during the year for:
Interest expense .............................................. 6,569 8,209 13,920 285
Income taxes .................................................. 247 460 870 18
See accompanying notes to financial statements.
(1) Exchange Rate: Rs 48.83 = US$ 1.00 at March 30, 2002
F-7
ICICI Bank Limited
Notes to financial statements
1 Significant accounting policies
1.1 Overview
1.1.1 ICICI Bank Limited ("ICICI Bank" or "the Bank"), incorporated
in the State of Gujarat having Registered Office at Vadodara, India is
a publicly held bank providing a wide range of banking and financial
services including corporate lending and retail lending, trade finance
and treasury products. ICICI Bank is a banking company governed by the
Banking Regulation Act, 1949.
1.1.2 In fiscal 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.
1.2 Proposed business combination with ICICI Limited
1.2.1 In January 2002, the shareholders of ICICI Limited and ICICI
Bank approved a plan of combination whereby ICICI Bank will acquire
ICICI Limited in a transaction, which would be accounted for as a
reverse acquisition. Subsequent to the transaction, ICICI Bank which is
the accounting acquiree will be the surviving legal entity. The
transaction will be accounted for by the purchase method to reflect the
increase in ownership interest of ICICI Limited in ICICI Bank from the
existing 46.01% to 100%.
1.2.2 The plan of combination was subject to regulatory approvals
which were obtained in April 2002. As the transaction was consummated
in April 2002, it is not reflected in the financial statements for the
year ended March 31, 2002.
1.2.3 ICICI Bank provides banking and financial services. The operations
of ICICI Bank are governed by the Banking Regulation Act, 1949. As a
result of the acquisition, ICICI Limited is expected to be a universal
banking company offering the entire spectrum of financial services. The
acquisition is expected to reduce the cost of funds for ICICI Limited
through access to the extensive branch network and core deposit base of
ICICI Bank. Subsequent to the acquisition, the operations of the
combined entity, to be renamed as ICICI Bank, will be governed by the
Banking Regulation Act, 1949.
1.2.4 The transaction will be consummated by issuing approximately 392
million shares of ICICI Bank to the shareholders of ICICI Limited. For
accounting purposes, the aggregate purchase price will approximate Rs
12,120 million.
F-8
ICICI Bank Limited
Notes to financial statements
1.2.5 The following table summarizes the preliminary allocation of
the estimated purchase price:
As of March 31, 2002
--------------------
(Rs in millions)
--------------------
Assets
Cash and cash equivalents ............................ 48,618
Securities ........................................... 119,505
Loans ................................................ 39,392
Property and equipment ............................... 2,790
Intangible assets .................................... 4,038
Other assets ......................................... 11,171
---------
Total assets ......................................... 225,514
=========
Liabilities
Deposits ............................................. 177,321
Long-term debt ....................................... 3,213
Other liabilities .................................... 32,860
---------
Total liabilities .................................... 213,394
=========
Net assets ........................................... 12,120
1.3 Basis of preparation
1.3.1 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").
1.3.2 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. Significant estimates
and assumptions are used to account for loan loss impairment, useful
lives of assets, determination of amortization period for goodwill, and
computation of retirement benefits.
1.4 Functional currency and convenience translation
1.4.1 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, 2002 have been translated into US dollars at the noon buying rate
in New York city at March 30, 2002 for the cable transfers in rupees as
certified for customs purposes by the Federal Reserve of New York of
US$1.00 = Rs 48.83. 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, 2002 or at any other certain
date.
1.5 Cash equivalents
1.5.1 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-9
ICICI Bank Limited
Notes to financial statements
1.6 Securities and trading activities
1.6.1 The Bank classifies investments in fixed maturities and equity
securities into three categories based upon management's intention at
the time of purchase: securities held to maturity, trading assets and
securities available for sale. Investments in fixed maturities include
bonds, notes and redeemable preferred stocks, as well as certain loan
backed and structured securities subject to prepayment risks. Realized
gains and losses on the sale of securities are recorded at the time of
sale (trade date).
1.6.2 Securities that are held principally for resale in the near
term are recorded as trading assets. Trading assets, primarily debt
securities and foreign exchange products, are recorded at fair value
with realized and unrealized gains and losses included in non-interest
income. Interest on trading assets is included in interest income. The
fair value of trading assets is based upon quoted market prices or, if
quoted market prices are not available, the value is estimated using
similar securities or pricing models.
1.6.3 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.
1.6.4 All securities not classified as held to maturity or trading
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.
1.6.5 Any "other than temporary diminution" in the value of
held-to-maturity or securities available for sale is charged to the
income statement. "Other than temporary diminution" is identified based
on management's evaluation of the securities portfolio.
1.7 Loans
1.7.1 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, preferred shares which are
in essence loans, pass through certificates ('PTCs') and loans
underlying certain PTC's where the Bank consolidates the Special
Purpose Vehicles ('SPV') established to facilitate the PTC transaction.
Credit substitutes and investments in PTC's are classified as available
for sale securities.
1.7.2 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.
1.7.3 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.
F-10
ICICI Bank Limited
Notes to financial statements
1.7.4 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
recovery of the loan is solely collateral dependent. If the value of
the 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 troubled
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.
1.7.5 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.
1.7.6 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 Bank classified as non-accrual, the loan is returned to
accrual status.
1.8 Allowance for loan losses
1.8.1 The allowance for credit losses represents management's estimate
of probable losses inherent in the portfolio. Loan losses deemed
uncollectible by management 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 factors
such 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 probable 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 portion
of 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.
1.8.2 Smaller balance homogeneous loans (including credit card
receivables) are collectively evaluated for impairment based on
historical loss experience, adjusted for changes in trends and
F-11
ICICI Bank Limited
Notes to financial statements
conditions including delinquencies and non accruals. Based on these
analyses, the allowance for loan losses is maintained at levels
considered adequate by management to also provide for probable credit
losses inherent in these portfolios.
1.9 Property and equipment
1.9.1 Property and equipment including assets under capital lease are
stated at cost, less accumulated depreciation. The cost of additions,
capital improvements and interest during the construction period are
capitalized, while repairs and maintenance are charged to expenses when
incurred.
1.9.2 Depreciation is provided over the estimated useful lives of the
assets, or lease term, whichever is shorter.
1.9.3 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.
1.9.4 Capitalized cost of computer software obtained for internal use
represents 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.
1.9.5 The Bank accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standard (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
1.10 Goodwill and intangible assets
1.10.1 Goodwill and other intangible assets such as tenancy rights are
assets, which arise or have been acquired in a business combination.
Values have been assigned to the identified intangible assets based on
available evidence and are amortized on a straight line basis over
their estimated useful life.
1.10.2 The Bank assesses the recoverability of goodwill by determining
whether the amortization of its balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operations. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows
using a discount rate reflecting the Bank's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
F-12
ICICI Bank Limited
Notes to financial statements
1.11 Income taxes
1.11.1 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.
1.12 Trading assets and liabilities
1.12.1 Trading assets and liabilities include securities and derivatives
and are recorded at either market value or where, market prices are not
readily available, fair value, which is determined under an alternative
approach. The determination of market or fair value considers various
factors including stock exchange quotations, time value and volatility
factors underlying derivatives, counterparty credit quality and
derivative transaction cash maintenance during that period.
1.12.2 Derivatives used for trading purposes include forwards, exchange
contracts, interest rate and currency swaps. The fair value of the
derivatives is based on the liquid market prices evidenced by exchange
traded prices, broker dealer quotations or prices of other transactions
with similarly related counterparties. Derivatives in a net receivable
position are reported as trading assets. Similarly derivatives in a net
payable position are reported as trading liabilities.
1.13 Employee benefit plans
1.13.1 ICICI Bank provides a variety of benefit plans to eligible
employees.
1.13.2 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.
1.14 Foreign currency translation
1.14.1 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.
1.15 Debt issuance costs
1.15.1 Debt issuance costs are amortized over the tenure of the debt.
1.16 Dividends
1.16.1 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.
F-13
ICICI Bank Limited
Notes to financial statements
1.17 Earnings per share
1.17.1 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.
1.18 Stock-based compensation
1.18.1 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 compensatory with
the exercise price equal to the fair value of the stock on the date of
grant, and accordingly, no expense is recognized.
1.18.2 Options granted to employees of ICICI Limited are accounted for
in accordance with 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.
1.19 Reclassifications
1.19.1 Certain amounts in fiscal 2000 and fiscal 2001 were reclassified
to conform with the presentation in fiscal 2002. These
reclassifications have no effect on the stockholders' equity or net
income as previously reported.
1.20 Accounting changes
1.20.1 On April 1, 2001 ICICI Bank adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". SFAS No. 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. All
derivatives entered into by ICICI Bank after April 1,2002 are for
trading purposes. The cumulative effect, net of tax, of adoption of
SFAS 133 at April 1, 2001 of Rs 16 million is included in net income.
1.20.2 Prior to April 1, 2001, currency swaps entered into for non-
trading purposes, were accounted for on an accrual basis. Although
considered effective as economic hedges, these currency swaps do not
qualify for hedge accounting under SFAS 133.
F-14
ICICI Bank Limited
Notes to financial statements
1.21 Risk management instruments
1.21.1 The Bank manages its exposures to market rate movements by
modifying the asset and liability mix, either directly or through the
use of derivative financial products including interest rate swaps,
cross currency swaps and forwards. To qualify as a hedge, the hedge
relationship is designated and formally documented at inception
detailing the particular risk management objective and strategy for the
hedge which includes the item and risk that is being hedged, the
derivative that is being used, as well as how effectiveness is being
assessed. A derivative must be highly effective in accomplishing the
objective of offsetting either changes in fair value or cash flows for
the risk being hedged.
2 Cash and cash equivalents
2.1.1 Cash and cash equivalents at March 31, 2002 include a balance
of Rs 14,610 million (March 31, 2001: Rs 10,968 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.
3 Trading assets
3.1.1 A listing of the trading assets is set out below:
At March 31,
-----------------
2001 2002
------ ------
(in Rs millions)
Government of India securities ........................... 14,055 20,765
Debentures ............................................... 1,808 538
Bonds .................................................... 2,348 727
Fair value of derivatives and foreign exchange contracts.. 127 541
Commercial paper ......................................... 387 -
Mutual fund units ........................................ - 3,504
------ ------
Total .................................................... 18,725 26,075
====== ======
3.1.2 At March 31, 2002, trading assets included certain securities
amounting to Rs Nil (March 31, 2001:Rs 32 million), which were pledged
in favor of certain banks against funds transfer facilities.
4 Securities
4.1.1 The portfolio of securities is set out below:
At March 31, 2001
------------------------------------------------------
Gross Gross
Book unrealized unrealized Fair
value gain 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
======== ======== ======== ========
F-15
ICICI Bank Limited
Notes to financial statements
At March 31, 2002
------------------------------------------------------
Gross Gross
Book unrealized unrealized Fair
value gain loss Value
(in Rs millions)
------------------------------------------------------
Securities, held to maturity
Government of India securities ........... 24,294 4,474 - 28,768
======== ======== ======== ========
Securities, available for sale
Corporate debt securities ................ 4,437 142 - 4,579
Government of India securities ........... 149,280 1,492 - 150,772
-------- -------- -------- --------
Total debt securities .................... 153,717 1,634 - 155,351
Mutual fund units ........................ 350 - (57) 293
Others ................................... 122 - (8) 114
-------- -------- -------- --------
Total securities, available for sale ..... 154,189 1,634 (65) 155,758
======== ======== ======== ========
4.1.2 At March 31, 2002, available for sale securities included certain
securities with fair value amounting to Rs 21,360 million (March 31,
2001: Rs Nil), which are pledged in favour of certain banks against
funds transfer facilities and borrowings.
Income from securities, available for sale
4.1.3 A listing of interest, dividends, gross realized gains and gross
realized losses on available for sale securities is set out below:
Year ended March 31
------------------------------------
2000 2001 2002
-------- -------- --------
(in Rs millions)
Interest ................................ 358 853 3,625
Dividends ............................... 326 364 84
-------- -------- --------
Total interest and dividends ............ 684 1,217 3,709
Gross realized gain ..................... 259 114 1,031
Gross realized losses ................... (184) (498) (159)
-------- -------- --------
Total ................................... 759 833 4,581
======== ======== ========
Maturity profile of debt securities
Held to Maturity Securities
4.1.4 Maturity profile of securities held to maturity at March 31, 2001
and March 31, 2002 is set out below:
At March 31, 2001 At March 31, 2002
----------------------- -----------------------
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 4,188 4,702
Five to ten years ............ 6,380 6,726 9,288 10,753
More than ten years .......... 1,626 1,721 10,818 13,313
--------- --------- --------- ---------
Total ........................ 10,944 11,524 24,294 28,768
========= ========= ========= =========
F-16
ICICI Bank Limited
Notes to financial statements
Available for sale securities
4.1.5 Maturity profile of securities available for sale, which have
fixed contractual maturities, at March 31, 2001 and March 31, 2002 is
set out below:
At March 31, 2001 At March 31, 2002
----------------------- -----------------------
Amortized Fair Amortized Fair
cost Value cost Value
--------- --------- --------- ---------
(in Rs millions)
Corporate debt securities
Less than one year ........... 1,835 1,849 996 992
One to five years ............ 3,737 3,876 1,718 1,782
More than five years ......... 485 515 1,723 1,805
--------- --------- --------- ---------
Total ........................ 6,057 6,240 4,437 4,579
Government of India securities
Less than one year ........... 5,963 5,971 78,860 79,316
One to five years ............ 6,843 7,095 44,633 45,123
More than five years ......... 2,959 2,995 25,787 26,333
--------- --------- --------- ---------
Total ........................ 15,765 16,061 149,280 150,772
========= ========= ========= =========
5 Loans and leases
5.1.1 A listing of loans by category is set out below:
At March 31,
------------------------
2001 2002
--------- ---------
(in Rs millions)
Working capital finance .......................... 57,316 37,340
Term loans - commercial .......................... 9,483 7,313
Credit substitutes ............................... 23,624 23,035
Lease financing .................................. 944 820
Retail loans and credit card receivables ......... 4,909 7,150
--------- ---------
Total loans ...................................... 96,276 75,658
Allowance for loan losses ........................ (2,890) (2,820)
Unearned income .................................. (356) (364)
--------- ---------
Net loans ........................................ 93,030 72,474
========= =========
5.1.2 As at March 31, 2002, working capital finance included debit
balances in savings and current accounts of Rs 3,765 million and loans
given to persons domiciled outside India of Rs 620 million (March 31,
2001: Rs 4,695 million and Rs 951 million respectively).
5.1.3 Generally, the working capital advances are secured by a first
lien on current assets, principally 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.
F-17
ICICI Bank Limited
Notes to financial statements
Corporate debt securities reported as loans (credit substitutes)
5.1.4 The portfolio of credit substitutes is set out below:
At March 31, 2001 At March 31, 2002
---------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
cost gain loss Value cost gain loss Value
-----------------------------------------------------------------------------------------------
(in Rs millions) (in Rs millions)
Available for sale ...... 488 - - 488 2,944 42 43 2,943
Held to maturity ........ 23,136 98 - 23,234 20,091 208 - 20,299
Income from credit substitutes available for sale
5.1.5 A listing of income from credit substitutes available for sale
is set out below:
Year ended March 31,
----------------------------------
2000 2001 2002
-------- -------- --------
(in Rs millions)
Interest ...................... - - 90
Dividends ..................... - - -
-------- -------- --------
Total ......................... - - 90
======== ======== ========
Gross realized gain ........... - - 18
Gross realized loss ........... - - -
-------- -------- --------
Total ......................... - - 18
======== ======== ========
Net investment in leasing activities
5.1.6 Contractual maturities of ICICI Bank's net investment in leasing
activities and its components, which are included in loans, are set
out below:
(in Rs millions)
----------------
Gross finance receivable for the year ending March 31......
2003 ...................................................... 265
2004 ...................................................... 96
2005 ...................................................... 87
2006 ...................................................... 82
2007 & beyond ............................................. 369
--------
899
Less: Unearned income ..................................... 287
Security deposits ................................... 79
--------
Investment in leasing and other receivables ............... 533
========
F-18
ICICI Bank Limited
Notes to financial statements
Maturity profile of loans
5.1.7 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, 2001
----------------------------------
More
Up to 1-5 than
1 Year years 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 ........................ 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
====== ====== ===== ======
At March 31, 2002
----------------------------------
More
Up to 1-5 than
1 Year years 5 years Total
------ ------ ------- ------
(in Rs millions)
Term loan ................................. 2,457 3,793 1,063 7,313
Working capital finance ................... 35,413 1,856 71 37,340
Credit substitutes ........................ 7,400 14,296 1,339 23,035
Retail loans and credit card receivables .. 6,357 772 21 7,150
------ ------ ----- ------
Total ..................................... 51,627 20,717 2,494 74,838
====== ====== ===== ======
Interest and fees on loans
5.1.8 A listing of interest and fees on loans (net of unearned income)
is set out below:
Year ended March 31,
---------------------------
2000 2001 2002
----- ----- ------
(in Rs millions)
Working capital finance ..................... 2,666 4,469 5,680
Term loan ................................... 480 847 940
Credit substitutes .......................... 981 1,539 2,669
Leasing and related activities .............. 14 22 (27)
Retail loans and credit card receivables .... 296 542 1,065
----- ----- ------
Total ....................................... 4,437 7,419 10,327
===== ===== ======
F-19
ICICI Bank Limited
Notes to financial statements
Impaired loans
5.1.9 A listing of impaired loans is set out below:
At March 31,
------------------
2001 2002
----- -----
(in Rs millions)
Working capital finance ............................. 3,700 3,665
Term loan ........................................... 1,242 1,041
Credit substitutes .................................. 121 86
Leasing and related activities ...................... 227 310
Credit card receivables ............................. 43 355
----- -----
Total ............................................... 5,333 5,457
Related allowance for loan losses (1) ............... (2,844) (2,774)
----- -----
Impaired loans net of valuation allowance ........... 2,489 2,683
===== =====
Impaired loans with valuation allowance ............. 5,319 5,448
Impaired loans without valuation allowance .......... 14 9
----- -----
Total ............................................... 5,333 5,457
===== =====
Interest foregone on non-performing assets .......... 495 451
Average non-performing loans ........................ 3,376 5,395
(1) Related allowance for loan losses does not include general
provision on loans of Rs 46 million (March 31, 2001: Rs 46 million).
Concentration of credit risk
5.1.10 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.
Allowance for loan losses
5.1.11 A listing of the changes in allowance for loan losses is set out
below :
Year ended March 31,
-------------------------
2000 2001 2002
----- ----- -----
(in Rs millions)
Allowance for loan losses at beginning of the year 880 748 2,890
Additions
Provisions for loan losses, net of release of
provisions as a result of cash collections ..... 427 1,082 1,722
Provision for loan losses on loans acquired
from Bank of Madura ............................ - 1,572 -
----- ----- -----
1,307 3,402 4,612
Loans charged off ................................ (559) (512) (1,792)
----- ----- -----
Allowance for loan losses at end of the year ..... 748 2,890 2,820
===== ===== =====
Troubled debt restructuring
5.1.12 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.
F-20
ICICI Bank Limited
Notes to financial statements
5.1.13 Loans at March 31, 2002 include loans aggregating Rs 613 million
(March 31, 2001: Rs 467 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 785 million
(March 31, 2001: Rs 890 million) against which an allowance for loan
losses aggregating Rs 172 million (March 31, 2001: Rs 423 million)
has been established. Income on restructured loans would have been Rs
144 million for year ended March 31, 2002 (March 31, 2001: Rs 101
million) based on original terms, and was Rs 100 million based on the
restructured terms (March 31, 2001: Rs 85 million).
5.1.14 There are no commitments to lend incremental funds to any
borrower who is party to a troubled debt restructuring.
6 Property and equipment
6.1.1 A listing of property and equipment by asset category is set out
below:
At March 31,
---------------
2001 2002
----- -----
(in Rs millions)
Land .................................... 286 286
Building ................................ 1,954 2,185
Equipment and furniture ................. 2,924 4,025
Capital work in progress ................ 216 341
----- -----
5,380 6,837
Accumulated depreciation ................ (1,460) (2,006)
----- -----
Net book value of property and equipment. 3,920 4,831
===== =====
6.1.2 Equipment and furniture includes an amount of Rs 394 million at
March 31, 2002 (March 31, 2001: Rs 246 million) for automated teller
machines taken on capital lease. The following is a summary of future
minimum lease rental commitments for non-cancelable leases:
(in Rs millions)
Year ending March 31, --------------
2003 ......................................... 42
2004 ......................................... 54
2005 ......................................... 77
2006 ......................................... 103
2007 ......................................... 130
Thereafter ................................... 241
----
Total minimum lease commitments .............. 647
====
7 Intangible assets
7.1.1 Intangible assets at March 31, 2002 include goodwill amounting
to Rs 2,353 million (March 31, 2001: Rs 2,568 million) and tenancy
rights amounting to Rs 44 million (March 31, 2001: Rs 73 million).
During the year the bank amortized Rs 215 million of goodwill and Rs
29 million of tenancy rights.
F-21
ICICI Bank Limited
Notes to financial statements
8 Other assets
8.1.1 Other assets at March 31, 2002 include interest accrued of Rs
4,488 million (March 31, 2001: Rs 2,248 million), advance taxes (net
of provisions) Rs 1,449 million (March 31, 2001: Rs 1,051 million),
deposits for leased premises and utilities of Rs 744 million (March
31, 2001: Rs 346 million), foreclosed assets held for resale of Rs
235 million (March 31, 2001: Rs 139 million) and prepaid expenses of
Rs 11 million (March 31, 2001: Rs 13 million).
9 Deposits
9.1.1 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,
---------------------
2001 2002
------- -------
(in Rs millions)
Interest bearing
Savings deposits ........................ 18,786 24,970
Time deposits ........................... 119,097 270,677
------- -------
137,883 295,647
Non-interest bearing
Demand deposits ......................... 26,371 29,574
------- -------
Total ................................... 164,254 325,221
======= =======
9.1.2 Maturity profile of deposits is set out below:
At March 31,
---------------------
2001 2002
------- -------
(in Rs millions)
Less than one year (including savings
and demand liabilities) ............... 111,215 185,264
One to three years ...................... 51,229 134,480
Three to five years ..................... 1,097 4,035
Greater than five years ................. 713 1,442
------- -------
Total deposits .......................... 164,254 325,221
======= =======
9.1.3 At March 31, 2002, the aggregate of deposits with amounts
greater than Rs 10 million was Rs 175,326 million. Demand and savings
deposits are included in the less than one year category.
10 Short-term borrowings
10.1.1 Short-term borrowings at March 31, 2002 represent 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 6.5% per
annum. The average level of such borrowings, during year ended March
31, 2002, was Rs 888 million (March 31, 2001: Rs 1,713 million).
There were no unused lines of credit available to the Bank at March
31, 2002 (March 31, 2001: Rs Nil).
F-22
ICICI Bank Limited
Notes to financial statements
11 Repurchase transactions
11.1.1 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 21,399 million (March 31, 2001: Rs 537 million). The average
level of repurchase transactions during the year ended March 31, 2002
was Rs 1,754 million (March 31, 2001: Rs 78 million). The repurchase
contracts outstanding on March 31, 2002 were Rs 21,399 million (March
31, 2001: Rs 537 million) and were collateralized by a pledge of
securities in the Bank's AFS portfolio with fair value of Rs 21,360
million (March 31, 2001: Rs 537 million).
11.1.2 ICICI Bank has also 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 9,116 million (March 31, 2001: Rs Nil). The average level of
reverse repurchase transactions outstanding during the year ended
March 31, 2002 was Rs 584 million (March 31, 2001: Rs 206 million).
The reverse repurchase contracts outstanding on March 31, 2002 were
Rs 9,116 million (March 31, 2001: Rs Nil ).
12 Trading liabilities
12.1.1 Trading liabilities at March 31, 2002 include borrowings from
banks in the interbank call money market of Rs 274 million (March 31,
2001: Rs 3,978 million) and fair value of losses on derivatives and
foreign exchange contracts of Rs 886 million (March 31, 2001: Rs
Nil).
13 Long-term debt
13.1.1 Long-term debt, represents debt with an original maturity of
greater than one year, net of unamortized debt issuance costs.
Long-term debt bears interest at fixed contractual rates ranging from
6.50% to 17.25%. In fiscal 2002, long-term debt includes subordinated
debt of Rs 2,270 million raised by the Bank during the current year
for a period of 69 months at 9.5%. A listing of long-term debt by
residual maturity is set out below:
At March 31, 2001 At March 31, 2002
---------------------- ----------------------
(in Rs millions) % (in Rs millions) %
---------------------- ----------------------
Maturity
2003 .................... 461 19 1,370 24
2004 .................... 1,136 47 1,175 20
2005 .................... 101 4 132 2
2006 .................... - - 71 1
2007 and later .......... 723 30 2,992 53
----- --- ----- ---
Total ................... 2,421 100 5,740 100
===== === ===== ===
14 Other liabilities
14.1.1 Other liabilities at March 31, 2002 include outward clearing
suspense of Rs 5,988 million (March 31, 2001: Rs 5,656 million),
accounts payable of Rs 2,649 million (March 31, 2001: Rs 3,806
million), interest accrued but not due on deposits amounting to Rs
1,752 million (March 31, 2001: Rs 557 million), cash margins on
letters of credit/guarantees of Rs 69 million (March 31, 2001: Rs 80
million) and obligations on account of capital leases amounting to Rs
318 million (March 31, 2001: Rs 251 million).
F-23
ICICI Bank Limited
Notes to financial statements
15 Earnings per share
15.1.1 A computation of earnings per share is set out below:
Year ended March 31,
-------------------------------------------------------------
2000 2001 2002
----------------- ---------------- ------------------
(in Rs millions except per share data)
-------------------------------------------------------------
Basic Fully Basic Fully Basic Fully
diluted diluted diluted
Earnings
Net income before cumulative effect of accounting change 1,402 1,402 1,308 1,308 2,021 2,021
Cumulative effect of accounting change, net of tax ..... - - - - 16 16
------ ------ ------ ------ ------ ------
Net income ............................................. 1,402 1,402 1,308 1,308 2,037 2,037
====== ====== ====== ====== ====== ======
Common stock
Weighted average common stock outstanding .............. 165.09 165.09 198.24 198.24 220.36 220.36
Dilutive effect of employee stock options .............. - 0.02 - - - -
------ ------ ------ ------ ------ ------
Total .................................................. 165.09 165.11 198.24 198.24 220.36 220.36
====== ====== ====== ====== ====== ======
Earnings per share
Before cumulative effect of accounting change .......... 8.49 8.49 6.60 6.60 9.17 9.17
Cumulative effect of accounting change, net of tax ..... - - - - 0.07 0.07
------ ------ ------ ------ ------ ------
Net income ............................................. 8.49 8.49 6.60 6.60 9.24 9.24
====== ====== ====== ====== ====== ======
15.1.2 Options granted to employees to purchase 1,636,125 equity shares
and 6,327,825 equity shares granted to employees at a weighted
average exercise price of Rs 171.90 and Rs 145.98, respectively, were
outstanding as at March 31, 2001 and 2002, respectively, and have
been included in the computation of diluted earnings per share
wherever the average market price of the equity shares during the
period was greater than the exercise price of the options.
16 Regulatory matters
16.1.1 ICICI Bank 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, 2002 was Rs 70,079 million (March 31, 2001:
Rs 38,087 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 I capital, of 9% be maintained. The
capital adequacy ratio of the Bank calculated in accordance with the
Reserve Bank of India guidelines at March 31, 2002 was 16.12% (March
31, 2001: 11.57%).
F-24
ICICI Bank Limited
Notes to financial statements
Restricted retained earnings
16.1.4 Retained earnings at March 31, 2002 computed as per generally
accepted accounting principles of India include profits aggregating
to Rs 2,494 million (March 31, 2001: Rs 1,844 million), which are not
distributable as dividends under the Banking Regulation Act, 1949.
These profits 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 the 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. Effective March 10, 2001, the Bank acquired
Bank of Madura Limited, a private sector bank in India. Immediately
following the merger, the results of the Bank of Madura were being
reviewed separately. During the current year, the operations of Bank
of Madura were completely integrated with the operations of ICICI
Bank and Bank of Madura is no longer considered a segment.
17.1.2 Until the financial year ended March 31, 2000, the Bank had been
analyzing its business information and making operating decisions
based upon reviews of the Bank's operations as a whole. However, with
continued growth in business, the Bank 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. The 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, ATM, internet banking, phone banking and
mobile banking. The Retail Banking SBU also offers consumer lending
services namely credit cards, loans against deposits and securities
etc. The Corporate Banking SBU (CB-SBU) provides financial products
and services to corporates, institutions and Government
organizations. The Corporate Banking-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.
F-25
ICICI Bank Limited
Notes to financial statements
17.1.3 The following table gives information on segmental revenues and
segmental profits for the years ended March 31, 2001 and March 31,
2002:
(Rs in millions)
-------------------------------------------------------------------------------------------------------------------------
Fiscal 2001
----------------------------------------------------------------------
SBU-
SBU-Retail Corporate SBU- Bank of
Banking Banking Treasury Madura Eliminations Total
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 (Note 1) ................. 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 other operating Note 1
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/(loss) before Income Taxes ................. (622) 1883 247 58 - 1,566
Income tax expense/(benefit) ...................... (101) 308 41 10 - 258
Net Income/(loss) ................................. (521) 1,575 206 48 - 1,308
(Rs in millions)
----------------------------------------------------------------------------------------------------------
Fiscal 2002
-------------------------------------------------------
SBU-
SBU-Retail Corporate SBU-
Banking Banking Treasury Eliminations Total
Revenue from external customers
Interest revenue .................................. 4,389 11,645 4,803 - 20,837
Other revenue ..................................... 685 1,736 2,792 - 5,213
Revenue from other operating segments
Interest & Other revenue (Note 1) ................. 9,517 - - (9,517) -
Total Revenue ..................................... 14,591 13,381 7,595 (9,517) 26,050
Interest expenses to external customers ........... 9,424 3,190 2,502 - 15,116
Interest & other expenses from other operating (Note 1)
segments ....................................... - 6,259 3,258 (9,517) -
Depreciation ...................................... 505 88 43 - 636
Provision for credit losses ....................... 268 1,454 - - 1,722
Other expenses .................................... 3,843 1,015 766 - 5,624
Income/(loss) before Income Taxes ................. 551 1,375 1,026 - 2,952
Income tax expense/(benefit) ...................... 161 460 310 - 931
Income before cumulative effect of accounting
changes ........................................ 390 915 716 - 2,021
Cumulative effect of accounting changes, net of
tax ........................................... - 16 - - 16
Net Income/(loss) ................................. 390 931 716 - 2,037
17.1.4 Note 1: Interest and other revenues from other operating
segments represents 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 a notional management fee charged
by 'Treasury' to other segments for managing part of their assets and
liabilities.
F-26
ICICI Bank Limited
Notes to financial statements
17.1.5 A listing of certain assets of reportable segments for the years
ended March 31, 2001 and March 31, 2002 is set out below:
(Rs in million)
-----------------------------------------------------------------------------------------
Fiscal 2001
------------------------------------------------------------------
SBU- SBU-
Retail Corporate SBU- Bank of
Particulars Banking Banking Treasury Madura Eliminations Total
Property and equipment. 2,270 586 56 1,008 - 3,920
Other assets .......... 30,332 115,468 37,888 32,930 - 216,618
Total assets .......... 32,602 116,054 37,944 33,938 - 220,538
(Rs in million)
------------------------------------------------------------------------------
Fiscal 2001
-------------------------------------------------------
SBU- SBU-
Retail Corporate SBU-
Particulars Banking Banking Treasury Eliminations Total
Property and equipment. 3,565 896 370 - 4,831
Other assets .......... 69,720 125,645 204,609 - 399,974
Total assets .......... 73,285 126,541 204,979 - 404,805
17.2 Geographic distribution
17.2.1 The business operations of the Bank are largely concentrated in
India. Activities outside India are restricted to resource
mobilization in the international markets. The assets and net income
from foreign operations are immaterial.
Major customers
17.2.2 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.
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 of Trustees
and managed by Life Insurance Corporation 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.
F-27
ICICI Bank Limited
Notes to financial statements
18.1.3 The following table sets forth the funded status of the plan and
the amounts recognized in the financial statements:
At March 31,
-------------
2001 2002
----- -----
(in Rs million)
Change in benefit obligations
Projected benefit obligations at beginning of the year/period 12 336
Obligations assumed on acquisition .......................... 317 -
Service cost ................................................ 3 24
Interest cost ............................................... 4 34
Benefits paid ............................................... (1) (11)
Actuarial (gain)/loss on obligations ........................ 1 9
--- ---
Projected benefit obligations at the end of the period ...... 336 392
Change in plan assets
Fair value of plan assets at beginning of the period ........ 17 333
Fair value of plan assets acquired on acquisition ........... 303 -
Expected return on plan assets .............................. 3 33
Employer contributions ...................................... 6 48
Gain/(loss) on plan assets .................................. 4 (1)
Benefits paid ............................................... - (11)
--- ---
Plan assets at the end of the period ........................ 333 402
Net prepaid asset/(accrued liability) ....................... (3) 10
--- ---
18.1.4 The components of the net gratuity cost for the year ended March
31, 2001 and the year ended March 31, 2002 are given below:
At March 31,
------------
2001 2002
---- ----
(Rs in million)
Service cost ................................................ 3 24
Interest cost ............................................... 4 34
Expected return on assets ................................... (3) (33)
Actuarial (gain)/loss ....................................... (3) 10
---- ----
Net gratuity cost ........................................... 1 35
18.1.5 Assumptions used in accounting for the gratuity plan are given
below:
At March 31,
-----------------
2001 2002
---- ----
Discount rate................................................ 11% 10%
Rate of increase in the compensation levels.................. 8% 8.0 - 8.5%
Rate of return on plan assets................................ 10.5% 10%
Pension Plan
18.1.6 ICICI Bank provides for a pension, a deferred benefit retirement
plan covering certain employees. The plan provides for a pension
payment on a monthly basis to these employees on their retirement
based on the respective employee's salary and years of employment
with 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 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 SFAS 87.
F-28
ICICI Bank Limited
Notes to financial statements
18.1.8 The following table sets forth the funded status of the plan and
the amounts recognized in the financial statements for the years
ended March 31, 2001 and March 31, 2002:
At March 31,
------------
2001 2002
---- ----
(in Rs Million)
Change in benefit obligations
Projected benefit obligations at beginning of the year/period - 724
Obligations assumed on acquisitions ......................... 711 -
Service cost ................................................ 1 26
Interest cost ............................................... 4 72
Benefits paid ............................................... - (27)
Actuarial loss on obligations ............................... 8 118
---- ----
Projected benefit obligations at the end of the period ...... 724 913
Change in plan assets
Fair value of plan assets at beginning of the period ........ - 795
Fair value of plan assets acquired on acquisitions .......... 779 -
Expected return on plan assets .............................. 1 79
Employer contributions ...................................... 1 53
Gain on plan assets ......................................... 14 13
Benefits paid ............................................... - (27)
---- ----
Plan assets at the end of the period ........................ 795 913
---- ----
Net prepaid benefit ......................................... 71 -
==== ====
18.1.9 The components of the net pension cost are given below:
At March 31,
------------
2001 2002
---- ----
(in Rs Million)
Service cost................................................. 1 26
Interest cost................................................ 4 72
Expected return on assets.................................... (1) (79)
Actuarial (gain)/loss........................................ (6) 105
---- ----
Net pension cost............................................. (2) 124
==== ====
18.1.10 Assumptions used in accounting for the pension plan are given
below:
At March 31,
------------
2001 2002
---- ----
Discount rate................................................ 11% 10%
Rate of increase in the compensation levels.................. 8% 8%
Rate of return on plan assets................................ 10.50% 10%
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 22 million and Rs 28 million to the employees' superannuation plan
in years ended March 31, 2001 and 2002, respectively.
F-29
ICICI Bank Limited
Notes to financial statements
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 9.5% (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 23 million and Rs 54 million in years ended March 31,
2001 and 2002, 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 a provision of Rs 27 million on account of
the leave encashment liability of the Bank at March 31, 2002 (March
31, 2001: Rs 8 million).
18.2 Employee stock option plan
18.2.1 In February 2000, the Bank approved an employee stock option
plan. Under the plan, the Bank is authorized to issue up to 9.84
million equity shares to its employees and the employees of the
affiliate company.
18.2.2 The options vest in a graded manner over three years with 20%,
30% and 50% of the options vesting at the end of each year. The
options can be exercised within 10 years from the date of the grant.
During April 2001 and March 2002, the Bank issued additional options
to its employees and executive directors. The Bank has not recorded
any compensation cost as the exercise price was not less than the
quoted market price of the underlying equity shares on the grant
date.
Stock option activity
18.2.3 A summary of the status of the Bank's option plan is presented
below:
Year ended March 31, 2000 Year ended March 31, 2001 Year ended March 31, 2002
------------------------- ------------------------- -------------------------
Option Range of Option Range of Option Range of
shares exercise shares exercise shares exercise
outstanding price and outstanding price and outstanding price and
grant date grant date grant date
fair values fair values fair values
Outstanding at the beginning of the
year ................................ - 1,713,000 Rs 171.90 1,636,125 Rs 171.90
Granted during the year ............... 1,788,000 Rs 171.90 - - 4,735,200 Rs 120.35 -
Rs 171.00
Forfeited during the year ............. 75,000 Rs 171.90 76,875 Rs 171.90 43,500 Rs 171.00 -
Rs 171.90
Exercised during the year ............. - - -
--------- --------- ---------
Outstanding at the end of the
year ................................ 1,713,000 1,636,125 6,327,825
========= ========= =========
Exercisable at the end of the year .... - - 322,425
F-30
ICICI Bank Limited
Notes to financial statements
18.2.4 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 would have been impacted as indicated
below:
Year ended March 31,
--------------------------------
2000 2001 2002
---- ---- ----
(in Rs millions, except per share data)
Net income
As reported ...................... 1,402 1,308 2,037
Proforma under SFAS No 123 ....... 1,401 1,273 1,956
Basic earnings per share
As reported ...................... 8.49 6.60 9.24
Proforma under SFAS No 123 ....... 8.49 6.42 8.88
Diluted earnings per share
As reported ...................... 8.49 6.60 9.24
Proforma under SFAS No 123 ....... 8.49 6.42 8.88
18.2.5 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.
18.2.6 The fair value at date of grant was Rs 55.78 for options granted
during February 2000, Rs. 83.38 for options granted during April 2001
and Rs 46.77 for options granted during March 2002 using the
Black-Scholes option-pricing model. The following assumptions have
been used to fair value the options:
For the year ended March 31,
----------------------------
2000 2001 2002
---- ---- ----
Expected life in years ............ 3 - 3
Risk free interest rate ........... 10.35% - 6.44% -
9.33%
Volatility ........................ 30.00% - 54.40% -
67.90%
Dividend yield .................... 0.70% - 1.18% -
1.66%
F-31
ICICI Bank Limited
Notes to financial statements
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,
---------------
2001 2002
----- -----
(in Rs millions)
Deferred tax assets
Allowance for loan losses ................................. 824 763
Amortization of held to maturity securities ............... 165 190
Amortization of trading & available for sale securities ... 82 323
Deposits .................................................. 141 38
Deferred loan fees ........................................ 25 29
Others .................................................... 34 9
----- -----
Gross deferred tax asset .................................. 1,271 1,352
Valuation allowances ...................................... 2 2
----- -----
Deferred tax asset ........................................ 1,269 1,350
Deferred tax liabilities
Depreciation .............................................. (475) (445)
Investments ............................................... (77) -
Unrealized gain on securities, available for sale ......... (117) (584)
Amortization of debt issue costs .......................... (34) (8)
Others .................................................... (36) (10)
----- -----
Total deferred tax liability .............................. (739) (1,047)
----- -----
Net deferred tax asset .................................... 530 303
===== =====
19.1.3 Management is of the opinion that the realization of the
recognized net deferred tax asset, net of valuation allowances, of Rs
1,350 million at March 31, 2002 (March 31, 2001: Rs 1,269 million)
will more likely than not be realized based on expectations as to
future taxable income.
F-32
ICICI Bank Limited
Notes to financial statements
19.2 Reconciliation of tax rates
19.2.1 The following is the reconciliation of estimated income taxes at
the Indian statutory income tax rate to income tax expense as
reported. The Indian statutory tax rate is 35% plus a surcharge. For
the year ended March 31, 2000, the surcharge was 10%, resulting in a
total statutory tax rate of 38.50%. During fiscal 2001, the surcharge
was changed to 13% effective April 1, 2000, which resulted in a total
statutory tax rate of 39.55% for the year ended March 31, 2001.
During fiscal 2002, the surcharge was changed to 2% effective April
1, 2001, which resulted in a total statutory tax rate of 35.70% for
the year ended March 31, 2002.
Year ended March 31,
---------------------------
2000 2001 2002
----- ----- -----
(in Rs millions)
Net income before taxes ...................... 1,781 1,566 2,952
Statutory tax rate ........................... 38.5% 39.55% 35.7%
Income tax expense at statutory tax rate ..... 686 619 1,054
Increase (reductions) in taxes on account of
Income exempt from taxes ..................... (340) (344) (213)
Amortization of goodwill ..................... - 6 81
Effect of change in statutory tax rate ....... 6 - 26
Others ....................................... 27 (23) (17)
----- ----- -----
Reported income tax expense .................. 379 258 931
===== ===== =====
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,
--------------------------------
2000 2001 2002
----- ----- -----
(in Rs millions)
Current .............................. 266 700 1,171
Deferred ............................. 113 (442) (240)
----- ----- -----
Total income tax expense ............. 379 258 931
===== ===== =====
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 13,690 million at March 31, 2001 and March 31,
2002, 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-33
ICICI Bank Limited
Notes to financial statements
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 recognized over the term of the
instruments.
20.1.4 Details of facilities outstanding are set out below:
At March 31,
-----------------------
2001 2002
--------- ---------
(in Rs millions)
Financial guarantees ....................... 7,511 12,551
Performance guarantees ..................... 5,949 8,565
--------- ---------
Total ...................................... 13,460 21,116
========= =========
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-cancelable leases.
Year ending March 31, (in Rs millions)
2003 .................................................. 174
2004 .................................................. 180
2005 .................................................. 183
2006 .................................................. 190
2007 .................................................. 197
Thereafter ............................................ 630
---------
Total minimum lease commitments ...................... 1,554
=========
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 93 million at March 31,
2002 (March 31, 2001: Rs 60 million).
F-34
ICICI Bank Limited
Notes to financial statements
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 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,
---------------------
2001 2002
-------- --------
(in Rs million)
ICICI Limited (former parent company) ...... 45 29
Other affiliates(1) ........................ 27 4
-------- --------
Total ...................................... 72 33
======== ========
(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 Company Limited and ICICI
Prudential Life Insurance Company Limited.
21.1.5 ICICI Bank paid related parties interest on deposits and
borrowings in call money markets amounting to Rs 268 million for the
year ended March 31, 2002 (March 31, 2001: Rs 203 million).
21.1.6 ICICI Bank paid brokerage fees to ICICI Brokerage Services
Limited amounting to Rs Nil for the year ended March 31, 2002 (March
31, 2001: Rs 1 million).
Leasing of premises and infrastructure facilities
21.1.7 ICICI Bank has entered into lease agreements with ICICI Limited
for the lease of certain premises and infrastructural facilities to
ICICI Bank. Net amount incurred, as rent for the year ended March 31,
2002, was Rs 207 million (March 31, 2001: Rs 177 million). Similarly,
ICICI Bank paid Rs 38 million for the year ended March 31, 2002 (March
31, 2001: Rs 16 million) towards lease rentals on certain equipment
leased from ICICI Limited.
Acquisition of Equipment
21.1.8 ICICI Bank purchased equipment from ICICI Limited and ICICI
Infotech Services Limited for Rs 11 million during the year ended March
31, 2002 (March 31, 2001: Rs 99 million).
F-35
ICICI Bank Limited
Notes to financial statements
Forward Contracts
21.1.9 ICICI Bank enters into foreign exchange forward contracts with
ICICI Limited. The outstanding contracts as at March 31, 2002 in
respect of the forward contracts amounted to Rs 251 million (March 31,
2001: 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, 2002 in respect of cross currency
swaps amounted to Rs 2,272 million (Rs 4,352 million at March 31, 2001)
and in respect of interest rate swap contracts amounted to Rs 2,710
million (Rs Nil at March 31, 2001). Similarly, the Bank also enters
into interest rate swaps with other affiliates on a back to back basis.
The outstanding contracts with other affiliates at March 31, 2002 in
respect of interest rate swaps amounted to Rs 6,050 million (March 31,
2001: Rs 2,900 million). The interest paid in respect of swaps with
ICICI Limited amounted to Rs 275 million (March 31, 2001 : Rs 189
million).
Investments in pass through certificates
21.1.11 During the year ICICI Bank Limited invested in certain securities
issued by trusts formed by its affiliate ICICI Limited. The repayment
of the principal amount of certificates and periodic interest at
predetermined rates are from the underlying securities held by the
trusts transferred to it by ICICI Limited. The total investments in
PTCs outstanding at March 31, 2002 was Rs 9,112 million (March 31, 2001
Rs Nil)
Repurchase transactions
21.1.12 The Bank entered into repurchase transactions with ICICI Limited
during the year. The amount of such transactions outstanding as at
March 31, 2002 was Rs 21,399 million (March 31, 2001: Rs Nil)
Expenses for services rendered
21.1.13 ICICI Bank paid Rs 12 million for the year ended March 31, 2002
(March 31, 2001: Rs 4 million) to ICICI Limited for secondment of its
employees.
21.1.14 ICICI Bank paid Rs 47 million for the year ended March 31, 2002
(March 31, 2001: Rs Nil) to ICICI Personal Financial Services Limited
for secondment of its employees.
Receipts for services rendered
21.1.15 ICICI Bank received Rs 10 million for the year ended March 31,
2002 (March 31, 2001: Rs 5 million) from ICICI Limited and ICICI
Personal Financial Services Limited for employees seconded to them.
Share transfer activities
21.1.16 ICICI Bank paid Rs 1 million for the year ended March 31, 2002
(March 31, 2001: Rs 3 million) to ICICI Infotech Services Limited for
share transfer services provided by them. The Bank incurred Rs 2
million for the year ended March 31, 2002 for dematerialization
services provided by the above affiliate (March 31, 2001 Rs 5 million).
F-36
ICICI Bank Limited
Notes to financial statements
Dividend payments
21.1.17 ICICI Bank declared and paid Rs 407 million as a dividend to its
affiliates for the year ended March 31, 2002 (March 31, 2001: Rs 184
million)
Other transaction with related parties
21.1.18 ICICI Bank has advanced concessional loans to employees, bearing
interest ranging from 3.5% to 6%. These loans are housing, vehicle and
general purpose loans. The tenure of these loans ranges from 5 to 20
years. The balance outstanding on account of all employee loans at
March 31, 2002 was Rs 865 million (March 31, 2001 : Rs 494 million).
21.1.19 ICICI Bank has entered into an agreement with ICICI Personal
Financial Services Limited for telephone banking call center services
and transaction processing services for credit card related activities.
The amount incurred for the year ended March 31, 2002 for these
services was Rs 149 million (March 31, 2001: Rs 99 million).
21.1.20 ICICI Limited had undertaken a corporate brand building
advertising campaign of which ICICI Bank's share amounted to Rs 29
million for the year ended March 31, 2002 (March 31, 2001: Rs 15
million).
21.1.21 ICICI Limited set up common technology infrastructure for
utilization by the ICICI group of companies. ICICI Bank incurred Rs 37
million (March 31, 2001: Rs 34 million) and Rs 18 million (March 31,
2001: Rs 11 million) as its share of communication expenses and share
of backbone infrastructure expense respectively for the year ended
March 31, 2002. Similarly, it incurred Rs 124 million for the year
ended March 31, 2002 (March 31, 2001: Rs 74 million), as expenses for
the development of software and the provision of support services for
software and hardware by ICICI Infotech Services Limited.
21.1.22 ICICI Bank incurred Rs 110 million for the year ended March 31,
2002 (March 31, 2001: Rs 49 million) as its share of the operating
costs of the common data center set up by ICICI Limited.
21.1.23 ICICI Bank hired the services of ICICI Capital Services Limited
to set up ATMs at various places for which Rs 7 million (March 31,
2001: Rs 8 million) was incurred during the year ended March 31, 2002.
The Bank paid Rs 9 million during the year ended March 31, 2002 (March
31, 2001: Rs 6 million) to ICICI e-Payments Limited for payment gateway
services rendered to internet merchants acquired by the Bank. The Bank
also paid Rs 10 million (March 31, 2001: Rs 2 million) to ICICI Web
Trade Limited for the compilation of data on new accounts acquired by
the Bank during the year ended March 31, 2002.
21.1.24 The balances pertaining to receivables from and payable to
related parties are as follows:
ICICI Other
Limited Affiliates(1)
(in Rs million)
At March 31, 2001
Accounts receivable ...................... 38 17
Accounts payable ......................... 5,209 2,847
At March 31, 2002
Accounts receivable ...................... 24 1
Accounts payable ......................... 4,680 893
Note 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
F-37
ICICI Bank Limited
Notes to financial statements
Limited, ICICI Personal Financial Services Limited, ICICI
Capital Services Limited, ICICI Venture Funds Management
Company Limited, ICICI Properties Private Limited, ICICI Home
Finance Company Limited, ICICI Real Estate Company Private
Limited, Traveljini.com Private Limited, ICICI Knowledge Park,
ICICI Realty Private Limited, ICICI Web Trade Limited, ICICI
e-Payments Limited and ICICI Prudential Life Insurance Company
Limited.
22 Estimated fair value of financial instruments
22.1.1 ICICI Bank's financial instruments include financial assets and
liabilities recorded on the balance sheet.
22.1.2 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.
22.1.3 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 judgments 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.
22.1.4 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.
22.1.5 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, 2001 At March 31, 2002
----------------------- -----------------------
(in Rs millions)
Financial assets
Securities, available for sale .................... 24,787 24,787 155,758 155,758
Securities, held to maturity ...................... 10,944 11,524 24,294 28,768
Trading assets (including derivatives) ............ 18,725 18,725 26,075 26,075
Loans (Note 1) .................................... 93,030 93,128 72,474 72,681
Other financial assets (Note 2) ................... 62,704 62,704 112,049 112,049
--------- --------- --------- ---------
Total ............................................. 210,190 210,868 390,650 395,331
========= ========= ========= =========
Financial liabilities
Interest-bearing deposits ......................... 137,883 138,846 295,647 296,385
Non-interest-bearing deposits ..................... 26,371 26,371 29,574 29,574
Short term borrowings ............................. 3,012 3,012 1,409 1,409
Trading liabilities (including derivatives) ....... 5,958 5,958 1,237 1,237
Long-term debt .................................... 2,421 2,594 5,740 5,906
Other financial liabilities (Note 3) .............. 18,236 18,236 42,272 42,272
--------- --------- --------- ---------
Total ............................................. 193,881 195,017 375,879 376,783
========= ========= ========= =========
F-38
ICICI Bank Limited
Notes to financial statements
Note 1: The carrying value of loans is net of allowance for loan
losses and unearned income.
Note 2: Includes cash, dues from banks, deposits at interest with
banks, reverse repurchase transactions, short-term highly
liquid securities, and customers acceptance liability for
which the carrying value is a reasonable estimate of the fair
value.
Note 3: Represents acceptances and other liabilities outstanding, for
which the carrying value is a reasonable estimate of the fair
value.
22.1.6 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
values of certain long-term loans are estimated by discounting the
contractual cash flows using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The
carrying value of certain other loans approximates fair value due to
the short-term and/or 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.
22.1.7 For liabilities, market borrowing rates of interest of similar
instruments are used to discount contractual cash flows. The estimated
fair value of interest-bearing deposits and long term debt reflects
changes in market rates since the time these were sourced.
------------------------------- --------------------------------
G. Venkatakrishnan Balaji Swaminathan
Senior Executive Vice President Chief Financial Officer
-------------------------------
Kalpana Morparia
Executive Director
F-39
INDEX TO ICICI US GAAP FINANCIAL STATEMENTS
Page
Independent Auditors' Report.................................................F41
Consolidated balance sheets..................................................F42
Consolidated statements of income............................................F43
Consolidated statements of stockholders' equity and other
comprehensive income..................................................... F45
Consolidated statements of cash flows........................................F46
Notes to the consolidated financial statements...............................F48
F-40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ICICI Bank Limited as successor through acquisition of ICICI Limited
We have audited the accompanying consolidated balance sheets of ICICI
Limited and subsidiaries as of March 31, 2001 and 2002, and the related
consolidated statements of income, stockholders' equity and other comprehensive
income, and cash flows for each of the years in the three-year period ended
March 31, 2002. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Limited and
subsidiaries as of March 31, 2001 and 2002, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 2002, in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 1 to the consolidated financial statements, effective
April 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, `Goodwill and Other Intangible Assets' and
SFAS No. 133, `Accounting for Derivative Instruments and Hedging Activities',
as amended by SFAS No. 138, `Accounting for Certain Derivative Instruments and
Certain Hedging Activities'. Also, as discussed in Note 12 to the consolidated
financial statements, effective April 1, 1999, the Company changed its method
of accounting for depreciation of property and equipment.
The United States dollar amounts are presented in the accompanying
consolidated financial statements solely for the convenience of the readers and
have been translated into United States dollar on the basis described in Note 1
to the consolidated financial statements.
KPMG
Mumbai, India
May 3, 2002
F-41
ICICI Limited and subsidiaries
Consolidated balance sheets
In millions, except share data
Convenience
translation
into US$,
As of
As of March 31, March 31,
----------------------- -----------
2001 2002 2002
---------- ---------- -----------
(unaudited)
Assets
Cash and cash equivalents.......................................Rs. 30,987 Rs. 41,760 US$ 855
Trading assets.................................................. 18,878 42,376 868
Securities
Available for sale............................................ 7,692 50,836 1,041
Held to maturity (fair value Rs. 1,563 million and Rs. Nil as
of March 31, 2001 and 2002, respectively).................. 1,506 - -
Non-readily marketable equity securities...................... 7,148 8,268 169
Venture capital investments................................... 3,769 3,921 80
Investments in affiliates....................................... 7,899 8,590 176
Loans, net of allowance for loan losses, security deposits and
unearned income............................................... 602,023 523,601 10,723
Customers' liability on acceptances............................. 2,715 4,783 98
Property and equipment, net..................................... 12,039 12,949 265
Assets held for sale............................................ 841 2,029 42
Intangible assets, net.......................................... 1,827 2,098 43
Deferred tax assets............................................. 4,587 7,428 152
Interest and fees receivable.................................... 13,878 9,561 196
Other assets.................................................... 24,656 27,630 566
---------- ---------- ----------
Total assets....................................................Rs.740,445 Rs.745,830 US$ 15,274
========== ========== ==========
Liabilities
Interest-bearing deposits.......................................Rs. 6,072 Rs. 7,380 US$ 151
Trading liabilities............................................. 12,484 17,095 350
Short-term borrowings........................................... 99,656 70,804 1,450
Bank acceptances outstanding.................................... 2,715 4,783 98
Long-term debt.................................................. 492,880 511,423 10,474
Redeemable preferred stock...................................... 698 772 16
Other borrowings................................................ - 5,787 119
Insurance policy and claims reserves............................ 49 1,536 31
Deferred credit, net............................................ 1,265 - -
Taxes and dividends payable..................................... 10,498 11,050 226
Deferred tax liabilities........................................ 806 1,291 26
Other liabilities............................................... 36,904 42,149 863
---------- ---------- ----------
Total liabilities............................................... 664,027 674,070 13,804
---------- ---------- ----------
Commitments and contingencies (Note 32)
Minority interest............................................... 496 599 12
Stockholders' equity
Common stock at Rs. 10 par value: 1,600,000,000 shares
authorized as of March 31, 2001 and 2002; Issued and
outstanding 785,344,048 and 785,345,448 shares as of March 31,
2001 and 2002, respectively................................... 7,848 7,848 161
Additional paid-in capital...................................... 38,110 38,110 780
Retained earnings............................................... 34,196 26,042 533
Deferred compensation........................................... (33) (7) -
Accumulated other comprehensive income.......................... (4,199) (832) (17)
---------- ---------- ----------
Total stockholders' equity...................................... 75,922 71,161 1,457
---------- ---------- ----------
Total liabilities and stockholders' equity......................Rs.740,445 Rs.745,830 US$ 15,274
========== ========== ==========
See accompanying notes to the consolidated financial statements.
F-42
ICICI Limited and subsidiaries
Consolidated statements of income
In millions, except share data
Convenience
translation
into US$,
Year ended
Year ended March 31, March 31,
------------------------------------ -----------
2000 2001 2002 2002
---------- ---------- ---------- -----------
(unaudited)
Interest and dividend income
Interest and fees on loans.................................... Rs. 69,339 Rs. 75,272 Rs. 75,237 US$ 1,541
Interest and dividends on securities ......................... 1,922 560 1,618 33
Interest and dividends on trading assets ..................... 7,426 2,836 1,714 35
Interest on balances and deposits with banks ................. 1,759 910 368 8
Other interest income ........................................ 352 585 100 2
---------- ---------- ---------- -----------
Total interest and dividend income............................ 80,798 80,163 79,037 1,619
---------- ---------- ---------- -----------
Interest expense
Interest on deposits ......................................... 6,104 490 744 15
Interest on long-term debt ................................... 52,893 56,830 59,798 1,225
Interest on short-term borrowings ............................ 6,867 9,123 7,717 158
Interest on trading liabilities .............................. 1,538 1,445 900 18
Other interest expense ....................................... 90 4 350 7
---------- ---------- ---------- -----------
Total interest expense........................................ 67,492 67,892 69,509 1,423
---------- ---------- ---------- -----------
Net interest income........................................... 13,306 12,271 9,528 195
Provision for loan losses .................................... 6,363 9,892 9,743 200
---------- ---------- ---------- -----------
Net interest income after provision for loan losses........... 6,943 2,379 (215) (4)
Non-interest income
Fees, commission and brokerage ............................... 4,258 5,317 4,747 97
Net gain on trading activities ............................... 2,157 847 2,442 50
Net gain/(loss) on venture capital investments ............... -- 62 (316) (6)
Net gain/(loss) on other securities .......................... 2,363 (1,771) (3,131) (64)
Gain on sale of loans ........................................ -- 705 1,979 41
Foreign exchange income/(loss) ............................... 428 (108) 78 2
Insurance premium ............................................ -- 60 1,178 24
Software development and services ............................ 5 701 1,493 31
Gain on sale of stock of subsidiaries/affiliates ............. -- 2,507 165 3
Gain/(loss) on sale of property and equipment ................ 212 (31) 29 1
Rent ......................................................... 22 413 310 6
Other non-interest income .................................... 370 586 476 10
---------- ---------- ---------- -----------
Total non-interest income..................................... 9,815 9,288 9,450 194
---------- ---------- ---------- -----------
Non-interest expense
Salaries and employee benefits ............................... 1,618 1,940 3,278 67
General and administrative expenses .......................... 3,497 3,560 5,328 109
Policy holder benefits and claims expense .................... -- 49 1,379 28
Amortization of goodwill and intangible assets ............... 187 259 290 6
---------- ---------- ---------- -----------
Total non-interest expense.................................... 5,302 5,808 10,275 210
---------- ---------- ---------- -----------
Equity in earning/(loss) of affiliates ....................... 20 856 975 20
Minority interest............................................. (361) 34 289 6
---------- ---------- ---------- -----------
Income before income taxes and cumulative effect of accounting
changes .................................................... 11,115 6,749 224 5
Income tax expense ........................................... 2,033 119 129 3
---------- ---------- ---------- -----------
Income before cumulative effect of accounting changes ........ 9,082 6,630 95 2
Cumulative effect of accounting changes, net of tax .......... 249 -- 1,265 26
---------- ---------- ---------- -----------
Net income ................................................... Rs 9,331 Rs. 6,630 Rs. 1,360 US$ 28
========== ========== ========== ===========
F-43
ICICI Limited and subsidiaries
Consolidated statements of income
In millions, except share data
Convenience
translation
into US$,
Year ended
Year ended March 31, March 31,
------------------------------------ -----------
2000 2001 2002 2002
---------- ---------- ---------- -----------
(unaudited)
Earnings per equity share: Basic (Rs.)
Net income before cumulative effect of accounting
changes...................................................... Rs. 14.06 Rs. 8.44 Rs. 0.12 US$ 0.00
Cumulative effect of accounting changes...................... 0.39 - 1.61 0.03
---------- ---------- ---------- -----------
Net income................................................... 14.45 8.44 1.73 0.03
Earnings per equity share: Diluted (Rs.)
Net income before cumulative effect of accounting
changes...................................................... Rs. 13.41 Rs. 8.41 0.12 US$ 0.00
Cumulative effect of accounting changes...................... 0.36 - 1.61 0.03
---------- ---------- ---------- -----------
Net income................................................... 13.77 8.41 1.73 0.03
Weighted average number of equity shares used in computing
earnings per equity share (millions)
Basic........................................................ 646 785 785 785
Diluted...................................................... 687 785 785 785
See accompanying notes to the consolidated financial statements.
F-44
ICICI Limited and subsidiaries
Consolidated statements of stockholders' equity and other comprehensive income
In millions, except share data
Common Stock Accumulated
----------------------- Other
Additional Comprehensive Total
No. of Paid-In Retained Deferred Income, Stockholders'
shares Amount Capital Earnings Compensation Net of Tax Equity
----------- --------- ---------- ---------- ------------ ------------- -------------
Balance as of March 31, 1999...... 480,102,913 Rs. 4,801 Rs. 14,772 Rs. 22,189 Rs. - Rs. (5,251) Rs. 36,511
Common stock issued............... 305,208,635 3,031 18,364 - - - 21,395
Compensation related to
employee stock option
plan............................ - - 97 - (97) - -
Amortization of compensation...... - - - - 27 - 27
Increase in carrying value
on direct issuance of
stock by subsidiary............. - - 4,114 - - - 4,114
Comprehensive income
Net income.................... - - - 9,331 - - 9,331
Net unrealized gain/(loss)
on securities, net of
realization................... - - - - - 2,712 2,712
------
Comprehensive income............. 12,043
------
Cash dividends declared
(Rs. 4.5 per common share)..... - - - (3,182) - - (3,182)
Balance as of March 31, 2000...... 785,311,548 Rs. 7,832 Rs. 37,347 Rs. 28,338 Rs. (70) Rs. (2,539) Rs. 70,908
----------- --------- ---------- ---------- --------- ------------- -----------
Common stock issued on exercise 32,500 - 3 - - - 3
of stock options..............
Amortization of compensation...... - - - - 37 - 37
Increase in carrying value on direct
issuance of stock by
subsidiary...................... - - 1,242 - - - 1,242
Tax effect of increase in carrying
value on direct issuance
of stock by subsidiary.......... - - (605) - - - (605)
Comprehensive income
Net income.................... - - - 6,630 - - 6,630
Net unrealized gain/(loss) on
securities, net of
realization................. - - - - - (1,674) (1,674)
Translation adjustments....... - - - - - 14 14
------
Comprehensive income............... 4,970
------
Cash dividends declared (Rs. 1 per
common share).................. - - - (772) - - (772)
Other............................. - 16 123 - - - 139
Balance as of March 31, 2001...... 785,344,048 Rs. 7,848 Rs. 38,110 Rs. 34,196 Rs. (33) Rs. (4,199) Rs. 75,922
----------- --------- ---------- ---------- --------- ------------- -----------
Common stock issued on exercise of
stock options................. 1,400 - - - - - -
Amortization of compensation...... - - - - 26 - 26
Comprehensive income
Net income.................... - - - 1,360 - - 1,360
Net unrealized gain/(loss) on
securities, net of
realization................. - - - - - 3,283 3,283
Translation adjustments....... - - - - - 84 84
------
Comprehensive income.............. 4,727
------
Cash dividends declared
(Rs. 11 per common share).... - - - (9,514) - - (9,514)
Balance as of March 31, 2002...... 785,345,448 Rs. 7,848 Rs. 38,110 Rs. 26,042 Rs. (7) Rs. (832) Rs. 71,161
=========== ========= ========== ========== ========= ============= ===========
Balance as of March 31, 2002 (US$)
(unaudited)....................... 161 780 533 - (17) 1,457
========= ========== ========== ========= ============= ===========
See accompanying notes to the consolidated financial statements.
F-45
ICICI Limited and subsidiaries
Consolidated statements of cash flows
In millions, except share data
Convenience
translation
into US$,
Year ended
Year ended March 31, March 31,
------------------------------------ -----------
2000 2001 2002 2002
---------- ---------- ---------- -----------
(unaudited)
Operating activities
Net income................................................... Rs. 9,331 Rs. 6,630 Rs. 1,360 US$ 28
Adjustments to reconcile net income to net cash (used
in)/provided by operating activities:
Provision for loan and other credit losses ................ 6,363 9,892 10,532 216
Depreciation .............................................. 431 663 856 18
Amortization .............................................. (64) 1,180 1,483 30
Deferral of discount and expenses on borrowings ........... 838 1,213 1,307 27
Deferred income tax ....................................... (103) (4,339) (3,348) (69)
Revaluation loss on foreign currency balances ............. 22 -- -- --
Unrealized loss/(gain) on trading securities .............. 24 136 (80) (2)
Unrealized loss on venture capital investments ............ -- -- 300 6
Other than temporary decline in value of other
securities ............................................. 1,444 1,835 3,480 71
Unrealized loss on derivative transactions ................ -- -- 190 4
Undistributed equity in earning/(loss) of affiliates ...... (20) (856) (572) (12)
Minority interest ......................................... 361 (34) (289) (6)
(Gain)/loss on sale of property and equipment, net ........ (212) 31 (29) (1)
(Gain)/loss on sale of securities available for sale ...... (3,807) (126) (349) (7)
Gain on sale of subsidiary's stock ........................ -- (2,507) (165) (3)
Cumulative effect of accounting changes, net of tax ....... (249) -- (1,265) (26)
Change in assets and liabilities
Trading account assets ................................. (21,494) 10,153 (23,421) (480)
Interest and fees receivable ........................... (1,946) (131) 3,528 72
Other assets ........................................... (1,120) (2,495) (2,932) (60)
Trading account liabilities ............................ 5,892 (4,857) 4,342 89
Insurance policy and claims reserves ................... -- -- 1,487 30
Taxes payable .......................................... 1,773 (1,302) 552 11
Other liabilities ...................................... 10,294 1,260 4,743 97
---------- ---------- ---------- -----------
Net cash (used in)/provided by operating activities 7,758 16,346 1,710 33
---------- ---------- ---------- -----------
Investing activities
Purchase of held to maturity securities ..................... (644) (861) -- --
Purchase of available for sale securities .................. (16,563) (6,462) (69,575) (1,425)
Purchase of venture capital investments ..................... (387) (4,094) (504) (10)
Purchase of non-readily marketable equity securities ........ (2,020) -- (2,015) (41)
Proceeds from sale of held to maturity securities ........... -- -- 640 13
Proceeds from sale of available for sale securities ......... 20,862 1,756 28,512 584
Proceeds from sale of venture capital investments ........... -- -- 53 1
Proceeds from sale of non-readily marketable equity
securities ................................................ -- 148 183 4
Proceeds from sale of subsidiary's stock .................... -- 4,075 302 6
Origination of loans, net ................................... (92,431) (98,573) 67,460 1,382
Purchase of property and equipment .......................... (4,320) (3,927) (1,936) (40)
Proceeds from sale of property and equipment ................ 276 145 128 3
Investments in affiliates ................................... -- (33) -- --
Payment for business acquisition, net of cash acquired ...... -- (1,950) (143) (3)
---------- ---------- ---------- -----------
Net cash (used in)/provided by investing activities.......... (95,227) (109,592) 23,105 474
---------- ---------- ---------- -----------
F-46
ICICI Limited and subsidiaries
Consolidated statements of cash flows
In millions, except share data
Convenience
translation
into US$,
Year ended
Year ended March 31, March 31,
------------------------------------ -----------
2000 2001 2002 2002
---------- ---------- ---------- -----------
(unaudited)
Financing activities
Increase in deposits, net.................................... Rs. 36,077 Rs. 8,050 Rs. 1,308 US$ 27
Proceeds from short-term borrowings, net .................... 30,514 21,204 (28,852) (591)
Proceed from other borrowings ............................... -- -- 5,787 119
Proceeds from issuances of long-term debt ................... 53,524 182,015 158,872 3,254
Repayment of long-term debt ................................. (47,909) (112,047) (142,019) (2,908)
Redemption of redeemable preferred stock .................... (750) (9,577) -- --
Proceeds from issuance of common stock ...................... 20,865 142 -- --
Proceeds from issuance of common stock by
subsidiary ................................................ 7,338 465 390 8
Cash dividends paid ......................................... (3,182) (775) (9,514) (195)
---------- ---------- ---------- -----------
Net cash provided by/(used in) financing activities.......... 96,477 89,477 (14,028) (286)
---------- ---------- ---------- -----------
Effect of de-consolidation of subsidiary on cash and
cash equivalents .......................................... -- (36,361) -- --
---------- ---------- ---------- -----------
Effect of exchange rate on cash and cash
equivalents ............................................... -- (14) (14) 0
---------- ---------- ---------- -----------
Net increase/(decrease) in cash and cash equivalents ........ 9,008 (40,144) 10,773 221
Cash and cash equivalents at the beginning of the
year ...................................................... 62,123 71,131 30,987 635
---------- ---------- ---------- -----------
Cash and cash equivalents at the end of the year ............ Rs. 71,131 Rs. 30,987 Rs. 41,760 US$ 856
========== ========== ========== ===========
Supplementary information:
Cash paid for:
Interest .................................................. Rs. 59,411 Rs. 57,144 Rs. 66,587 US$ 1,364
Taxes ..................................................... 2,759 2,919 4,505 92
Non-cash items:
Foreclosed assets ......................................... -- 2,024 1,188 24
Conversion of loan to equity shares ....................... 1,002 1,982 1,586 32
Conversion of convertible instruments to equity
shares .................................................... 530 -- -- --
Transfer of securities from held to maturity
category to available for sale category ................... -- -- 866 18
Change in unrealized gain/(loss) on securities
available for sale, net ................................ 2,712 (1,674) 3,283 67
See accompanying notes to the consolidated financial statements.
F-47
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
1. Significant accounting policies
Overview
ICICI Limited together with its subsidiaries (collectively, ICICI or
the Company) is a diversified financial services group providing a variety
of banking and financial services including project finance, working
capital finance, venture capital finance, investment banking, treasury
products and services, retail banking, broking and insurance. Further, the
Company has an interest in the software development and services business.
ICICI is headquartered in Mumbai, India.
Principles of consolidation
The consolidated financial statements include the accounts of ICICI
Limited (parent company) and all of its subsidiaries, which are more than
50% owned and controlled. All significant intercompany accounts and
transactions are eliminated on consolidation. The Company accounts for
investments in common stock of affiliates by the equity method where its
investments in the voting stock gives it the ability to exercise
significant influence over the investee.
As discussed in Note 2, the financial statements of ICICI Bank
Limited were consolidated in the year ended March 31, 2000 and were
accounted for by the equity method in the years ended March 31, 2001 and
2002.
As discussed in Note 3, ICICI merged with ICICI Bank effective April
2002 under a plan of combination.
Basis of preparation
The accounting and reporting policies of ICICI used in the
preparation of these consolidated financial statements reflect general
industry practices and conform to generally accepted accounting principles
in the United States (US GAAP).
The preparation of consolidated financial statements in conformity
with US GAAP requires that management makes estimates and assumptions that
affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial
statements and the reported income and expense for the reporting period.
Management believes that the estimates used in the preparation of the
consolidated financial statements are prudent and reasonable. The actual
results could differ from these estimates.
Foreign currencies
The consolidated financial statements are reported in Indian rupees
(Rs.), the national currency of India. The functional currency of each
entity within ICICI is its respective local currency.
The assets and liabilities of ICICI's foreign operations are
translated into Indian rupees at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Resulting
translation adjustments are reflected as a component of accumulated other
comprehensive income.
Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred.
F-48
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Solely for the convenience of the readers, the financial statements
as of and for the year ended March 31, 2002, have been translated into
United States dollar at the noon buying rate in New York City on March 29,
2002, for cable transfers in Indian rupees, as certified for customs
purposes by the Federal Reserve of New York of US$ 1 = Rs. 48.83. No
representation is made that the Indian rupee amounts have been, could have
been or could be converted into United States dollars at such a rate or
any other certain rate on March 31, 2002, or at any other certain date.
Revenue recognition
Interest income is accounted on an accrual basis except in respect of
impaired loans, where it is recognized on a cash basis. Income from
leasing and hire purchase operations is accrued in a manner to provide a
fixed rate of return on outstanding investments.
Fees from activities such as investment banking, loan syndication and
financial advisory services are accrued based on the stage of completion
of the underlying transactions. Fees for guarantees and letters of credit
are amortized over the contracted period of the commitment.
Revenues from software development and services comprise income from
time-and-material and fixed-price contracts. Revenue with respect to
time-and-material contracts is recognized as related services are
performed. Revenue with respect to fixed-price contracts is recognized in
accordance with the percentage of completion method of accounting.
Provisions for estimated losses on contracts-in-progress are recorded in
the period in which such losses become probable based on the current
contract estimates.
Insurance premiums from long duration contracts, principally life
insurance, are accounted as and when due. Premiums from short duration
insurance contracts are accounted for over the related contract period.
Short duration contracts include primarily property, auto, accident and
health policies. The accounting for benefits and expenses is associated
with premiums by means of the provisions for future policy benefits,
unearned premiums and the deferral and amortization of policy acquisition
costs.
Cash equivalents
ICICI considers all highly liquid investments, which are readily
convertible into cash and have contractual maturities of three months or
less from the date of purchase, to be cash equivalents. The carrying value
of cash equivalents approximates fair value.
Securities and trading activities
ICICI classifies investments in debt and readily marketable equity
securities, other than venture capital subsidiary investments, into two
categories based upon management's intention at the time of purchase:
trading securities and securities available for sale. Realized gains and
losses on the sale of securities are recorded at the time of sale.
As discussed in Note 8, ICICI no longer classifies investments in
debt securities as held to maturity, due to sale of certain held to
maturity securities during the year ended March 31, 2002.
Trading assets, primarily debt securities and foreign exchange
products, are recorded at fair value with realized and unrealized gains
and losses included in non-interest income. Interest on trading securities
is recorded in interest income. The fair value of trading assets is based
upon quoted market prices or, if quoted market prices are not available,
estimates using similar securities or pricing models.
F-49
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Securities not classified as trading securities are classified as
available for sale. These include securities used as part of ICICI's asset
liability management strategy, which may be sold in response to changes in
interest rates, prepayment risk, liquidity needs and similar factors.
Securities available for sale are recorded at fair value with unrealized
gains and losses recorded, net of tax, as a component of accumulated other
comprehensive income.
Equity securities, which are traded on a securities exchange within
six months of the balance sheet date are considered as publicly traded.
The last quoted price of such securities is taken as their fair value.
Non-readily marketable equity securities for which there is no readily
determinable fair value are recorded at cost.
Securities on which there is an unrealized loss that is deemed to be
other than temporary are written down to fair value with the loss recorded
in non-interest income as a loss on other securities. Other than temporary
decline is identified by management based on an evaluation of all
significant factors including the length of time and the extent to which
the fair value has been less than the cost, the financial condition and
prospects of the issuer and the extent and ability of ICICI to retain the
investment for a period of time sufficient to allow for any probable
recovery in fair value.
Securities acquired through conversion of loans in a troubled debt
restructuring are recorded at the fair value on the date of conversion and
subsequently accounted for as if acquired for cash.
ICICI's venture capital subsidiaries carry their investments at fair
value, with changes in fair value recognized in gain/loss on venture
capital investments. The fair values of publicly traded venture capital
investments are generally based upon quoted market prices. In certain
situations, including thinly traded securities, large-block holdings,
restricted shares or other special situations, the quoted market price is
adjusted to produce an estimate of the attainable fair value for the
securities. For securities that are not publicly traded, fair value is
determined in good faith pursuant to procedures established by the Board
of Directors of the venture capital subsidiaries. In determining the fair
value of these securities, consideration is given to the financial
condition, operating results and prospects of the underlying companies,
and any other factors deemed relevant. Generally, these investments are
carried at cost during the first year, unless a significant event occurs
that effects the long-term value of the investment. Because of the
inherent uncertainty of the valuations, those estimated values may differ
significantly from the values that would have been used had a ready market
for the investments existed.
Trading liabilities represent borrowings from banks in the inter-bank
call money market, borrowings from banks and corporates in the course of
trading operations and balances arising from repurchase transactions of a
securities trading subsidiary.
Loans
Loans are reported at the principal amount outstanding, inclusive of
interest accrued and due per the contractual terms, except for certain
non-readily marketable privately placed debt instruments, which are
considered credit substitutes and are, therefore classified as loans but
accounted for as debt securities. Loan origination fees (net of loan
origination costs) are deferred and recognized as an adjustment to yield
over the life of the loan. Interest is accrued on the unpaid principal
balance and is included in interest income.
Loans include aggregate rentals on lease financing transactions and
residual values, net of security deposits and unearned income. Lease
financing transactions substantially represent direct financing leases.
Loans also include the aggregate value of purchased securitized
receivables, net of unearned income.
F-50
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
ICICI identifies a commercial loan as impaired and places it on
non-accrual status when it is probable that ICICI will be unable to
collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. A commercial loan is also
considered to be impaired and placed on a non-accrual basis if interest or
principal is greater than 180 days overdue. Delays or shortfalls in loan
payments are evaluated along with other factors to determine if a loan
should be classified as impaired. The decision to classify a loan as
impaired is also based on an evaluation of the borrower's financial
condition, collateral, liquidation value and other factors that affect the
borrower's ability to pay.
ICICI classifies a loan as a troubled debt restructuring where it has
made concessionary modifications, that it would not otherwise consider, to
the contractual terms of the loan to a borrower experiencing financial
difficulties. Such loans are placed on a non-accrual status.
Generally, at the time a loan is placed on non-accrual status,
interest accrued and uncollected on the loan in the current fiscal year is
reversed from income, and interest accrued and uncollected from the prior
year is charged off against the allowance for loan losses. Thereafter,
interest on non-accrual loans is recognized as interest income only to the
extent that cash is received. When borrowers demonstrate over an extended
period the ability to repay a loan in accordance with the contractual
terms of a loan, which the company classified as non-accrual, the loan is
returned to accrual status. With respect to restructured loans,
performance prior to the restructuring or significant events that coincide
with the restructuring are evaluated in assessing whether the borrower can
meet the rescheduled terms and may result in the loan being returned to
accrual status after a performance period.
Consumer loans are generally identified as impaired not later than a
predetermined number of days overdue on a contractual basis. The number of
days is set at an appropriate level by loan product. The policy for
suspending accruals of interest and impairment on consumer loans varies
depending on the terms, security and loan loss experience characteristics
of each product.
Allowance for loan losses
The allowance for loan losses represents management's estimate of
probable losses inherent in the portfolio. Larger balance, non-homogenous
exposures representing significant individual credit exposures are
evaluated based upon the borrower's overall financial condition, resources
and payment record and the realizable value of any collateral. Within the
allowance of loan losses, a valuation allowance is maintained for
larger-balance, non-homogenous loans that have been individually
determined to be impaired. This estimate considers all available evidence
including the present value of the expected future cash flows discounted
at the loan's contractual effective rate and the fair value of collateral.
Each portfolio of smaller-balance, homogenous loans, including
consumer mortgage, installment, revolving credit and most other consumer
loans, is individually evaluated for impairment. The allowance for loan
losses attributed to these loans is established via a process that
includes an estimate of probable losses inherent in the portfolio, based
upon various statistical analysis. These include migration analysis, in
which historical delinquency and credit loss experience is applied to the
current aging of the portfolio, together with an analysis that reflects
current trends and conditions.
While determining the adequacy of the allowance for loan losses,
management also considers overall portfolio indicators including
historical credit losses, delinquent and non-performing loans, and trends
in volumes and terms of loans; an evaluation of overall credit quality and
the credit process, including lending policies and procedures;
consideration of economic, geographical, product, and other environmental
factors; and model imprecision.
F-51
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Transfer and servicing of financial assets
In September 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of SFAS No. 125. The
provisions of SFAS No. 140 relating to transfer and servicing of financial
assets are effective for transactions after March 31, 2001. ICICI
transfers commercial and consumer loans through securitization
transactions. The transferred loans are de-recognized and gains/losses are
recorded only if the transfer qualifies as a sale under SFAS No. 140.
Recourse and servicing obligations and put options written are recorded as
proceeds of the sale. Retained beneficial interests in the loans and
servicing rights are measured by allocating the carrying value of the
loans between the assets sold and the retained interest, based on the
relative fair value at the date of securitization. The fair values are
determined using either financial models, quoted market prices or sales of
similar assets.
Derivatives instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Certain Hedging Activities. In June 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activity, an Amendment of SFAS No. 133. SFAS No. 133 and SFAS No.
138 require that all derivative instruments be recorded on the balance
sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are
effective for all fiscal quarters of all fiscal years beginning after June
30, 2000. On April 1, 2001, the Company adopted SFAS No. 133 and SFAS No.
138 on a prospective basis.
Under SFAS No. 133, the Company may designate a derivative as either
a hedge of the fair value of a recognized fixed rate asset or liability or
an unrecognized firm commitment (fair value hedge), a hedge of a
forecasted transaction or the variability of future cash flows of a
floating rate asset or liability (cash flow hedge) or a foreign-currency
fair value or cash flow hedge (foreign currency hedge). All derivatives
are recorded as assets or liabilities on the balance sheet at their
respective fair values with unrealized gains and losses recorded either in
accumulated other comprehensive income or in the statement of income,
depending on the purpose for which the derivative is held. Derivatives
that do not meet the criteria for designation as a hedge under SFAS No.
133 at inception, or fail to meet the criteria thereafter, are accounted
for in other assets with changes in fair value recorded in the statement
of income.
Changes in the fair value of a derivative that is designated and
qualifies as a fair value hedge along with the gain or loss on the hedged
asset or liability that is attributable to the hedged risk, are recorded
in the statement of income as other non-interest income. To the extent of
the effectiveness of a hedge, changes in the fair value of a derivative
that is designated and qualifies as a cash flow hedge, are recorded in
accumulated other comprehensive income, net of tax. For all hedge
relationships, ineffectiveness resulting from differences between the
changes in fair value or cash flows of the hedged item and changes in the
fair value of the derivative are recognized in the statement of income as
other non-interest income.
At the inception of a hedge transaction, the Company formally
documents the hedge relationship and the risk management objective and
strategy for undertaking the hedge. This process includes identification
of the hedging instrument, hedged item, risk being hedged and the
methodology for measuring effectiveness. In addition, the Company
assesses, both at the inception of the hedge and on an ongoing quarterly
basis, whether the derivative used in the hedging transaction has been
highly effective in offsetting changes in fair value or cash flows of the
hedged item, and whether the derivative is expected to continue to be
highly effective.
F-52
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
The Company discontinues hedge accounting prospectively when either
it is determined that the derivative is no longer highly effective in
offsetting changes in the fair value or cash flows of a hedged item; the
derivative expires or is sold, terminated or exercised; the derivative is
de-designated because it is unlikely that a forecasted transaction will
occur; or management determines that designation of the derivative as a
hedging instrument is no longer appropriate.
When a fair value hedge is discontinued, the hedged asset or
liability is no longer adjusted for changes in fair value and the existing
basis adjustment is amortized or accreted over the remaining life of the
asset or liability. When a cash flow hedge is discontinued but the hedged
cash flow or forecasted transaction is still expected to occur, gains and
losses that were accumulated in other comprehensive income are amortized
or accreted into the statement of income. Gains and losses are recognized
in the statement of income immediately if the cash flow hedge was
discontinued because a forecasted transaction did not occur.
The Company may occasionally enter into a contract (host contract)
that contains a derivative that is embedded in the financial instrument.
If applicable, an embedded derivative is separated from the host contract
and can be designated as a hedge; otherwise, the derivative is recorded as
a freestanding derivative.
Prior to the adoption of SFAS No. 133, derivatives used for interest
rate risk management were not recorded at fair value. Rather, the net
interest settlement on designated derivatives that either effectively
altered the interest rate characteristics of assets or liabilities or
hedged exposures to risk was treated as an adjustment to the interest
income or interest expense of the related assets or liabilities. The
effect of adopting SFAS No. 133 at April 1, 2001 did not result in any
impact on the statement of income.
Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. The cost of additions, capital improvements and interest
during the construction period are capitalized, while maintenance and
repairs are charged to expense when incurred. Property and equipment held
to be disposed off are reported as assets held for sale at the lower of
carrying amount or fair value, less cost to sell.
Depreciation is provided over the estimated useful lives of the
assets or lease term whichever is shorter.
Property under construction and advances paid towards acquisition of
property and equipment are disclosed as capital work in progress. The
interest costs incurred for funding an asset during its construction
period are capitalized based on the average outstanding investment in the
asset and the average cost of funds. The capitalized interest cost is
included in the cost of the relevant asset and is depreciated over the
estimated useful life of the asset.
Capitalized costs of computer software obtained for internal use
represent costs incurred to purchase computer software from third parties
and direct costs of materials and services incurred on internally
developed software. The capitalized costs are amortized on a straight-line
basis over the estimated useful life of the software.
F-53
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Impairment of long-lived assets
Long-lived assets and certain intangible assets, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Goodwill and intangible assets
On April 1, 2001, ICICI early-adopted SFAS No. 142, Goodwill and
Other Intangible Assets. As required by SFAS No. 142, ICICI reclassified
existing goodwill and intangible assets to conform with the new criteria
in SFAS No. 141, Business Combinations, for recognition apart from
goodwill. This resulted in reclassification of previously recorded
intangible assets of Rs. 115 million as goodwill and a reclassification of
previously recorded goodwill of Rs. 373 million as a separate
unidentifiable intangible asset.
As required by SFAS No. 142, ICICI identified its reporting units and
assigned assets and liabilities, including goodwill to the reporting units
on the date of adoption. Subsequently, ICICI compared the fair value of
each reporting unit to its carrying value, to determine whether goodwill
is impaired at the date of adoption. This transitional impairment
evaluation did not indicate an impairment loss.
Subsequent to the adoption of SFAS No. 142, ICICI does not amortize
goodwill but instead tests goodwill for impairment at least annually. The
annual impairment test under SFAS No. 142 did not indicate an impairment
loss.
The unidentifiable intangible asset relates to the acquisition of a
financial service company in 1998 and continues to be amortized.
Business combinations
In June 2001, the FASB issued SFAS No. 141, which requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies the criteria
that intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that
any purchase price allocated to an assembled workforce may not be
accounted separately.
As of April 1, 2001, ICICI had an unamortized deferred credit of Rs.
1,265 million related to an excess of the fair value of assets acquired
over the cost of an acquisition. As required by SFAS No. 141, in
conjunction with the early adoption of SFAS No. 142, the unamortized
deferred credit as of April 1, 2001, has been written-off and recognized
as the effect of a change in accounting principle.
F-54
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Income taxes
The Company accounts for income taxes under the provisions of SFAS
No. 109, Accounting for Income Taxes. SFAS No. 109 requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax
basis of assets and liabilities, using enacted tax rates expected to apply
to taxable income in the years the temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the statement of income in the
period of change. Deferred tax assets are recognized subject to a
valuation allowance based upon management's judgment as to whether
realization is considered more likely than not.
Insurance policy and claim reserves
Insurance policy and claim reserves represent liabilities for future
insurance policy benefits. Insurance reserves for traditional life
insurance, annuities, and accident and health policies have been computed
based on the mortality, morbidity, persistency and interest rate
assumptions applicable to these coverages, including adverse deviations.
These assumptions consider the industry standards and may be revised if it
is determined that future experience will differ substantially from that
previously assumed.
Issue of shares by subsidiary/affiliate
An issuance of shares by a subsidiary/affiliate to third parties
reduces the proportionate ownership interest of the Company in the
investee. A change in the carrying value of the investment in a
subsidiary/affiliate due to such direct sale of unissued shares by the
investee is accounted for as a capital transaction, and is recognized in
stockholders' equity when the transaction occurs.
Employee benefit plans
ICICI provides a variety of benefit plans to eligible employees.
Contributions to defined contribution plans are charged to income in the
period in which they accrue. Current service costs for defined benefit
plans are accrued in the period to which they relate. Prior service costs,
if any, resulting from amendments to the plans are recognized and
amortized over the remaining period of service of the employees.
Stock-based compensation
ICICI uses the intrinsic value based method of Accounting Principle
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to
account for its employee stock-based compensation plans. Compensation cost
for fixed and variable stock based awards is measured by the excess, if
any, of the fair market price of the underlying stock over the exercise
price. Compensation cost for fixed awards is measured at the grant date,
while compensation cost for variable awards is estimated until the number
of shares an individual is entitled to receive and the exercise price are
known (measurement date).
Dividends
Dividends on common stock and the related dividend tax are recognized
on approval by the Board of Directors.
F-55
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Earnings per share
Basic earnings per share is computed by dividing net income by the
weighted average number of common stock outstanding during the period.
Diluted earnings per share reflect the potential dilution that could occur
if securities or other contracts to issue equity shares were exercised or
converted.
Reclassifications
Certain reclassifications have been made in the financial statements
of prior years to conform to classifications used in the current year.
These changes had no impact on previously reported results of operations
or stockholders' equity.
2. Dilution of ownership interest in ICICI Bank Limited
In March 2000, ICICI Bank Limited (ICICI Bank), a then consolidated
subsidiary, providing banking services, issued 15.9 million American
Depository Shares (ADS) to third parties representing 31.8 million common
shares at an offer price of US$ 11.00 per ADS. The proceeds from the
offering, after deducting underwriting discounts and other direct issue
costs, were Rs. 7,338 million. As a result of the issuance, the
proportionate ownership interest of the Company in ICICI Bank reduced from
74.2% to 62.2%.
The offering price per share exceeded ICICI's carrying amount per
share in ICICI Bank, resulting in an increase in the carrying value of
ICICI's investment in ICICI Bank by Rs. 4,114 million. This change in the
carrying value was recognized in the statement of stockholders' equity as
a capital transaction.
In accordance with Reserve Bank of India (RBI) guidelines prevalent
at the time of incorporation of ICICI Bank, the Company was required to
reduce its ownership interest in ICICI Bank to 40% at some point in the
future. Based on certain regulatory developments subsequent to the
incorporation of ICICI Bank, the Company was in discussions with the RBI
to determine whether and to what extent it was still required to reduce
its ownership in ICICI Bank. In February 2001, the RBI communicated its
final views on the matter requiring the Company to take steps to reduce
its interest to 40% immediately.
In March 2001, ICICI Bank acquired Bank of Madura Limited, a banking
company, through issuance of stock. The acquisition was recorded by the
purchase method. As a result of the issuance, the ownership interest of
the Company in ICICI Bank was reduced from 62.2% to 55.6%. The issuance
price exceeded ICICI's carrying amount per share in ICICI Bank resulting
in an increase in the carrying value of ICICI's investment in ICICI Bank
by Rs. 1,242 million. This change in the carrying value, net of the
related tax effect of Rs. 140 million, has been recognized in the
statement of stockholders' equity as a capital transaction.
Further, during March 2001, the Company sold a 9.2% interest in ICICI
Bank to institutional investors for a consideration of Rs. 3,499 million.
The gain on sale of Rs. 1,996 million is included in the statement of
income. This reduced the Company's interest in ICICI Bank to 46.4%.
In view of the Company's ownership interest in ICICI Bank having been
reduced to below majority level, the Company determined that consolidation
of ICICI Bank was not appropriate and has accounted for its ownership
interest under the equity method beginning April 1, 2000, the beginning of
the fiscal year in which the ownership interest was less than majority.
During the year ended March 31, 2002, ICICI further reduced its
ownership interest to 46%. This resulted in a gain of Rs. 57 million,
which is included in the statement of income.
F-56
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
3. Proposed business combination with ICICI Bank
In January 2002, the shareholders of ICICI and ICICI Bank approved a
plan of combination whereby ICICI Bank will acquire ICICI in a
transaction, which would be accounted for as a reverse acquisition.
Subsequent to the transaction, ICICI Bank, the accounting acquiree will be
the surviving legal entity. The transaction will be accounted for by the
purchase method to reflect the increase in ownership interest of ICICI in
ICICI Bank from the existing 46% to 100%.
The plan of combination was subject to regulatory approvals which
were obtained in April 2002. As the transaction was consummated in April
2002, it is not reflected in the consolidated financial statements for the
year ended March 31, 2002.
ICICI Bank provides banking and financial services. The operations of
ICICI Bank are governed by the Banking Regulation Act, 1949. As a result
of the acquisition, ICICI is expected to be a universal banking company
offering the entire spectrum of financial services. The acquisition is
expected to reduce the cost of funds for ICICI through access to the
extensive branch network and core deposit base of ICICI Bank. Subsequent
to the acquisition, the operations of the combined entity, to be renamed
ICICI Bank Limited, will be governed by the Banking Regulation Act.
The transaction will be consummated by issuing approximately 392
million shares of ICICI Bank to the shareholders of ICICI. For accounting
purposes, the aggregate purchase price will approximate Rs. 12,120
million.
The following table summarizes the preliminary allocation of the
estimated purchase price:
Assets (in millions)
Cash and cash equivalents ........................... Rs. 48,618
Securities .......................................... 119,505
Loans ............................................... 39,392
Property and equipment .............................. 2,790
Intangible assets ................................... 4,038
Other assets ....................................... 11,171
----------
Total assets ........................................ Rs.225,514
==========
Liabilities
Deposits ............................................ 177,321
Long-term debt ...................................... 3,213
Other liabilities ................................... 32,860
----------
Total liabilities ................................... Rs.213,394
==========
Net assets .......................................... Rs. 12,120
The amount of Rs. 4,038 million assigned to intangible assets is
estimated to be the value of core deposit relationships, which will be
amortized over a period of 10 years.
F-57
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
4. Sale of stock of ICICI Infotech Services Limited
During the year ended March 31, 2001, ICICI diluted its interest in
ICICI Infotech Services Limited (ICICI Infotech) to 92% through sale of an
8% interest to a strategic investor for a consideration of Rs. 576
million. The gain on sale of Rs. 511 million is included in the statement
of income.
5. Acquisitions
During the year ended March 31, 2001, ICICI acquired certain software
development and services companies in India and the United States for an
aggregate cash consideration of Rs. 2,524 million. The transactions were
accounted for under the purchase method of accounting and resulted in
goodwill of Rs. 1,391 million, which was being amortized over a period of
five years. During the year ended March 31, 2002, ICICI recorded goodwill
of Rs. 354 million in relation to the acquisition of certain software
development and services companies. As of March 31, 2002, goodwill of Rs.
70 million has been recorded pending final allocation. The revenues and
total assets of the acquired companies are immaterial to the consolidated
results of operations and financial position of ICICI.
6. Cash and cash equivalents
Cash and cash equivalents as of March 31, 2002, include
interest-bearing deposits with banks aggregating Rs. 35,508 million (2001:
Rs. 21,693 million).
7. Trading assets
A listing of the trading assets is set out below:
As of March 31,
-----------------------
2001 2002
---------- ----------
(in millions)
Government of India securities ....................Rs. 8,889 Rs. 15,602
Securities purchased under agreements to resell.... - 21,399
Corporate debt securities.......................... 7,289 4,627
Equity securities.................................. 2,677 742
Fair value of derivative and foreign
exchange contracts............................... 23 6
---------- ----------
Total..............................................Rs. 18,878 Rs. 42,376
========== ===========
As of March 31, 2002, trading assets include Government of India
(GOI) securities amounting to Rs.11,866 million (2001: Rs. 4,821 million),
which are pledged for the purpose of collateralizing short-term
borrowings.
F-58
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
8. Securities
The portfolio of securities is set out below:
As of March 31, 2001 As of March 31, 2002
---------------------------------------------- ------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
cost gain loss value cost gain loss value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(in millions)
Available for sale
Corporate debt
securities........... Rs. 485 Rs. 4 Rs. - Rs. 489 Rs. 5,724 Rs. 52 Rs. (32) Rs. 5,744
GOI securities......... 975 35 - 1,010 28,262 507 - 28,769
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total debt securities.. 1,460 39 - 1,499 33,986 559 (32) 34,513
Equity securities...... 11,821 482 (6,110) 6,193 19,181 365 (3,223) 16,323
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total securities
available for sale..... Rs.13,281 Rs. 521 Rs. (6,110) Rs. 7,692 53,167 924 (3,255) 50,836
========= ========== ========== ========= ========= ========== ========== =========
Held to maturity
Corporate debt
securities.... ........ Rs. 418 Rs. - Rs. (1) Rs. 417 - - - -
GOI securities......... 1,088 58 - 1,146 - - - -
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total securities held
to maturity............ Rs. 1,506 Rs. 58 Rs. (1) Rs. 1,563 Rs. - Rs. - Rs. - Rs. -
========= ========== ========== ========= ========= ========== ========== =========
Non-readily marketable
equity securities
(1).................... Rs. 7,148 Rs. 8,268
========= =========
--------- ---------
Venture capital
investments(2)......... Rs. 3,769 Rs. 3,921
========= =========
(1) Primarily represents securities acquired as a part of project financing
activities or conversion of loans in debt restructurings.
(2) Represents venture capital investments held by venture capital
subsidiaries of ICICI.
During the year ended March 31, 2002, as part of its ongoing
evaluation of its securities portfolio, the Company recorded an impairment
charge of Rs. 3,480 million (2001: Rs. 1,835 million, 2000: Rs. 1,444
million) for an other than temporary decline in value of available for
sale and non-readily marketable equity securities.
Privately placed corporate debt securities reported as loans (credit
substitutes)
The portfolio of credit substitutes is set out below:
As of March 31, 2001 As of March 31, 2002
---------------------------------------------- ------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
cost gain loss value cost gain loss value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(in millions)
Available for sale......Rs. - Rs. - Rs. - Rs. - Rs. 59,707 Rs. 1,077 Rs. (502) Rs.60,282
Held to maturity........ 75,496 - (1,412) 74,084 - - - -
During the year ended March 31, 2002, ICICI sold debt securities
classified as held to maturity. The debt securities were sold for Rs. 640
million resulting in a realized gain of Rs. 102 million. As the securities
were sold for reasons other than those specified in SFAS No. 115, all
remaining held to maturity securities were reclassified as available for
sale. Subsequent to the sale, ICICI no longer classifies debt securities
as held to maturity.
F-59
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Income from securities available for sale
A listing of income from securities available for sale is set out
below:
Year ended March 31,
-------------------------------------
2000 2001 2002
--------- ---------- ---------
(in millions)
Interest.............................. Rs. 388 Rs. 128 Rs. 1,151
Dividends............................. 1,502 406 267
--------- --------- ---------
Total interest and dividends.......... Rs. 1,890 Rs. 534 Rs.1,418
========= ========= =========
Gross realized gain................... Rs.5,851 Rs. 474 Rs. 1,346
Gross realized loss................... (2,044) (348) (8)
--------- --------- ---------
Total................................. Rs. 3,807 Rs. 126 Rs. 1,338
========= ========= =========
Income from credit substitutes available for sale
A listing of income from credit substitutes available for sale is set
out below:
Year ended March 31,2002
------------------------
(in millions)
Interest................................................. Rs. 2,872
Dividends................................................ 45
---------
Total.................................................... Rs. 2,917
=========
Gross realized gain...................................... Rs. 282
Gross realized loss...................................... -
---------
Total.................................................... Rs. 282
=========
F-60
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Maturity profile of debt securities
A listing of each category of available for sale debt securities as
of March 31, 2002, by maturity is set out below:
Available for sale
-----------------------
Amortized
Cost Fair value
--------- ----------
(in millions)
Corporate debt securities
Less than one year.......................................Rs. 321 Rs. 316
One to five years........................................ 2,899 2,933
Five to ten years........................................ 2,441 2,418
Greater than ten years................................... 63 77
--------- ----------
Rs. 5,724 Rs. 5,744
--------- ----------
GOI securities
Less than one year....................................... 6,751 6,767
One to five years........................................ 18,479 18,687
Five to ten years........................................ 1,006 1,055
Greater than ten years................................... 2,026 2,260
--------- ----------
Rs.28,262 Rs. 28,769
--------- ----------
Total debt securities....................................Rs.33,986 Rs. 34,513
========= ==========
Credit substitutes
Less than one year....................................... 14,135 14,387
One to five years........................................ 27,396 27,533
Five to ten years........................................ 17,472 17,637
Greater than ten years................................... 704 725
--------- ----------
Total credit substitutes.................................Rs.59,707 Rs. 60,282
========= ==========
9. Repurchase transactions
ICICI has undertaken repurchase and reverse repurchase transactions
in GOI securities. The average level of repurchase transactions
outstanding during the year ended March 31, 2002, was Rs. 1,743 million
(2001: Rs. 420 million). The average level of reverse repurchase
transactions outstanding during the year ended March 31, 2002, was Rs.
1,347 million (2001: Rs. 309 million). As of March 31, 2002, outstanding
repurchase and reverse repurchase transactions reported as trading
liabilities and trading assets respectively, were Rs. 595 million (2001:
Rs. Nil) and Rs. 21,399 million (2001: Rs. Nil) respectively.
10. Investments in affiliates
ICICI Bank
As discussed in Note 2, the Company has accounted for its 46% (2001:
46.4%) interest in ICICI Bank using the equity method. The carrying value
of the investment in ICICI Bank as of March 31, 2002, was Rs. 8,206
million (2001: Rs. 7,562 million). The Company's equity in the income of
ICICI Bank for the year ended March 31, 2002, was Rs. 928 million (2001:
Rs. 814 million). During the year ended March 31, 2002, the Company
received dividends of Rs. 403 million (2001: Rs. 184 million) from ICICI
Bank.
F-61
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
The summarized balance sheets and statements of income of ICICI Bank
are set out below:
Balance sheet As of March 31,
-----------------------
2001 2002
---------- ----------
(in millions)
Cash and cash equivalents......................... Rs. 47,306 Rs. 89,371
Trading assets.................................... 18,725 26,075
Securities........................................ 35,731 180,052
Loans............................................. 93,030 72,474
Other assets...................................... 25,746 36,833
---------- ----------
Total assets...................................... Rs.220,538 Rs.404,805
========== ==========
Deposits.......................................... Rs.164,254 325,221
Trading liabilities............................... 5,958 1,237
Long-term debt.................................... 2,421 5,740
Other liabilities................................. 31,598 54,457
Stockholders' equity.............................. 16,307 18,150
---------- ----------
Total liabilities and stockholders' equity........ Rs.220,538 Rs.404,805
========== ==========
Statement of income Year ended March 31,
-----------------------
2001 2002
---------- ----------
(in millions)
Interest income................................... Rs. 12,406 Rs. 20,837
Interest expense.................................. (8,408) (15,116)
---------- ----------
Net interest income............................... 3,998 5,721
Provision for loan losses......................... (1,082) (1,722)
Non-interest income............................... 1,754 5,213
Non-interest expense.............................. (3,104) (6,260)
Income taxes...................................... (258) (931)
Cumulative effect of accounting change............ - 16
---------- ----------
Net income........................................ Rs. 1,308 Rs. 2,037
Other affiliates
Other affiliates of the Company are Prudential ICICI Management
Company Limited (Pru-ICICI), Prudential ICICI Trust Limited (Pru-Trust),
Tricolor Infotech International Inc. (Tricolor) and TCW/ICICI Investment
Partners LLC (TCW). The Company has accounted for its interest in such
affiliates using the equity method. The carrying value of the investment
in such affiliates as of March 31, 2002, was Rs. 384 million (2001: Rs.
337 million). The Company's equity in the income of such affiliates for
the year ended March 31, 2002, was Rs. 47 million (2001: Rs. 42 million,
2000: Rs. 20 million).
11. Loans
A listing of loans by category is set out below:
As of March 31,
-----------------------
2001 2002
---------- ----------
(in millions)
Project finance(1) (2)........................... Rs.515,971 Rs.416,386
Working capital finance.......................... 44,442 42,225
Lease financing.................................. 61,822 49,865
Consumer loans................................... 27,106 73,013
Other............................................ 12,457 10,346
---------- ----------
Gross loans...................................... 661,798 591,835
Unearned income.................................. (23,365) (20,013)
Security deposits................................ (3,375) (11,574)
---------- ----------
Loans, net of unearned income and security
deposits........................................ 635,058 560,248
Allowances for loan losses........................ (33,035) (36,647)
---------- ----------
Loans, net....................................... Rs.602,023 Rs.523,601
========== ==========
F-62
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
(1) Non-readily marketable privately placed debt instruments are
classified as loans to reflect the substance of such transactions as
substitutes for direct lending (credit substitutes).
(2) Includes Rs. 60,282 million (2001: Rs. 75,496 million) of credit
substitutes classified as loans.
Project finance loans are generally secured by property, plant and
equipment and other tangible assets. Generally, the working capital loans
are secured by a first charge on current assets, principally comprising
inventory and receivables. Additionally, in certain cases ICICI may obtain
additional security for working capital loans through a first or second
charge on property and equipment, pledge of financial assets like
marketable securities and corporate/personal guarantees.
Lease financing
Contractual maturities of ICICI's investment in lease financing and
its components, which are included in loans, are set out below:
As of March 31, 2002
--------------------
(in millions)
Gross finance receivables for the year ending March 31,
2003....................................................... Rs. 10,060
2004....................................................... 6,383
2005....................................................... 6,473
2006....................................................... 6,026
2007....................................................... 4,386
Thereafter................................................. 16,537
----------
Rs. 49,865
Unearned income............................................ (13,959)
Security deposits.......................................... (11,574)
----------
Investment in lease financing.............................. Rs. 24,332
==========
Maturity profile of loans
A maturity profile of gross loans, other than investment in lease
financing, is set out below:
As of March 31,
-----------------------
2001 2002
---------- ----------
(in millions)
Less than one year................................. Rs.176,230 Rs.143,309
One to five years.................................. 271,349 237,025
Greater than five years............................ 152,397 161,636
---------- ----------
Total.............................................. Rs.599,976 Rs.541,970
========== ==========
Restructured loans
The Company classifies a debt restructuring as a troubled debt
restructuring (restructured loan) when it grants a concession, that it
would not otherwise consider, to a borrower in financial difficulties. As
of March 31, 2002, the Company had committed to lend Rs. 18,616 million
(2001: Rs. 750 million) to borrowers who are parties to troubled debt
restructurings.
F-63
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Impaired loans, including restructured loans
A listing of restructured loans is set out below:
As of March 31,
-----------------------
2001 2002
---------- ----------
(in millions)
Project finance................................... Rs. 37,726 Rs. 84,048
Working capital finance........................... 818 5,283
Other............................................. 5,137 5,757
---------- ----------
Restructured loans................................ 43,681 95,088
Allowance for loan losses......................... (11,372) (17,722)
---------- ----------
Restructured loans, net........................... Rs. 32,309 Rs. 77,366
========== ==========
Restructured loans:
With a valuation allowance...................... Rs. 40,196 95,088
Without a valuation allowance................... 3,485 -
---------- ----------
Restructured loans................................ Rs. 43,681 Rs. 95,088
========== ==========
A listing of other impaired loans is set out below:
-----------------------
2001 2002
---------- ----------
(in millions)
Project finance................................... Rs. 39,430 Rs. 48,093
Working capital finance........................... 1,234 1,699
Lease financing................................... 899 731
Consumer loans.................................... 32 190
Other............................................. 149 41
---------- ----------
Other impaired loans.............................. 41,744 50,754
Allowance for loan losses......................... (21,663) (17,567)
---------- ----------
Other impaired loans, net......................... Rs. 20,081 Rs. 33,187
========== ==========
Other impaired loans:
With a valuation allowance...................... Rs. 41,744 50,754
Without a valuation allowance................... - -
---------- ----------
Other impaired loans.............................. Rs. 41,744 Rs. 50,754
========== ==========
During the year ended March 31, 2002, interest income of Rs. 3,257
million (2001: Rs. 1,989 million, 2000: Rs. 1,035 million) was recognized
on impaired loans on a cash basis. Gross impaired loans averaged Rs.
81,051 million during the year ended March 31, 2002 (2001: Rs. 76,642
million).
Concentration of credit risk
Concentration of credit risk exists when changes in economic,
industry or geographic factors affect groups of counterparties whose
aggregate credit exposure is material in relation to ICICI's total credit
exposure. ICICI's portfolio of financial instruments is broadly
diversified along industry, product and geographic lines within India.
F-64
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
12. Allowance for loan losses
Changes in the allowance for loan losses
Movements in the allowance for loan losses are set out below:
Year ended March 31,
-------------------------------------
2000 2001 2002
---------- ---------- ----------
(in millions)
Allowance for loan losses at the
beginning of the year..............Rs. 28,524 Rs. 34,085 Rs. 33,035
Effect of de-consolidation of
subsidiary on allowance for loan
losses............................. - (747) -
Provisions for loan losses, net of
releases of provisions as a result
of cash collections................ 6,363 9,892 9,743
---------- ---------- ----------
34,887 43,230 42,778
Loans charged-off.................... (802) (10,195) (6,131)
---------- ---------- ----------
Allowance for loan losses at the end
of the year.........................Rs. 34,085 Rs. 33,035 Rs 36,647
Until the year ended March 31, 2000, the parent company followed a
policy whereby loan balances were not charged-off against the allowance
for loan losses. This policy was in response to the regulatory environment
governing debt recovery proceedings in India. During the year ended March
31, 2001, changes in the tax laws necessitated that loan balances deemed
unrecoverable be charged-off against the allowance for loan losses.
Accordingly, the parent company charged-off significant loan balances
deemed unrecoverable during the years ended March 31, 2001 and 2002.
13. Securitization activity
ICICI primarily securitizes commercial loans through `pass-through'
securitizations. After the securitization, ICICI generally continues to
maintain customer account relationships and services loans transferred to
the securitization trust. Generally, the securitizations are without
recourse and ICICI does not provide any credit enhancement. In a few
cases, ICICI may enter into derivative transactions such as written put
options and interest rate swaps with the transferees. Generally, ICICI
does not retain any beneficial interests in the assets sold.
During the year ended March 31, 2002, ICICI securitized loans with a
carrying value of Rs. 40,851 million (2001: Rs. 5,511), which resulted in
gains of Rs. 1,079 million (2001: Rs. 434 million). The gains are reported
as a component of gain on sale of loans.
Transfers that do not meet the criteria for a sale under SFAS No.
140, are recorded as secured borrowings with a pledge of collateral. As of
March 31, 2002, ICICI recorded secured borrowings of Rs. 5,787 million
that arise on securitization transaction involving trusts that are not
considered as qualifying special purpose entities under the guidance
provided by SFAS No. 140. Such secured borrowings are reported as a
component of other borrowings.
As discussed above, ICICI has written put options, which require
ICICI to purchase, upon request of the holders, securities issued in
certain securitization transactions. The put options seek to provide
liquidity to holders of such instruments. If exercised, ICICI will be
obligated to purchase the securities at the predetermined exercise price.
All put options were out-of-the-money for the holders.
As of March 31, 2002, ICICI sold loans with a carrying value of Rs.
13,249 million and an aggregate put option exercise price of Rs. 13,108
million. Subsequent to their initial issuance, such options are recorded
at fair values with changes reported in the statement of income.
F-65
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
14. Derivative instruments and hedging activities
ICICI manages its exposures to market rate movements by modifying its
mix of assets and liabilities, either directly or through the use of
derivative financial products including interest rate swaps, cross
currency swaps, equity index futures, equity index options and forward
exchange contracts.
All such freestanding derivatives, whether held for trading or
non-trading purposes, are carried at their fair value as either assets or
liabilities and related gains and losses are included in other
non-interest income. ICICI has not identified any significant derivative
features embedded in other contracts that are not clearly and closely
related to the host contract and meet the definition of a derivative.
Fair values for derivatives are based on quoted market prices, which
take into account current market and contractual prices of the underlying
instrument as well as time value underlying the positions.
All the designated hedges entered into by ICICI qualify as fair value
hedges under SFAS No. 133. There are no cash flow hedges or hedges of net
investments in foreign operations. For fair value hedges, changes in the
fair value of the hedged asset or liability due to the risk being hedged
are recognized in the statement of income along with changes in the fair
value of the derivative. ICICI assesses the effectiveness of the hedge
instrument at inception and continually on a quarterly basis. The
ineffectiveness, to the extent to which offsetting gains or loss are not
achieved, is recorded through the statement of income.
The table below summarizes certain information relating to ICICI's
hedging activities:
As of March 31, 2002
--------------------
(in millions)
Fair value hedges............................................ 1,161
Hedge ineffectiveness recognized in earnings................. 77
15. Property and equipment
A listing of property and equipment by asset category is set out
below:
As of March 31,
-----------------------
2001 2002
---------- ----------
(in millions)
Land.............................................. Rs. 1,342 Rs. 1,336
Buildings......................................... 6,668 7,316
Equipment and furniture........................... 4,330 5,567
Capital work-in-progress.......................... 802 483
Others............................................ 355 490
---------- ----------
Gross value of property and equipment............. 13,497 15,192
Accumulated depreciation.......................... (1,458) (2,243)
---------- ----------
Property and equipment, net....................... Rs. 12,039 Rs. 12,949
========== ==========
As of March 31, 2002, land and buildings include certain assets of
Rs. 397 million (2001: Rs. 541 million), which have not yet been
registered in the Company's name pending regulatory transfer approvals.
F-66
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Effective April 1, 1999, the parent company changed the method of
accounting for depreciation of property and equipment from the
written-down value method to the straight-line method. Under the
written-down value method, depreciation is charged over the reducing
balance of the fixed asset over its estimated useful life whereas under
the straight-line method, the depreciation is charged at a fixed rate on
the original cost of the fixed asset over its estimated useful life. The
new method of depreciation was adopted to provide an improved measure of
the Company's capital investment and is consistent with industry
practices. The new method has been applied prospectively with a cumulative
adjustment for all prior periods.
The effect of the change on the net income for the year ended March
31, 2000, was Rs. 226 million. The cumulative effect of the change
aggregating Rs. 405 million, net of the related income tax effect of Rs.
156 million, to apply retroactively the new method has been included in
the statement of income for the year ended March 31, 2000.
16. Assets held for sale
As of March 31, 2002, assets held for sale include assets of Rs.
2,029 million (2001: Rs. 828 million) acquired through foreclosure of
loans.
17. Intangible assets, net
A listing of intangible assets by category is set out below:
As of March 31,
---------- ----------
2001 2002
---------- ----------
(in millions)
Goodwill ......................................... Rs. 2,325 Rs. 1,862
Accumulated amortization ......................... (613) (54)
---------- ----------
Goodwill, net .................................... 1,712 1,808
---------- ----------
Employee workforce and customer relationships .... 135 --
Accumulated amortization ......................... (20) --
---------- ----------
Other intangible assets, net ..................... 115 --
---------- ----------
Unidentifiable intangible asset .................. -- 1,139
Accumulated amortization ......................... -- (849)
---------- ----------
Unidentifiable intangible asset, net ............. -- 290
---------- ----------
Intangible assets, net ........................... Rs. 1,827 Rs. 2,098
---------- ----------
As more fully discussed in Note 1, ICICI adopted SFAS No. 142 on
April 1, 2001, which resulted in reclassification of existing goodwill and
intangible assets. During the year ended March 31, 2002, the Company
recorded goodwill of Rs. 354 million relating to acquisitions of certain
software services companies. Substantially all goodwill as of March 31,
2002, relates to the software development and services reporting unit of
ICICI. No goodwill impairment loss has been recorded during the year ended
March 31, 2002.
The unidentifiable intangible asset relates to the personal financial
services reporting unit and is amortized over its useful life of five
years. The balance-unamortized asset as of March 31, 2002, will be
amortized during the year ended March 31, 2003.
F-67
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Disclosure of adjusted net income and earnings per share excluding
amortization expense recognized in prior periods related to goodwill and
deferred credit are given below:
Year ended March 31,
-----------------------
2000 2001
---------- ----------
in millions)
Reported net income ............................ Rs. 9,331 Rs. 6,630
Add: Goodwill amortization ..................... -- 72
Less: Deferred credit amortization ............. 253 253
---------- ----------
Adjusted net income ............................ Rs. 9,078 Rs. 6,449
========== ==========
Year ended March 31,
---------------------------------------------------
2000 2001
------------------------- -----------------------
Fully Fully
Basic diluted Basic Diluted
----------- ---------- ---------- ----------
Reported earnings per share ............ Rs. 14.45 Rs. 13.77 Rs. 8.44 Rs. 8.41
Add: Goodwill amortization ............. -- -- 0.09 0.09
Less: Deferred credit amortization ..... 0.39 0.36 0.32 0.32
----------- ---------- ---------- ----------
Adjusted earnings per share ............ Rs. 14.06 Rs. 13.40 Rs. 8.21 Rs. 8.18
==========- ========== ========== ==========
18. Other assets
Other assets consist of the following:
As of March 31,
-------------------------
2001 2002
----------- ----------
(in millions)
Debtors ............................ Rs. 1,911 Rs. 1,398
Staff advances ..................... 762 949
Advance taxes ...................... 14,585 16,568
Security deposits .................. 937 1,004
Advances for purchases of securities 2,766 3,339
Prepaid expenses ................... 198 164
Derivatives ........................ -- 896
Recoverable from Indian Government . 1,379 1,111
Others ............................. 2,118 2,201
----------- ----------
Total .............................. Rs. 24,656 Rs. 27,630
----------- ----------
Recoverable from Indian Government represents foreign exchange
fluctuations on specific foreign currency long term debts, guaranteed by
and recoverable from the Indian Government.
19. Deposits
Deposits represent interest-bearing time deposits. Contractual
maturities of deposits as of March 31, 2002, are set out below:
Deposits maturing during the year ending March 31,
2003 Rs. 1,224
2004 1,352
2005 2,198
2006 692
2007 1,834
Thereafter 80
----------
Total deposits Rs. 7,380
==========
F-68
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
As of March 31, 2002, the aggregate of deposits with individual
balances greater than Rs. 5 million was Rs. 1,922 million (2001: Rs. 3,306
million).
20. Short-term borrowings
Short-term borrowings represent non-trading borrowings with an
original maturity of one year or less.
21. Long-term debt and redeemable preferred stock
Long-term debt
Long-term debt represents debt with an original maturity of greater
than one year. Maturity distribution is based on contractual maturities or
earlier dates at which debt is callable at the option of the holder. A
significant portion of the long-term debt bears a fixed rate of interest.
Interest rates on floating-rate debt are generally linked to the London
Inter-bank Offer Rate or similar money market rates. The segregation
between fixed-rate and floating-rate obligations is based on the
contractual terms.
A listing of long-term debt as of March 31, 2002, by maturity and
interest rate profile is set out below:
Various Various
fixed-rate floating-rate
obligations obligations Total
----------- -------------- ------------
(in millions)
Long-term debt maturing during
the year ending March 31,
2003 ........................................... Rs. 98,060 Rs. 21,201 Rs. 119,261
2004 ........................................... 77,451 9,892 87,343
2005 ........................................... 75,616 4,234 79,850
2006 ........................................... 61,630 7,309 68,939
2007 ........................................... 39,442 6,332 45,774
Thereafter ..................................... 98,560 14,118 112,678
----------- -------------- -----------
Total ..........................................Rs. 450,759 Rs. 63,086 Rs. 513,845
Less: Unamortized debt issue costs ............. (2,422)
-----------
Total .......................................... Rs. 511,423
===========
All long-term debt is unsecured. Debt aggregating Rs. 40,439 million
(2001: Rs. 42,376 million) is guaranteed by the GOI.
Long-term debt is denominated in various currencies. As of March 31,
2002, long-term debt comprises Indian rupee debt of Rs. 438,529 million
(2001: Rs. 404,017 million) and foreign currency debt of Rs. 72,894
million (2001: Rs. 88,863 million).
F-69
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Indian rupee debt
A listing of the major categories of Indian rupee debt is set out
below:
As of March 31,
----------------------------------------------------------------------------
2001 2002
------------------------- ------------------------------------------------
Category Weighted Weighted
average average Average
interest interest residual
Amount rate Amount rate Range maturity
----------- ---------- ----------- ----------- --------- ---------
(in millions)
Bonds issued to institutional
/individual investors Rs. 374,629 12.9% Rs. 413,353 11.9% 8.4-16.5% 3.4 years
Bonds eligible for statutory
reserve requirements(1) 21,653 11.1% 18,240 11.3% 7.8-12% 6.8 years
Borrowings from GOI(2) 7,735 12.4% 6,936 10.3% 11-16% 4.9 years
----------- ------ ----------- ------ ---------
Total Rs. 404,017 12.8% Rs. 438,529 11.9% 3.5 years
=========== ====== =========== ====== =========
(1) Banks in India are required to mandatorily maintain a specified
percentage of certain liabilities as cash or in approved securities.
These bonds issued by ICICI are approved securities under the rules.
(2) Includes interest-free borrowing from the GOI aggregating Rs. 255 million
(2001: Rs. 220 million). The borrowing was initially recorded at its fair
value of Rs. 100 million based on the prevailing interest rate of 16% for
borrowings of a similar term and risk. Interest is being imputed for each
reporting period using this rate.
Foreign currency debt
A listing of the major categories of foreign currency debt is set out
below:
As of March 31,
----------------------------------------------------------------------------
2001 2002
------------------------- ------------------------------------------------
Category Weighted Weighted
average average Average
interest interest residual
Amount rate Amount rate Range maturity
----------- ---------- ----------- ----------- --------- ---------
(in millions)
Borrowings from international
development agencies (1)(2)(3)... Rs. 21,473 5.6% Rs. 25,224 3.0% 0-6.8% 13.6 years
Other borrowings from international
markets.......................... 67,390 6.5% 47,670 3.8% 2- 9.1% 2.1 years
----------- ---------- ---------- ----------- ----------
Total.............................. Rs. 88,863 6.3% Rs. 72,894 3.5% 6.08 years
=========== ========== ========== =========== ==========
(1) These borrowings have been raised under specific lines of credit from
international development agencies. The borrowings have lender-imposed
restrictions that limit the use of the funds for specified purposes,
which include lending to specified sectors.
(2) As of March 31, 2002, under these lines of credit, the Company has an
unutilized option to borrow Rs. 5,349 million as per an agreed schedule
over a period of five years at various interest rates.
(3) Exchange rate fluctuations on certain borrowings are guaranteed by the
Government of India.
Redeemable preferred stock
ICICI issued preferred stock with a face value of Rs. 3,500 million
during the year ended March 31, 1998 under the scheme of business
combination with ITC Classic Finance Limited. This preferred stock bears a
dividend yield of 0.001% and is redeemable at face value after 20 years.
The preferred stock was initially recorded at its fair value of Rs. 466
million. Subsequently, interest is being imputed for each reporting
period. The imputed interest rate of 10.6% was determined based on the
then prevailing interest rate for GOI securities of similar maturity. The
carrying amount of this redeemable preferred stock as of March 31, 2002 is
Rs. 772 million (2001: Rs. 698 million).
F-70
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
22. Other liabilities
Interest accrued
Other liabilities as of March 31, 2002, include Rs. 21,435 million
(2001: Rs. 21,775 million) of interest accrued but not due on borrowings.
Borrowings from Kreditanstalt fur Wiederaufbau
The Company has borrowings from Kreditanstalt fur Wiederaufbau (KfW),
an international development agency, under specific lines of credit. The
terms of the borrowings provide for limitations on usage, whereby funds
can be used only for specified purposes. The borrowings are guaranteed by
the GOI.
With respect to certain borrowings, the terms of the borrowing
agreement provide that a portion of the interest payable on the borrowing
shall be paid to the GOI instead of the lender. KfW and the GOI have
entered into an agreement whereby the interest paid to the GOI is repaid
to the Company either in the form of a grant or a loan. While the loan is
repayable as per a specified schedule, the grants do not have a repayment
schedule. The interest amounts received from the GOI bear limitations on
usage and are required to be advanced as loans/contributions for specified
purposes. Similarly, with respect to certain other borrowings from KfW,
the terms of the borrowing agreement provide that a portion of the
interest payable on the borrowings shall be retained by ICICI and used to
be advanced as loans/contributions for specified purposes.
The Company periodically advances loans/contributions for specified
purposes out of these funds and reports such utilizations to the GOI/KfW.
However, no time schedule has been specified for the usage of the funds.
In the event that the funds are not utilized for specified purposes, the
GOI/KfW have the right to require repayment of the grant/retained
interest. Additionally, KfW can modify the scope of the specified
purposes. The Company retains the income derived from the loans made out
of the funds. Similarly, it bears the risk of default on the loans.
The interest repaid by the GOI in the form of grants and the interest
retained under the agreement with KfW do not represent contributions as
they specify donor-imposed conditions, the breach of which, would enable
the donor to demand repayment of the grants/retained interest.
Accordingly, the grants/retained interest have been reported as
liabilities.
Other liabilities as of March 31, 2002, include grants of Rs. 2,689
million (2001: Rs. 1,649 million) and retained interest of Rs. 439 million
(2001: Rs. 361 million).
23. Common stock
ICICI presently has only one class of common stock. In the event of
liquidation of the affairs of the Company, all preferential amounts, if
any, shall be discharged by the Company. The remaining assets of the
Company, after such discharge, shall be distributed to the holders of
common stock in proportion to the common stock held by shareholders.
F-71
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
During the year ended March 31, 2000, ICICI issued 32 million ADS
representing 161 million common shares. The common stock represented by
the ADS is similar to other common stock, except for voting rights. While
every holder of common stock, as reflected in the records of the Company,
has one vote in respect of each share held, the ADS holders have no voting
rights due to a condition contained in the approval of the offering from
the Ministry of Finance of India. Under the depositary agreement, the
depositary of the ADS will vote as directed by the Board of Directors of
ICICI. Upon consummation of the proposed business combination with ICICI
Bank discussed in Note 2, each holder of common stock will receive one
equity share of ICICI Bank for two equity shares in ICICI.
24. Retained earnings and dividends
Retained earnings as of March 31, 2002, include profits aggregating
Rs. 12,153 million (2001: Rs. 11,875 million), which are not distributable
as dividends under Indian company law. These relate to profits on
redemption of preferred stock and requirements regarding earmarking a part
of profits under banking laws.
Retained earnings as of March 31, 2002, include reserves of Rs.
10,866 million (2001: Rs. 9,208 million) earmarked under Indian tax laws
to avail tax benefits and which are not distributable as dividends. Any
transfer of balances from such earmarked reserves would result in
withdrawal of the tax exemption on the transferred amounts.
Indian law mandates that any dividend, exceeding 10% of the common
stock, can be declared out of distributable profits only after the
transfer of upto 10% of net income computed in accordance with current
regulations, to a general reserve. Should the Company declare and pay
dividends, such dividends will be paid in Indian rupees to each holder of
common stock in proportion to the number of shares held to the total
common stock outstanding as on that date. Issuances of common stock during
a period would be entitled to dividend on a pro rata basis based on the
date of issuance. Additionally, the remittance of dividends outside India
is governed by Indian statutes on foreign exchange transactions. Dividend
payments are also subject to dividend taxes applicable at the time of the
declaration.
25. Earnings per share
A computation of the earnings per share is set out below:
Year ended March 31,
-------------------------------------------------------------------------
2000 2001 2002
---------------------- ----------------------- -----------------------
(in millions, except earnings per share data)
Fully Fully Fully
Basic diluted Basic diluted Basic Diluted
--------- ---------- ---------- ---------- ---------- ----------
Earnings
Net income before cumulative effect of
accounting change (before dilutive
impact) ................................ Rs. 9,082 Rs. 9,082 Rs. 6,630 Rs. 6,630 Rs. 95 Rs. 95
Interest on convertible debt instruments.. - 132 - - - -
Contingent issuances of subsidiaries/
affiliates.............................. - - - (25) - -
--------- ---------- ---------- ---------- ---------- ----------
Net income before cumulative effect of
accounting change (adjusted for full
dilution) .............................. 9,082 9,214 6,630 6,605 95 95
Cumulative effect of accounting change,
net of tax ............................ 249 249 - - 1,265 1,265
--------- ---------- ---------- ---------- ---------- ----------
Net income (adjusted for full dilution)... 9,331 9,463 6,630 6,605 1,360 1,360
========= ========== ========== ========== ========== ==========
Common stock
Weighted-average common stock
outstanding ............................ 646 646 785 785 785 785
Dilutive effect of convertible debt
instruments - 41 - - - -
Dilutive effect of employee stock
options ................................ - - - - - -
--------- ---------- ---------- ---------- ---------- ----------
Total .................................... 646 687 785 785 785 785
========= ========== ========== ========== ========== ==========
F-72
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Earnings per share
Net income before cumulative effect of
accounting change ...................... 14.06 13.41 8.44 8.41 0.12 0.12
Cumulative effect of accounting change ... 0.39 0.36 - - 1.61 1.61
--------- ---------- ---------- ---------- ---------- ----------
Net income ............................... Rs. 14.45 Rs. 13.77 Rs. 8.44 Rs. 8.41 Rs. 1.73 Rs. 1.73
========= ========== ========== ========== ========== ==========
For the purpose of calculating diluted earnings per share, the net
income is adjusted for interest (after tax) on convertible instruments
only for the year ended March 31, 2000 as all convertible bonds were
converted/redeemed during the year ended March 31, 2001.
For the purpose of determining the impact of dilution, it is assumed
that convertible instruments were converted to common stock at the
beginning of the year, at prices which are most advantageous to the
holders of the instruments. Shares assumed to be issued have been weighted
for the period the convertible instruments were outstanding. All series of
convertible instruments were dilutive.
Options to purchase 2,323,750 equity shares, 2,922,500 equity shares
and 8,391,250 equity shares granted to employees at a weighted average
exercise price of Rs. 85.5, Rs. 133.4 and Rs. 100.8 were outstanding
during the year ended March 31, 2000, 2001 and 2002 respectively, but were
not included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of
the equity shares during the period.
26. Segmental disclosures and related information
Segmental disclosures
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for the reporting of information about
operating segments. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
regularly evaluated by the Chief Operating Decision Maker (CODM) in
deciding how to allocate resources and in assessing performance. The
varied financial services activities of ICICI are carried out by a number
of legal entities. Thus, while the parent company focuses primarily on
medium-term and long-term project financing, other activities such as
commercial banking, investment banking, broking, venture capital financing
and insurance are conducted by subsidiaries/affiliates. Each
subsidiary/affiliate focuses on specific activities and represents an
operating segment for ICICI.
The project-financing segment provides medium-term and long-term
project and infrastructure financing, securitization and factoring and
lease financing. The commercial banking segment provides working capital
finance and foreign exchange services to clients. Further, it provides
deposit and loan products to retail customers. The investment-banking
segment deals in the debt, equity and money markets and provides corporate
advisory products such as mergers and acquisition advice, loan syndication
advice and issue management services. The life insurance segment provides
life insurance products to individuals. The personal financial services
segment provides consumer loan products such as automobile loans and home
mortgages to individuals.
The CODM evaluates the Company's performance and allocates resources
based on an analysis of various performances indicators for each of the
above reportable segments. These indicators by reportable segment are
given below:
Project financing, commercial banking and investment banking:
Components of profit and loss;
Life insurance: Total income and net income;
F-73
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Personal financial services: Total assets
As discussed in Note 2, the results of ICICI Bank, which represents
the commercial banking segment, are reported by the equity method with
effect from April 1, 2000. However, for management reporting, the entire
results of ICICI Bank continue to be reported as if the business were a
consolidated entity. The segment information presented is consistent with
the management reporting.
F-74
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
The profit and loss of reportable segments is set out below:
Project financing Commercial banking Investment banking
------------------------------ ------------------------------ ----------------------------
Year ended March 31, Year ended March 31, Year ended March 31,
------------------------------ ------------------------------ ----------------------------
2000 2001 2002 2000 2001 2002 2000 2001 2002
--------- -------- -------- -------- ---------- --------- -------- -------- --------
(in millions)
Income from external customers
Interest income ............... Rs.69,641 Rs.76,243 Rs.70,143 Rs.8,434 Rs.12,206 Rs.19,274 Rs.2,176 Rs.1,888 Rs.1,411
Other income .................. 6,244 6,602 3,275 1,718 1,682 5,196 722 943 2,100
Income from other operating
segments
Interest income ............... 498 833 2,876 -- 200 1,563 181 142 231
Other income .................. 118 550 834 41 72 26 36 11 64
--------- -------- -------- -------- ---------- --------- -------- -------- --------
Total income .................. 76,501 84,228 77,128 10,193 14,160 26,059 3,115 2,984 3,806
Interest expense .............. 59,840 65,973 66,353 6,656 8,408 15,116 1,467 1,633 1,277
Depreciation .................. 330 469 623 201 352 581 18 15 15
Provision for loan losses ..... 5,847 9,840 9,603 427 1,082 1,722 76 13 8
Other expenses ................ 3,710 2,887 2,596 1,128 2,752 5,679 383 447 538
--------- -------- -------- -------- ---------- --------- -------- -------- --------
Income before taxes ........... 6,774 5,059 (2,047) 1,781 1,566 2,961 1,171 876 1,968
Income tax expense/
(benefit) ................... 890 (520) (346) 379 258 934 401 370 692
Cumulative effect of
accounting changes,
net of tax ................. 249 -- 1,265 -- -- 10 -- -- --
--------- -------- --------- -------- --------- --------- -------- -------- --------
Net income .................... Rs.6,133 Rs.5,579 Rs. (436) Rs.1,402 Rs. 1,308 Rs. 2,037 Rs. 770 Rs. 506 Rs.1,276
========= ======== ========= ======== ========= ========= ======== ======== ========
A listing of certain assets of reportable segments is set out below:
Project financing Commercial banking Investment banking
--------------------- -------------------- ------------------
As of March 31, 2001 2002 2001 2002 2001 2002
--------- ---------- --------- --------- ------- -------
(in millions)
Property and equipment ................................. Rs. 9,649 Rs. 10,406 Rs. 4,059 Rs. 5,130 Rs. 123 Rs. 116
Investments in affiliates .............................. 7,868 8,456 - - - -
Transactions between reporting segments are at arms-length and are
accounted similar to transactions with external parties.
A reconciliation between the segment income and consolidated totals
of ICICI is set out below:
Total income Income before taxes and Net income
accounting changes
Year ended March 31, Year ended March 31, Year ended March 31,
----------------------------------- ---------------------------------- --------------------------------
2000 2001 2002 2000 2001 2002 2000 2001 2002
----------- ---------- ---------- ---------- --------- ---------- --------- --------- ---------
(in millions)
Project financing ....... Rs. 76,501 Rs. 84,228 Rs. 77,128 Rs. 6,774 Rs. 5,059 Rs. (2,047) Rs. 6,133 Rs. 5,579 Rs. (436)
Commercial banking ...... 10,193 14,160 26,059 1,781 1,566 2,961 1,402 1,308 2,037
Investment banking ...... 3,115 2,984 3,806 1,171 876 1,968 770 506 1,276
Life insurance(1) ....... - 126 1,414 - (205) (791) - (137) (705)
Other operating segments 1,538 4,715 9,505 783 295 (106) 420 139 (95)
Elimination of
commercial banking .... - (14,160) (26,059) - (1,566) (2,961) - (1,308) (2,037)
Other reconciling
adjustments ............. (734) (2,602) (3,366) 606 724 1,200 606 543 1,320
----------- ---------- ---------- ---------- --------- ---------- --------- --------- ---------
Consolidated total ...... Rs. 90,613 Rs. 89,451 Rs. 88,487 Rs. 11,115 Rs. 6,749 Rs. 224 Rs. 9,331 Rs. 6,630 Rs. 1,360
=========== ========== ========== ========== ========= ========== ========= ========= =========
(1) Represents information for the segment reported to the CODM.
F-75
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
A reconciliation between the segment assets and consolidated total
assets of ICICI is set out below:
As of March 31,
------------------------------
2001 2002
----------- -----------
(in millions)
Project financing ............... Rs. 685,971 Rs. 643,686
Commercial banking .............. 220,008 404,802
Investment banking .............. 17,619 22,726
Personal financial services ..... 27,106 75,072
Life insurance .................. 1,559 2,892
Other operating segments ........ 12,919 14,060
Elimination of commercial banking (220,008) (404,802)
Other eliminations .............. (4,729) (11,085)
----------- -----------
Consolidated total assets ....... Rs. 740,445 Rs. 747,351
=========== ===========
Geographic distribution
The business operations of ICICI are largely concentrated in India.
Activities outside India are currently restricted to resource mobilization
in the international markets and operations of certain software
development and services subsidiaries in the United States.
Major customers
ICICI provides banking and financial services to a wide base of
customers. There is no major customer contributing more than 10% of total
income.
27. Employee benefits
Gratuity
In accordance with Indian regulations, ICICI provides for gratuity, a
defined benefit retirement plan covering all employees. The plan provides
a lump sum payment to vested employees at retirement or termination of
employment based on the respective employee's salary and the years of
employment with ICICI. The gratuity benefit provided by ICICI to its
employees is equal to or greater than the statutory minimum.
In respect of the parent company, the gratuity benefit is provided to
the employees through a fund set-up by ICICI. ICICI is responsible for
settling the gratuity obligation through contributions to the fund. The
plan is fully funded.
In respect of the remaining entities within the group, the gratuity
benefit is provided through annual contributions to a fund administered
and managed by the Life Insurance Corporation of India (LIC). Under this
scheme, the settlement obligation remains with ICICI, although the LIC
administers the scheme and determines the contribution premium required to
be paid by ICICI.
The following table sets forth the funded status of the plans and the
amounts recognized in the financial statements:
As of March 31,
--------------------------------
2001 2002
----------- ------------
(in millions)
Change in benefit obligations
Projected benefit obligations at
beginning of the year .............. Rs. 146 Rs. 207
Divestitures ......................... (12) -
Service cost ......................... 12 30
Interest cost ........................ 16 25
Expected benefits payments ........... (6) (14)
Actuarial (gain)/loss on obligations.. 51 18
----------- ------------
Projected benefit obligations at the
end of the year .................... 207 266
F-76
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
As of March 31,
----------------------------
2001 2002
-------- ------
(in millions)
Change in plan assets
Fair value of plan assets at
beginning of the year .............. 160 213
Divestitures ......................... (17) -
Expected return on plan assets ....... 16 26
Employer contributions ............... 59 30
Actual benefits paid ................. (16) (16)
Actuarial (gain)/loss ................ 11 (5)
------ ------
Plan assets at the end of the year ... 213 248
------ ------
Funded status ........................ 6 (18)
Unrecognized actuarial loss .......... 66 86
Unrecognized transitional obligation.. (21) (19)
Unrecognized prior service cost ...... 10 9
------ ------
Net prepaid gratuity cost ............ Rs. 61 Rs. 58
====== ======
The components of the net gratuity cost are set out below:
Year ended March 31,
-----------------------------
2000 2001 2002
------- ------- -------
(in millions)
Service cost ......................... Rs. 17 Rs. 12 Rs. 30
Interest cost ........................ 19 16 25
Expected return on assets ............ (23) (16) (29)
Amortization of transition asset/
liability........................... (1) (1) (1)
Amortization of prior service cost.... - 1 1
Actuarial (gain)/loss................. (1) - 2
------- ------- -------
Net gratuity cost .................... Rs. 11 Rs. 12 Rs. 28
======= ======= =======
The actuarial assumptions used in accounting for the gratuity plan
are given below:
As of March 31,
------------------
2001 2002
----- -----
Discount rate .................................... 11.0% 10.0%
Rate of increase in the compensation levels ...... 10.0% 9.0%
Rate of return on plan assets..................... 10.5% 9.5%
As of March 31, 2002, of the total plan assets, Rs. 3 million (2001:
Rs. 8 million) has been invested in debt securities of the parent company.
Superannuation
The permanent employees of ICICI are entitled to receive retirement
benefits under the superannuation scheme operated by ICICI. Superannuation
is a defined contribution plan under which ICICI contributes annually a
sum equivalent to 15% of the employee's eligible annual salary to the fund
manager, LIC, which undertakes to pay the lumpsum and annuity benefit
payments pursuant to the scheme. ICICI contributed Rs. 50 million to the
superannuation plan for the year ended March 31, 2002 (2001: Rs. 51
million, 2000: Rs. 62 million).
F-77
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Provident fund
In accordance with Indian regulations, all employees of ICICI are
entitled to receive benefits under the provident fund plan through a
defined contribution plan in which both the employee and ICICI contribute
monthly at a determined rate. These contributions are made to a fund
set-up by ICICI 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 is contributed by ICICI and
charged to the statement of income. ICICI contributed Rs. 89 million to
the provident fund plan for the year ended March 31, 2002 (2001: Rs. 55
million, 2000: Rs. 52 million).
28. Voluntary retirement scheme
During the year ended March 31, 2000, ICICI terminated the employment
of 223 employees through a Voluntary Retirement Scheme (Scheme). The
Scheme covered several levels of employees, who met specific conditions
relating to age and period of employment with ICICI. Costs of employee
termination under the Scheme aggregating Rs. 232 million have been
expensed as employee costs in the statement of income for the year ended
March 31, 2000.
29. Employee Stock Option Plan
ICICI Limited
In August 1999, ICICI Limited approved an Employee Stock Option Plan
(ICICI Plan). Under the ICICI Plan, ICICI is authorized to issue upto
39.27 million equity shares to eligible employees. Eligible employees are
granted an option to purchase shares subject to vesting and performance
conditions. The options vest in a graded manner over 3 years with 20%, 30%
and 50% of the options vesting at the end of each year. In the event that
an employee does not meet the performance condition specified for an
individual year, the options vesting during that year would be forfeited.
The options can be exercised within 10 years from the date of the grant.
Due to the performance condition, the ICICI Plan was initially
accounted as a variable plan. During the year ended March 31, 2000, ICICI
Limited recorded compensation cost of Rs. 97 million based on the excess
of the quoted market price as of March 31, 2000, over the exercise price.
The compensation cost is amortized over the vesting period. In April 2000,
the ICICI Plan was modified to eliminate the performance condition. The
date of modification qualified as the measurement date to record
compensation cost.
Subsequent awards, during the year ended March 31, 2001 and March 31,
2002, qualify as fixed awards and ICICI has not recorded any compensation
cost on these awards as the exercise price was equal to the quoted market
price of underlying equity shares on the grant date.
Compensation expense under the ICICI Plan for the year ended March
31, 2002 is Rs. 26 million (2001: Rs.37 million, 2000: Rs.27 million).
F-78
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Stock option activity under the above stock option plan is set out below:
Year ended March 31, 2000
---------------------------------------------------------------------
ICICI Limited
-------------------------------
Range of
exercise Weighted average Weighted average
Option prices and exercise price remaining
shares grant date and grant date contractual life
outstanding fair values fair values (months)
----------- ----------- ---------------- -----------------
Outstanding at the beginning
of the year............... - Rs. - Rs. -
Granted during the year..... 2,323,750 85.5 85.5 112
Forfeited during the year... - - - -
Exercised during the year... - - - -
---------
Outstanding at the end of
the year.................. 2,323,750 Rs. 85.5 Rs. 85.5 112
=========
Exercisable at the end of
the year.................. - - - -
Year ended March 31, 2001
---------------------------------------------------------------------
ICICI Limited
-------------------------------
Range of
exercise Weighted average Weighted average
Option prices and exercise price remaining
shares grant date and grant date contractual life
outstanding fair values fair values (months)
----------- ----------- ---------------- -----------------
Outstanding at the beginning
of the year............... 2,323,750 Rs. 85.5 Rs. 85.5 112
Granted during the year..... 2,922,500 133.4 133.4 108
Forfeited during the year... (120,400) 85.5 85.5 -
Exercised during the year... (32,500) 85.5 85.5 -
Outstanding at the end of
the year.................. 5,093,350 Rs. 85.5-133.4 Rs. 113.0 109
---------
Exercisable at the end of
the year.................. 462,350 Rs. 85.5 Rs. 85.5 -
=========
Year ended March 31, 2002
--------------------------------------------------------------------
ICICI Limited
-------------------------------
Range of
exercise Weighted average Weighted average
Option prices and exercise price remaining
shares grant date and grant date contractual life
outstanding fair values fair values (months)
----------- ----------- ---------------- ----------------
Outstanding at the beginning
of the year............... 5,093,350 Rs. 85.5-133.4 Rs. 113.0 109
Granted during the year..... 9,775,000 52.5-82.0 67.2 116
Forfeited during the year... (835,350) 82.0-133.4 109.2 -
Exercised during the year... (1,400) 85.5 85.5 -
----------
Outstanding at the end of
the year.................. 14,031,600 Rs. 52.5-133.4 Rs. 81.3 114
==========
Exercisable at the end of
the year.................. 1,748,600 Rs. 85.5-133.4 102.8 -
F-79
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
ICICI Infotech
In April 2000, ICICI Infotech approved an Employee Stock Option Plan
(Infotech Plan). Under the Infotech Plan, ICICI Infotech is authorized to
issue up to 12 million equity shares to its employees and employees of the
parent company. Eligible employees are granted an option to purchase
shares subject to vesting conditions. The options vest in a graded manner
over 3 years with 20%, 30% and 50% of the options vesting at the end of
each year. The options can be exercised within 10 years from the date of
the grant.
During the year ended March 31, 2001, ICICI has not recorded any
compensation cost as the exercise price was equal to the fair value of the
underlying equity shares on the grant date. As shares of ICICI Infotech
are not quoted on exchanges, the fair value represents management's best
estimates considering all available factors.
Stock option activity under the above stock option plan is set out below:
Year ended March 31, 2001
--------------------------------------------------------------------
ICICI Infotech
-------------------------------
Range of
exercise Weighted average Weighted average
Option prices and exercise price remaining
shares grant date and grant date contractual life
outstanding fair values fair values (months)
----------- ----------- ---------------- ----------------
Outstanding at the beginning
of the year............... - Rs. - Rs. - -
Granted during the year..... 2,344,800 37.5 37.5 108
Forfeited during the year... (103,400) 37.5 - -
Exercised during the year - - - -
=========
Outstanding at the end of
the year.................. 2,241,400 Rs. 37.5 Rs. 37.5 108
---------
Exercisable at the end of
the year.................. - - - -
Year ended March 31, 2002
--------------------------------------------------------------------
ICICI Infotech
-------------------------------
Range of
exercise Weighted average Weighted average
Option prices and exercise price remaining
shares grant date and grant date contractual life
outstanding fair values fair values (months)
----------- ----------- ---------------- ----------------
Outstanding at the beginning
of the year............... 2,241,400 Rs. 37.5 Rs. 37.5 108
Granted during the year..... 1,974,800 68.0 68.0 99
Forfeited during the year... (342,960) 37.5-68.0 42.0 -
Exercised during the year... (10,220) 37.5 37.5 -
----------
Outstanding at the end of
the year.................. 3,863,020 Rs. 37.5-68.0 Rs. 52.7 104
=========
Exercisable at the end of
the year................. 369,448 Rs. 37.5 Rs. .37.5 -
ICICI Venture
In July 2000, ICICI Venture, a consolidated subsidiary, approved an
Employee Stock Option Plan (Venture Plan). As of March 31, 2001, 78,900
options with an exercise price of Rs. 835 per share were outstanding.
ICICI did not record compensation cost, as the exercise price was equal to
the fair value of the underlying equity shares on the grant date. During
the year ended March 31, 2002, the Venture Plan was discontinued and all
the options outstanding were voluntarily forfeited by the employees. ICICI
does not intend to replace such cancelled options.
F-80
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Pro forma disclosure
The Company has adopted the pro forma disclosure provisions of SFAS
No. 123. Had compensation cost been determined in a manner consistent with
the fair value approach described in SFAS No. 123, the Company's net income
and earnings per share as reported would have changed to the amounts
indicated below:
Year ended March 31,
------------------------------
2000 2001 2002
---- ---- ----
Net income (in millions)
As reported ........................... Rs. 9,331 Rs. 6,630 Rs. 1,360
Adjusted .............................. 9,335 6,539 1,328
Earnings per share: Basic (in Rs.)
As reported ........................... 14.45 8.44 1.73
Adjusted .............................. 14.46 8.33 1.69
Earnings per share: Diluted (in Rs.)
As reported ........................... 13.77 8.41 1.73
Adjusted .............................. 13.77 8.29 1.69
The fair value of the options is estimated on the date of the grant
using the Black-Scholes options pricing model, with the following
assumptions:
ICICI Limited ICICI Infotech
------------- --------------
Dividend yield ...................... 5.5% 2.75%
Expected life ....................... 10 years 10 years
Risk free interest rate ............. 7.4% 7.4%
Volatility .......................... 55% 0%
30. Income taxes
Components of deferred tax balances
The tax effects of significant temporary differences are reflected
through deferred tax assets/liabilities, which are included in the balance
sheet of ICICI.
The components of the deferred tax balances are set out below:
As of March 31,
----------------------------
2001 2002
----------- -----------
(in millions)
Deferred tax assets
Allowance for loan losses .............................. Rs. 10,420 Rs. 12,263
Available for sale securities .......................... 2,633 2,120
Investments in trading securities ...................... 36 176
Unearned income ........................................ 1,050 1,264
Capital loss carryforward .............................. 53 31
Business loss carryforward ............................. 202 250
Minimum alternate tax credit carryforward .............. 207 -
Other .................................................. 470 734
---------- ----------
15,071 16,838
Less valuation allowance ............................... (97) (226)
---------- ----------
Total deferred tax asset ............................... Rs. 14,974 Rs. 16,612
========== ==========
Deferred tax liabilities
Property and equipment ................................. (10,334) (9,416)
Undistributed earnings of subsidiary and affiliates .... (732) (875)
Other .................................................. (127) (184)
---------- ----------
Total deferred tax liability ........................... (11,193) (10,475)
---------- ----------
Net deferred tax asset/(liability) ..................... Rs. 3,781 Rs. 6,137
========== ==========
F-81
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized net of the existing valuation
allowances. The ultimate realization of the deferred tax asset is dependent
on the generation of future taxable income during the periods in which the
temporary differences become deductible. Management considers the scheduled
reversal of the projected future taxable income, and tax planning
strategies in making this assessment. Based on the level of historical
taxable income and projections for future taxable incomes over the periods
in which the deferred tax assets are deductible, management believes that
it is more likely than not that the Company will realize the benefits of
those deductible differences, net of existing valuation allowance. The
amount of deferred tax assets considered realizable, however could be
reduced in the near term if estimates of future taxable income are reduced.
As of March 31, 2002, ICICI has a deferred tax asset for business loss
carried forward of Rs. 751 million, which will expire over the period to
March 31, 2009 to 2010. In addition, carry forward business loss of Rs. 302
million pertaining to ICICI's foreign subsidiary will expire in the year
2022.
Reconciliation of tax rates
The following is the reconciliation of expected income taxes at
statutory income tax rate to income tax expense as reported. Indian
statutory income tax rates are subject to change each year as part of the
fiscal policy measures enacted in April or May each year. The rates used in
the table below are enacted tax rates:
Year ended March 31,
---------------------------------------
2000 2001 2002
---- ---- ----
(in millions)
Income before income taxes .................................... Rs. 11,115 Rs. 6,749 Rs. 224
Statutory tax rate ............................................ 38.5% 39.55% 35.70%
Income tax expense at the statutory tax rate .................. 4,279 2,669 80
Increases/(reductions) in taxes on account of:
Special tax deductions available to financial institutions .... (1,218) (542) (333)
Exempt interest and dividend income ........................... (1,625) (525) (800)
Income charged at rates other than statutory tax rate ......... (239) (974) 181
Changes in the statutory tax rate ............................. 16 (192) 360
Expenses disallowed for tax purposes .......................... 419 179 252
Tax on undistributed earnings of subsidiaries ................. - 227 234
Change in valuation allowance ................................. - 97 129
Minority interest ............................................. 139 (13) (104)
Tax payable in respect of prior year tax assessments .......... - - 175
Other ......................................................... 262 (807) (45)
---------- ---------- ----------
Income tax expense reported ................................... Rs. 2,033 Rs. 119 Rs. 129
========== ========== ==========
Components of income tax expense from continuing operations
The components of income tax expense/(benefit) from continuing
operations are set out below:
Year ended March 31,
---------------------------------------
2000 2001 2002
---------- ---------- ----------
(in millions)
Current ..................................... Rs. 2,136 Rs. 4,458 Rs 3,477
Deferred .................................... (103) (4,339) (3,348)
---------- ---------- ----------
Income tax expense reported ................. Rs. 2,033 Rs. 119 Rs 129
========== ========== ==========
F-82
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Allocation of income taxes
The total income tax expense/(benefit) was recorded as follows:
Year ended March 31,
----------------------------------------
2000 2001 2002
---- ---- ----
(in millions)
Income from continuing operations ........................................ Rs. 2,033 Rs. 119 Rs. 129
Cumulative effect of accounting change ................................... 156 - -
Unrealized gain/(loss) on securities available for sale .................. 721 (481) 890
Increase in carrying value on direct issuance of stock by subsidiary ..... - 605 -
---------- ---------- ----------
Income tax expense/(benefit) recorded .................................... Rs. 2,910 Rs. 243 Rs. 1,019
========== ========== ==========
31. Commitments and contingencies
Loan commitments
ICICI has outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs. 68,217
million as of March 31, 2002 (2001: Rs. 70,981 million). The interest rate
on these commitments is dependent on the lending rates on the date of the
loan disbursement. Further, the commitments have fixed expiration dates
and are contingent upon the borrower's ability to maintain specific credit
standards.
Guarantees
As a part of its project financing and commercial banking activities,
ICICI has issued guarantees to enhance the credit standing of its
customers. These generally represent irrevocable assurances that ICICI will
make payments in the event that the customer fails to fulfill its financial
or performance obligations. Financial guarantees are obligations to pay a
third party beneficiary where a customer fails to make payment towards a
specified financial obligation. Performance guarantees are obligations to
pay a third party beneficiary where a customer fails to perform a
non-financial contractual obligation. The guarantees are generally for a
period not exceeding 10 years.
The credit risk associated with these products, as well as the
operating risks, are similar to those relating to other types of financial
instruments. Fees are recognized over the term of the facility.
Details of guarantees outstanding are set out below:
As of March 31,
-------------------------------
2001 2002
---- ----
(in millions)
Financial guarantees .............. Rs. 53,167 Rs. 53,037
Performance guarantees ............ 6,083 21,266
Total ............................. Rs. 59,250 Rs. 74,303
========== ==========
Capital commitments
ICICI 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 Rs. 756 million as of March 31, 2002 (2001: Rs. 681 million).
F-83
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Tax contingencies
Various tax-related legal proceedings are pending against ICICI.
Potential liabilities, if any, have been adequately provided for, and the
Company does not estimate any incremental liability in respect of these
proceedings.
Litigation
In January 2001, certain international banks filed a claim against
ICICI before the English Courts at London challenging certain transactions
between ICICI and a borrower to whom both ICICI and the plaintiffs are
lenders. These transactions relate to certain lease, brand financing and
investment agreements between ICICI and the borrower. Such transactions
aggregate approximately Rs. 5,700 million. The plaintiffs allege that such
specified transactions breach the Security Agent and Trust Agreement
between ICICI and the plaintiffs, whereby ICICI was appointed as a trustee
for the plaintiffs.
The plaintiffs have sought:
o A declaration that the specified transactions are void;
o Damages and/or compensation equal to the sum of money sufficient to
compensate each of the plaintiffs for loss of security;
o Interest in equity computed in quarterly rests and/or pursuant to
Section 35A of the UK Supreme Court Act of 1981; and
o Costs of litigation.
The litigation is in its early stages and as the claims are
unparticularized, no estimate of the interest, damages and costs claimed
can be quantified currently. ICICI has denied all claims of the plaintiffs
and is contesting the jurisdiction of the English courts to hear the
matter.
The proceedings of the English Courts have been adjourned till a
decision is reached on a restructuring scheme filed in the Indian Courts by
the borrower.
Given the preliminary stage of the proceedings, management is unable
to make a reasonable assessment of the final outcome of the litigation and
accordingly has not recorded any liability associated with this
contingency.
In addition to the litigation noted above, ICICI is from time to time
subject to routine litigation incidental to its business.
Management believes, based on consultation with counsel, that the
ultimate resolution of the above litigations will not have a material
adverse effect on the Company's results of operations, financial condition,
or liquidity. However, the final outcome of the litigations cannot be
predicted with certainty, and accordingly, no assurance can be given that
the ultimate resolution of the litigations will not have a material impact
on the Company's results of operations, financial condition or liquidity.
F-84
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Operating lease commitments
ICICI has commitments under long-term operating leases principally for
premises. The following is a summary of future minimum lease rental
commitments as of March 31, 2002, for non-cancelable leases:
(in millions)
Lease rental commitments for the year ending March 31,
2003 ....................................................... Rs. 252
2004 ....................................................... 187
2005 ....................................................... 66
2006 ....................................................... 47
2007 ....................................................... 29
Thereafter ................................................. 31
Total minimum lease commitments ............................ Rs. 612
32. Related party transactions
ICICI has transactions with its affiliates and directors/employees.
The following represent the significant transactions between ICICI and such
related parties:
Banking services
ICICI utilized banking services of ICICI Bank on terms that equate
those offered to other customers. Non-interest expense of ICICI relating to
such services during the year ended March 31, 2002, amounted to Rs. 32
million (2001: Rs. 72 million).
Derivative transactions
ICICI entered into interest rate swap contracts and cross currency
swap contracts with ICICI Bank aggregating Rs. 10,310 million and Rs. Nil
(2001: Rs. 3,350 million and Rs. 1,331 million) respectively during the
year ended March 31, 2002. Contracts aggregating Rs. 8,760 million and Rs.
2,272 million (2001: Rs. 2,900 million and Rs. 4,352 million) were
outstanding as of March 31, 2002, for interest rate swaps and currency
swaps respectively. Net interest income in respect of these swaps amounted
to Rs. 275 million (2001: Rs. 189 million) during the year ended March 31,
2002.
Similarly, ICICI entered into forward foreign exchange contracts with
ICICI Bank aggregating Rs 22,466 million (2001: Rs. 47,863 million) during
the year ended March 31, 2002. Contracts aggregating Rs. 251 million (2001:
Rs. 2,262 million) were outstanding as of March 31, 2002.
Reverse repurchase transactions
ICICI has entered into reverse repurchase transactions with ICICI Bank
amounting to Rs. 52,792 million (2001: Rs Nil) during the year ended March
31, 2002. At March 31, 2002, ICICI had reverse repurchase transactions
outstanding with ICICI Bank of Rs. 21,399 million (2001:Rs Nil).
Software development services
ICICI provided software development services to Tricolor and Pru-ICICI
and earned fees of Rs. 19 million (2001: Rs. 8 million) during the year
ended March 31, 2002.
ICICI developed software and provided software and hardware support
services to ICICI Bank, and earned fees of Rs. 124 million (2001: Rs. 73
million) during the year ended March 31, 2002.
F-85
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Back-office support services
ICICI set up a common technology infrastructure platform for the
group, and ICICI Bank was charged Rs. 182 million (2001: Rs. 94 million)
during the year ended March 31, 2002, towards communication expenses,
backbone infrastructure expenses and data centre costs.
ICICI provided telephone banking call-centre services and transaction
processing services for the credit card operations of ICICI Bank, and
earned fees of Rs. 149 million (2001: Rs. 99 million) during the year ended
March 31, 2002.
Indian rupee debt
At March 31, 2002, certain members of management held bonds issued by
ICICI Limited amounting to Rs. 2 million (2001: Rs. 8 million).
Asset management services
ICICI provided asset management services to TCW and earned fees of Rs.
21 million (2001: Rs. 31 million) during the year ended March 31, 2002.
Deposits and borrowings
During the year ended March 31, 2002, ICICI received interest on
deposits/call borrowings of Rs. 268 million (2001: Rs. 202 million) from
ICICI Bank.
Transfer of financial assets
During the year ended March 31, 2002, ICICI transferred loans of Rs.
11,152 million (2001: Rs. 438 million) in pass-through securitization
transactions, where the beneficial interests were purchased by ICICI Bank.
Gains of Rs. 98 million (2001: Rs. 50 million) were recorded on the sale.
Subsequently, due to a change in the status of the qualifying special
purpose entity used in the transactions, ICICI regained control of the
assets sold. Obligations of Rs. 3,526 million (2001: Rs. Nil) relating to
such repurchases are reflected as a component of the other borrowings.
Lease of premises and facilities
During the year ended March 31, 2002, ICICI received rentals of Rs.
256 million (2001: Rs. 193 million) from ICICI Bank for lease of premises,
facilities and other equipment. Similarly, during the year ended March 31,
2002, ICICI paid rentals of Rs. 11 million (2001: Rs. Nil) to ICICI Bank
for lease of premises.
Sale of assets
During the year ended March 31, 2002, ICICI sold certain assets for
Rs. 11 million (2001: Rs. 99 million) to ICICI Bank.
Expenses/revenue for services rendered
ICICI received Rs. 55 million (2001: Rs. 4 million) during the year
ended March 31, 2002, from ICICI Bank for seconded employees. Similarly,
ICICI paid Rs. 8 million (2001: Rs. 5 million) during the year ended March
31, 2002, to ICICI Bank for employees seconded to ICICI.
Share transfer activities
ICICI provided share transfer services and dematerialization services
to ICICI Bank and earned fees of Rs. 3 million (2001: Rs. 8 million) during
the year ended March 31, 2002.
F-86
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Other transactions
ICICI undertook a corporate brand advertising campaign for the group,
out of which an amount of Rs. 29 million (2001: Rs. 15 million) has been
recovered from ICICI Bank during the year ended March 31, 2002.
Related party balances
The following balances payable to/receivable from related parties are
included in the balance sheet:
As of March 31,
-----------------------
2001 2002
---- ----
(in millions)
Cash and cash equivalents ............. Rs. 4,882 Rs. 4,360
Loans ................................. 192 209
Other assets .......................... 147 320
Other liabilities ..................... 55 24
Employee loans
ICICI has advanced housing, vehicle and general-purpose loans to
employees, bearing preferential rates of interest ranging from 2.5% to
3.5%. The tenure of these loans range from five years to 25 years. The
loans are generally secured by the assets acquired by the employees.
Employee loan balances outstanding as of March 31, 2002, of Rs. 949 million
(2001: Rs. 762 million) are included in other assets.
33. Estimated fair value of financial instruments
Fair value estimates are generally subjective in nature, and are made
as of a specific point in time based on the characteristics of the
financial instruments and relevant market information. Where available,
quoted market prices are used. In other cases, fair values are based on
estimates using present value or other valuation techniques. These
techniques involve uncertainties and are significantly affected by the
assumptions used and judgments made regarding risk characteristics of
various financial instruments, discount rates, estimates of future cash
flows, future expected loss experience and other factors. Changes in
assumptions could significantly affect these estimates and the resulting
fair values. Derived fair value estimates cannot necessarily be
substantiated by comparison to independent markets and, in many cases,
could not be realized in an immediate sale of the instruments.
Fair value estimates are based on existing financial instruments
without attempting to estimate the value of anticipated future business and
the value of assets and liabilities that are not considered financial
instruments. Disclosure of fair values is not required for certain items
such as investment accounted for under the equity method of accounting,
obligations for pension and other post-retirement benefits, income tax
assets and liabilities, property and equipment, prepaid expenses, core
deposit intangibles and the value of customer relationships associated with
certain types of consumer loans, particularly the credit card portfolio,
and other intangible assets. Accordingly, the aggregate fair value amounts
presented do not purport to represent, and should not be considered
representative of, the underlying market or franchise value of the Company.
In addition, because of differences in methodologies and assumptions used
to estimate fair values, the Company's fair values should not be compared
to those of other financial institutions.
The following describes the methods and assumptions used by the
Company in estimating the fair values of financial instruments.
F-87
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
Cash and cash equivalents
The carrying amounts reported in the balance sheet approximate fair
values because maturities are less than three months.
Trading assets and liabilities
Trading assets and liabilities are carried at fair value in the
balance sheet. Values for trading securities are generally based on quoted,
or other independent, market prices. Values for interest rate and foreign
exchange products are based on quoted, or other independent, market prices,
or are estimated using pricing models or discounted cash flows.
Securities
Fair values are based primarily on quoted, or other independent,
market prices. For certain debt and equity investments that do not trade on
established exchanges, and for which markets do not exist, estimates of
fair value are based upon management's review of the investee's financial
results, condition and prospects.
Loans
The fair values of certain commercial and consumer loans are estimated
by discounting the contractual cash flows using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. The carrying value of certain other loans approximates fair value
due to the short-term and/or repricing characteristics of these loans. For
impaired loans, the impairment is considered while arriving at the fair
value.
Deposits
The carrying amount of deposits with no stated maturity or maturities
of less than three months is considered to be equal to their fair value.
Fair value of fixed-rate time deposits is estimated by discounting
contractual cash flows using interest rates currently offered on the
deposit products. Fair value for variable-rate time deposits approximates
their carrying value. Fair value estimates for deposits do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of alternative forms of funding (core
deposit intangibles).
Long-term debt, short-term borrowings and redeemable preferred stock
The fair value of the Company's debt, including short-term borrowings,
is estimated based on quoted market prices for the issues for which there
is a market, or by discounting cash flows based on current rate available
to the Company for similar types of borrowing arrangements.
F-88
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
A listing of the fair values by category of financial assets and
financial liabilities is set out below:
As of March 31, 2001 As of March 31, 2002
------------------------- -----------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
---------- ---------- ---------- ----------
(in millions)
Financial assets
Trading assets ................................. Rs. 18,878 Rs. 18,878 42,376 42,376
Securities (Note 1) ............................ 20,115 20,172 63,025 63,025
Loans (Note 2) ................................. 602,023 603,810 523,601 527,168
Other financial assets (Note 3) ................ 33,702 33,702 46,543 46,543
------------ ------------- ------------ ------------
Total .......................................... Rs. 674,718 Rs. 676,562 675,545 679,112
============ ============= ============ ============
Financial liabilities
Interest-bearing deposits ...................... Rs. 6,072 Rs. 6,100 Rs. 7,380 Rs. 7,609
Trading liabilities ............................ 12,484 12,484 17,095 17,095
Short-term borrowings .......................... 99,656 100,169 70,804 70,954
Long-term debt ................................. 492,880 508,043 511,423 540,649
Other borrowings ............................... - - 5,787 5,848
Redeemable preferred stock ..................... 698 709 772 980
Other financial liabilities (Note 4) ........... 2,715 2,715 4,783 4,783
------------ ------------- ------------ ------------
Total .......................................... Rs. 614,505 Rs. 630,220 618,044 647,918
============ ============= ============ ============
Derivative instruments
Interest rate swaps ............................ - 280 568 568
Currency swaps ................................. - 426 328 328
Note 1: Includes non-readily marketable equity securities of Rs. 8,268
million (2001: Rs. 7,148 million) for which there are no readily
determinable fair values.
Note 2: The carrying value of loans is net of the allowance for loan losses,
security deposits and unearned income.
Note 3: Includes cash and cash equivalents and customers acceptance liability
for which the carrying value is a reasonable estimate of fair value.
Note 4: Represents acceptances outstanding, for which the carrying value is a
reasonable estimate of fair value.
F-89
ICICI Limited and subsidiaries
Notes to the consolidated financial statements
For and on behalf of the Board
N. VAGHUL
Chairman
K.V. KAMATH
Managing Director &
Chief Executive Officer
LALITA D. GUPTE
Joint Managing Director &
Chief Operating Officer
KALPANA MORPARIA Executive Director
JYOTIN MEHTA BALAJI SWAMINATHAN S. MUKHERJI
General Manager & Chief Financial Officer Executive Director
Company Secretary
F-90
EXHIBIT INDEX
Exhibit No. Description of Document
----------- -----------------------
1.1 ICICI Bank Memorandum of Association, as amended.
1.2 ICICI Bank Articles of Association, as amended.
2.1 Deposit Agreement among ICICI Bank, Deutsche Bank and the holders
from time to time of American Depositary Receipts issued
thereunder (including as an exhibit, the form of American
Depositary Receipt) (incorporated by reference from ICICI Bank's
Registration Statement on Form F-1 (File No. 333-30132)).
2.2 Letter Agreements dated February 19, 2002 and April 1, 2002
amending and supplementing the Deposit Agreement.
2.3 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, as amended.
4.2 ICICI Infotech Employee Stock Option Plan, as amended.
4.3 Scheme of Amalgamation of Bank of Madura Limited with ICICI Bank
(incorporated by reference from ICICI Bank's Annual Report on
Form 20-F for the year ended March 31, 2001 filed on September
28, 2001).
4.4 Letter from the Reserve Bank of India to ICICI Bank 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 (incorporated by reference from
ICICI Bank's Annual Report on Form 20-F for the year ended March
31, 2001 filed on September 28, 2001).
4.5 Scheme of Amalgamation of ICICI, ICICI Personal Financial
Services, ICICI Capital Services with ICICI Bank.
257
4.6 Letter from the Reserve Bank of India to ICICI Bank dated April
26, 2002 approving the Scheme of Amalgamation of ICICI, ICICI
Personal Financial Services, ICICI Capital Services with ICICI
Bank.
8.1 List of Subsidiaries (included under "Business - Subsidiaries and
Affiliates" herein).
258
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
For ICICI BANK LIMITED
By : /s/Jyotin Mehta
---------------------------
Name : Mr. Jyotin Mehta
Title : General Manager and Company
Secretary.
Place : Mumbai
Date : September 30, 2002
I, Mr. K.V. Kamath, the Chief Executive Officer of ICICI Bank Limited,
certify that:
1. I have reviewed this annual report on Form 20-F of ICICI Bank
Limited;
-
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 30, 2002
/s/ K. V. Kamath
----------------
Name: Mr. K.V. Kamath
Chief Executive Officer
I, Mr. Balaji Swaminathan, the Chief Financial Officer of ICICI Bank
Limited, certify that:
1. I have reviewed this annual report on Form 20-F of ICICI Bank
Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 30, 2002
/s/ Balaji Swaminathan
----------------------
Name: Mr. Balaji Swaminathan
Chief Financial Officer