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, 2004
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________
to _____________
Commission File Number 001-15002
ICICI BANK LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Vadodara, Gujarat, India
(Jurisdiction of incorporation or organization)
ICICI Bank Towers
Bandra-Kurla Complex
Mumbai 400051, India
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act.
American Depositary Share
each represented by 2 Equity Shares, par value Rs. 10 per share.
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
Not Applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report - 616,391,905 Equity Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 month (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
TABLE OF CONTENTS
Page
Cross Reference Sheet..................................................... 3
Certain Definitions ...................................................... 5
Forward-Looking Statements................................................ 6
Exchange Rates............................................................ 7
Risk Factors.............................................................. 8
Business ................................................................ 23
Overview ............................................................. 23
History ............................................................. 25
Shareholding Structure and Relationship with the Government of India.. 26
Strategy ............................................................. 27
Overview of ICICI Bank's Products and Services........................ 31
Funding .............................................................. 51
Risk Management....................................................... 55
Loan Portfolio........................................................ 70
Impaired Loans........................................................ 75
Subsidiaries and Affiliates .......................................... 83
Technology............................................................ 86
Competition........................................................... 87
Employees............................................................. 89
Properties............................................................ 91
Legal and Regulatory Proceedings...................................... 91
Selected Consolidated Financial and Operating Data........................ 94
Operating and Financial Review and Prospects.............................. 99
Management................................................................ 141
Overview of the Indian Financial Sector................................... 161
Supervision and Regulation................................................ 172
Exchange Controls......................................................... 191
Market Price Information.................................................. 194
Restriction on Foreign Ownership of Indian Securities..................... 196
Dividends................................................................. 199
Taxation.................................................................. 201
Presentation of Financial Information..................................... 206
Additional Information.................................................... 208
Index to Consolidated Financial Statements................................ F-1
Exhibit Index............................................................. 210
2
CROSS REFERENCE SHEET
Form 20-F Item Number and Caption Location Page
--------- ----------------------- -------- ----
Part - I
1 Identity of Directors, Senior
Management and Advisers Not applicable
2 Offer Statistics and Expected
Timetable Not applicable
3 Key Information Selected Consolidated Financial and Operating Data 94
Exchange Rates.................................... 7
Risk Factors...................................... 8
4 Information on the Company Business.......................................... 23
Operating and Financial Review and
Prospects--Capital Expenditure..................... 131
Operating and Financial Review and
Prospects--Effect of Other Acquisitions............ 101
Operating and Financial Review and
Prospects--Segment Revenues and Assets............. 133
Overview of the Indian Financial Sector........... 161
Supervision and Regulation........................ 172
5 Operating and Financial
Review and Prospects Operating and Financial Review and Prospects...... 99
Business--Risk Management.......................... 55
6 Directors, Senior Management and
Employees Management........................................ 141
Business--Employees................................ 89
7 Major Shareholders and Business--Shareholding Structure and Relationship
Related Party Transactions with the Government of India...................... 26
Operating and Financial Review and
Prospects--Related Party Transactions.............. 135
Management--Interest of Management in Certain
Transactions...................................... 160
Management--Compensation and Benefits to Directors
and Officers--Loans................................ 158
Market Price Information.......................... 194
Note 30 in Notes to Consolidated Financial
Statements........................................ F-51
8 Financial Information Report of Independent Auditors on Consolidated
Financial Statements.............................. F-2
Consolidated Financial Statements and the notes
thereto........................................... F-3
Operating and Financial Review and Prospects--
Significant Changes............................... 133
Business--Legal and Regulatory Proceedings......... 91
3
Dividends......................................... 199
9 The Offer and Listing Market Price Information.......................... 194
Restriction on Foreign Ownership of Indian
Securities........................................ 196
10 Additional Information Additional Information............................ 208
Exchange Controls................................. 191
Taxation.......................................... 201
Restriction on Foreign Ownership of Indian
Securities........................................ 196
Dividends......................................... 199
11 Quantitative and Qualitative Business--Quantitative and Qualitative Disclosures
Disclosures About Market Risk About Market Risk................................. 61
12 Description of Securities Other
than Equity Securities Not applicable
Part - II
13 Defaults, Dividend Arrearages
and Delinquencies Not applicable
14 Material Modifications to the
Rights of Security Holders and
Use of Proceeds Not applicable
15 Controls and Procedures Business--Risk Management........................ 55
16 [Reserved] Not applicable
16A Audit Committee Financial Expert Management--Corporate Governance--Audit Committee. 151
16B Code of Ethics Management--Corporate Governance--Code of Ethics.. 153
16C Principal Accountant Fees and Management--Corporate Governance--Principal
Services Accountant Fees and Services...................... 153
16D Exemptions from the Listing
Standards for Audit Committees Not applicable
16E Purchases of Equity Securities
by the Issuer and Affiliated
Purchasers Not applicable
Part - III
17 Financial Statements See Item 18
18 Financial Statements Report of Independent Auditors on Consolidated
Financial Statements.............................. F-2
Consolidated Financial Statements and the notes
thereto........................................... F-3
19 Exhibits Exhibit index and attached exhibits............... 210
4
CERTAIN DEFINITIONS
ICICI Limited, ICICI Personal Financial Services Limited and ICICI Capital
Services Limited amalgamated with and into ICICI Bank Limited, effective April
1, 2002 for accounting purposes under US GAAP. In this annual report, all
references to "we", "our" and "us" are, as the context requires, to ICICI Bank
Limited and its consolidated subsidiaries and other consolidated entities
subsequent to the amalgamation. References to specific data applicable to
particular subsidiaries or other consolidated entities are made by reference to
the name of that particular company. References to "ICICI Bank" are, as the
context requires, to ICICI Bank Limited on an unconsolidated basis subsequent to
the amalgamation, to ICICI Bank Limited on an unconsolidated basis prior to the
amalgamation, or to both. References to "ICICI" are to ICICI Limited and its
consolidated subsidiaries and other consolidated entities prior to the
amalgamation. References to "ICICI Personal Financial Services" are to ICICI
Personal Financial Services Limited. References to "ICICI Capital Services" are
to ICICI Capital Services Limited. References to the "amalgamation" are to the
amalgamation of ICICI, ICICI Personal Financial Services and ICICI Capital
Services with and into ICICI Bank. References to "the Scheme of Amalgamation"
are to the Scheme of Amalgamation of ICICI, ICICI Personal Financial Services
and ICICI Capital Services with ICICI Bank sanctioned by the High Court of
Gujarat at Ahmedabad on March 7, 2002 and by the High Court of Judicature at
Bombay on April 11, 2002 and approved by the Reserve Bank of India on April 26,
2002.
Statement on Financial Accounting Standards No. 141 on "Business
Combinations", issued by the Financial Accounting Standards Board, requires that
business combinations be accounted for in the period in which the combination is
consummated. The effective date of the amalgamation for accounting purposes
under US GAAP was April 1, 2002. Accordingly, under US GAAP, the amalgamation
has been reflected in the financial statements contained in this annual report
for fiscal 2003 and fiscal 2004, as it was consummated in April 2002. Under US
GAAP, the amalgamation was accounted for as a reverse acquisition. This means
that ICICI was recognized as the accounting acquirer in the amalgamation,
although ICICI Bank was the legal acquirer. Accordingly, the financial
statements and other financial information contained in this annual report for
fiscal 2002 and prior years, except where specifically stated otherwise, present
the assets, liabilities and results of operations of ICICI.
In the financial statements contained in this annual report and the notes
thereto, all references to "the Company" are to ICICI Bank Limited and its
consolidated subsidiaries and other consolidated entities subsequent to the
amalgamation, all references to the "acquiree" are to ICICI Bank Limited prior
to the amalgamation and all references to the "acquirer" are to ICICI Limited
and its consolidated subsidiaries and other consolidated entities prior to the
amalgamation.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation, with ICICI Bank
recognized as the accounting acquirer.
5
FORWARD-LOOKING STATEMENTS
We have included statements in this annual report which contain words or
phrases such as "will", "would", "aim", "aimed", "will likely result", "is
likely", "are likely", "believe", "expect", "expected to", "will continue",
"will achieve", "anticipate", "estimate", "estimating", "intend", "plan",
"contemplate", "seek to", "seeking to", "trying to", "target", "propose to",
"future", "objective", "goal", "project", "should", "can", "could", "may", "will
pursue", "our judgment" and similar expressions or variations of such
expressions, that are "forward-looking statements". Actual results may differ
materially from those suggested by the forward-looking statements due to certain
risks or uncertainties associated with our expectations with respect to, but not
limited to, the actual growth in demand for banking and other financial products
and services, our ability to successfully implement our strategy, our ability to
integrate recent or future mergers or acquisitions into our operations, future
levels of impaired loans, our growth and expansion, the adequacy of our
allowance for credit and investment losses, technological changes, investment
income, our ability to market new products, cash flow projections, the outcome
of any legal or regulatory proceedings we are or become a party to, the future
impact of new accounting standards, our ability to implement our dividend
policy, the impact of Indian banking regulations on us, which includes the
assets and liabilities of ICICI, a former financial institution not subject to
Indian banking regulations, our ability to roll over our short-term funding
sources, our exposure to market risks and the market acceptance of and demand
for Internet banking services. By their nature, certain of the market risk
disclosures are only estimates and could be materially different from what
actually occurs in the future. As a result, actual future gains, losses or
impact on net interest income and net income could materially differ from those
that have been estimated.
In addition, other factors that could cause actual results to differ
materially from those estimated by the forward-looking statements contained in
this annual report include, but are not limited to general economic and
political conditions in India, southeast Asia, and the other countries which
have an impact on our business activities or investments, political or financial
instability in India or any other country caused by any factor including any
terrorist attacks in India, the United States or elsewhere, any anti-terrorist
or other attacks by the United States, a United States-led coalition or any
other country or any other acts of terrorism world-wide, the monetary and
interest rate policies of India, political or financial instability in India or
any other country caused by political uncertainty, tensions between India and
Pakistan related to the Kashmir region or military armament or social unrest in
any part of India, inflation, deflation, unanticipated turbulence in interest
rates, changes in the value of the rupee, foreign exchange rates, equity prices
or other rates or prices, the performance of the financial markets and level of
Internet penetration in India and globally, changes in domestic and foreign
laws, regulations and taxes, changes in competition and the pricing environment
in India and regional or general changes in asset valuations. For a further
discussion on the factors that could cause actual results to differ, see the
discussion under "Risk Factors" contained in this annual report.
6
EXCHANGE RATES
Fluctuations in the exchange rate between the Indian rupee and the US
dollar will affect the US dollar equivalent of the Indian rupee price of the
equity shares on the Indian stock exchanges and, as a result, will affect the
market price of our 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 our equity shares represented by ADSs.
On an average annual basis, the Indian rupee has consistently declined
against the dollar since 1980. In early July 1991, the government adjusted the
Indian rupee downward by an aggregate of approximately 20.0% against the dollar.
The adjustment was effected as part of an economic package designed to overcome
economic and foreign exchange problems. Since the Indian rupee was made
convertible on the current account in March 1993, it has steadily depreciated on
an average annual basis at a rate of approximately 5-6%. During fiscal 2003 and
fiscal 2004, however, the rupee appreciated against the US dollar, from Rs.
49.06 per US$ 1.00 at May 31, 2002 to Rs. 43.40 per US$ 1.00 at March 31, 2004.
The rupee has again depreciated against the dollar during fiscal 2005 (through
August 31, 2004) by 6.8%. The following table sets forth, for the periods
indicated, certain information concerning the exchange rates between Indian
rupees and US dollars based on the noon buying rate.
Fiscal Year Period End(1) Average(1) (2)
--------------------------------------------------------------------------------
1999............................................ 42.50 42.27
2000............................................ 43.65 43.46
2001 ........................................... 46.85 45.88
2002............................................ 48.83 47.80
2003 ........................................... 47.53 48.43
2004 .......................................... 43.40 45.78
2005 (through September 24, 2004)............... 46.35 45.39
Month High Low
--------------------------------------------------------------------------------
March 2004...................................... 45.32 43.40
April 2004...................................... 44.52 43.40
May 2004........................................ 45.57 44.55
June 2004 ...................................... 46.21 44.94
July 2004....................................... 46.45 45.66
August 2004 .................................... 46.40 46.21
September 2004 (through September 24, 2004)..... 46.35 45.81
__________________
(1) The noon buying rate at each period end and the average rate for each
period differed from the exchange rates used in the preparation of our
financial statements.
(2) Represents the average of the noon buying rate on the last day of each
month during the period.
Although certain rupee amounts in this annual report have been translated
into dollars for convenience, this does not mean that the rupee amounts referred
to could have been, or could be, converted into dollars at any particular rate,
the rates stated below, or at all. Except in the section on "Market Price
Information", all translations from rupees to dollars are based on the noon
buying rate in the City of New York for cable transfers in rupees at March 31,
2004. The Federal Reserve Bank of New York certifies this rate for customs
purposes on each date the rate is given. The noon buying rate at March 31, 2004
was Rs. 43.40 per US$ 1.00 and at August 31, 2004 was Rs. 46.35 per US$ 1.00.
7
RISK FACTORS
You should carefully consider the following risk factors as well as the
other information contained in this annual report in evaluating us and our
business.
Risks Relating to India
A slowdown in economic growth in India could cause our business to suffer.
The Indian economy has shown sustained growth over the last few years with
real GDP growing at 8.2% in fiscal 2004, 4.0% in fiscal 2003 and 5.8% in fiscal
2002. The Index of Industrial Production grew at 6.9% in fiscal 2004 compared to
5.8% in fiscal 2003 and 2.7% in fiscal 2002. Any slowdown in the Indian economy
or volatility of global commodity prices, in particular oil and steel prices,
could adversely affect our borrowers and contractual counterparties. With the
increasing importance of retail loans to our business, any slowdown in the
growth of sectors like housing and automobiles could adversely impact our
performance. Further, with the increasing importance of the agricultural sector
in our business, any slowdown in the growth of the agricultural sector could
also adversely impact our performance. Growth in the agricultural sector in
India has been variable and dependent on climatic conditions, primarily the
level and timing of rainfall. The agricultural sector grew by 9.1% in fiscal
2004 compared to a decline of 5.2% during fiscal 2003. Any slowdown could
adversely affect our business, including our ability to grow our asset
portfolio, the quality of our assets, our financial performance, our
stockholders' equity, our ability to implement our strategy and the price of our
equity shares and our ADSs.
A significant increase in the price of crude oil could adversely affect the
Indian economy, which could adversely affect our business.
India imports approximately 70.0% of its requirements of crude oil, which
were approximately 26.7% of total imports in fiscal 2004. The sharp increase in
global crude oil prices during fiscal 2001 adversely affected the Indian economy
in terms of volatile interest and exchange rates. This adversely affected the
overall state of liquidity in the banking system leading to intervention by the
Reserve Bank of India. Crude oil prices declined in fiscal 2002 due to weaker
demand. During fiscal 2003, crude oil prices initially rose as a result of
Middle-East tensions and in particular the US-led military action in Iraq before
declining on account of the relatively short duration of the war. Conditions
remain volatile in the Middle-East where most of the world's oil production
facilities are located. There has been a sharp increase in global crude oil
prices over the past few months (due to increased international oil demand and
tensions in the Middle East), which has contributed to a rise in inflation,
higher market interest rates in the Indian economy and a higher trade deficit.
Any significant increase or volatility in oil prices, due to continuing or
further tensions or hostilities or otherwise, could affect the Indian economy
and the Indian banking and financial system, in particular through its impact on
inflation, interest rates and the trade deficit. This could adversely affect our
business including our ability to grow, the quality of our assets, our financial
performance, our stockholders' equity, our ability to implement our strategy and
the price of our equity shares and our ADSs.
A significant change in the Indian government's economic liberalization and
deregulation policies could disrupt our business and cause the price of our
equity shares and our ADSs to go down.
Our assets and customers are predominantly located in India. The Indian
government has traditionally exercised and continues to exercise a dominant
influence over many aspects of the economy. Its economic policies have had and
could continue to have a significant effect on private sector entities,
including us, and on market conditions and prices of Indian securities,
including our equity shares and our ADSs.
8
The most recent parliamentary elections were completed in May 2004. A
coalition government led by the Indian National Congress party has been formed
with Dr. Manmohan Singh as the Prime Minister of India. A significant change in
the government's policies could adversely affect business and economic
conditions in India and could also adversely affect our business, our future
financial performance, our stockholders' equity and the price of our equity
shares and our ADSs.
Financial instability in other countries, particularly emerging market
countries, could disrupt our business and cause the price of our equity
shares and our ADSs to go down.
The Indian market and the Indian economy are influenced by economic and
market conditions in other countries, particularly emerging market countries in
Asia. Financial turmoil in Asia, Latin America, Russia and elsewhere in the
world in the past years has affected the Indian economy even though India was
relatively unaffected by the financial and liquidity crises experienced
elsewhere. Although economic conditions are different in each country,
investors' reactions to developments in one country can have adverse effects on
the securities of companies in other countries, including India. A loss of
investor confidence in the financial systems of other emerging markets may cause
increased volatility in Indian financial markets and indirectly, in the Indian
economy in general. Any worldwide financial instability could also have a
negative impact on the Indian economy. This in turn could negatively impact the
Indian economy, including the movement of exchange rates and interest rates in
India, which could adversely affect the Indian financial sector, including us.
Any financial disruption could have an adverse effect on our business, our
future financial performance, our stockholders' equity and the price of our
equity shares and our ADSs.
If regional hostilities, terrorist attacks or social unrest in some parts
of the country increase, our business could suffer and the price of our
equity shares and our ADSs could go down.
India has from time to time experienced social and civil unrest and
hostilities both internally and with neighboring countries. In recent years,
there have been military confrontations between India and Pakistan in the
Kashmir region and present relations between India and Pakistan continue to be
tense on the issues of terrorism, armament and Kashmir. India has also
experienced terrorist attacks in some parts of the country. These hostilities
and tensions could lead to political or economic instability in India and a
possible adverse effect on our business, our future financial performance and
the price of our equity shares and our ADSs. For example, the terrorist attacks
in the United States on September 11, 2001 and subsequent military action in
Afghanistan and Iraq affected markets all over the world. The United States'
continuing battle against terrorism could lengthen these regional hostilities
and tensions. Further, India has also experienced social unrest in some parts of
the country. If such tensions occur in other parts of the country leading to
overall political and economic instability, it could have an adverse effect on
our business, our future financial performance and the price of our equity
shares and our ADSs.
Trade deficits could cause our business to suffer and the price of our
equity shares and our ADSs to go down.
India's trade relationships with other countries can also influence Indian
economic conditions. In fiscal 2004, India experienced a trade deficit of Rs.
628.7 billion (US$ 14.5 billion), an increase of Rs. 268.7 billion (US$ 6.2
billion) from fiscal 2003. In fiscal 2005 (through July 2004), the trade deficit
increased significantly to Rs. 385.7 billion (US$ 8.9 billion) as compared to
Rs. 251.0 billion (US$ 5.8 billion) in the corresponding period of the previous
year, mainly due to the rise in global crude oil prices. International crude oil
prices have increased from US$ 35.75 per barrel at March 31, 2004 to US$ 43.72
per barrel at July 31, 2004. If trade deficits increase or are no longer
manageable, the Indian economy, and therefore our business, our financial
performance, our stockholders' equity and the price of our equity shares and our
ADSs, could be adversely affected.
9
Natural calamities could have a negative impact on the Indian economy and
could cause our business to suffer and the price of our equity shares and
our ADSs to go down.
India has experienced natural calamities like earthquakes, floods and
drought in the past few years. The extent and severity of these natural
disasters determine their impact on the Indian economy. In fiscal 2003, many
parts of India received significantly less than normal rainfall. As a result of
the drought conditions in the economy during fiscal 2003, the agricultural
sector recorded a negative growth of 5.2%. According to the India Meteorological
Department, rainfall for the period June 1, 2004 to August 25, 2004 has been
6.0% below normal. The erratic progress of the monsoon in 2004 has adversely
affected sowing operations for certain crops. Further prolonged spells of below
normal rainfall in the country or other natural calamities could have a negative
impact on the Indian economy, affecting our business and causing the price of
our equity shares and our ADSs to go down.
Financial difficulty and other problems in certain financial institutions
in India could cause our business to suffer and the price of our equity
shares and our ADSs to go down.
As an Indian bank, we are exposed to the risks of the Indian financial
system which in turn may be affected by financial difficulties and other
problems faced by certain Indian financial institutions. See "Overview of the
Indian Financial Sector". As an emerging market system, the Indian financial
system faces risks of a nature and extent not typically faced in developing
countries, including the risk of deposit runs notwithstanding the existence of a
national deposit insurance scheme. For example, in April 2003, unsubstantiated
rumours, believed to have originated in Gujarat, a state in India, alleged that
we were facing liquidity problems, although our liquidity position was sound. We
witnessed higher than normal deposit withdrawals during April 11 to 13, 2003 on
account of these unsubstantiated rumours. We successfully controlled the
situation, but if such situations were to arise in future, any failure to
control such situations could result in large deposit withdrawals which would
adversely impact our liquidity position.
In addition, certain Indian financial institutions have experienced
difficulties in recent years. In July 2004, on an application by the Reserve
Bank of India, the Indian government issued an order of moratorium on Global
Trust Bank, a new private sector bank, and restricted withdrawals by depositors.
The Reserve Bank of India subsequently announced a merger of Global Trust Bank
with Oriental Bank of Commerce, a public sector bank. Some co-operative banks
have also faced serious financial and liquidity crises. The problems faced by
individual Indian financial institutions and any instability in or difficulties
faced by the Indian financial system generally could create adverse market
perception about Indian financial institutions and banks. This in turn could
adversely affect our business, our future financial performance, our
shareholders' funds and the price of our equity shares and our ADSs.
A decline in India's foreign exchange reserves may affect liquidity and
interest rates in the Indian economy which could adversely impact us.
India's foreign exchange reserves increased 47.5% during fiscal 2004 and
7.2% during fiscal 2005 (through September 10, 2004) to US$ 118.3 billion. A
decline in these reserves could result in reduced liquidity and higher interest
rates in the Indian economy. Reduced liquidity or an increase in interest rates
in the economy following a decline in foreign exchange reserves could adversely
affect our business, our future financial performance, our stockholders' equity
and the price of our equity shares and our ADSs. See also "- Risks Relating to
Our Business".
Any down-grading of India's debt rating by an international rating agency
could cause our business to suffer and the price of our equity shares and
our ADSs to go down.
Any adverse revisions to India's credit ratings for domestic and
international debt by international rating agencies may adversely affect our
business, our future financial performance, our stockholders' equity and the
price of our equity shares and our ADSs.
10
Risks Relating to Our Business
Our business is particularly vulnerable to interest rate risk and
volatility in interest rates could cause our net interest margin, the value
of our fixed income portfolio and our income from treasury operations to
decline and adversely affect our financial performance.
As an Indian bank, we are, as a result of the Indian reserve requirements
more structurally exposed to interest rate risk than banks in many other
countries. Under the regulations of the Reserve Bank of India, our liabilities
are subject to the statutory liquidity ratio requirement which requires that a
minimum specified percentage, currently 25.0%, of a bank's demand and time
liabilities be invested in government of India securities and other approved
securities. Pursuant to the amalgamation, the statutory liquidity ratio
requirement was imposed on the liabilities acquired from ICICI. We earn interest
on such government of India securities at rates which are less favourable than
those which we typically receive in respect of our retail and corporate loan
portfolio. The statutory liquidity ratio generally has a negative impact on net
interest income and net interest margin since it requires us to invest in lower
interest-earning securities. If our cost of funds does not decline at the same
time and to the same extent as the yield on our interest-bearing assets, or if
the yield on our interest-bearing assets does not increase at the same time and
to the same extent as our cost of funds, our net interest margins would be
adversely impacted. Our subsidiary ICICI Securities is a primary dealer in
government of India securities and its net income in fiscal 2004 had a high
proportion of fixed income securities trading gains. During fiscal 2005, the
secondary market yields on government of India securities have been volatile due
to expectations of tightening of monetary policy and increase in interest rates
as a result of global trends, particularly in the United States, and rising oil
prices and their impact on inflation in India. The yield on 10-year government
of India securities increased from 5.1% at March 31, 2004 to a high of 6.7% at
August 11, 2004 before declining again to 6.1% at August 31, 2004. The Reserve
Bank of India has increased the cash reserve ratio (the percentage of a bank's
demand and time liabilities that it must maintain in the form of cash balances
with the Reserve Bank of India) from 4.5% to 4.75% effective September 18, 2004
and 5.0% effective October 2, 2004. In a rising interest rate environment,
especially if the rise were sudden or sharp, we would be materially adversely
affected by the decline in market value of our government securities portfolio
and other fixed income securities. Our income from treasury operations is
particularly vulnerable to interest rate volatility and an increasing interest
rate environment is likely to adversely affect the income from our treasury
operations. Declines in the value of our trading portfolio in such an
environment will adversely affect our income.
A large proportion of ICICI's loans comprised project finance assistance, a
substantial portion of which was particularly vulnerable to completion
risk.
Long-term project finance assistance was a significant proportion of
ICICI's asset portfolio. Although retail loans have significantly increased in
our balance sheet, long-term project finance continues to be a significant
proportion of our loan portfolio. The viability of these projects depends upon a
number of factors, including completion risk, market demand, government policies
and the overall economic environment in India and international markets. We
cannot be sure that these projects will perform as anticipated. Over the last
several years, we and ICICI experienced a high level of impaired loans in our
project finance loan portfolio to industrial companies as a result of the
downturn in certain global commodity markets and increased competition in India.
In addition, a significant portion of infrastructure and other projects financed
by us are still under implementation and present risks, including delays in the
commencement of operations and breach of contractual obligations by
counterparties that could impact the project's ability to generate revenues. We
cannot assure you that future credit losses on account of such loans would not
have a materially adverse effect on our profitability. If a substantial portion
of these loans were to become impaired, the quality of our loan portfolio could
be adversely affected.
11
We have high concentrations of loans to certain customers and to certain
sectors and if a substantial portion of these loans were to become
impaired, the quality of our loan portfolio could be adversely affected.
At year-end fiscal 2004, our 20 largest borrowers, based on gross
outstanding balances, totaled approximately Rs. 149.6 billion (US$ 3.5 billion),
which represented approximately 18.6% of our total gross loans outstanding
(gross of unearned income and security deposits). Our largest single borrower by
outstanding at that date was approximately Rs. 17.5 billion (US$ 402 million),
which represented approximately 2.2% of our total gross loans outstanding. The
largest borrower group of companies under the same management control accounted
for approximately 4.5% of our total gross loans outstanding. Credit losses on
these large single borrower and group exposures could adversely affect our
business, our financial performance, our stockholders' equity and the prices of
our equity shares and our ADSs.
At year-end fiscal 2004, we had extended loans to several industrial
sectors in India. At that date, approximately 40.5% of our gross restructured
loan portfolio was concentrated in three sectors: iron and steel (19.6%), crude
petroleum and refining (10.8%) and textiles (10.1%). At that date, approximately
42.2% of our gross other impaired loan portfolio was concentrated in three
sectors: power (23.7%), iron and steel (11.2%) and petrochemicals (7.3%). Our
total loan portfolio also had a significant concentration of loans in these
sectors. These sectors have been adversely affected by economic conditions over
the last few years in varying degrees. Although our loan portfolio contains
loans to a wide variety of businesses, financial difficulties in these sectors
could increase our level of impaired loans and adversely affect our business,
our future financial performance, our stockholders' equity and the price of our
equity shares and our ADSs.
If we are not able to control or reduce the level of impaired loans in our
portfolio, our business will suffer.
Our gross restructured loans represented 20.4% of our gross loan portfolio
at year-end fiscal 2004 and 21.5% of our gross loan portfolio at year-end fiscal
2003. Our gross other impaired loans represented 6.3% of our gross loan
portfolio at year-end fiscal 2004 and 12.2% of our gross loan portfolio at
year-end fiscal 2003. Our net restructured loans represented 16.7% of our net
loans at year-end fiscal 2004 and 19.5% of our net loans at year-end fiscal
2003. Our net other impaired loans represented 4.0% of our net loans at year-end
fiscal 2004 and 8.8% of our net loans at year-end fiscal 2003.
In absolute terms, our total gross restructured and other impaired loans
declined by 7.8% in fiscal 2004 over fiscal 2003. In fiscal 2003, our total
gross restructured and other impaired loans increased by 58.1% over the total
combined gross impaired loans of ICICI and ICICI Bank at year-end fiscal 2002.
The growth of our and ICICI's gross restructured and other impaired loans
over the past few years can be attributed to several factors, including
increased competition arising from economic liberalization in India, variable
industrial growth, the high level of debt in the financing of projects and
capital structures of companies in India and the high interest rates in the
Indian economy during the period in which a large number of projects contracted
their borrowings, which reduced the profitability for certain borrowers, and the
resultant restructuring of certain Indian companies. The decline in our total
gross restructured and other impaired loans is primarily due to recoveries and
reclassification of loans as unimpaired based on satisfactory performance of the
borrower accounts as per the contractual terms of payment. This was offset, in
part, by the continuing process of restructuring of loans to corporations in
several sectors as well as classification of additional loans as impaired based
on default in payment. It is expected that the restructuring process will
continue in fiscal 2005.
Further, we have experienced rapid growth in our retail loan portfolio. Our
gross consumer loans and credit card receivables increased from Rs. 188.3
billion (US$ 4.3 billion), constituting 27.5% of
12
our gross loans at year-end fiscal 2003 to Rs. 311.9 billion (US$ 7.2 billion),
constituting 39.2% of our gross loans at year-end fiscal 2004. We cannot assure
you that there will be no additional impaired loans on account of these retail
loans and that such impaired loans will not have a materially adverse impact on
the quality of our loan portfolio. The factors that could cause impaired loans
in our retail loan portfolio to increase are substantially similar to those
factors relevant in developed countries which include rise in unemployment,
prolonged recessionary conditions and a sharp and sustained rise in interest
rates.
The directed lending norms of the Reserve Bank of India require that every
bank should extend 40.0% of its net bank credit to certain eligible sectors,
which are categorized as "priority sectors". Priority sectors are specific
sectors such as agriculture and small-scale industries, and also include housing
finance loans up to certain limits. Considering that the advances of ICICI were
not subject to the requirement applicable to banks in respect of priority sector
lending, the Reserve Bank of India directed us to maintain an additional 10.0%
over and above the requirement of 40.0%, i.e., a total of 50.0% of our net bank
credit on the residual portion of our advances (i.e. the portion of our total
advances excluding advances of ICICI at year-end fiscal 2002) in the form of
priority sector loans. This additional 10.0% priority sector lending requirement
will apply until such time as our aggregate priority sector advances reach a
level of 40.0% of our total net bank credit. We may experience a significant
increase in impaired loans in our directed lending portfolio, particularly loans
to the agriculture sector and small-scale industries, since economic
difficulties are likely to affect those borrowers more severely and we would be
less able to control the quality of this portfolio.
A number of factors will affect our ability to control and reduce impaired
loans. Some of these, including developments in the Indian economy, movements in
global commodity markets, global competition, interest rates and exchange rates,
are not within our control. There can be no assurance that troubled debt
restructuring approved by us will be successful and the borrowers will meet
their obligations under the restructured terms. Although we are increasing our
efforts to improve collections and to foreclose on existing impaired loans, we
cannot assure you that we will be successful in our efforts or that the overall
quality of our loan portfolio will not deteriorate in the future. If we are not
able to control and reduce our impaired loans, or if there is a significant
increase in our impaired loans, our business, our future financial performance,
our stockholders' equity and the price of our equity shares and our ADSs could
be adversely affected.
If there is a further deterioration in our impaired loan portfolio and we
are not able to improve our allowance for loan losses as a percentage of
impaired loans, the price of our equity shares and our ADSs could go down.
Although we believe that our allowance for loan losses is adequate to cover
all known losses in our portfolio of assets, the level of our impaired loans is
significantly higher than the average percentage of impaired loans in the
portfolios of banks in more developed countries.
At year-end fiscal 2004, our allowance for loan losses on restructured
loans represented 25.2% of gross restructured loans and our allowance for loan
losses on other impaired loans represented 42.7% of gross other impaired loans.
At year-end fiscal 2003, our allowance for loan losses on restructured loans
represented 16.8% of gross restructured loans and our allowance for loan losses
on other impaired loans represented 33.5% of gross other impaired loans.
Although we believe that our allowances for loan losses will be adequate to
cover all known losses in our asset portfolio, we cannot assure you that there
will be no deterioration in the allowance for loan losses as a percentage of
gross impaired loans or otherwise or that the percentage of impaired loans that
we will be able to recover will be similar to our and ICICI's past experience of
recoveries of impaired loans. In the event of any further deterioration in our
impaired loan portfolio, there could be an adverse impact on our business, our
future financial performance, our stockholders' equity and the price of our
equity shares and our ADSs.
13
We may experience delays in enforcing our collateral when borrowers default
on their obligations to us which may result in failure to recover the
expected value of collateral security exposing us to a potential loss.
A substantial portion of our loans to corporate customers, primarily
comprising loans made by ICICI, is secured by real assets, including property,
plant and equipment. Our loans to corporate customers also include working
capital credit facilities that are typically secured by a first lien on
inventory, receivables and other current assets. In some cases, we may have
taken further security of a first or second lien on fixed assets, a pledge of
financial assets like marketable securities, corporate guarantees and personal
guarantees. A substantial portion of our loans to retail customers is also
secured by the assets financed, predominantly property and vehicles. Although in
general our loans are over-collateralized, an economic downturn could result in
a fall in relevant collateral values.
In India, foreclosure on collateral generally requires a written petition
to an Indian court or tribunal. An application, when made, may be subject to
delays and administrative requirements that may result, or be accompanied by, a
decrease in the value of the collateral. In the event a corporate borrower makes
a reference to a specialized quasi-judicial authority called the Board for
Industrial and Financial Reconstruction, foreclosure and enforceability of
collateral is stayed. The Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, has strengthened the ability of
lenders to resolve non-performing assets by granting them greater rights as to
enforcement of security and recovery of dues from corporate borrowers. There can
be no assurance that the legislation will have a favorable impact on our efforts
to resolve non-performing assets. See also "Overview of the Indian Financial
Sector - Recent Structural Reforms - Legislative Framework for Recovery of Debts
Due to Banks." We cannot guarantee that we will be able to realize the full
value on our collateral, as a result of, among other factors, delays in
bankruptcy and foreclosure proceedings, defects in the perfection of collateral
and fraudulent transfers by borrowers. A failure to recover the expected value
of collateral security could expose us to a potential loss. Any unexpected
losses could adversely affect our business, our future financial performance,
our stockholders' equity and the price of our equity shares and our ADSs.
We face greater credit risks than banks in developed countries.
Our principal business is to provide financing to our clients, a
predominant number of whom are based in India. At year-end fiscal 2004, loans
outside India constituted only 1.4% of our gross loans. In the past, ICICI
focused its activities on financing large-scale projects. Increasingly, we are
focusing on lending to individuals, as well as large corporate customers, many
of who have strong credit ratings, as well as select small and middle market
companies. Our loans to small and middle market companies can be expected to be
more severely affected by adverse developments in the Indian economy than loans
to large corporations. In all of these cases, we are subject to the credit risk
that our borrowers may not pay in a timely fashion or may not pay at all. The
credit risk of all our borrowers is higher than that in more developed countries
due to the higher uncertainty in the Indian regulatory, political, economic and
industrial environment and difficulties that many of our borrowers face in
adapting to instability in world markets and technological advances taking place
across the world. Unlike several developed countries, India does not have an
operational nationwide credit bureau which may affect the quality of information
available to us about the credit history of our borrowers, especially
individuals and small businesses. In addition, increased competition arising
from economic liberalization in India, variable industrial growth, a sharp
decline in commodity prices, the high level of debt in the financing of projects
and capital structures of companies in India and the high interest rates in the
Indian economy during the period in which a large number of projects contracted
their borrowings has reduced the profitability of certain of our borrowers which
in turn could adversely affect our loan portfolio and accordingly our business.
14
Our funding is primarily short-term and if depositors do not roll over
deposited funds upon maturity our business could be adversely affected.
Most of our incremental funding requirements, including replacement of
maturing liabilities of ICICI which generally had longer maturities, are met
through short-term funding sources, primarily in the form of deposits including
inter-bank deposits. However, a large portion of our assets, primarily the
assets of ICICI and our home loan portfolio, have medium or long-term
maturities, creating a potential for funding mismatches. Our customer deposits
are generally of less than one year maturity. If a substantial number of our
depositors do not roll over deposited funds upon maturity, our liquidity
position could be adversely affected. The failure to obtain rollover of customer
deposits upon maturity or to replace them with fresh deposits could have a
material adverse effect on our business, our future financial performance, our
stockholders' equity and the price of our equity shares and our ADSs.
In April 2003, unsubstantiated rumours believed to have originated in
Gujarat, a state in India, alleged that we were facing liquidity problems,
although our liquidity position was sound. We witnessed higher than normal
deposit withdrawals during the period April 11 to 13, 2003, on account of these
unsubstantiated rumours. We successfully controlled the situation, but if such
situations were to arise in future, any failure to control such situations could
result in large deposit withdrawals, which would adversely impact our liquidity
position.
Material changes in the regulations which govern us could cause our
business to suffer and the price of our equity shares and our ADSs to go
down.
Banks in India operate in a highly regulated environment. The Reserve Bank
of India extensively supervises and regulates banks. In addition, 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. See
"Supervision and Regulation". For example, on September 11, 2004, the Reserve
Bank of India increased the cash reserve ratio from 4.5% to 4.75% effective
September 18, 2004 and 5.0% effective October 2, 2004 and reduced the rate of
interest that it pays on the eligible cash reserve ratio balances from the bank
rate (currently 6.0%) to 3.5%. This will have a negative impact on our net
interest income in fiscal 2005. The laws and regulations governing the banking
sector could change in the future and any such changes could adversely affect
our business, our future financial performance, our stockholders' equity and the
price of our equity shares and our ADSs.
A determination against us in respect of disputed tax assessments may
adversely impact our financial performance.
At year-end fiscal 2004, we had been assessed an aggregate of Rs. 25.2
billion (US$ 579 million) in excess of the provision made in our accounts, in
income tax, interest tax, wealth tax and sales tax demands by the government of
India's tax authorities. We have appealed each of these tax demands. While we
expect that no additional liability will arise out of these disputed demands,
there can be no assurance that these matters will be settled in our favor, and
that no further liability will arise out of these demands. Any additional tax
liability may adversely impact our financial performance and the price of our
equity shares and our ADSs.
We are involved in various litigations and any final judgement awarding
material damages against us could have a material adverse impact on our
future financial performance, our stockholders' equity and the price of our
equity shares and our ADSs.
We are often involved in litigations for a variety of reasons, which
generally arise because we seek to recover our dues from borrowers or because
customers seek claims against us. We believe, based on the facts of the cases
and consultation with counsel, that these cases generally do not involve the
risk of a material adverse impact on our financial performance or stockholders'
equity. The vast majority of these cases arise in the normal course and do not
involve the risk of a material adverse impact on our financial performance or
stockholders' equity. Where we assess that there is a material
15
risk of loss, it is our policy to make provisions for the loss; however, we do
not make provisions where our assessment is that the risk is insignificant. We
have not made any provisions for a suit filed by Mardia Chemicals against ICICI
Bank, Mr. K. V. Kamath, Managing Director and CEO and Ms. Lalita D. Gupte, Joint
Managing Director, for an amount of Rs. 56.3 billion (US$ 1.3 billion) on the
grounds that Mardia Chemicals had 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. We
cannot guarantee that the judgment in this suit would be favourable to us and
should our assessment of the risk change, our view on provisions will also
change. We have also not made any provisions for an arbitration proceeding in
London, brought against us and other Indian lenders by certain foreign lenders
in relation to a dispute under an inter-creditor agreement in connection with a
power project, the principal sponsor of which has filed for bankruptcy in the
United States, claiming damages against us and other Indian lenders in an
aggregate amount of US$ 534 million. Any final judgement awarding material
damages against us in this arbitration proceeding could, however, have a
material adverse impact on our future financial performance, our stockholders'
equity and the price of our equity shares and our ADSs. We cannot guarantee that
the arbitration will be concluded in a manner favourable to us and should our
assessment of the risk change, our view on provisions will also change.
We have experienced recent and rapid growth in our retail loan portfolio
and our business strategy supports continued growth in this area. Our
inability to grow further or succeed in retail products and services may
adversely affect our business.
We are a relatively new entrant into the retail loan business and have
achieved significant growth in this sector since the amalgamation. At year-end
fiscal 2004, consumer loans and credit card receivables represented 39.2% of our
gross loans outstanding as compared to 27.5% of our gross loans outstanding at
year-end fiscal 2003. Our present business strategy reflects continued focus on
further growth in this sector. While we anticipate continued significant demand
in this area, we cannot assure you that our retail portfolio will continue to
grow as expected. Our inability to grow further or succeed in retail products
and services may adversely affect our business, our future financial
performance, our stockholders' equity and the price of our equity shares and our
ADSs.
Retail products and services could expose us to the risk of financial
irregularities by various intermediaries and customers. We cannot assure you
that our skills and management information systems will be adequate to
successfully manage these retail products and services. Our retail loans are
relatively new and there is no assurance that there will be no additional
impaired loans on account of these loans and that such impaired loans will not
have a materially adverse impact on the quality of our loan portfolio.
If we are not able to succeed in our new business areas, we may not be
able to meet our projected earnings and growth targets.
ICICI entered the life insurance business in fiscal 2001 and the non-life
insurance business in fiscal 2002 through its majority-owned joint ventures,
which are now majority-owned joint ventures of ICICI Bank. We are also seeking
to expand internationally by leveraging on our home country links and technology
competencies in financial services. We are a new entrant in the international
business and the skills required for this business could be different from those
for our domestic businesses. The life insurance business and the international
business are expected to require substantial capital. We cannot be certain that
these new businesses will perform as anticipated. Our inability to grow or
succeed in new business areas may adversely affect our business, our future
financial performance, our stockholders' equity and the price of our equity
shares and our ADSs.
We are exposed to fluctuation in foreign exchange rates.
As a financial intermediary we are exposed to exchange rate risk. We comply
with regulatory limits on our unhedged foreign currency exposure by making
foreign currency loans on terms that are
16
generally similar to our foreign currency borrowings and thereby transferring
the foreign exchange risk to the borrower or through active use of
cross-currency swaps and forwards to generally match the currencies of our
assets and liabilities. However, we are exposed to fluctuation in foreign
currency rates for our unhedged exposure. Adverse movements in foreign exchange
rates may also impact our borrowers negatively which may in turn impact the
quality of our exposure to these borrowers. Volatility in foreign exchange rates
could adversely affect our business, our future financial performance, our
shareholders' funds and the price of our equity shares and our ADSs.
Our business is very competitive and our growth strategy depends on our
ability to compete effectively.
We face intense competition from Indian and foreign commercial banks in all
our products and services. Additonally, the Indian financial sector may
experience further consolidation, resulting in fewer banks and financial
institutions, some of which may have greater resources than us. The government
of India has also announced measures that would permit foreign banks to
establish wholly-owned subsidiaries in India or acquire up to 74.0% of any
Indian private sector bank. Due to competitive pressures, we may be unable to
successfully execute our growth strategy and offer products and services at
reasonable returns and this may adversely impact our business, our future
financial performance, our stockholders' equity and the price of our equity
shares and our ADSs.
Significant security breaches in our computer system and network
infrastructure and frauds could adversely impact our business.
We seek to protect our computer systems and network infrastructure from
physical break-ins as well as security breaches and other disruptive problems
caused by our increased use of the Internet. Computer break-ins and power
disruptions could affect the security of information stored in and transmitted
through these computer systems and network infrastructure. We employ security
systems, including firewalls and password encryption, designed to minimise the
risk of security breaches. Although we intend to continue to implement security
technology and establish operational procedures to prevent break-ins, damage and
failures, there can be no assurance that these security measures will be
successful. A significant failure in security measures could have a material
adverse effect on our business, our future financial performance and the price
of our equity shares and our ADSs. Our business operations are based on a high
volume of transactions. Although we take adequate measures to safeguard against
system related and other frauds, there can be no assurance that we would be able
to prevent frauds. Our reputation could be adversely affected by significant
frauds committed by employees, customers or outsiders.
System failures could adversely impact our business.
Given the increasing share of retail products and services and transaction
banking services in our total business, the importance of systems technology to
our business has increased significantly. Our principal delivery channels
include ATMs, call centers and the Internet. Any failure in our systems,
particularly for retail products and services and transaction banking, could
significantly affect our operations and the quality of customer service and
could result in business and financial losses and adversely affect the price of
our equity shares and our ADSs.
Any inability to attract and retain talented professionals may impact our
business.
Attracting and retaining talented professionals is a key element of our
strategy and we believe it to be a significant source of competitive advantage.
An inability to attract and retain talented professionals or the resignation or
loss of key management personnel may have an adverse impact on our business, our
future financial performance and the price of our equity shares and our ADSs.
17
Risks Relating to the ADSs and Equity Shares
You will not be able to vote your ADSs.
ADS holders have no voting rights unlike holders of the equity shares who
have voting rights. The depositary will exercise its right to vote on the equity
shares represented by the ADSs as directed by our board of directors. However,
under the 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 the
depositary, which owned approximately 21.8% of our equity shares as of August
27, 2004, could vote only 10.0% of our equity shares. 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 rules, including the possible
imposition of interest charges, if ICICI Bank is considered to be a passive
foreign investment company.
Based upon certain proposed Treasury Regulations which are proposed to be
effective for taxable years beginning after December 31, 1994 and upon certain
management estimates, ICICI Bank does not expect to be a Passive Foreign
Investment Company (PFIC). ICICI Bank has based the expectation that it is
currently not a PFIC on, among other things, provisions in the proposed Treasury
Regulations that provide that certain restricted reserves (including cash and
securities) of banks are assets used in connection with banking activities and
are not passive assets, as well as the composition of ICICI Bank's income and
ICICI Bank's assets from time to time. Since there can be no assurance that such
proposed Treasury Regulations will be finalized in their current form or not at
all, and since the composition of income and assets of ICICI Bank will vary over
time, there can be no assurance that ICICI Bank will not be considered a PFIC
for any taxable year. If ICICI Bank is a PFIC for any taxable year during which
a US investor (see "Taxation - United States Taxation") holds equity shares or
ADSs of ICICI Bank, the US investor would be subject to special tax rules,
including the possible imposition of interest charges (see "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 approval of the
Reserve Bank of India is required.
ADS holders seeking to sell in India any equity shares withdrawn upon
surrender of an ADS will require the Reserve Bank of India's approval for each
such transaction unless the sale of such equity shares is made on a stock
exchange or in connection with an offer made under the regulations regarding
takeovers. We cannot guarantee that any approval will be obtained in a timely
manner or at all. Because of possible delays in obtaining requisite approvals,
investors in equity shares may be prevented from realizing gains during periods
of price increases or limiting losses during periods of price declines.
18
Restrictions on withdrawal of ADSs from the depositary facility and
redeposit of equity shares in the depositary facility could adversely
affect the price of our ADSs.
An ADS holder who surrenders an ADS and withdraws equity shares may be able
to redeposit those equity shares in the depositary facility in exchange for
ADSs. In addition, an investor who has purchased equity shares in the Indian
market may be able to deposit them in the ADS program. However, in either case,
the deposit or redeposit of equity shares may be limited by securities law
restrictions and will be restricted so that the cumulative aggregate number of
equity shares that can be deposited or redeposited as of any time cannot exceed
the cumulative aggregate number represented by ADSs converted into underlying
equity shares as of such time. An investor who has purchased equity shares in
the Indian market could, therefore, face restrictions in depositing them in the
ADS program. This increases the risk that the market price of the ADSs will be
below that of the equity shares. For a discussion of the legal restrictions
triggered by withdrawal of ADSs from the depositary facility and redeposit of
equity shares in the depositary facility, see "Restriction on Foreign Ownership
of Indian Securities".
Certain shareholders own a large percentage of our equity shares. Their
actions could adversely affect the price of our equity shares and our ADSs.
Life Insurance Corporation of India, General Insurance Corporation of India
and government-owned general insurance companies, each of which is directly or
indirectly controlled by the Indian government, are among our principal
shareholders. At August 27, 2004, government-controlled entities owned
approximately 17.1% of our outstanding equity shares. Deutsche Bank Trust
Company Americas holds the equity shares represented by 80.01 million ADSs
outstanding and equivalent to 21.8% of our outstanding equity shares, as
depositary on behalf of the holders of the ADSs. The ADSs are listed on the New
York Stock Exchange. Our other large equity shareholders include Allamanda
Investments Pte. Limited, a subsidiary of Temasek Holdings Limited, the
government of Singapore, HWIC Asia Fund, an affiliate of Fairfax Financial
Holdings Limited and Bajaj Auto Limited, an Indian company. Any substantial sale
of our equity shares by these or other large shareholders could adversely affect
the price of our equity shares and our ADSs.
Conditions in the Indian securities market may affect the price or
liquidity of our equity shares and our ADSs.
The Indian securities markets are smaller and more volatile than securities
markets in developed economies. The Indian stock exchanges have in the past
experienced substantial fluctuations in the prices of listed securities.
Indian stock exchanges have also experienced problems that have affected
the market price and liquidity of the securities of Indian companies. These
problems have included temporary exchange closures, broker defaults, settlement
delays and strikes by brokers. The Stock Exchange, Mumbai, or the BSE, was
closed for three days in March 1995 following a default by a broker. In March
2001, the BSE dropped 667 points or 15.6% and there were also rumors of insider
trading in the BSE leading to the resignation of the BSE president and several
other members of the governing board. In the same month, the Kolkata Stock
Exchange, formerly known as the Calcutta Stock Exchange, suffered a payment
crisis when several brokers defaulted and the exchange invoked guarantees
provided by various Indian banks. In April 2003, the decline in the price of the
equity shares of a leading Indian software company created volatility in the
Indian stock markets and created temporary concerns regarding our exposure to
the equity markets. On May 17, 2004, the BSE Sensex fell by 565 points from
5,070 to 4,505, creating temporary concerns regarding our exposure to the equity
markets. Both the Stock Exchange, Mumbai and the National Stock Exchange halted
trading on the exchanges on May 17, 2004 in view of the sharp fall in prices of
securities. In addition, the governing bodies of the Indian stock exchanges have
from time to time imposed restrictions on trading in certain securities,
limitations on price movements and margin requirements. Further, from time to
time, disputes have occurred between listed companies and stock exchanges and
other regulatory bodies, which in some
19
cases may have had a negative effect on market sentiment. In recent years, there
have been changes in laws and regulations for the taxation of dividend income,
which have impacted the Indian equity capital markets. See "Dividends". Similar
problems or changes could occur in the future and, if they did, they could
affect the market price and liquidity of our equity shares and our ADSs.
Settlement of trades of equity shares on Indian stock exchanges may be
subject to delays.
The equity shares represented by the ADSs are currently listed on the Stock
Exchange, Mumbai 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.
The imposition of securities transaction tax could adversely impact the
Indian securities market and the price of our equity shares and our ADSs.
The government of India's budget for fiscal 2004 has introduced the
securities transaction tax. Effective October 1, 2004, the purchase
and sale of equity shares on a recognized stock exchange in India settled by
actual delivery or transfer will be subject to securities transaction tax at the
rate of 0.075%, on the value of the transaction, recoverable from the purchaser
and the seller. See "Taxation - Taxation on sale of Equity Shares or ADSs". The
introduction of the transaction tax could have a negative impact on market
sentiment and trading volumes and may adversely impact the price of our equity
shares and ADSs.
As a result of Indian government regulation of foreign ownership, the price
of our ADSs could go down.
Foreign ownership of Indian securities is heavily regulated and is
generally restricted. ADSs issued by companies in certain emerging markets,
including India, may trade at a discount or premium to the underlying equity
shares, in part because of the restrictions on foreign ownership of the
underlying equity shares.
Your holdings may be diluted by additional issuances of equity and any
dilution may adversely affect the market price of our equity shares and
ADSs.
Subsequent to year-end fiscal 2004, we issued 115,920,758 new equity
shares, representing 18.8% of our outstanding equity shares at year-end fiscal
2004. In addition, up to 5.0% of our issued equity shares may be issued in
accordance with our employee stock option scheme to eligible employees. At
August 31, 2004, ICICI Bank had granted a total of 28,941,975 stock options, of
which 5,642,108 had been exercised, 5,809,619 had vested but had not been
exercised and 2,373,639 had lapsed or been forfeited at that date. The total
stock options granted, less options lapsed or forfeited, were 3.7 % of our
issued equity shares. There is a risk that growth in our business, including in
our international operations and our insurance business, could require us to
fund this growth through additional equity offerings. Any future issuance of
equity shares would dilute the positions of investors in the ADSs and equity
shares, and could adversely affect the market price of our equity shares and our
ADSs.
You may be unable to exercise preemptive rights available to other
shareholders.
A company incorporated in India must offer its holders of equity shares
preemptive rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any new
equity shares, unless these rights have been waived by at least 75.0% of the
company's shareholders present and voting at a shareholders' general meeting. US
investors in ADSs may be unable to exercise preemptive rights for equity shares
underlying ADSs unless a registration statement under the Securities Act is
effective with respect to such rights or an exemption from the registration
requirements of the Securities Act is available. Our decision to file a
20
registration statement will depend on the costs and potential liabilities
associated with any such registration statement as well as the perceived
benefits of enabling US investors in ADSs to exercise their preemptive rights
and any other factors we consider appropriate at the time. We do not commit that
we would file a registration statement under these circumstances. If ICICI Bank
issues any such securities in the future, such securities may be issued to the
depositary, which may sell such securities in the securities markets in India
for the benefit of the investors in the ADSs. There can be no assurance as to
the value, if any, the depositary would receive upon the sale of these
securities. To the extent that investors in ADSs are unable to exercise
preemptive rights, their proportional interests in ICICI Bank would be reduced.
Because the equity shares underlying the ADSs are quoted in rupees in
India, you may be subject to potential losses arising out of exchange rate
risk on the Indian rupee and risks associated with the conversion of rupee
proceeds into foreign currency.
Investors that purchase ADSs are required to pay for the ADSs in US
dollars. Investors are subject to currency fluctuation risk and convertibility
risks since the equity shares are quoted in rupees on the Indian stock exchanges
on which they are listed. Dividends on the equity shares will also be paid in
rupees, and then converted into US dollars for distribution to ADS investors.
Investors that seek to convert the rupee proceeds of a sale of equity shares
withdrawn upon surrender of ADSs into 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 12.8% of its value against the US dollar from September 1999
to May 2002, depreciating from Rs. 43.47 per US$ 1.00 on September 1, 1999 to
Rs. 49.03 per US$ 1.00 on May 31, 2002 before appreciating to Rs. 45.39 per US$
1.00 on May 28, 2004. The rupee has depreciated again by 4.2% since May 28, 2004
to reach Rs. 47.31 per US$ 1.00 on August 27, 2004. In addition, in the past,
the Indian economy has experienced severe foreign exchange shortages.
You may be subject to Indian taxes arising out of capital gains.
Generally, capital gains, whether short-term or long-term, arising on the
sale of the underlying equity shares in India are subject to Indian capital
gains tax. For the purpose of computing the amount of capital gains subject to
tax, Indian law specifies that the cost of acquisition of the equity shares will
be deemed to be the share price prevailing on the BSE or the National Stock
Exchange on the date the depositary advises the custodian to redeem receipts in
exchange for underlying equity shares. The period of holding of such equity
shares, for determining whether the gain is long-term or short-term, commences
on the date of the giving of such notice by the depositary to the custodian.
Investors are advised to consult their own tax advisers and to consider
carefully the potential tax consequences of an investment in the ADSs.
There may be less company information available in Indian securities
markets than securities markets in developed countries.
There is a difference between the level of regulation and monitoring of the
Indian securities markets and the activities of investors, brokers and other
participants and that of markets in the United States and other developed
countries. The Securities and Exchange Board of India is responsible for
21
improving disclosure and other regulatory standards for the Indian securities
markets. The Securities and Exchange Board of India has issued regulations and
guidelines on disclosure requirements, insider trading and other matters. There
may, however, be less publicly available information about Indian companies than
is regularly made available by public companies in developed countries.
22
BUSINESS
Overview
We offer a wide range of banking products and services to corporate and
retail customers through a variety of delivery channels. In fiscal 2004, we made
a net profit of Rs. 5.2 billion (US$ 120 million) compared to a net loss of Rs.
8.0 billion (US$ 184 million) in fiscal 2003. At year-end fiscal 2004, we had
assets of Rs. 1,409.1 billion (US$ 32.5 billion) and stockholders' equity of Rs.
94.5 billion (US$ 2.2 billion).
ICICI Bank was organized under the laws of India in 1994 as a private
sector commercial bank. ICICI Bank was an affiliate company of ICICI. ICICI was
organized under the laws of India in 1955 and together with its subsidiaries and
affiliates was a diversified financial services group. In April 2002, ICICI and
two of its subsidiaries, ICICI Personal Financial Services and ICICI Capital
Services merged with and into ICICI Bank in an all-stock amalgamation.
Statement on Financial Accounting Standards No. 141 on "Business
Combinations", issued by the Financial Accounting Standards Board, requires that
business combinations be accounted for in the period in which the combination is
consummated. The effective date of the amalgamation for accounting purposes
under US GAAP was April 1, 2002. Accordingly, under US GAAP, the amalgamation
has been reflected in the financial statements for fiscal 2003 and fiscal 2004
contained in this annual report, as it was consummated in April 2002. Under US
GAAP, the amalgamation was accounted for as a reverse acquisition. This means
that ICICI was recognized as the accounting acquirer in the amalgamation,
although ICICI Bank was the legal acquirer. Accordingly, the financial
statements and other financial information contained in this annual report for
fiscal 2002 and prior years, except where specifically stated otherwise, present
the assets, liabilities and results of operations of ICICI.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation, with ICICI Bank
recognized as the accounting acquirer.
During fiscal 2004, we offered products and services in the areas of
commercial banking to corporate and retail customers, both domestic and
international, investment banking and other products including insurance.
Our commercial banking products and services for retail customers include
both retail loans and retail liability products and services. We offer a wide
range of retail credit products including home loans, automobile loans,
commercial vehicle loans, two wheeler loans, dealer financing, personal loans,
credit cards, loans against time deposits and loans against shares. We also
offer loans and fee-based services to small enterprises, which include suppliers
and dealers of large corporations, and clusters of small enterprises that have a
homogeneous profile. We take rupee and foreign currency deposits from customers
in India as well as non-resident Indians. Our deposit products include checking
accounts and time deposits, with specific products for customers in various
segments, like student accounts, payroll accounts, accounts for small businesses
and non-resident Indian accounts. We also offer retail bond products. Our other
retail products and services include private banking, debit cards, fund transfer
facilities and utility bill payment services. We also distribute third party
investment products, including government of India Relief Bonds, mutual funds
and insurance policies issued by our joint ventures, ICICI Prudential Life
Insurance Company and ICICI Lombard General Insurance Company.
Our commercial banking operations for corporate customers include a range
of products and services for India's leading corporations and growth-oriented
middle market businesses. Our products and services for corporate customers
include loan products and fee and commission-based products and services. Our
loan products consist of project finance, corporate finance and working capital
loans, including cash credit facilities and bill discounting. Fee and
commission-based products and
23
services include documentary credits, standby letters of credit, project finance
guarantees, cash management services, escrow and trust and retention accounts,
cross-border trade services, payment services, custodial services and loan
syndication. We also take rupee or foreign currency deposits with fixed or
floating interest bases from our corporate customers. Our deposit taking
products include certificates of deposit, checking accounts and time deposits.
We also offer agricultural financing products.
Our investment banking business includes ICICI Bank's treasury operations.
ICICI Bank's treasury operations include maintenance and management of
regulatory reserves, proprietary trading in equity, fixed income and foreign
exchange, a range of products and services for corporate customers, such as
forward contracts and interest rate and currency swaps, and foreign exchange
products and services. Through its treasury operations, ICICI Bank manages its
balance sheet including the maintenance of required regulatory reserves and
seeks to optimize profits from its trading portfolio by taking advantage of
market opportunities. There is no restriction on active management of ICICI
Bank's regulatory portfolio through sales and purchases of securities. Our
investment banking business also includes corporate advisory services, including
advice on financing and strategic transactions, underwriting and placement of
equity offerings and brokering, and fixed income operations, including primary
dealership in government securities and proprietary operations in various money
market instruments, all of which are undertaken by ICICI Securities Limited, our
investment banking subsidiary. Funds managed by our subsidiary ICICI Venture
Funds Management Company Limited provide venture capital funding to start-up
companies, as well as private equity to a range of companies.
Our other businesses include life insurance and non-life insurance. ICICI
Prudential Life Insurance Company, our joint venture with Prudential plc, offers
a range of life insurance products to individuals in India. ICICI Lombard
General Insurance Company, our joint venture with Lombard Canada Limited, offers
property and other non-life insurance products to companies and individuals in
India.
We believe that the international markets present a major growth
opportunity and have, therefore, expanded the range of our commercial banking
products to international customers. Our strategy for growth in international
markets is based on leveraging home country links and technology for
international expansion by capturing market share in select international
markets. We have identified North America, the United Kingdom, the Middle-East
and South-East Asia as the key regions for establishing our international
presence. We currently have subsidiaries in the United Kingdom and Canada,
branches in Singapore and Bahrain and representative offices in the United
States, China, United Arab Emirates and Bangladesh. We have also received
regulatory approval to set up a representative office in South Africa and
propose to establish a subsidiary in Russia.
We offer our customers a choice of delivery channels including physical
branches, ATMs, telephone banking call centers and the Internet. In recent
years, we have expanded our physical delivery channels, including bank branches
and ATMs, to cover a total of approximately 1,790 locations in 311 centers
throughout India at year-end fiscal 2004.
We have consistently used technology to differentiate our products and
services from those of our competitors. For example, we were among the first
banks in India to offer Internet banking. Our technology-driven products also
include cash management services, mobile phone banking services and electronic
commerce-based business-to-business and business-to-consumer banking solutions.
To support our technology initiatives, we have set up online real time
transaction processing systems. We remain focused on changes in customer needs
and technological advances and seek to remain at the forefront of electronic
banking in India.
Our legal name is ICICI Bank Limited but we are known commercially as ICICI
Bank. We were incorporated on January 5, 1994 under the laws of India as a
limited liability corporation. The duration of ICICI Bank is unlimited. Our
principal corporate office is located at ICICI Bank Towers, Bandra-Kurla
Complex, Mumbai 400 051, India, our telephone number is +91 22 2653 1414 and our
24
web site address is www.icicibank.com. Our agent for service of process in the
United States is CT Corporation System and their address is 111 Eighth Avenue,
New York, New York, 10011.
History
ICICI 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
other group companies, 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 Bank was incorporated in 1994 as a part of the ICICI group. 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. Pursuant to the merger of SCICI into ICICI, ICICI Bank
became a wholly-owned subsidiary of ICICI. Effective March 10, 2001, ICICI Bank
acquired Bank of Madura, an old private sector bank, in an all-stock merger.
The issue of universal banking, which in the Indian context means
conversion of long-term lending institutions such as ICICI into commercial
banks, has been discussed at length over the past few years. Conversion into a
bank offered ICICI the ability to accept low-cost demand deposits and offer a
wider range of products and services, and greater opportunities for earning
non-fund based income in the form of banking fees and commissions. ICICI Bank
also considered various strategic alternatives in the context of the emerging
competitive scenario in the Indian banking industry. ICICI Bank identified a
large capital base and size and scale of operations as key success factors in
the Indian banking industry. In view of the benefits of transformation into a
bank and the Reserve Bank of India's pronouncements on universal banking, ICICI
and ICICI Bank decided to merge.
At the time of the merger, both ICICI Bank and ICICI were publicly listed
in India and on the New York Stock Exchange. The amalgamation was approved by
each of the boards of directors of ICICI, ICICI Personal Financial Services,
ICICI Capital Services and ICICI Bank at the respective board meetings held on
October 25, 2001. The amalgamation was approved by ICICI Bank's and ICICI's
shareholders 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 amalgamation became effective on
May 3, 2002 and the date of the amalgamation for accounting purposes under US
GAAP was April 1, 2002.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 Bank. 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.
25
Shareholding Structure and Relationship with the Government of India
The following table sets forth, at August 27, 2004, certain information
regarding the ownership of our equity shares.
--------------------------------
Percentage
of total
equity
shares Number of equity
outstanding shares held
--------------------------------
Government-controlled shareholders:
Life Insurance Corporation of India...................................... 10.11 74,217,104
General Insurance Corporation of India and government-owned general
insurance companies..................................................... 6.30 46,284,604
Other government-controlled institutions, corporations and banks......... 0.67 4,925,255
--------------------------------
Total government-controlled shareholders................................... 17.08 125,426,963
--------------------------------
Other Indian investors:
Individual domestic investors (1) (2).................................... 7.92 58,146,757
Bajaj Auto Limited ...................................................... 3.40 24,957,373
Indian corporates and others (excluding Bajaj Auto Limited).............. 0.97 7,155,897
Mutual funds and banks (other than government-controlled banks).......... 0.53 3,906,966
--------------------------------
Total other Indian investors............................................... 12.82 94,166,993
--------------------------------
Total Indian investors..................................................... 29.90 219,593,956
--------------------------------
Foreign investors:
Deutsche Bank Trust Company Americas, as depositary...................... 21.79 160,025,318
Allamanda Investments Pte. Limited....................................... 9.02 66,234,627
HWIC Asia Fund........................................................... 4.63 33,965,361
Government of Singapore.................................................. 4.22 30,995,744
Foreign institutional investors, foreign banks, overseas corporate bodies
and non-resident Indians (excluding Allamanda Investments Pte. Limited,
HWIC Asia Fund and Government of Singapore) (1)........................ 30.44 223,571,050
--------------------------------
Total foreign investors.................................................... 70.10 514,792,100
--------------------------------
Total ..................................................................... 100.00 734,386,056
================================
____________
(1) Executive officers and directors as a group held less than 0.5% of the
equity shares as of this date.
(2) No single shareholder in this group owned 5.0% or more of ICICI Bank's
equity shares as of this date.
In April 2004, we issued 115,920,758 equity shares to foreign and domestic
institutional investors and domestic retail investors at a price of Rs. 280 (US$
6) per share, totaling Rs. 32.5 billion (US$ 748 million).
The holding of government-controlled shareholders was 17.1% as at August
27, 2004 against 17.8% at August 29, 2003. The holding of Life Insurance
Corporation of India was 10.1% at August 27, 2004 compared to 8.0% at August 29,
2003 primarily due to the issuance of shares to Life Insurance Corporation of
India in April 2004.
We operate as an autonomous and commercial enterprise, making decisions and
pursuing strategies that are designed to maximize shareholder value, and the
Indian government has never directly held any of our shares. There is no
shareholders' agreement or voting trust relating to the ownership of the shares
held by the government-controlled shareholders. We do not have any agreement
with our government-controlled shareholders regarding management control, voting
rights, anti-dilution or any other matter. The government of India has
guaranteed certain of our domestic and multilateral borrowings. Under the terms
of these loan and guarantee facilities provided by the government of India to
us, the government of India is entitled to appoint and has appointed one
representative to our board. We invite a representative of each of the
government-controlled insurance
26
companies that are among our principal institutional shareholders, Life
Insurance Corporation of India and General Insurance Corporation of India,
generally their respective chairman, on our board. Mr. P.C. Ghosh, the current
chairman of the General Insurance Corporation of India was appointed as a
director effective January 31, 2003. Mr. S.B. Mathur, chairman of Life Insurance
Corporation of India was appointed as a director effective January 29, 2004. See
"Management--Directors and Executive Officers" for a discussion of the
composition of our board of directors.
The holding of other Indian investors was 12.8% as at August 27, 2004,
against 15.6% as at August 29, 2003. The total holding of Indian investors was
29.9% as at August 27, 2004 compared to 33.4% as at August 29, 2003. The holding
of foreign investors increased to 70.1% as at August 27, 2004 from 66.7% at
August 29, 2003. See "Supervision and Regulation - Reserve Bank of India
Regulations - Ownership Restrictions" and "Restriction on Foreign Ownership of
Indian Securities".
Deutsche Bank Trust Company Americas holds the equity shares represented by
80.01 million ADSs outstanding as depositary on behalf of the holders of the
ADSs. The ADSs are listed on the New York Stock Exchange. The depositary has the
right to vote on the equity shares represented by the ADSs as directed by our
board of directors. Under the Indian Banking Regulation Act, no person holding
shares in a banking company can exercise more than 10.0% of the total voting
power. This means that Deutsche Bank Trust Company Americas (as depositary),
which owned approximately 21.8% of our equity shares as of August 27, 2004,
could only vote 10.0% of our equity shares, in accordance with the directions of
our board of directors. See "Overview of the Indian Financial Sector - Recent
Structural Reforms - Proposed Amendments to the Banking Regulation Act". Except
as stated above, no shareholder has differential voting rights.
Strategy
Our objective is to enhance our position as a premier provider of banking
and other financial services in India and to leverage our competencies in
financial services and technology to develop our international business.
The key elements of our business strategy are to:
o fully leverage on the synergies of the amalgamation and our enhanced
capital base following our recent share issuance;
o focus on profitable, quality growth opportunities by:
- maintaining and enhancing our strong retail franchise;
- maintaining and enhancing our strong corporate franchise;
- building an international presence; and
- enhancing our strengths in the insurance business.
o emphasize conservative risk management practices and enhance asset quality;
o use technology for competitive advantage; and
o attract and retain talented professionals.
Fully Leverage on the Synergies of the Amalgamation and Our Enhanced
Capital Base following Our Recent Share Issuance
As a result of the acquisition of Bank of Madura, we became and continue to
be the largest private sector bank in India and as a result of the amalgamation,
we became and continue to be the second largest among all banks in India, in
terms of total assets. The amalgamation increased our capital base, lowered the
cost of our funding compared to ICICI and expanded the scope of our business
operations. Subsequent to year-end fiscal 2004, we completed a share issuance of
Rs. 32.5 billion (US$ 748 million) to support growth in various areas of our
business operations. We aim to continue to leverage on our larger size and
enhanced capital base, comprehensive suite of products and
27
services, extensive corporate and retail customer relationships,
technology-enabled distribution architecture, strong brand franchise and vast
talent pool to develop and increase our market share in profitable business
lines.
Focus on Profitable, Quality Growth Opportunities by:
Maintaining and Enhancing our Strong Retail Franchise
We believe that the Indian retail financial services market is likely to
continue to experience sustained growth. With upward migration of household
income levels, increasing affordability of retail finance and acceptance of use
of credit to finance purchases, retail credit has emerged as a rapidly growing
opportunity for banks that have the necessary skills and infrastructure to
succeed in this business. We have capitalized on the growing retail opportunity
in India and believe that we have emerged, on an incremental basis, as a market
leader in retail credit. The key dimensions of our retail strategy are
innovative products, parity pricing, customer convenience, wide distribution,
strong processes, prudent risk management and customer focus. We are also
focusing on growth in our retail deposit base to diversify our funding towards
more stable and lower cost funding sources. We earn fee income from our
commercial banking services to retail customers, including retail loan
processing fees, credit card and debit card fees, and retail transaction fees.
Our ATM acquiring business also generates fee income when customers of other
banks execute transactions at our ATMs. We have also entered the credit card
acquiring business, in which we earn income on transactions executed at merchant
point of sale terminals owned by us. We also offer our customers depositary
share accounts and direct sales of third party mutual funds and government of
India Relief Bonds, for which we earn fee income. Cross selling of the entire
range of credit and investment products and banking services to our customers is
a critical aspect of our retail strategy. We will also continue to securitize a
portion of the retail assets originated by us.
We have integrated our strategy with regard to small enterprises with our
strategy for retail products and services. We are focusing on offering working
capital loans and other banking products and services to suppliers or dealers of
large corporations, and clusters of small enterprises that have a homogeneous
profile.
Maintaining and Enhancing our Strong Corporate Franchise
Our commercial banking services to corporate customers will continue to
focus on leveraging our strong corporate relationships and increased capital
base to increase our market share in non-fund based working capital products and
fee-based services. Our corporate lending activities will continue to focus on
structured finance, corporate finance and working capital lending to highly
rated corporations. We will also focus on achieving directed lending obligations
to the agricultural sector through carefully structured credit products. The
government policy focus on infrastructure development, including resolution of
certain issues through legislation, and the repositioning and emerging global
competitiveness of the Indian industry offer growth opportunities in the area of
project financing. In project finance, we will continue to focus on structuring
and syndication of financing for large projects by leveraging our expertise in
project financing, and on actively managing our project finance portfolio to
reduce portfolio concentration and to manage portfolio risk. We view ourselves
not only as a provider of project finance but also as an arranger and
facilitator, creating appropriate financing structures that may serve as
financing and investment vehicles for a wider range of market participants.
Our goal is to provide a comprehensive and integrated service to corporate
treasurers through our client bankers. We aim to increase the cross selling of
our products and services and maximize the value of our corporate relationships
through the effective use of technology, speedy response times, quality service
and the provision of products and services designed to meet specific customer
needs. We will continue to actively manage our asset portfolio through
securitization of assets as well as
28
through acquisition of credit portfolios from other institutions and banks, to
diversify the portfolio, reduce long-term balance sheet exposures and maximize
risk-adjusted returns.
Building an International Presence
We believe that the international markets present a major growth
opportunity and have therefore expanded the range of our commercial banking
products in international markets. Our initial strategy for growth in
international markets is based on leveraging home country links for
international expansion by capturing market share in select international
markets. The initial focus areas are supporting Indian companies in raising
corporate and project finance for their investments abroad, trade finance,
personal financial services for non-resident Indians and international alliances
to support domestic businesses. We have over the last few years built a large
network of correspondent relationships across all major countries. Most of these
countries have significant trade and other relationships with India.
We have identified North America, the United Kingdom, the Middle-East and
South-East Asia as the key regions for establishing our international presence.
We currently have subsidiaries in the United Kingdom and Canada, branches in
Singapore and Bahrain and representative offices in the United States, China,
United Arab Emirates and Bangladesh. We have also received regulatory approval
to set up a representative office in South Africa and propose to establish a
subsidiary in Russia.
With the establishment of a presence in key overseas locations, we aim to
expand our offering to include local banking to non-resident Indians as well as
to the broader local market. We propose to increase our scale of operations in
each of these locations by launching appropriate products that leverage our
technological capabilities and relative cost efficiencies.
Enhancing Our Strengths in the Insurance Business
Following the deregulation of the insurance sector in India, private sector
companies were allowed to enter the insurance business. We have a joint venture
partnership with Prudential plc of UK for the life insurance business. We have a
74.0% interest in this joint venture. This joint venture company, ICICI
Prudential Life Insurance Company Limited, obtained the license to conduct life
insurance business in November 2000 and commenced business operations in
December 2000. ICICI Prudential Life Insurance Company is the largest private
sector life insurance company in India, with about 31% market share in the
private sector based on incremental premium income (i.e., new business) in
fiscal 2004. ICICI Bank distributes life insurance policies issued by ICICI
Prudential Life Insurance Company through ICICI Bank's branch network, based on
a customer referral arrangement.
In the non-life insurance sector, we have a joint venture partnership with
Lombard Canada Limited. We have a 74.0% interest in this joint venture. The
joint venture company, ICICI Lombard General Insurance Company Limited, obtained
the license to conduct general insurance business in August 2001 and
subsequently commenced operations. ICICI Lombard General Insurance Company is
the largest private sector general insurance company in India, with about 22%
market share in the private sector in fiscal 2004. ICICI Lombard General
Insurance Company offers general insurance products to corporate and retail
customers and seeks to capitalize on our customer relationships.
The key dimensions of our strategy for growth in the insurance business are
innovative products, a wide distribution network, a prudent portfolio mix and
sound risk management practices. In addition, we are focussed on leveraging our
corporate and retail customer base for cross selling insurance products.
Emphasize Conservative Risk Management Practices and Enhance Asset Quality
We believe that conservative risk management policies, processes and
controls are critical for long-term sustainable competitive advantages in our
business. ICICI Bank's Risk Management Group
29
is an independent, centralized group responsible for establishing and
implementing company-wide risk management policies, with an increasing focus on
enhancing asset quality. An independent, centralized Compliance and Audit Group
and a Middle Office Group monitor adherence to regulations, policies and
procedures. We continue to build on our credit risk management procedures,
credit evaluation and rating methodology, credit risk pricing models,
proprietary analytics and monitoring and control mechanisms. We expect to enter
new product markets only after conducting detailed risk analysis and pilot
testing programs.
To reduce risk, we have diversified our loan portfolio towards retail
lending and shorter-term working capital, while continuing to focus on corporate
lending to highly-rated corporate customers and structured finance. In addition,
we seek to lower the credit risk profile of the project and corporate loan
portfolio through the increased use of financing structures based on a security
interest in the cash flows generated from the business of the borrower and
increased collateral, including additional security in the form of liquid
assets, such as investment securities and readily marketable real property. We
are also trying to mitigate project risk through the allocation of risk to
various project counterparties, such as construction contractors, operations and
maintenance contractors and raw material and fuel suppliers, by entering into
rigorous project contracts with those counterparties. We seek to control credit
risk in the retail loan portfolio, the small enterprises loan portfolio and the
agricultural financing portfolio through carefully designed approval criteria
and credit controls and efficient collection and recovery systems. We have
placed emphasis on recruiting experienced retail credit professionals to staff
our retail credit approval function. We have also established standards and
investigative verification procedures for selection of our marketing and
processing agents. While our lending to the agricultural sector and small scale
industries to comply with the priority sector lending norms of the Reserve Bank
of India may result in higher credit risk, we are seeking to develop appropriate
credit approval criteria and credit delivery structures to mitigate this risk.
Management has placed great emphasis on asset quality and this focus has
been institutionalized across the organization. We believe we are the market
driver in India in achieving early settlements with troubled borrowers, thus
maximizing our cash flows from these loans. Our Special Asset Management Group
has the responsibility for managing large impaired loans and accounts under
watch.
Use Technology for Competitive Advantage
We seek to be at the forefront of technology usage in the financial
services sector. Information technology is a strategic tool for our business
operations to gain a competitive advantage and to improve overall productivity
and efficiency of the organization. All of our technology initiatives are aimed
at enhancing value, offering customer convenience and improving service levels
while optimizing costs.
We expect to continue with our policy of making investments in technology
to achieve a significant competitive advantage. The key objectives behind our
information technology strategy continue to be:
o building a cost-efficient distribution network to accelerate the
development of our retail franchise;
o enhancing cross selling and client segmenting capability by using
analytical tools and efficient data storage and retrieval systems;
o improving credit risk and market risk management; and
o improving product and client profitability analysis.
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Attract and Retain Talented Professionals
We believe a key to our success will be our ability to continue to maintain
and grow a pool of strong and experienced professionals. We have been successful
in building a team of talented professionals with relevant experience, including
experts in credit evaluation, risk management, retail consumer products,
treasury, technology and marketing. Recruitment is a key management activity and
we continue to attract graduates from the premier Indian business schools as
well as employees with other professional qualifications. Recruitment and
assimilation of talented professionals from other organizations is a key element
of our strategy.
Our management team is committed to enhancing shareholder value and our
performance targets seek to meet this primary objective. We believe we have
created the right balance of performance bonuses, stock options and other
economic incentives for our employees so that they will be challenged to develop
business, achieve profitability targets and control risk. We intend to
continuously re-engineer our management and organizational structure to allow us
to respond effectively to changes in the business environment and enhance our
overall profitability.
Overview of ICICI Bank's Products and Services
We offer products and services in the areas of commercial banking to
retail and corporate customers, both domestic and international, investment
banking and other products like insurance.
Commercial Banking
Commercial Banking Products and Services for Retail Customers
General
We believe that the Indian retail financial services market is likely to
continue to experience sustained growth in the future. With upward migration of
household income levels, increasing affordability of retail finance and
acceptance of use of credit to finance purchases, retail credit has emerged as a
rapidly growing opportunity for banks that have the necessary skills and
infrastructure to succeed in this business. We have capitalized on the growing
retail opportunity in India and believe that we have emerged as a market leader
in retail credit on an incremental basis. The key dimensions of our retail
strategy are innovative products, parity pricing, customer convenience, wide
distribution, strong processes, prudent risk management and customer focus.
Cross selling of the entire range of credit and investment products and banking
services to our customers is a critical aspect of our retail strategy.
We offer a wide variety of consumer credit products such as home loans,
automobile loans, commercial vehicle loans, two wheeler loans, dealer financing,
personal loans, credit cards, loans against time deposits and loans against
shares. Our total retail loans at year-end fiscal 2004 included consumer loans
and credit card receivables of Rs. 311.9 billion (US$ 7.2 billion), which were
39.2% of our total gross loans at year-end fiscal 2004.
Our commercial banking operations for retail customers also consist of
raising deposits from retail customers. In addition, we offer retail liability
products in the form of a variety of unsecured redeemable bonds. Issuance of
these bonds to the public was undertaken by ICICI and continued by us following
the amalgamation pursuant to the approval of the Reserve Bank of India.
ICICI Bank's affiliate Prudential ICICI Asset Management Company, a joint
venture between Prudential Corporation plc of the United Kingdom and ICICI Bank,
offers a variety of mutual fund products. All of ICICI Bank's retail products
are marketed under the "ICICI Bank" brand. To enhance our brand equity, we
undertake comprehensive brand building and advertising campaigns with
advertisements in print and television. Studies undertaken periodically by
independent market research agencies commissioned by us have shown that our
brand is among the top two financial services brands in India.
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Retail Lending Activities
We offer a range of retail asset products, including home loans, automobile
loans, commercial vehicle loans, two wheeler loans, personal loans and credit
cards. We also fund dealers who sell automobiles, two wheelers and commercial
vehicles. We also provide loans against time deposits and loans against shares,
including for subscriptions to initial public offerings of Indian companies.
Home Finance
Our home finance business involves giving long-term secured housing loans
to individuals and corporations. We also provide construction finance to
builders. We provide housing loans directly and also through our wholly-owned
subsidiary called ICICI Home Finance Company, which serves as the focal point
for marketing, distribution and servicing of our home loan products. Currently,
these loans are being given to resident and non-resident Indians for the
purchase, construction and extension of residential premises and to
self-employed professionals for office premises. At year-end fiscal 2004, our
total home finance loans were approximately 53.0% of our consumer loans and
credit card receivables.
Automobile Finance
Automobile finance generally involves the provision of retail consumer
credit for an average maturity of three to five years to acquire specified new
and used automobiles. Automobile loans are secured by a lien on the purchased
automobile. We have "preferred financier" status with 12 car manufacturers in
India. We have a strong external distribution network and a strong in-house team
to manage the distribution network which has been instrumental in achieving this
leadership position. At year-end fiscal 2004, our total automobile finance loans
were approximately 22.0% of our consumer loans and credit card receivables. We
also give loans for the purchase of two wheelers. At year-end fiscal 2004, our
total two wheeler finance loans were approximately 3.0% of our consumer loans
and credit card receivables.
Commercial Business
We fund commercial vehicles, utility vehicles and construction and farm
equipment sold through manufacturer-authorized dealers. The finance is generally
for a maximum term of five to seven years through loans, hire purchase
agreements or a lease. At year-end fiscal 2004, our total commercial business
loans were approximately 13.0% of our consumer loans and credit card
receivables.
Personal Loans
Personal loans are unsecured loans provided to customers for various
purposes such as higher education, medical expenses, social events and holidays.
At year-end fiscal 2004, our total personal loans were approximately 2.7% of our
consumer loans and credit card receivables.
Credit Cards
In January 2000, ICICI Bank launched its credit card operations. As the
Indian economy develops, we expect that the retail market will seek short-term
credit for personal uses, and our offering of credit cards will facilitate
further extension of our retail credit business. We also expect that as credit
usage increases, we will be able to leverage our customer relationships to cross
sell additional retail and consumer-oriented products and services. At year-end
fiscal 2004, we had approximately 2.3 million credit cards and our credit card
receivables were approximately 3.4% of our consumer loans and credit card
receivables.
Dealer Funding
We fund dealers who sell automobiles, two wheelers, consumer durables and
commercial vehicles. These loans are generally given for a short term. In May
2003, we acquired Transamerica
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Apple Distribution Finance Private Limited, which has now been renamed ICICI
Distribution Finance Private Limited. ICICI Distribution Finance was primarily
engaged in providing distribution financing in the two-wheeler segment. The
acquisition supplemented our retail franchise, especially in the two-wheeler
segment.
Lending to Small Enterprises
We are seeking to extend our reach to the growing small enterprises sector
without the accompanying high credit risks which are normally associated with
advances to small enterprises, through our Small Enterprises Group. This group
focuses on supply chain financing, including the financing of selected suppliers
of our existing corporate clients. Typically, the financing is in the form of
short-term revolving facilities with overdraft or bill discounting limits and is
extended only to carefully pre-selected suppliers and dealers to be used only
for genuine transactions with our corporate clients. The group is also involved
in financing based on a cluster or community based approach, that is, financing
of small enterprises that have a homogeneous profile such as apparel
manufacturers and manufacturers of pharmaceuticals.
Retail Deposits
Our retail deposit products include the following:
o time deposits including:
- recurring deposits, which are periodic deposits of a fixed
amount over a fixed term that accrue interest at a fixed rate
and may be withdrawn before maturity by paying penalties; and
- certificates of deposit;
o savings accounts, which are demand deposits that accrue interest
at a fixed rate set by the Reserve Bank of India (currently 3.5%
per annum) and upon which checks can be drawn; and
o current accounts, which are non-interest-bearing demand deposits.
In addition to deposits from Indian residents, we accept time and savings
deposits from non-resident Indians, foreign nationals of Indian origin and
foreign nationals working in India. These deposits are accepted on a repatriable
and a non-repatriable basis and are maintained in rupees and select foreign
currencies. See also "-- Products and Services for International Customers".
For a description of the Reserve Bank of India's regulations applicable to
deposits in India and required deposit insurance, see "Supervision and
Regulation -- Regulations Relating to Deposits" and "Supervision and Regulation
-- Deposit Insurance".
In addition to our conventional deposit products, we offer a variety of
special value-added products and services which seek to maximize returns as well
as convenience for our customers. Following a strategy focused on customer
profiles and product segmentation, we offer differentiated liability products to
various categories of customers depending on their age group, such as Young Star
Accounts for children below the age of 18 years, Student Banking Services for
students, Salary Accounts for salaried employees and Senior Citizens Account for
individuals above the age of 60 years. We have also micro-segmented various
categories of customers to offer targeted products, like private banking for
high net worth individuals, defense banking services for defense personnel,
Special Savings Accounts for trusts and Roaming Current Accounts for
businessmen.
Salary Accounts
In September 1996, ICICI Bank introduced "Power Pay", a direct deposit
product for its corporate customers, to help them streamline their salary
payment systems for their employees. This product allows the employees' salaries
to be directly credited to a special individual savings account
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established for this purpose. Renamed as "Salary Account" in 2002, this product
provides us with a competitive advantage as these new payroll account holders
often open other accounts with us, including time deposits. We also seek to
market our retail credit products to our salary account holders. We aim to
deliver value to corporates and their employees by offering end-to-end financial
solutions from salary processing through strategic alliances, offering payment
services through checks, debit and credit cards as well as online bill payment
and in-house as well as third party investment vehicles. By year-end fiscal
2004, over 25,000 corporate clients were using Salary Accounts.
Auto Invest Account
Our auto invest account is a savings account product that offers the
customer liquidity as well as higher returns than an ordinary savings account.
This product provides weekly automatic transfer of idle balances, above a
certain minimum amount, from savings accounts to time deposits, resulting in
higher yields. Whenever there is a shortfall in the customer's savings account,
deposits are automatically transferred back from the time deposit account, in
units of Rs. 10,000 (US$ 230) to meet the shortfall. A similar product is
available for current accounts. Our time deposits at year-end fiscal 2004
included current and savings account linked deposits of approximately Rs. 100.4
billion (US$ 2.3 billion).
Roaming Current Account
We launched a current account product called "Business Multiplier" in July
2000 to meet the needs of the small enterprises segment. This product was
re-launched in September 2002 as "Roaming Current Account" and offers
flexibility to customers to choose from five product options with varying
minimum average quarterly balance requirements. In addition to conventional
banking facilities, this product offers a multi-city current account facility,
anywhere banking facility, cash deposit and withdrawal facility across branches
and doorstep banking. Customers can access their account through the corporate
Internet banking platform and a 24-hour telephone banking facility and can
receive account balance information on mobile telephones and electronic mail.
Service charges for deposit accounts
Service charges on deposit accounts mainly comprise of levies to savings
account customers for non-maintenance of the minimum quarterly average balance.
Savings account customers, other than salary account customers, are generally
required to maintain Rs 5,000 (US$ 115) as the minimum average balance.
Non-maintenance of the minimum balance attracts charges of Rs. 750 (US$ 17) for
the quarter.
For more information on the type, cost and maturity profile of our
deposits, see "-- Funding".
Private Banking
Our private banking services seek to meet the entire banking and financial
advisory needs of customers with a high net worth. At present, we offer this
preferred banking product to clients with a banking relationship size in excess
of Rs. 500,000 (US$ 11,521). Private banking services offer competitive pricing
on certain asset products and preferential rates for select services, along with
personalized service. In addition, our private banking services offer financial
planning and investment advisory services to assist our customers in their
investment and savings plans. The services offered include assistance in risk
profiling and regular monitoring and performance review of the client's
investment and savings portfolio.
Debit Cards
We offer an international debit card, branded as ICICINCash, in association
with VISA International on its popular VISA Electron signature-based platform.
This provides a greater choice of payment solutions to customers. It provides
customers a safer and more convenient alternative to
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carrying cash both locally and internationally. The ICICINCash debit card
enables direct deductions of the purchase amount from the customer's account
from any VISA-enabled merchant establishment and ATM around the world. We earn
an annual fee of Rs. 99 (US$ 2) for every card and an interchange fee of 1.1% of
the amount spent through the debit card. We had a debit card base of over 5.8
million cards at year-end fiscal 2004.
Bond Issues
During fiscal 2004, we raised Rs. 13.5 billion (US$ 311 million) through
bond issuances. We had about 5.1 million bondholder accounts at year-end fiscal
2004. We may continue to offer similar bonds to the public subject to
regulations, though deposits are and will be our primary source of funding.
Internet banking services
We offer Internet banking services to retail customers through our website
www.icicibank.com. We believe that the increasing number of Internet users, the
demographic characteristics of those users and the relative flexibility and
convenience of internet banking provides us an opportunity to capitalize on our
experience and to increase market share in retail banking. Services offered to
our Internet banking customers include online access to account information,
placement of time deposits, secure mail box facility for communication with
ICICI Bank, bill and credit card payments through ICICI Bank and transfer of
funds to third party within ICICI Bank or to any account outside ICICI Bank in
select cities. We had approximately 6.1 million Internet banking accounts at
fiscal year-end 2004.
Online Bill Payment
We have tie-ups with several telecommunication companies, utility
providers, insurance companies and internet shopping portals for online payment
of bills by our internet banking customers. We currently offer this service free
to our customers with the intention of building a base of users. This service is
based on cost sharing arrangements with most of these companies, where we either
charge the company a fixed fee per bill or the company maintains a balance with
us before the funds are used by the company, resulting in short-term low cost
deposits with us.
Other Fee-Based Products and Services
Mutual Fund Sales
We have entered into arrangements with select mutual funds to distribute
their products through our distribution network, for which we earn up-front and
trailing commissions. We believe we are one of the largest market players in
this segment.
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. We are a depositary participant of the National Securities
Depository Limited and Central Depository Services (India) Limited and offer
depositary share accounts.
Government of India Relief Bond Sales
We have been permitted by the Reserve Bank of India to sell government of
India Relief Bonds. This includes the receipt of applications for Relief Bonds,
the issue of Relief Bonds in the form of bond ledger accounts and the servicing
of bondholders. Relief Bonds are sold across all of our branches. We seek to
capitalize on this opportunity by effectively distributing Relief Bonds through
our distribution network and earning fee income in the process. We believe that
we are one of the largest market players in this segment.
35
Web Brokering
ICICI Web Trade Limited provides web brokering services. This service
involves the online integration of a customer's depositary share accounts and
bank accounts with us and securities brokerage accounts with ICICI Web Trade.
This service has assisted us in our efforts to acquire new customers and
low-cost savings deposits, as each e-brokering customer is required to open a
bank account. ICICI Comm Trade Limited, a subsidiary of ICICI Web Trade,
proposes to provide web and telephone based brokering services in the
commodities and commodity derivatives market.
Portfolio Investment Scheme
We are one of the banks designated by the Reserve Bank of India for issuing
approvals to non-resident Indians and overseas corporate bodies to trade in
shares and convertible debentures on the Indian stock exchanges. Pursuant to
this scheme of the Reserve Bank of India, these investors can trade on the
Indian stock exchanges within a prescribed limit by obtaining an approval from a
designated bank and by routing all the transactions through that bank. As a
designated bank, we report all such transactions to the Reserve Bank of India.
We also help these investors with regulatory compliance, such as ensuring
delivery based trading and limit monitoring and providing tax calculations.
Life Insurance Policy Referral and Lead Generation
We have a Memorandum of Understanding with ICICI Prudential Life Insurance
Company for generating leads from our banking customers for the products of
ICICI Prudential Life Insurance Company and referring these leads to ICICI
Prudential Life Insurance Company. The insurance policy is issued by ICICI
Prudential Life Insurance Company. We collect fees for generating leads and
providing referrals that are converted into policies.
General Insurance Policy Referral and Lead Generation
We have a Memorandum of Understanding with ICICI Lombard General Insurance
Company for generating leads from our banking customers for the products of
ICICI Lombard General Insurance Company and referring these leads to ICICI
Lombard General Insurance Company. The insurance policy is issued by ICICI
Lombard General Insurance Company. We collect fees for generating leads and
providing referrals that are converted into policies.
Distribution of equity offerings
We distribute public offerings of equity shares by companies through our
distribution network.
Commercial Banking Products and Services for Corporate Customers
General
We provide a range of commercial banking products and services to India's
leading corporations and growth-oriented middle market companies. Our key
commercial banking products and services to corporate customers can be
classified into loan products and fee and commission-based products and
services. Our loan products include project and corporate finance, working
capital finance including cash credit facilities (a revolving floating rate
asset-backed overdraft facility) and bill discounting (a type of receivables
financing). We also provide agricultural financing. Our fee and commission-based
products and services include documentary credits, standby letter of credit
facilities, cash management services, escrow and trust and retention accounts,
cross border trade services, payment services, securities processing services
and loan syndication. We also take rupee or foreign currency deposits with fixed
or floating interest bases from our corporate customers. Our deposit taking
products include certificates of deposit, checking accounts and time deposits.
We deliver our commercial banking products and services to our corporate
customers through a combination of physical branches, correspondent banking
networks, telephone banking and the Internet.
36
Corporate Loan Portfolio
Our corporate loan portfolio primarily consists of term loans for project
and corporate finance, and working capital credit facilities. For details on our
loan portfolio, see "- Loan Portfolio".
Project and Corporate Finance
We offer project finance to the manufacturing sector and structured finance
to the infrastructure sector respectively. Our project finance business consists
principally of extending medium-term and long-term rupee loans to our clients
although we do provide financing in foreign currencies. We also provide
guarantees to foreign lenders and export credit agencies, on behalf of our
clients, typically for large projects in the infrastructure sector. Our
manufacturing sector financing includes project-based lending to companies in
traditional manufacturing sectors, including iron, steel and metal products,
textiles, machinery and capital goods, cement and paper. We also offer corporate
finance to our customers based on their existing operations and balance sheets.
We have focused on using securitization techniques to credit enhance our lending
products.
Project and corporate finance is provided generally through term loans that
amortize over a period of typically between one and ten years. Our term credits
include rupee loans, foreign currency loans, lease financing and subscription to
preferred stock. These products also include marketable instruments such as
fixed rate and floating rate debentures. In the case of rupee and foreign
currency loans, and debentures, we generally have a security interest and first
lien on the fixed assets of the borrower. The security interest typically
includes property, plant and equipment and other tangible assets of the
borrower.
At year-end fiscal 2004, our gross wholesale banking loans outstanding were
Rs. 319.6 billion (US$ 7.4 billion), constituting 40.2% of our gross loan
portfolio.
We extend fund based loans as well as standby letters of credit facilities
to corporates outside India which are joint ventures and/or wholly-owned
subsidiaries of Indian corporates. At year-end fiscal 2004, our balance
outstanding in respect of loans to corporates outside India was not a material
proportion of our total gross loan portfolio.
Working Capital Finance
Under working capital finance, we offer our customers cash credit
facilities and bill discounting. At year-end fiscal 2004, our gross working
capital loans, including working capital term loans, outstanding were Rs. 80.5
billion (US$ 1.9 billion), constituting approximately 10.1% of our gross loan
portfolio.
Cash Credit Facilities: Cash credit facilities are the most common form of
working capital financing in India. A cash credit facility is generally backed
by current assets like inventories and receivables. Interest is earned on this
facility on a monthly basis, based on the daily outstanding amounts. The
facility is generally given for a period of up to 12 months, with a review after
that period. In most cases, we have a first lien on the borrower's current
assets, which normally are inventory and receivables. Additionally, in some
cases, we may take further security of a first or second lien on fixed assets
including real estate, a pledge of financial assets like marketable securities,
corporate guarantees and personal guarantees.
Cash credit facilities are extended to borrowers by a single bank, multiple
banks or a consortium of banks with a lead bank. The nature of the arrangement
is usually agreed between the bank(s) and the borrower and depends upon the
amount of working capital financing required by the borrower, the risk profile
of the borrower and the amount of loan exposure a single bank can take on the
borrower. Regardless of the arrangement, we undertake our own due diligence and
follow our credit risk policy to determine whether we should lend money to the
borrower and, if so, the amount to be lent to the borrower and the rate of
interest to be charged. For more details on our credit risk procedures, see "--
Risk Management -- Credit Risk".
37
Bill Discounting: Bill discounting involves the financing of short-term
trade receivables through negotiable instruments. These negotiable instruments
can then be discounted with other banks if required, providing us with
liquidity. In addition to traditional bill discounting, we also provide
customized solutions to our corporate customers having large dealer networks.
Loans are approved to dealers in the form of working capital lines of credit,
based on analysis of dealer credit risk profiles.
Agricultural Financing
The Reserve Bank of India's directed lending norms, as applicable to us,
require us to lend 18.0% of our net bank credit on the residual portion of our
advances (i.e., our total advances excluding the advances of ICICI at year-end
fiscal 2002) to the agricultural sector. Our agricultural lending portfolio
includes loans to farmers and to co-operatives and companies in eligible sectors
such as dairying and seeds as well as micro-finance loans to borrowers in rural
areas. Our strategy is based on a holistic approach to the agricultural value
chain, focus on diversification and partnerships with companies, micro finance
and other rural financial institutions and non-government organizations that
have close linkages with agriculture. For details of our directed lending
portfolio, refer "-Loan Portfolio - Directed Lending".
Fee and Commission-Based Activities
Our fee and commission-based products and services include documentary
credits, standby letters of credit, cash management services, trust and
retention accounts, payment services, securities processing services and loan
syndication.
Documentary Credits
We provide documentary credit facilities to our working capital loan
customers both for meeting their working capital needs as well as for capital
equipment purchases. Lines of credit for documentary credits and standby letters
of credit are approved as part of a working capital loan package provided to a
borrower. These facilities, like cash credit facilities, are generally given for
a period up to 12 months, with review after that period. Typically, the line is
drawn down on a revolving basis over the term of the facility, resulting in a
fee payable to us at the time of each drawdown, based on the amount and term of
the drawdown. Borrowers pay a fee to us based on the amount drawn down from the
facility and the term of the facility. This facility is generally secured by the
same collateral available for cash credit facilities. We may also take
collateral in the form of cash deposits, in the range of 5.0% to 20.0% of the
drawdown amount, from our borrowers before each drawdown of the facility.
At year-end fiscal 2004, we had a portfolio of documentary credits of Rs.
65.1 billion (US$ 1.5 billion).
Guarantees
We provide standby letter of credit facilities, called guarantees in India,
which can be drawn down any number of times up to the committed amount of the
facility. We issue guarantees on behalf of our borrowers in favor of
corporations and government authorities. Guarantees are generally issued for the
purpose of bid bonds, guaranteeing the performance of our borrowers under a
contract as security for advance payments made to our borrowers by project
authorities and for deferral of and exemption from the payment of import duties
granted to our borrowers by the government against fulfillment of certain export
obligations by our borrowers. The term of these guarantees is generally up to 36
months though in specific cases, the term could be higher. This facility is
generally secured by collateral similar to that of documentary credits. In
addition, as a part of our project financing activity, we issue guarantees to
foreign lenders, export credit agencies and domestic lenders on behalf of our
clients.
At year-end fiscal 2004, our total guarantees outstanding were Rs. 122.3
billion (US$ 2.8 billion).
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Cash Management Services
Under cash management services, we offer our corporate clients custom-made
collection, payment and remittance services allowing them to reduce the time
period between collections and remittances, thereby streamlining their cash
flows. Our cash management products include physical check-based clearing in
locations where settlement systems are not uniform, electronic clearing
services, central pooling of country-wide collections, dividend and interest
remittance services and Internet-based payment products. Our customers pay a fee
to us for these services based on the volume of the transaction, the location of
the check collection center and speed of delivery. This also results in low-cost
funds being maintained for short durations in checking accounts of customers
which we invest profitably.
The total amount handled by us under cash management services was Rs.
3,854.0 billion (US$ 88.8 billion) for fiscal 2004. At year-end fiscal 2004, we
had 1,270 cash management service customers.
Escrow and Trust and Retention Accounts
We offer escrow account and trust and retention account facilities to
customers who require us to administer or monitor cashflows routed through these
accounts under contractual arrangements entered into by them. These are
typically offered to project finance lenders who typically require the setting
up of escrow accounts and trust and retention accounts as part of the project
financing structure. We also offer escrow account facilities for securitization
and merger and acquisition transactions. Our customers pay a negotiated fee to
us for this product based on the complexity of the structure and the level of
monitoring involved in the transaction.
The cash flows managed by us under this product during fiscal 2004 were
about Rs. 96.3 billion (US$ 2.2 billion).
Payment Services
We offer online electronic payment facilities through our commercial
Internet banking platform to our corporate customers and their suppliers and
dealers as a closed user group, where the entire group is required to maintain
bank accounts with us. 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.
Securities Processing Services
We provide custodial services for offshore and domestic institutional
clients and act as a custodian of overseas depositary banks for depositary
receipt issues of Indian companies in the international markets. The total
assets held in custody on behalf of our clients, mainly foreign institutional
investors, offshore funds, overseas corporate bodies and depositary banks for
GDR investors, increased to Rs. 619.1 billion (US$ 14.3 billion) at year-end
fiscal 2004 from Rs. 300.1 billion (US$ 6.9 billion) at year-end fiscal 2003. In
addition, we are registered as a depositary participant of National Securities
Depository Limited and Central Depository Services (India) Limited, the two
securities depositaries operating in India, and provide electronic depositary
facilities to investors including retail investors. To facilitate settlement
services, we are a clearing member of clearing agencies of the leading stock
exchanges.
Loan Syndication
We have developed significant syndication capabilities while structuring
and arranging large project finance transactions. We seek to leverage these
syndication capabilities to arrange project and corporate finance for our
corporate clients and earn fee income, as well as to securitize loans
39
originated by us. We have been granted a merchant banking license by the
Securities and Exchange Board of India.
Tax collections
In fiscal 2004, the Reserve Bank of India authorized us to accept payments
of direct and indirect taxes on behalf of the government of India and the
governments of Indian states. Our ability to accept payments of various
categories of taxes in various centers in India is subject to further specific
approvals from the tax authorities and state governments. We earn a fee for the
tax payments routed through us.
Corporate Deposits
We take deposits from our corporate clients with terms ranging from 15 days
(seven days in respect of deposits over Rs. 1.5 million (US$ 34,562) with effect
from April 19, 2001) to seven years but predominantly from 15 days to one year.
The Reserve Bank of India regulates the term of deposits in India but not the
interest rates, with some minor exceptions. Banks are not permitted to pay
interest for periods less than seven days. Also, pursuant to the current
regulations, we are permitted to vary the interest rates on our corporate
deposits based upon the size range of the deposit so long as the rates offered
are the same for every customer for a deposit of a certain size range on a given
day. Corporate deposits include funds taken by us from large public sector
corporations, government organizations, other banks and private sector
companies.
We offer a variety of deposit products to our corporate customers. We take
rupee or foreign currency denominated deposits with fixed or floating interest
rates. Our deposit products for corporations include:
o current accounts -- non-interest-bearing demand deposits;
o time deposits -- fixed term deposits that accrue interest at a fixed
rate and may be withdrawn before maturity by paying penalties; and
o certificates of deposit -- a type of time deposit.
We market corporate deposits from branches and directly from our corporate
office.
We act as banker to the market offerings of select companies on account of
raising of equity or debt, buy back of equity and equity takeovers. These
companies are required to maintain the subscription funds with the bankers to
the offering until the allotment of shares/buy back of shares and the refund of
excess subscription is completed. This process generally takes about 15 to 30
days, resulting in short-term deposits with us. We act as banker to corporates
for their dividend payout to their shareholders and interest payout to
bondholders, which results in mobilizing interest-free, float balances to us. We
believe that our relationships with corporate deposit customers significantly
reduce the volatility in our corporate deposit base. We also offer inter-bank
call rate-linked floating rate deposits.
We also provide liquidity management services to our corporate customers to
enable them to invest their short-term cash surpluses in a variety of short-term
treasury and deposit-based instruments, including treasury bills, commercial
paper and certificates of deposit. We also facilitate the holding of foreign
currency accounts. In addition to large public and private sector companies, our
other target customers for these products are provident funds and high net worth
individuals.
For more information on the type, cost and maturity profile of our
deposits, see "-- Funding".
Client Coverage
Our principal corporate relationship groups are the Corporate Banking
Group, the Government Banking Group and the Rural, Micro-banking and
Agri-business Group. The Corporate Banking
40
Group is responsible for managing relationships with large, highly rated
corporates and public sector corporates. The Government Banking Group is a
dedicated group created to leverage the business opportunities in central and
state governments and local government bodies. The Rural, Micro-banking and
Agri-business Group is responsible for all our rural and agri-business
initiatives. The group is also responsible for relationships with regional rural
banks, co-operative banks, co-operatives and all other entities with a primarily
agricultural or rural focus. The principal product groups are the Product and
Technology Group and the Structured Finance, Credit and Markets Group. We have
specialized groups for infrastructure project finance and manufacturing project
finance (including oil, gas and petrochemicals and shipping).
The relationship managers are supported by product specialists from the
product groups who focus on product improvements and customization. The main
focus of the relationship managers is to market our products. In addition to the
above, they cross sell the products offered by our subsidiaries and affiliates.
Loan Pricing
We price our loans based on the following factors:
o our internal credit rating of the company;
o the maturity of the loan;
o the nature of the banking or financing arrangement (either a single
bank, multiple bank or consortium arrangement);
o the collateral available; and
o market conditions.
For a description of our credit rating and approval system, see "- Risk
Management - Credit Risk".
As required by the Reserve Bank of India's guidelines and the advice issued
by the Indian Banks' Association, effective January 1, 2004, ICICI Bank prices
its loans (other than fixed rate loans and certain categories of loans to
individuals and agencies specified by the Indian Banks' Association, including
among others, loans to individuals for acquiring residential properties, loans
for purchase of consumer durables, non-priority sector personal loans and loans
to individuals against shares, debentures, bonds and other securities) with
reference to a benchmark prime lending rate, called the ICICI Bank Benchmark
Advance Rate. The Asset-Liability Management Committee of our board of directors
fixes the ICICI Bank Benchmark Advance Rate based on cost of funds, cost of
operations and credit charge as well as yield curve factors, such as interest
rate and inflation expectations, as well as market demand for loans of a certain
term and our cost of funds. The ICICI Benchmark Advance Rate is 9.75% p.a.
payable monthly, effective May 05, 2004. The lending rates comprise ICICI
Benchmark Advance Rate, term premium and transaction-specific credit and other
charges.
Commercial Banking Products and Services for International Customers
Our strategy in international commercial banking is based on leveraging
home country links for international expansion by capturing market share in
select international markets. The initial focus areas are supporting Indian
companies in raising corporate and project finance for their investments abroad,
trade finance, personal financial services for non-resident Indians and
international alliances to support domestic businesses. We have over the last
few years built a large network of correspondent relationships with
international banks across all major countries. Most of these countries have
significant trade and other relationships with India.
41
Many international commercial banking products such as trade finance and
letters of credit are variants of their respective commercial banking
counterparts. Some of the key products and services that are unique to our
international customers are described below.
TradeWay
"TradeWay" is an Internet-based documentary collection product, which
provides correspondent banks access to real-time on-line information on the
status of their export bills collections routed through us. The main features of
the product are the availability of online status enquiry for documentary
collections, availability of tracking and tracing functions for bills routed
through us and the presence of a single point contact for India-bound
documentary collections.
Guarantee Re-issuance
We re-issue guarantees favoring corporations and government departments in
India against counter guarantees issued by correspondent banks. This service is
provided subject to pre-arrangement. We offer competitive pricing for our
guarantee re-issuance facility. We can issue bid bond guarantees, performance
guarantees and financial guarantees including payment guarantees. Our guarantees
have wide acceptance across Indian corporates and government departments.
Remittance Tracker
Remittance Tracker is a web-based application that allows a correspondent
bank to query on the status of their payment instructions and also to get
various information reports online. We currently offer this product free of
charge to all our correspondent banks.
Offshore Banking Deposits
We offer multi-currency deposit products in US Dollar, Pound Sterling and
Euro through our Offshore Banking Unit in the Special Economic Zone at Mumbai.
These deposits are offered for tenures between three months and six years. The
minimum deposit values are US$ 2,000, GBP 1,500 and EUR 2,000 respectively.
Foreign Currency Non-Resident Deposits
Foreign Currency Non-Resident deposits are simple foreign currency deposits
offered in four main currencies - US Dollar, Pound Sterling, Euro and Japanese
Yen. Both the principal amount and interest earned can be fully repatriated out
of India. These foreign currency deposits are subject to minimum deposit values
of US$ 1,000, GBP 1,000, EUR 1,000 and 200,000 Yen respectively.
Non-Resident External Fixed Deposits
These deposits are maintained in Indian rupees and the minimum investment
amount is Rs. 25,000 (US$ 576). These deposit accounts can be opened for tenure
in the range of one year to 10 years. Both the interest earned and principal
amounts are fully repatriable out of India. Interest rates are fixed on a
monthly basis. The interest rates cannot exceed the LIBOR/swap rates for US
Dollar deposits of corresponding maturity. Loans against these deposits are
generally available for up to 90.0% of the deposit amount.
Non-Resident External Savings Account
Non-resident external savings accounts are maintained in Indian rupees and
the minimum average balance required to be maintained is Rs. 10,000 (US$ 230)
for the quarter. An international ATM and debit card is offered together with
the account and funds can be accessed from ATMs across the world. Funds can be
transferred to this account free of cost, through the online remittance channel
42
Money2India. Interest rates on balances in the non-resident external savings
accounts are fixed on a quarterly basis. The interest rate cannot exceed the
LIBOR/swap rates for six months maturity on US dollar deposits and is fixed
quarterly on the basis of the LIBOR/swap rate of US dollar on the last working
day of the preceding quarter.
Non-Resident Ordinary Savings Accounts and Non-Resident Ordinary
Fixed Deposits
These products are primarily intended for non-residents who earn income in
India. The interest rates offered and other product features are similar to the
rates offered on domestic deposits. Principal is not repatriable except in
certain cases while the interest is repatriable net of taxes payable in India.
Money2India Remittance Facility
For easy transfer of funds to India, we offer Money2India, a wire transfer
remittance facility with a web interface. Non-resident Indians can send money to
over 1,250 locations in India, besides direct credit to any bank account in
ICICI Bank or networked branches of select banks within India.
Delivery Channels
We deliver our products and services through a variety of distribution
outlets, ranging from traditional bank branches to ATMs, call centers and the
Internet. We believe that India's vast geography necessitates a variety of
distribution channels to best serve our customers' needs. As part of our
strategy to migrate customers to lower cost electronic delivery channels, we
have made significant investments in channels such as ATMs, call centers and the
Internet. Our channel migration effort is aimed at reducing cost while enhancing
customer satisfaction levels by providing them round-the-clock transaction and
servicing facilities. We believe that currently, more than 70.0% of our retail
customer induced banking transactions take place through non-branch channels.
The key components of our distribution network are described below.
Branches
At year-end fiscal 2004, we had a network of 413 branches and 56 extension
counters in 311 centers across several Indian states, an increase of 19 branches
and 4 extension counters over the previous year. Extension counters are small
offices primarily within office buildings or on factory premises that provide
commercial banking services. Prior to opening a branch, we conduct a detailed
study in which we assess the deposit potential of the area. Our branch locations
are largely leased rather than owned. Our back office operations are centralized
at regional processing centers, enabling us to create a more efficient branch
network.
As a part of its branch licensing conditions, the Reserve Bank of India has
stipulated that at least 25.0% of our branches must be located in semi-urban and
rural areas. A semi-urban area is defined as a center with a population of
greater than 10,000 but less than 100,000. A rural area is defined as a center
with a population of less than 10,000. The population figures relate to the 1991
census. We have adhered to this requirement as shown in the table below. Several
of these branches are located in suburbs of large cities, and some of these
branches are located in areas where large corporations have their manufacturing
facilities. About 260 of our branches are open 12 hours a day, six days a week.
The following table sets forth, at the date indicated, the number of
branches broken down by area.
At March 31, 2004
--------------------------------------
Number of branches % of total
-------------------- ----------------
Metropolitan/urban........... 229 55.4%
Semi-urban/rural ............ 184 44.6%
--------------------- ----------------
Total ....................... 413 100.0%
--------------------- ----------------
43
Our corporate relationship groups are principally based at Mumbai, New
Delhi, Chennai, Kolkata, Bangalore, Hyderabad, Ahmedabad, Pune, Vadodara,
Coimbatore, Ludhiana, Chandigarh, Jaipur and Kochi. Our commercial banking
services to corporate customers are delivered through our network of branches.
Franchisee Network
We have direct marketing agents or associates, who deliver our retail
credit products. These agencies help us achieve deeper penetration by offering
door-step service to the customer. We make all credit and risk management
decisions pertaining to any customer and no agency can extend credit to any
customer without our approval. These agencies receive a fee based on the volume
of business generated by them. At year-end fiscal 2004, we offered one or more
retail credit products in about 695 centers.
Automated Teller Machines (ATMs)
At year-end fiscal 2004, we had 1,790 ATMs, of which 465 were located at
our branches and extension counters. The remaining 1,325 were located at the
offices of select corporate clients, large residential developments, airports,
gas stations and on major roads in metropolitan cities. Apart from cards issued
to our own customers, our ATMs also process Visa, Visa Electron, Master, Cirrus
and Maestro card transactions. We have entered into ATM sharing arrangements
with certain other banks, which allow our customers to access their accounts
with us through the ATM networks of these banks in addition to our own ATM
networks. Similarly, customers of these banks can also access their bank
accounts using our ATM network.
In view of the diversity of regional languages used in various parts of
India, our ATMs offer multilingual screens. Other facilities offered through
ATMs include bill payment services and a facility for recharging prepaid cards
for mobile phones. We have also pioneered the concept of mobile ATMs in India,
to reach remotely located customers. This service deploys ATMs mounted on mobile
vans to visit specific areas at a pre-designated time.
Internet
We believe that Internet access and information is key to satisfying the
needs of certain customer segments. As a result, we maintain a website at
www.icicibank.com, offering generalized information on our products and
services. Our Internet banking service allows customers to access all
account-related information and give account instructions through our website.
Customers can also electronically transfer funds from our account to any other
account with us or to accounts in any branch of any bank, in eight cities
through eCheques, the inter-bank fund transfer facility. The Internet banking
service also allows transactions and bill payment facilities. We had
approximately six million Internet banking accounts at year-end fiscal 2004. We
seek to continue to be at the forefront of providing web-based products to our
retail customers.
We provide Internet banking services to our corporate clients through ICICI
e-business, a finance portal which is the single point web-based interface for
all our corporate clients. This platform allows clients to conduct banking
business online in a secure environment. Clients can view accounts online,
transfer funds between their own accounts or to other accounts, among other
services. We offer 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 by straight through processing using a constituent subsidiary ledger
account. The client can view real time quotes offered by us and ICICI
Securities. The client can use the chat facility to negotiate the deal over the
Internet. We ensure credit of interest and redemption payments from the Reserve
Bank of India to the client's bank account. The client can monitor transactions
and the portfolio at any given time.
44
Call Centers
We provide telephone banking services through our call center. The call
center functions 24 hours a day, seven days a week, and offers a self-service
option to customers for automated phone banking. In addition, well-trained
customer service officers offer personalized services for banking,
dematerialized securities, online share trading customers, credit card holders,
bondholders and loan product customers. As part of our cross-selling
initiatives, 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 2004, our call center had 1,750 workstations
across two locations.
Mobile Phone Banking
Our mobile phone banking services are available to our customers using any
cellular telephone service operator in India. Savings account and credit card
customers can view their account details on their mobile phones. Savings account
customers can also request a checkbook or account statement, and obtain a list
of all the major transactions in their account through Short Messaging Service
(SMS).
Correspondent Banking Networks
We have correspondent banking relationships with other banks in India with
large physical branch networks to offer a broader coverage for our funds
transfers and remittance related products. As a result of our correspondent
banking associations, we provide remittance and cash management services at over
3,900 locations in India.
Investment Banking
Our investment banking operations principally consist of our treasury
operations and the operations of ICICI Securities, our subsidiary.
Treasury
Through our treasury operations, we seek to manage our balance sheet
including the maintenance of required regulatory reserves and to optimize
profits from our trading portfolio by taking advantage of market opportunities.
Our trading and securities portfolio includes our regulatory portfolio, as there
is no restriction on active management of our regulatory portfolio. Our treasury
operations include a range of products and services for corporate customers,
such as forward contracts and interest rate and currency swaps, and foreign
exchange products and services.
General
Under the Reserve Bank of India's statutory liquidity ratio requirement, we
are required to maintain 25.0% of our total demand and time liabilities by way
of approved securities, such as government of India securities and state
government securities. We maintain the statutory liquidity ratio through a
portfolio of government of India securities that we actively manage to optimize
the yield and benefit from price movements. Until September 17, 2004, under the
Reserve Bank of India's cash reserve ratio requirements, we were required to
maintain 4.5% of our demand and time liabilities in a current account with the
Reserve Bank of India. The Reserve Bank of India announced an increase in the
cash reserve ratio to 5.0% in two stages (4.75% effective September 18, 2004 and
5.0% effective October 2, 2004). The Reserve Bank of India pays no interest on
these cash reserves up to 3.0% of the net demand and time liabilities and,
effective September 18, 2004, pays interest at 3.5% on the remaining eligible
balance, on which it used to pay interest at the bank rate (the rate at which
the Reserve Bank of India provides refinance to the banking system, currently
6.0%).
Due to these regulatory reserve requirements, a substantial portion of our
trading and securities portfolio consists of government of India securities. At
year-end fiscal 2004, government of India securities (excluding securities
purchased under agreements to resell) constituted 40.4% of our trading
45
portfolio and 78.3% of our total trading and available for sale securities
portfolio, while the remainder included corporate debt securities, equity
securities and derivative and foreign exchange contracts.
For further discussion of these regulatory reserves, see "Supervision and
Regulation -- Legal Reserve Requirements".
Our treasury undertakes liquidity management by seeking to maintain an
optimum level of liquidity and complying with the cash reserve ratio. The
objective is to ensure the smooth functioning of all our branches and at the
same time avoid the holding of excessive cash. Our treasury maintains a balance
between interest-earning liquid assets and cash to optimize earnings. The
treasury undertakes reserve management by maintaining statutory reserves,
including the cash reserve ratio and the statutory liquidity ratio. Our treasury
engages in domestic and foreign exchange operations from a centralized trading
floor in Mumbai. As part of our treasury activities, we also maintain
proprietary trading portfolios in domestic debt and equity securities and in
foreign currency assets. Our treasury manages our foreign currency exposures,
offers foreign exchange and risk hedging derivative products to our customers
and engages in proprietary trading of currencies. Our investment and market risk
policies are approved by the Risk Committee and Asset-Liability Management
Committee of our board of directors.
Our securities are classified into held to maturity securities, available
for sale securities, trading securities, venture capital investments and
non-readily marketable securities. The following table sets forth, at the dates
indicated, certain information related to our trading portfolio.
At March 31,
--------------------------------------------------------------------------
2002 2003 2004 2004
------------------ -------------------- ------------------- --------------
(in millions)
Government of India securities.. Rs. 15,602 Rs. 26,658 Rs. 30,374 US$ 700
Securities purchased under
agreements to resell.......... 21,399 5,399 34,974 806
Corporate debt securities....... 4,627 6,704 6,403 148
Equity securities............... 742 187 1,018 23
Fair value of derivative and
foreign exchange contracts... 6 686 2,386 55
------------------ -------------------- ------------------- --------------
Total........................... Rs. 42,376 Rs. 39,634 Rs. 75,155 US$1,732
================== ==================== =================== ==============
The following table sets forth, for the periods indicated, certain
information related to interest and dividends on our trading securities, net
gain from the sale of these securities and gross unrealized gain/(loss) on these
securities.
At March 31,
---------------------------------------------------------------------------
2002 2003 2004 2004
------------------ -------------------- ------------------- ---------------
(in millions)
Interest and dividends........... Rs. 1,715 Rs. 2,754 Rs. 3,232 US$ 74
Gain on sale of trading
securities....................... 2,948 2,356 3,889 90
Unrealized gain/(loss) on
trading securities............ (506) 719 544 13
------------------ -------------------- ------------------- ---------------
Total............................ Rs. 4,157 Rs. 5,829 Rs. 7,665 US$ 177
================== ==================== =================== ===============
46
In addition to trading securities, we also hold available for sale
securities. The following tables set forth, at the dates indicated, certain
information related to our available for sale securities portfolio.
At March 31,
--------------------------------------------------------------
2002
--------------------------------------------------------------
Amortized Gross Gross
cost unrealized gain unrealized loss Fair value
------------ --------------- --------------- ----------
(in millions)
Corporate debt securities............. Rs. 4,446 Rs. 502 Rs. (513) Rs. 4,435
Government of India securities........ 26,662 438 - 27,100
----------- ------------ ---------- -----------
Total debt securities................. 31,108 940 (513) 31,535
Equity securities..................... 19,181 365 (3,223) 16,322
----------- ------------ ---------- -----------
Total................................. Rs. 50,289 Rs. 1,305 Rs. (3,736) Rs. 47,857
----------- ------------ ---------- -----------
Non readily marketable securities(1).. Rs. 8,268
===========
Venture capital investments(2)........ Rs. 3,921
===========
At March 31,
--------------------------------------------------------------
2003
--------------------------------------------------------------
Amortized Gross Gross
cost unrealized gain unrealized loss Fair value
------------ --------------- --------------- ----------
(in millions)
Corporate debt securities............. Rs. 10,636 Rs. 389 Rs. (79) Rs. 10,946
Government of India securities........ 240,187 4,403 (459) 244,131
Total debt securities................. 250,823 4,792 (538) 255,077
Equity securities..................... 13,609 745 (1,932) 12,422
Total................................. Rs. 264,432 Rs. 5,537 Rs. (2,470) Rs. 267,499
----------- ------------ ---------- -----------
Non readily marketable securities(1).. Rs. 9,418
==========
Venture capital investments(2)........ Rs. 3,704
===========
At March 31,
--------------------------------------------------------------
2004
--------------------------------------------------------------
Amortized Gross Gross
cost unrealized gain unrealized loss Fair value
------------ --------------- --------------- ----------
(in millions)
Corporate debt securities............. Rs. 18,791 Rs. 183 Rs. (154) Rs. 18,820
Government of India securities........ 256,284 4,488 (192) 260,580
Total debt securities................. 275,075 4,671 (346) 279,400
Equity securities..................... 15,475 2,072 (342) 17,205
Total................................. Rs. 290,550 Rs. 6,743 Rs. (688) Rs. 296,605
----------- ------------ ---------- -----------
Non readily marketable securities(1).. Rs. 8,621
==========
Venture capital investments(2)........ Rs. 5,142
===========
(1) Primarily represents securities acquired as a part of project financing
activities or conversion of loans in debt restructurings.
(2) Represents venture capital investments in funds managed by ICICI Venture
Funds Management Company.
The following table sets forth, for the period indicated, income from
available for sale securities.
Year ended March 31,
-----------------------------------------------------------------------
2002 2003 2004 2004
--------------- --------------- --------------- ----------
(in millions)
Interest............................ Rs. 1,027 Rs. 16,633 Rs. 15,264 US$ 352
Dividend............................ 267 389 431 10
----------- ------------ ---------- -----------
Total............................... 1,294 Rs. 17,022 Rs. 15,695 US$ 362
=========== ============ ========== ===========
Gross realized gain................. 1,238 Rs. 6,845 Rs. 16,211 374
Gross realized loss................. (7) (5,022) (2,467) (57)
----------- ------------ ---------- -----------
Total............................... Rs. 1,231 Rs. 1,823 Rs. 13,744 US$ 317
=========== ============ ========== ===========
47
The following table sets forth, at the date indicated, an analysis of the
maturity profile of our investments in debt securities classified as available
for sale securities and the yields thereon. This maturity profile is based on
repayment dates and does not reflect re-pricing dates of floating rate
securities.
At March 31, 2004
---------------------------------------------------------------------------------------------
Up to one year One to five years Five to 10 years More than 10 years
--------------------- ------------------ ------------------- ---------------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------- ----- ---------- ----- ----------- ----- ----------- -----
(in millions)
Corporate debt securities Rs. 2,204 5.51% Rs. 4,696 6.77% Rs. 9,357 6.80% Rs. 2,563 6.71%
Government of India
securities............ 43,456 4.32 18,956 4.87 112,704 5.09 85,464 5.26
---------- ---------- ---------- -----------
Total interest-earning
securities............ Rs. 45,660 4.38% Rs. 23,652 5.25% Rs.122,061 5.23% Rs. 88,027 5.30%
========== ========== ========== ===========
Total amortized cost...... Rs. 43,847 Rs. 23,419 Rs.122,144 Rs. 85,665
We have a limited equity portfolio because the Reserve Bank of India
restricts investments by a bank in equity securities to 5.0% of its total
outstanding domestic loan portfolio as at March 31 of the previous year. A
significant portion of ICICI's investments in equity securities were related to
projects financed by it. The Reserve Bank of India has permitted us to exclude
these investments for determining compliance with the restriction on investments
by banks in equity securities, for a period of five years from the amalgamation.
In addition, the Reserve Bank of India has approved the exclusion of specific
equity investments acquired by conversion of debt under restructuring schemes
approved by the Corporate Debt Restructuring Forum. See also "Supervision and
Regulation".
Equity securities, forming part of our investment securities portfolio, are
considered as publicly traded if they have been traded on a securities exchange
within six months of the balance sheet. The last quoted price of such securities
is taken and recorded as their fair value. Non-readily marketable equity
securities for which there is no readily determinable fair value are recorded at
cost and a provision is made for other than temporary diminution. Securities
acquired through conversion of loans in a troubled debt restructuring are
recorded at the fair value on the date of conversion and subsequently accounted
for as if acquired for cash. Venture capital investments are carried at fair
value. However, they are generally carried at cost during the first year, unless
a significant event occurs that affects the long-term value of the investment.
Equity securities, including venture capital investments and mutual fund
units were 2.3% of our total assets at year-end fiscal 2004 and 8.3% of our
total investment securities portfolio at year-end fiscal 2004. 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. In general, we pursue a strategy of active
management of our long-term equity portfolio to maximize return on investment.
To ensure compliance with the Securities and Exchange Board of India's insider
trading regulations, all dealings in our equity investments in listed companies
are undertaken by the equity and corporate bonds dealing desks of our treasury,
which are segregated from our other business groups as well as the other groups
and desks in the treasury, and which do not have access to unpublished price
sensitive information about these companies that may be available to us as a
lender.
We deal in several major foreign currencies and take deposits from
non-resident Indians in four major foreign currencies. We also manage onshore
accounts in foreign currencies. The foreign exchange treasury manages its
portfolio through money market and foreign exchange instruments to optimize
yield and liquidity.
We control market risk and credit risk on our foreign exchange trading
portfolio through an internal model which sets counterparty limits, stop-loss
limits and limits on the loss of the entire foreign exchange trading operations
and exception reporting.
Customer Foreign Exchange and Derivative Products
48
We provide customer specific products and services and risk hedging
solutions in several currencies to meet the trade and service-related
requirements of our corporate clients. We earn commissions on these products and
services from our corporate customers.
We provide forward contracts to our customers for hedging their short-term
exchange rate risk on foreign currency denominated receivables and payables. We
generally provide this facility for a term of up to six months and occasionally
up to 12 months. We also offer interest rate and currency swaps to our customers
for hedging their medium and long-term risks due to interest rate and currency
exchange rate movements. We offer these swaps for a period ranging from three to
10 years. Our customers pay a commission for this product that is included in
the price of the product and is dependent upon market conditions. We also hedge
our own exchange rate risk related to our foreign currency trading portfolio
with products from banking counterparties. Our risk management products are
currently limited to foreign currency forward transactions and currency and
interest rate swaps for selected approved clients. We believe, however, that the
demand for risk management products will grow, and we are building the
capabilities to grow these products. We are focusing particularly on setting up
the sophisticated infrastructure and internal control procedures that are
critical to these products.
At year-end fiscal 2004, we had a portfolio of outstanding forward
contracts of Rs. 620.4 billion (US$ 14.3 billion), interest rate and currency
swaps of Rs. 1,118.1 billion (US$ 25.8 billion) and other derivative products of
Rs. 472.0 billion (US$ 10.9 billion).
ICICI Securities
In addition to ICICI Bank's treasury operations, we also provide investment
banking services through our subsidiary, ICICI Securities. ICICI Securities
provides investment banking services through three main business lines -
corporate advisory, fixed income and equities. The clients of ICICI Securities
include a range of Indian and foreign corporations and institutional investors.
ICICI Securities is a non-bank finance company. For a description of non-bank
finance companies, see "Overview of the Indian Financial Sector - Non-Bank
Finance Companies".
Corporate Advisory
ICICI Securities provides a variety of advisory services, including advice
on financing and strategic transactions. ICICI Securities was one of the first
Indian investment banks to form a dedicated mergers and acquisitions group to
provide a range of services to large and mid-market Indian corporate clients,
including business valuations, pricing and structuring of transactions, and
financial and corporate restructuring. In addition, ICICI Securities provides
specialized services, such as private equity syndication and privatization
advisory services for public sector companies.
Fixed Income
We believe ICICI Securities is one of the market leaders in the Indian debt
market, having been named the "Best Bond House - 2004" by Finance Asia. ICICI
Securities is a primary dealer appointed and authorized by the Reserve Bank of
India to trade in government securities. As a primary dealer, ICICI Securities
is permitted to underwrite the issuance of government securities and treasury
bills and to act as a market maker in these instruments. ICICI Securities was
the first primary dealer to commence activity in interest rate derivative
products such as interest rate swaps and forward rate agreements following their
introduction by the Reserve Bank of India in July 1999. In fiscal 2004, ICICI
Securities achieved turnover in excess of Rs. 1,000.0 billion (US$ 23.0 billion)
in government securities for the first time in its existence. 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. ICICI Securities achieved a turnover of about Rs. 125.0 billion
(US$ 2.9 billion) in non-government debt in fiscal 2004.
49
Equities
In equities, ICICI Securities offers a range of products including
underwriting of equity offerings, public and private placement of corporate
equity, assistance in buyback programs and equity brokering and research,
primarily for institutional investor clients. Indian law prohibits ICICI
Securities from holding or trading ICICI Bank's equity shares.
Other Investment Banking Products and Services
Venture Capital Funding
We provide venture capital funding to start-up companies and private equity
to a range of companies through funds managed by our subsidiary ICICI Venture
Funds Management Company Limited. At year-end fiscal 2004, ICICI Venture managed
or advised funds of Rs. 27.9 billion (US$ 643 million). The company focuses on
investments in several sectors, including media and entertainment, retail,
healthcare, information technology, and other manufacturing sectors. We believe
that ICICI Venture is the leading private equity investor in India, having
invested in a large number of the private equity deals completed in the country
to date and having established a track record of successfully exiting from
several investments.
Others
Insurance
We provide a wide range of insurance products and services through ICICI
Prudential Life Insurance Company and ICICI Lombard General Insurance Company .
The key dimensions of our strategy for growth in the insurance business are
innovative products, wide distribution network, prudent portfolio mix and sound
risk management practices. In addition, we are focused on leveraging on our
corporate and retail customer base for cross selling insurance products.
Life Insurance
We have a joint venture partnership with Prudential plc of UK for the life
insurance business. We have a 74.0% interest in this joint venture. This joint
venture company, ICICI Prudential Life Insurance Company, obtained the license
to conduct life insurance business in November 2000 and commenced business
operations in December 2000. ICICI Prudential Life Insurance Company is the
largest private sector life insurance company in India, with about 31% market
share in the private sector based on incremental premiums income (i.e., new
business) in fiscal 2004. We have a Memorandum of Understanding with ICICI
Prudential Life Insurance Company for distribution of life insurance policies
issued by ICICI Prudential Life Insurance Company through ICICI Bank's branch
network.
Non-Life Insurance
We have a joint venture partnership with Lombard Canada Limited for the
non-life insurance business. We have a 74.0% interest in this joint venture. The
joint venture company, ICICI Lombard General Insurance Company, obtained the
license to conduct general insurance business in August 2001 and since then has
commenced operations. ICICI Lombard General Insurance Company is the largest
private sector general insurance company in India, with about 22% market share
in terms of gross written premium in the private sector in fiscal 2004. ICICI
Lombard General Insurance Company offers a wide range of general insurance
products for corporate and retail customers. ICICI Lombard General Insurance
Company offers general insurance products to our customers and seeks to
capitalize on our customer relationships.
50
Funding
Our funding operations are designed to ensure stability of funding,
minimize funding costs and effectively manage liquidity. Subsequent to the
amalgamation, our primary source of funding is deposits raised from both retail
and corporate customers. We also raise funds through short-term rupee
borrowings. During fiscal 2004, we also raised funds through domestic and
overseas bond issuances pursuant to specific regulatory approvals. As a
financial institution, ICICI was not allowed to raise banking deposits and so
its primary sources of funding, prior to the amalgamation, were rupee borrowings
from a wide range of institutional investors, and retail bonds. ICICI also
obtained funds through foreign currency borrowings from multilateral
institutions like the Asian Development Bank and the World Bank, which were
guaranteed by the government of India, as well as through commercial foreign
currency borrowings.
Our deposits constituted 52.1% of our total liabilities at year-end fiscal
2004 compared to 45.2% of our total liabilities at year-end fiscal 2003. Our
borrowings constituted 34.8% of our total liabilities at year-end fiscal 2004
compared to 43.1% of our total liabilities at year-end fiscal 2003. Our
borrowings declined to Rs. 456.9 billion (US$ 10.5 billion) at year-end fiscal
2004 compared to Rs. 469.0 billion (US$ 10.8 billion) at year-end fiscal 2003,
due to repayment of ICICI's long-term debt during fiscal 2004 in line with
scheduled maturities, offset, in part, by new borrowings made by us. As a
result, our long-term debt decreased 6.8% to Rs. 373.4 billion (US$ 8.6 billion)
at year-end fiscal 2004 compared to Rs. 400.8 billion (US$ 9.2 billion) at
year-end fiscal 2003. Our short-term borrowings and trading liabilities
increased 22.4% to Rs. 83.4 billion (US$ 1.9 billion) at year-end fiscal 2004
compared to short-term borrowings and trading liabilities of Rs. 68.2 billion
(US$ 1.6 billion) at year-end fiscal 2003. Going forward, we will continue to
repay our borrowings in accordance with their scheduled maturities and raise new
funds primarily in the form of lower-cost deposits.
Our deposits increased 39.4% to Rs. 685.0 billion (US$ 15.8 billion) at
year-end fiscal 2004 compared to Rs. 491.3 billion (US$ 11.3 billion) at
year-end fiscal 2003. This significant growth in deposits was achieved primarily
through increased focus on retail and corporate customers by offering a wide
range of products designed to meet varied individual and corporate needs and
leveraging on our network of branches, extension counters and ATMs.
The following table sets forth, for the periods indicated, the average
volume and average cost of deposits by type of deposit.
Year ended March 31, (1)(2)
-------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------------------------------------------------------------------------------------------------------
Amount Cost(3) Amount Cost(3) Amount Cost(3) Amount Cost(3) Amount Amount Cost(3)
-------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Interest-bearing deposits:
Savings deposits...... Rs. 3,530 3.34% Rs. - -% Rs. - -% Rs. 30,874 2.96% Rs. 56,914 US$ 1,311 2.37%
Time deposits......... 64,309 9.31 3,682 13.31 6,618 11.24 327,144 7.68 469,589 10,820 6.25
Non-interest-bearing
deposits:
Demand deposits....... 7,443 - - - - - 31,172 - 54,090 1,246 -
---------- --------- --------- ---------- ---------- ---------
Total deposits.............Rs. 75,282 8.11% Rs. 3,682 13.31% Rs. 6,618 11.24% Rs.389,190 6.69 Rs.580,593 13,377 5.28%
========== ========= ========= ========== ========== =========
---------
(1) Data for fiscal 2003 and 2004 is not comparable to fiscal 2001 and
2002, as data for fiscal 2001 and 2002 is only for ICICI and does not
include ICICI Bank, as ICICI Bank was accounted for by the equity method in
those fiscal years. Also, the average volume of deposits for fiscal 2001
and 2002 is not comparable with fiscal 2000 due to deconsolidation of ICICI
Bank effective April 1, 2000.
(2) Average of quarterly balances at the end of March of the previous
fiscal year and June, September, December and March of that fiscal year for
each of fiscal 2000, 2001, 2002, 2003 and 2004.
(3) Represents interest expense divided by the average of quarterly
balances.
51
Our average deposits in fiscal 2004 were Rs. 580.6 billion (US$ 13.4
billion) at an average cost of 5.3% compared to average deposits of Rs. 389.2
billion (US$ 9.0 billion) at an average cost of 6.7% in fiscal 2003. Our average
time deposits in fiscal 2004 were Rs. 469.6 billion (US$ 10.8 billion) at an
average cost of 6.3% compared to average time deposits of Rs. 327.1 billion (US$
7.5 billion) in fiscal 2003 at an average cost of 7.7%. The average cost of
deposits decreased primarily due to the reduction in the deposit rates offered
to customers in fiscal 2004 in line with the overall decline in interest rates
in the economy as well as an increase in our savings and demand deposits.
The following table sets forth, at the date indicated, the maturity profile
of deposits by type of deposit.
At March 31, 2004
---------------------------------------------------------------------------
After one year
and within After three
Up to one year three years years Total
---------------------------------------------------------------------------
(in millions)
Interest-bearing deposits:
Savings deposits ........ Rs. 86,403 Rs. - Rs. - Rs. 86,403
Time deposits............ 421,435 72,081 31,259 524,775
Non-interest-bearing
deposits:
Demand deposits.......... 73,777 - - 73,777
--------------------------------------------------------------------------
Total deposits.............. Rs. 581,615 Rs. 72,081 Rs. 31,259 Rs. 684,955
===========================================================================
The following table sets forth, for the periods indicated, average
outstanding rupee borrowings based on quarterly balance sheets and by category
of borrowing and the percentage composition by category of borrowing. The
average cost (interest expense divided by average of quarterly balances) for
each category of borrowings is provided in the footnotes.
Year ended March 31,(1)(2)
------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------------------------------------------------------------------------------------------------------
Amount % to Amount % to Amount % to Amount % to Amount Amount % to
total total total total total
------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
SLR bonds(3)........... Rs. 26,507 6.5% Rs. 23,405 4.9% Rs. 20,518 4.0% Rs. 15,690 3.4% Rs. 14,815 US$ 341 3.9%
Borrowings from Indian
government(4)........ 9,194 2.2 8,049 1.7 7,333 1.4 6,434 1.4 5,735 132 1.5
Convertible
debentures(5)........ 130 0.1 - - - - - - - - -
Other borrowings(6)(7). 373,256 91.2 442,716 93.4 481,951 94.6 444,461 95.2 357,913 8,247 94.6
------------------------------------------------------------------------------------------------------------
Total...................Rs. 409,087 100.0% Rs. 474,170 100.0% Rs. 509,802 100% Rs.466,585 100.0% Rs.378,463 US$8,720 100.0%
============================================================================================================
---------
(1) Data for fiscal 2003 and 2004 is not comparable to fiscal 2001 and 2002, as
data for fiscal 2001 and 2002 is only for ICICI and does not include ICICI
Bank, as ICICI Bank was accounted for by the equity method in those fiscal
years. Also, the average volume of borrowings for fiscal 2001 and 2002 is
not comparable with fiscal 2000 due to deconsolidation of ICICI Bank
effective April 1, 2000.
(2) Average of quarterly balances at the end of March of the previous fiscal
year and June, September, December and March of that fiscal year for each
of fiscal 2000, 2002, 2003 and 2004 and average of quarterly balances at
the end of June, September, December and March for fiscal 2001.
(3) With an average cost of 10.33% in fiscal 2000, 10.62% in fiscal 2001,
11.10% in fiscal 2002, 11.44% in fiscal 2003 and 9.24% in fiscal 2004.
(4) With an average cost of 10.85% in fiscal 2000, 10.70% in fiscal 2001,
10.40% in fiscal 2002 and 10.40% in fiscal 2003 and 10.07% in fiscal 2004.
(5) With an average cost of 14.38% in fiscal 2000. The convertible debentures
were redeemed on July 17, 1999.
(6) With an average cost of 13.67% in fiscal 2000, 13.06% in fiscal 2001,
12.36% in fiscal 2002, 11.65% in fiscal 2003 and 10.46% in fiscal 2004.
(7) Includes publicly and privately placed bonds, borrowings from institutions
and wholesale deposits such as inter-corporate deposits, certificate of
deposits and call borrowings.
52
The following table sets forth, at the date indicated, the maturity profile
of our rupee term deposits of Rs. 10 million (US$ 230,415) or more.
At March 31,
-----------------------------------------
% of total
2004 deposits
-----------------------------------------
(in millions, except percentages)
Less than three months............................ Rs. 103,175 US$ 2,377 15.06%
Above three months and less than six months....... 58,670 1,352 8.57%
Above six months and less than 12 months.......... 76,733 1,768 11.20%
More than 12 months............................... 52,772 1,216 7.70%
----------- --------- -----
Total deposits of Rs. 10 million and more......... Rs. 291,350 US$ 6,713 42.54%
=========== ========= =====
During fiscal 2004, we repaid a significant amount of ICICI's high cost
long-term debt. As a result, average long-term debt reduced to Rs. 382.7 billion
(US$ 8.8 billion) during fiscal 2004 compared to Rs. 455.3 billion (US$ 10.5
billion) during fiscal 2003.
The following table sets forth, at the dates indicated, certain information
related to short-term rupee borrowings, which consist of certificates of
deposits, inter-corporate deposits and borrowings from government-owned
companies, and trading liabilities.
At March 31, (1)
-------------------------------------------------------------------
2000 2001 2002 2003 2004
----------- ------------- ------------ ------------- --------------
(in millions, except percentages)
Year-end balance.......................... Rs. 87,758 Rs. 99,997 Rs. 74,932 Rs. 50,232 Rs. 57,787
Average balance during the year (2) ...... 68,626 100,569 85,057 75,983 48,020
Maximum quarter-end balance............... 90,442 104,412 91,950 82,100 57,787
Average interest rate during the year 12.38% 10.17% 9.65% 11.31% 6.16%
Average interest rate at year-end (4)..... 10.82% 11.01% 9.34% 6.80% 4.85%
---------
(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 2000, 2002, 2003 and 2004 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 average interest rate at year-end fiscal 2004 at 4.85% was
significantly lower compared to the average interest rate during fiscal 2004 at
6.16% due to declining interest rates.
The following table sets forth, at the dates indicated, average outstanding
volume of foreign currency borrowings based on quarterly balance sheets by
source and the percentage composition by source. The average cost (interest
expense divided by average of quarterly balances) for each source of borrowings
is provided in the footnotes.
At March 31, (1) (2)
-------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------------------------------------------------------------------------------------------------------
% to % to % to % to % to
Amount total Amount total Amount total Amount total Amount Amount total
-------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Commercial borrowings(3)... Rs. 74,509 77.4% Rs. 74,745 77.6% Rs. 73,955 77.6% Rs. 53,791 67.4% Rs. 47,003 US$1,083 65.2%
Multilateral borrowings(4). 21,748 22.6 21,554 22.4 22,290 22.4 26,020 32.6 25,073 578 34.8
-------------------------------------------------------------------------------------------------------
Total...................... Rs. 96,257 100.0% Rs. 96,299 100.0% Rs. 96,246 100.0% Rs. 79,811 100.0% Rs. 72,076 US$1,661 100.0%
=======================================================================================================
---------
(1) Data for fiscal 2003 and 2004 is not comparable to fiscal 2001 and
2002, as data for fiscal 2001 and 2002 is only for ICICI and does not
include ICICI Bank, as ICICI Bank was accounted for by the equity method in
those fiscal years.
53
Also, the average volume of borrowings at year-end fiscal 2001 and 2002 is
not comparable with fiscal 2000 due to deconsolidation of ICICI Bank
effective April 1, 2000.
(2) Average of quarterly balances at the end of March of the previous
fiscal year, June, September, December and March of that fiscal year for
each of fiscal 2000, 2002, 2003 and 2004 and average of quarterly balances
at the end of June, September, December and March for fiscal 2001.
(3) With an average cost of 5.72% in fiscal 2000, 7.55% in fiscal 2001,
6.75% in fiscal 2002, 3.16% in fiscal 2003 and 3.11% in fiscal 2004.
(4) With an average cost of 5.53% in fiscal 2000, 4.39% in fiscal 2001,
4.93% in fiscal 2002, 4.40% in fiscal 2003 and 3.03% in fiscal 2004.
At year-end fiscal 2004, our outstanding subordinated debt was Rs. 91.1
billion (US$ 2.1 billion). This debt is classified as Tier 2 capital in
calculating the capital adequacy ratio in accordance with the Reserve Bank of
India's regulations on capital adequacy. See "Supervision and Regulation -
Reserve Bank of India Regulations".
54
Risk Management
As a financial intermediary, we are exposed to risks that are particular to
our lending and trading businesses and the environment within which we operate.
Our goal in risk management is to ensure that we understand, measure and monitor
the various risks that arise and that the organization adheres strictly to the
policies and procedures which are established to address these risks.
ICICI Bank is primarily exposed to credit risk, market risk, liquidity
risk, operational risk and legal risk. ICICI Bank has two centralized groups,
the Risk Management Group and the Compliance and Audit Group with a mandate to
identify, assess and monitor all of ICICI Bank's principal risks in accordance
with well-defined policies and procedures. The Head of the Risk Management Group
reports to the Chief Financial Officer and Treasurer and through him to the
Deputy Managing Director. The Head of the Compliance and Audit Group reports to
the Deputy Managing Director. Both the groups are independent of the business
units and coordinate with representatives of the business units to implement
ICICI Bank's risk management methodologies. Committees of the board of directors
have been constituted to oversee the various risk management activities. The
Audit Committee provides direction to and also monitors the quality of the
internal audit function. The Risk Committee 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
reviews developments in key industrial sectors and ICICI Bank's exposure to
these sectors as well as to large borrower accounts. The Agriculture & Small
Enterprises Business Committee reviews ICICI Bank's strategy for small
enterprises and agri-business and the quality of the agricultural lending and
small enterprises finance credit portfolio. The Asset Liability Management
Committee is responsible for managing the balance sheet and reviewing the
asset-liability position to manage ICICI Bank's liquidity and market risk
exposure. For a discussion of these and other committees, see "Management".
The Risk Management Group is further organized into the Credit Risk
Management Group, Market Risk Management Group, Retail Risk Management Group and
Risk Analytics Group. The Compliance and Audit Group is further organized into
the Compliance and Anti-Money Laundering Group and the Internal Audit Group.
The Risk Management Group is also responsible for assessing the risks
pertaining to the international operations, including review of policies and
setting sovereign and counterparty limits.
Credit Risk
ICICI Bank's credit policy is approved by the Credit Committee of our board
of directors. In its lending operations, ICICI Bank 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
ICICI Bank, principally the failure to make required payments on loans due to
ICICI Bank. ICICI Bank currently measures, monitors and manages credit risk for
each borrower and also at the portfolio level. ICICI Bank 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,
ICICI Bank assesses a variety of risks relating to the borrower and the relevant
industry. Borrower risk is evaluated by considering:
o the financial position of the borrower by analyzing the quality of its
financial statements, its past financial performance, its financial
flexibility in terms of ability to raise capital and its cash flow
adequacy;
o the borrower's relative market position and operating efficiency; and
55
o the quality of management by analyzing their track record, payment
record and financial conservatism.
Industry risk is evaluated by considering:
o certain industry characteristics, such as the importance of the
industry to the economy, its growth outlook, cyclicality and
government policies relating to the industry;
o the competitiveness of the industry; and
o certain industry financials, including return on capital employed,
operating margins and earnings stability.
After conducting an analysis of a specific borrower's risk, the Credit Risk
Management Group assigns a credit rating to the borrower. ICICI Bank has a scale
of 10 ratings ranging from AAA to B, an additional default rating of D and
short-term ratings from S1 to S8. Credit rating is a critical input for the
credit approval process. ICICI Bank determines the desired credit risk spread
over its cost of funds by considering the borrower's credit rating and the
default pattern corresponding to the credit rating. Every proposal for a
financing facility is prepared by the relevant business unit and reviewed by the
appropriate industry specialists in the Credit Risk Management Group before
being submitted for approval to the appropriate approval authority. The approval
process for non-fund facilities is similar to that for fund-based facilities.
The credit rating for every borrower is reviewed at least annually and is
typically reviewed on a more frequent basis for higher risk credits and large
exposures. ICICI Bank also reviews the ratings of all borrowers in a particular
industry upon the occurrence of any significant event impacting that industry.
Working capital loans are generally approved for a period of 12 months. At
the end of 12 months validity period, ICICI Bank reviews the loan arrangement
and the credit rating of the borrower and takes a decision on continuation of
the arrangement and changes in the loan covenants as may be necessary.
Project Finance Procedures
ICICI Bank has a strong framework for the appraisal and execution of
project finance transactions. ICICI Bank believes that this framework creates
optimal risk identification, allocation and mitigation, and helps minimize
residual risk.
The project finance approval process begins with a detailed evaluation of
technical, commercial, financial, marketing and management factors and the
sponsor's financial strength and experience. Once this review is completed, an
appraisal memorandum is prepared for credit approval purposes. As part of the
appraisal process, a risk matrix is generated, which identifies each of the
project risks, mitigating factors and residual risks associated with the
project. The appraisal memorandum analyzes the risk matrix and establishes the
viability of the project. Typical risk mitigating factors include the commitment
of stand-by funds from the sponsors to meet any cost over-runs and a
conservative collateral position. After credit approval, a letter of intent is
issued to the borrower, which outlines the principal financial terms of the
proposed facility, sponsor obligations, conditions precedent to disbursement,
undertakings from and covenants on the borrower. After completion of all
formalities by the borrower, a loan agreement is entered into with the borrower.
In addition to the above, in the case of structured project finance in
areas such as infrastructure and oil, gas and petrochemicals, as a part of the
due diligence process, ICICI Bank appoints consultants, wherever considered
necessary, to advise the lenders, including technical advisors, business
analysts, legal counsel and insurance consultants. These consultants are
typically internationally recognized and experienced in their respective fields.
Risk mitigating factors in these financings generally also include creation of
debt service reserves and channeling project revenues through a trust and
retention account.
56
ICICI Bank's project finance credits are generally fully secured and have
full recourse to the borrower. In most cases, ICICI Bank has a security interest
and first lien on all the fixed assets and a second lien on all the current
assets of the borrower. Security interests typically include property, plant and
equipment as well as other tangible assets of the borrower, both present and
future. Typically, it is ICICI Bank's practice to lend between 60.0% and 80.0%
of the appraised value of these types of collateral securities. ICICI Bank's
borrowers are required to maintain comprehensive insurance on their assets where
ICICI Bank is recognized as payee in the event of loss. In some cases, ICICI
Bank also takes additional collateral in the form of corporate or personal
guarantees from one or more sponsors of the project and a pledge of the
sponsors' equity holding in the project company. In certain industry segments,
ICICI Bank also takes security interest in relevant project contracts such as
concession agreements, off-take agreements and construction contracts as part of
the security package. In limited cases, loans are also guaranteed by commercial
banks and, in the past, have also been guaranteed by Indian state governments or
the government of India.
It is ICICI Bank's current practice to normally disburse funds after the
entire project funding is committed and all necessary contractual arrangements
have been entered into. Funds are disbursed in tranches to pay for approved
project costs as the project progresses. When ICICI Bank appoints technical and
market consultants, they are required to monitor the project's progress and
certify all disbursements. ICICI Bank also requires the borrower to submit
periodic reports on project implementation, including orders for machinery and
equipment as well as expenses incurred. Project completion is contingent upon
satisfactory operation of the project for a certain minimum period and, in
certain cases, the establishment of debt service reserves. ICICI Bank continues
to monitor the credit exposure until its loans are fully repaid.
Corporate Finance Procedures
As part of the corporate loan approval procedures, ICICI Bank carries out a
detailed analysis of funding requirements, including normal capital expenses,
long-term working capital requirements and temporary imbalances in liquidity.
ICICI Bank's funding of long-term core working capital requirements is assessed
on the basis, among other things, of the borrower's present and proposed level
of inventory and receivables. In case of corporate loans for other funding
requirements, ICICI Bank undertakes a detailed review of those requirements and
an analysis of cash flows. A substantial portion of ICICI Bank's corporate
finance loans are secured by a lien over appropriate assets of the borrower.
The focus of ICICI Bank's structured corporate finance products is on cash
flow based financing. ICICI Bank has a set of distinct approval procedures to
evaluate and mitigate the risks associated with such products. These procedures
include:
o carrying out a detailed analysis of cash flows to accurately forecast
the amounts that will be paid and the timing of the payments based on
an exhaustive analysis of historical data;
o conducting due diligence on the underlying business systems, including
a detailed evaluation of the servicing and collection procedures and
the underlying contractual arrangements; and
o paying particular attention to the legal, accounting and tax issues
that may impact any structure.
ICICI Bank's analysis enables it to identify risks in these transactions.
To mitigate risks, ICICI Bank uses various credit enhancement techniques, such
as over-collateralization, cash collateralization, creation of escrow accounts
and debt service reserves and performance guarantees. The residual risk is
typically managed by complete or partial recourse to the borrowing company whose
credit risk is evaluated as described above. ICICI Bank also has a monitoring
framework to enable continuous review of the performance of such transactions.
57
Working Capital Finance Procedures
ICICI Bank carries out a detailed analysis of its borrowers' working
capital requirements. Credit limits are established in accordance with the
approval authorization approved by ICICI Bank's board of directors. Once credit
limits are approved, ICICI Bank calculates the amounts that can be lent on the
basis of monthly statements provided by the borrower and the margins stipulated.
Quarterly information statements are also obtained from borrowers to monitor the
performance on a regular basis. Monthly cash flow statements are obtained where
considered necessary. Any irregularity in the conduct of the account is reported
to the appropriate authority on a monthly basis. Credit limits are reviewed on
an annual basis.
Working capital facilities are primarily secured by inventories and
receivables. Additionally, in certain cases, these credit facilities are secured
by personal guarantees of directors, or subordinated security interests in the
tangible assets of the borrower including plant and machinery.
Credit Approval Authority for Corporate Loans
ICICI Bank has established four levels of credit approval authorities for
its corporate banking activities, the Credit Committee of the board of
directors, the Committee of Directors, the Committee of Executives (Credit) and
the Regional Committee (Credit). The Credit Committee has the power to approve
all financial assistance. ICICI Bank's board of directors has delegated the
authority to the Committee of Directors, consisting of ICICI Bank's wholetime
directors, to the Committee of Executives (Credit) and the Regional Committee
(Credit), both consisting of designated executives of ICICI Bank, to approve
financial assistance to any company within certain individual and group exposure
limits set by the board of directors.
The following table sets forth the composition and the approval authority
of these committees at year-end fiscal 2004.
Committee Members Approval Authority
-------------------------------------------------------------------------------------------------------------------
Credit Committee of the Chaired by an o All approvals to companies with rating below BB and
board of directors independent director and all new (non agriculture) companies rated BB, pursuant
consisting of a majority to ICICI Bank's internal credit rating policy. Only the
of independent directors. Credit Committee has approval authority in these cases.
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 the Committee
(Lending) Director & CEO and of Executives (Credit) subject to the following total
consisting of all exposure limits:
wholetime directors. o Up to 10.0% of ICICI Bank's capital funds(1) to a
single entity; and
o Up to 30.0% of ICICI Bank's capital funds(1) to a single
group of companies.
-------------------------------------------------------------------------------------------------------------------
Committee of Executives Consisting of heads of Approvals linked to the rating, tenure and security of the
(Credit) client relationship exposure, which are above the authority of the Regional
groups, Retail Products Committee (Credit) subject to the following indicative
& Distribution Group, exposure limits:
Retail Infrastructure o From up to Rs. 5.0 billion (US$ 115 million) for a one
Group, International year secured exposure to up to Rs. 0.4 billion (US$ 9 million)
Banking Group, Structured for a secured exposure greater than 10 years for each
Finance, Credit and company with an internal credit rating of AA- and above;
Markets Group, Compliance o From up to Rs. 5.0 billion (US$ 115 million) for a one year
and Audit Group, Project unsecured exposure to up to Rs. 0.3 billion (US$ 7 million)
Finance Group and Chief for an unsecured exposure greater than 10 years for each
Financial company with an internal credit rating of AA- and above;
58
Officer. o From up to Rs. 1.6 billion (US$ 37 million) for a
one year secured exposure to up to Rs. 0.1 billion (US$
2 million) for a 10 year secured exposure for each
company with an internal credit rating of A+ and below;
o From up to Rs. 1.1 billion (US$ 25 million) for a
one year unsecured exposure to up to Rs. 0.1 billion
(US$ 2 million) for a 10 year unsecured exposure for
each company with an internal credit rating of A+ and
below;
-------------------------------------------------------------------------------------------------------------------
Regional Committee (Credit)Consisting of regional o From up to Rs. 5.0 billion (US$ 115 million) for a
representatives of one year secured exposure to up to Rs. 0.2 billion (US$
various client 5 million) for a 10 year secured exposure for each
relationship groups with company with an internal credit rating of AA- and above;
representatives of Risk o From up to Rs. 5.0 billion (US$ 115 million) for a
Management Group, one year unsecured exposure to up to Rs. 0.1 billion
Compliance and Audit (US$ 2 million) for a 10 year unsecured exposure for
Group and Middle Office each company with an internal credit rating of AA- and
Group as permanent above;
invitees. o From up to Rs. 0.6 billion (US$ 14 million) for a
one year secured exposure to up to Rs. 0.06 billion (US$
1 million) for a 10 year secured exposure for each
company with an internal credit rating of A+ and below;
o From up to Rs. 0.4 billion (US$ 9 million) for a one
year unsecured exposure to up to Rs. 0.04 billion (US$ 1
million) for a 10 year unsecured exposure for each
company with an internal credit rating of A+ and below;
-------------------------------------------------------------------------------------------------------------------
In all cases, subject to adherence to limits on ICICI Bank's
capital funds(1) imposed on the Committee of Directors as
mentioned above.
----------
(1) Capital funds consist of Tier 1 and Tier 2 capital, as defined in the
Reserve Bank of India regulations, under Indian GAAP. See "Supervision and
Regulation - Capital Adequacy Requirements".
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$
460,829);
o temporary accommodation not exceeding the lower of 20.0% of existing
approved facilities and Rs. 20 million (US$ 460,829); and
o facilities fully secured by deposits, cash margin, letters of credit
of approved banks or approved sovereign debt instruments.
In addition to the above loan products, ICICI Bank's Rural,Micro-banking
and Agri-business 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 our board of directors requires that
all such loans above Rs. 1.5 million (US$ 34,562) be approved by the Committee
of Directors, while the authority to approve loans up to Rs. 1.5 million (US$
34,562) has been delegated to designated executives.
Credit Monitoring Procedures for Corporate Loans
The Credit Middle Office Group monitors compliance with the terms and
conditions for credit facilities prior to disbursement. It also reviews the
completeness of documentation, creation of security and insurance policies for
assets financed. All borrower accounts are reviewed at least once a year. Larger
exposures and lower rated-borrowers are reviewed more frequently.
Retail Loan Procedures
Our customers for retail loans are typically middle and high-income,
salaried or self-employed individuals, and, in some cases, partnerships and
corporations. Except for personal loans, credit cards
59
and loan against shares, we require a contribution from the borrower and our
loans are secured by the asset financed.
Our retail credit product operations are sub-divided into various product
lines. Each product line is further sub-divided into separate sales and
marketing and credit groups. The Risk Management 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. All credit approval authorizations require the
approval of our board of directors.
ICICI Bank uses direct marketing agents as well as its own branch network
and employees for marketing retail credit products. However, credit approval
authority lies only with ICICI Bank's credit officers who are distinct from the
product marketing teams. The delegation of credit approval authority is linked,
among other factors, to the size of the credit and the authority delegated to
credit officers varies across different products.
ICICI Bank's credit officers evaluate credit proposals on the basis of the
product policy approved by the Committee of Directors and the risk assessment
criteria defined by the Risk Management Group. These criteria vary across
product segments but typically include factors such as the borrower's income,
the loan-to-value ratio and certain stability factors. In case of credit cards,
in order to limit the scope of individual discretion, ICICI Bank has implemented
a credit-scoring programme that is an automated credit approval system that
assigns 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. External agencies such as field
investigation agents and credit processing agents are used to facilitate a
comprehensive due diligence process including visits to offices and homes 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.
Though a formal credit bureau does not as yet operate in India, ICICI Bank
avails the services of certain private agencies operating in India to check
applications before disbursement. A centralized retail credit team undertakes
review and audit of credit quality across each credit approval team.
ICICI Bank has established centralized operations to manage operating risk
in the various back office processes of ICICI Bank's retail loan business except
for a few operations which are decentralized to improve turnaround time for
customers.
ICICI Bank has a collections unit structured along various product lines
and geographical locations, to manage delinquency levels. The collections unit
operates under the guidelines of a standardized recovery process. ICICI Bank
also makes use of external collection agents to aid it in collection efforts,
including collateral repossession in accounts that are overdue for more than 90
days. External agencies for collections are governed by standardized process
guidelines.
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. The fraud control department also evaluates the various
external agencies involved in the retail finance operations, including direct
marketing agents, external verification agents and collection agents.
Small Enterprises Loan Procedures
The Small Enterprises Group finances dealers and vendors of companies by
implementing structures to enhance the base credit quality of the vendor /
dealer, that involve an analysis of the base credit quality of the vendor /
dealer pool and an analysis of the linkages that exist between the vendor /
dealer and the company.
60
The group is also involved in financing based on a community-based
approach, that is, financing of small enterprises that have a homogeneous
profile such as apparel manufacturers and manufacturers of pharmaceuticals. The
risk assessment of such communities involves identification of appropriate
credit norms for target market, use of scoring models for enterprises that
satisfy these norms and applying pre-determined exposure limits to enterprises
that are awarded a minimum required score in the scoring model. The assessment
also involves setting up of portfolio control norms, individual borrower
approval norms and stringent exit triggers to be followed while financing such
clusters or communities.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the possibility of loss arising from changes in the value of
a financial instrument as a result of changes in market variables such as
interest rates, exchange rates and other asset prices. The prime source of
market risk for us is the interest rate risk we are exposed to as a financial
intermediary, which arises on account of our asset liability management
activities. In addition to interest rate risk, we are exposed to other elements
of market risk such as liquidity or funding risk, price risk on trading
portfolios, and exchange rate risk on foreign currency positions.
Market Risk Management Procedures
Our board of directors reviews and approves the policies for the management
of market risk. The board has delegated the responsibility for market risk
management on the banking book to the Asset Liability Management Committee and
the trading book to the Committee of Directors, under the Risk Committee of the
board of directors. The Asset Liability Management Committee is responsible for
approving policies and managing interest rate risk on the banking book and
liquidity risks reflected in the balance sheet. The Committee of Directors is
responsible for setting policies and approving risk controls for the trading
portfolio.
The Asset Liability Management Committee is chaired by the Joint Managing
Director and the Deputy Managing Director and Executive Directors are members of
the Committee. This Committee generally meets on a monthly basis and reviews the
interest rate and liquidity gap positions on the banking book, formulates a view
on interest rates, sets deposit and benchmark lending rates, reviews the
business profile and its impact on asset liability management and determines the
asset liability management strategy, as deemed fit, in light of the current and
expected business environment. This Committee reports to the Risk Committee. A
majority of the members of the Risk Committee are independent directors and the
committee is chaired by an independent director. The Structural Rate Risk
Management Group and Balance Sheet Management Group are responsible for managing
interest rate risk and liquidity risk, under the supervision of the Asset
Liability Management Committee.
The Risk Management Group recommends changes in risk policies and controls,
including for new trading products, and the processes and methodologies for
quantifying and assessing market risks. Risk limits including position limits
and stop loss limits for the trading book are monitored on a daily basis and
reviewed periodically.
Interest Rate Risk
Since our balance sheet consists predominantly of rupee assets and
liabilities, movements in domestic interest rates constitute the main source of
interest rate risk. Our portfolio of traded and other debt securities and our
loan portfolio are negatively impacted by an increase in interest rates.
Exposure to fluctuations in interest rates is measured primarily by way of gap
analysis, providing a static view of the maturity and re-pricing characteristics
of balance sheet positions. An interest rate gap report is prepared by
classifying all assets and liabilities into various time period categories
according to contracted maturities or anticipated re-pricing date. The
difference in the amount of assets and liabilities maturing or being re-priced
in any time period category, would then give an indication of the extent of
exposure to the risk of potential changes in the margins on new or re-priced
61
assets and liabilities. ICICI Bank prepares interest rate risk reports on a
fortnightly basis. The same are reported to the Reserve Bank of India on a
monthly basis. Interest rate risk is further monitored through interest rate
risk limits approved by the Asset Liability Management Committee.
Our core business is deposit taking and lending in both rupees and foreign
currencies, as permitted by the Reserve Bank of India. These activities expose
us to interest rate risk. As the rupee market is significantly different from
the international currency markets, gap positions in these markets differ
significantly.
Our primary source of funding is deposits and to a smaller extent,
borrowings. In the rupee market, most of our deposit taking is at fixed rates of
interest for fixed periods, except for savings deposits and current deposits,
which do not have any specified maturity and can be withdrawn on demand. We
usually borrow for a fixed period with a one-time repayment on maturity, with
some borrowings having European call/put options, exercisable only on specified
dates, attached to them. However, we have a mix of floating and fixed interest
rate assets. Our loans generally are repaid more gradually, with principal
repayments being made over the life of the loan. Our housing loans at year-end
fiscal 2004 were primarily floating rate loans where the rates are reset every
quarter. Until December 31, 2003, we followed a four-tier prime rate structure,
namely, a short-term prime rate for one-year loans or loans that re-price at the
end of one year, a medium-term prime rate for one to three year loans, a
long-term prime rate for loans with maturities greater than three years and a
prime rate for cash credit products. Effective January 1, 2004, we have moved to
a single benchmark prime rate structure for all loans other than specific
categories of loans advised by the Indian Banks' Association (which include,
among others, loans to individuals for acquiring residential properties, loans
for purchase of consumer durables, non-priority sector personal loans and loans
to individuals against shares, debentures, bonds and other securities), with
lending rates comprising the benchmark prime rate, term premia and
transaction-specific credit and other charges. Interest rates on loans
outstanding at December 31, 2003 continue to be based on the four-tier prime
rate structure. We seek to eliminate interest rate risk on undisbursed
commitments by fixing interest rates on rupee loans at the time of loan
disbursement.
In contrast to our rupee loans, a large proportion of our foreign currency
loans are floating rate loans. These loans are generally funded with floating
rate foreign currency funds. Our fixed rate foreign currency loans are generally
funded with fixed rate foreign currency funds. We generally convert all our
foreign currency borrowings and deposits into floating rate dollar liabilities
through the use of interest rate and currency swaps with leading international
banks. The foreign currency gaps are generally significantly lower than rupee
gaps, representing a considerably lower exposure to fluctuations in foreign
currency interest rates.
We use the duration of our government securities portfolio as a key
variable for interest rate risk management. We increase or decrease the duration
of government securities portfolio to increase or decrease our interest rate
risk exposure. In addition, we also use interest rate derivatives to manage
asset and liability positions. We are an active participant in the interest rate
swap market and are one of the largest counterparties in India.
The following table sets forth, at the date indicated, our asset-liability
gap position.
At March 31, 2004(1)-(4)
---------------------------------------------------------------------
Less than or Greater than
equal to one one year and up Greater than Total
year to five years five years
---------------------------------------------------------------------
(in millions)
Loans, net................................... Rs. 370,346 Rs. 261,039 Rs. 97,134 Rs. 728,520
Securities................................... 221,267 19,930 147,945 389,142
Fixed assets................................. - 633 32,782 33,415
Other assets(5).............................. 58,380 22,857 176,817 258,054
---------------------------------------------------------------------
Total assets................................. 649,993 304,460 454,678 1,409,131
Stockholders' equity......................... - - 94,525 94,525
62
Debt(5)...................................... 681,557 291,474 168,816 1,141,847
Other liabilities............................ 13,101 19,543 140,114 172,759
--------------------------------------------------------------------
Total liabilities............................ 694,658 311,017 403,455 1,409,131
Total gap before risk management positions... (44,665) (6,558) 51,223 -
Risk management positions.................... (52,518) 33,989 18,529 -
--------------------------------------------------------------------
Total gap after risk management positions.... Rs. (97,184) Rs. 27,431 Rs. 69,752 Rs. -
====================================================================
----------------
(1) Assets and liabilities are classified into the applicable categories, based
on residual maturity or re-pricing whichever is earlier. Classification
methodologies are generally based on Asset Liability Management Guidelines
issued by the Reserve Bank of India, effective from April 1, 2000.
(2) Items that neither mature nor re-price are included in the "greater than
five years" category. This includes equity share capital and a substantial
part of fixed assets.
(3) Impaired loans of residual maturity less than three years are classified in
the "greater than one year and up to five years" category and impaired
loans of residual maturity between three to five years are classified in
the "greater than five years" category.
(4) The risk management positions comprise foreign currency and rupee swaps.
(5) The categorization for these items is different from that reported in the
financial statements.
The following table sets forth, at the date indicated, the amount of our
loans with residual maturities greater than one year that had fixed and variable
interest rates.
At March 31, 2004
------------------------------------------
Fixed rate Variable Total
loans rate loans
------------------------------------------
(in millions)
Loans....................... Rs. 312,960 Rs. 179,100 Rs. 492,060
Price Risk (Banking book)
The following table sets forth, using the balance sheet at year-end fiscal
2004 as the base, one possible prediction of the impact of adverse changes in
interest rates on net interest income for fiscal 2005, assuming a parallel shift
in yield curve at year-end fiscal 2004.
At March 31, 2004
----------------------------------------------------------------------------------------------------------
Change in interest rates
(in basis points)
----------------------------------------------------------------------------------------------------------
(100) (50) 50 100
(in millions, except percentages)
Rupee portfolio........................ Rs. (347) Rs. (173) Rs. 173 Rs. 347
Foreign currency portfolio............. 60 30 (30) (60)
---------------- ---------------- -------------- -------------
Total.................................. Rs. (287) Rs. (143) Rs. 143 Rs. 287
================ ================ ============== =============
Based on our asset and liability position at year-end fiscal 2004, the
sensitivity model shows that net interest income from the banking book for
fiscal 2005 would rise by Rs. 287 million (US$ 7 million) if interest rates
increased by 100 basis points during fiscal 2005. Conversely, the sensitivity
model shows that if interest rates decreased by 100 basis points during fiscal
2005, net interest income for fiscal 2005 would fall by an equivalent amount of
Rs. 287 million (US$ 7 million). Based on our asset and liability position at
year-end fiscal 2003, the sensitivity model showed that net interest income for
fiscal 2003 would have fallen by Rs. 174 million (US$ 4 million) if interest
rates had increased by 100 basis points during fiscal 2004. Interest rate risk
numbers at year-end fiscal 2004 are low primarily due to the low duration of
government securities portfolio maintained by us and the large proportion of
floating rate loans in the housing loans.
Sensitivity analysis, which is based upon a static interest rate risk
profile of assets and liabilities, is used for risk management purposes only and
the model above assumes that during the course of the year no other changes are
made in the respective portfolios. Actual changes in net interest income will
vary from the model.
63
Price Risk (Trading book)
We undertake trading activities to enhance earnings through profitable
trading for our own account. ICICI Securities, our investment banking
subsidiary, is a primary dealer in government of India securities, and a
significant proportion of its portfolio consists of government of India
securities.
The following tables sets forth, using the fixed income portfolio at
year-end fiscal 2004 as the base, one possible prediction of the impact of
changes in interest rates on the value of our rupee fixed income trading
portfolio for fiscal 2005, assuming a parallel shift in yield curve.
At March 31, 2004
----------------------------------------------------------
Change in interest rates
(in basis points)
----------------------------------------------------------
Portfolio
Size (100) (50) 50 100
----------------------------------------------------------
(in millions)
Government of India securities............ Rs. 9,776 Rs. 842 Rs. 410 Rs. (387) Rs. (754)
Corporate debt securities................. 209 14 7 (7) (13)
----------- ---------- ----------- ---------- ------------
Total..................................... Rs. 9,985 Rs. 857 Rs. 417 Rs. (393) Rs. (767)
----------- ---------- ----------- ---------- ------------
At year-end fiscal 2004, the total value of our rupee fixed income
portfolio was Rs.10.0 billion (US$ 230 million). The sensitivity model shows
that if interest rates increase by 100 basis points during fiscal 2005, the
value of the trading portfolio, would fall by Rs. 767 million (US$ 18 million).
Conversely, if interest rates fell by 100 basis points during fiscal 2005, under
the model, the value of this portfolio would rise by Rs. 857 million (US$ 20
million). At year-end fiscal 2003, the sensitivity model showed that if interest
rates had increased by 100 basis points during fiscal 2004, the value of the
trading portfolio would have fallen by Rs. 1.6 billion (US$ 37 million). The
decrease at year-end fiscal 2004 was primarily due to the decrease in the
portfolio to Rs. 10.0 billion (US$ 230 million) from Rs. 33.4 billion (US$ 770
million) at year-end fiscal 2003.
As noted above, sensitivity analysis is used for risk management purposes
only and the model used above assumes that during the course of the year no
other changes are made in the respective portfolios. Actual changes in the value
of the fixed income portfolio will vary from the model above.
We revalue our trading portfolio on a daily basis and recognize aggregate
re-valuation losses in our profit and loss account. The asset liability
management policy stipulates an interest rate risk limit which seeks to cap the
risk on account of the mark-to-market impact on the mark-to-market book (under
the Indian GAAP classification which is different from the US GAAP
classification - see "Supervision and Regulation - Banks' Investment
Classification and Valuation Norms") and the earnings at risk on the banking
book, based on a sensitivity analysis of a 100 basis points parallel and
immediate shift in interest rates.
In addition, the Risk Management Group stipulates risk limits including
position limits and stop loss limits for the trading book. These limits are
monitored on a daily basis and reviewed periodically. In addition to risk
limits, we also have risk monitoring tools such as Value-at-Risk models for
measuring market risk in our trading portfolio.
ICICI Bank is required to invest a specified percentage, currently 25.0%,
of its liabilities in government of India securities to meet the statutory ratio
requirement prescribed by the Reserve Bank of India. As a result, we have a very
large portfolio of government of India securities and these are primarily
classified as available for sale securities. Our available for sale securities
included Rs. 260.6 billion (US$ 6.0 billion) of government of India securities.
These are not included in the trading book analysis presented above.
64
Equity Risk
We assume equity risk both as part of our investment book and our trading
book. On the investment book, investments in equity shares and preference shares
are essentially long-term in nature. Nearly all the equity investment securities
have been driven by our project financing activities. The decision to invest in
equity shares during project financing activities has been a conscious decision
to participate in the equity of the company with the intention of realizing
capital gains arising from the expected increases in market prices, and is
separate from the lending decision.
Trading account securities are recorded at market value. For the purpose of
valuation of our available for sale equity investment securities, an assessment
is made whether a decline in the fair value, below the amortized cost of the
investments, is other than temporary. If the decline in fair value below the
amortized cost is other than temporary, the decline is provided for in the
income statement. A temporary decline in value is excluded from the income
statement and reflected directly in the shareholders' equity. To assess whether
a decline in fair value is temporary, the duration for which the decline had
existed, industry and company specific conditions and dividend record are
considered. Non-readily marketable securities for which there is no readily
determinable fair value are recorded at cost. Venture capital investments are
carried at fair value. However, they are generally carried at cost during the
first year, unless a significant event occurs that affected the long-term value
of the investment.
At year-end fiscal 2004, the fair value of trading account equity
securities was Rs. 1.0 billion (US$ 23 million). The fair value of our available
for sale equity securities investment portfolio, including non-readily
marketable securities of Rs. 8.6 billion (US$ 199 million), was Rs. 31.0 billion
(US$ 714 million). At year-end fiscal 2003, the fair value of trading equity
securities was Rs. 187 million (US$ 4 million). The fair value of the available
for sale equity securities investment portfolio, including non-readily
marketable securities of Rs. 9.4 billion (US$ 217 million), was Rs. 25.5 billion
(US$ 589 million).
Exchange Rate Risk
We offer foreign currency hedge instruments like swaps, forwards, and
currency options to clients, which are primarily banks and highly rated
corporate customers. We actively use cross currency swaps, forwards, and options
to hedge against exchange risks arising out of these transactions. Trading
activities in the foreign currency markets expose us to exchange rate risks.
This risk is mitigated by setting counterparty limits, stipulating daily and
cumulative stop-loss limits, and engaging in exception reporting.
The Reserve Bank of India has authorized the dealing of foreign
currency-rupee options by banks for hedging foreign currency exposures including
hedging of balance sheet exposures. We have been offering such products to
corporate clients and other inter-bank counterparties and are one of the largest
participants in the currency options market accounting for a significant share
of daily trading volume. All the options are maintained within the specified
limits.
In addition, foreign currency loans are made on terms that are similar to
foreign currency borrowings, thereby transferring the foreign exchange risk to
the borrower. Foreign currency cash balances are generally maintained abroad in
currencies matching with the underlying borrowings. In addition, there is an
open foreign exchange position limit to minimize exchange rate risk.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the risk
of unexpected increases in the cost of funding an asset portfolio at appropriate
maturities and the risk of being unable to liquidate a position in a timely
manner at a reasonable price. The goal of liquidity management is to be able,
even under adverse conditions, to meet all liability repayments on time, to meet
contingent liabilities, and fund all investment opportunities.
65
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. We fund our operations principally by accepting
deposits from retail and corporate depositors and through public issuance of
bonds. We also borrow in the short-term inter-bank market. Loan maturities,
securitization of assets and loans, and sale of investments also provide
liquidity. See "Operating and Financial Review and Prospects - Financial
Condition - Liquidity Risk" for a detailed description of liquidity risk.
Operational Risk
We are 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. We attempt to mitigate operational risk
by maintaining a comprehensive system of internal controls, establishing systems
and procedures to monitor transactions, maintaining key back-up procedures and
undertaking regular contingency planning.
Operational Controls and Procedures in Branches
ICICI Bank has operating manuals detailing the procedures for the
processing of various banking transactions and the operation of the application
software. Amendments to these manuals are implemented through circulars sent to
all offices.
ICICI Bank has a scheme of delegation of financial powers that sets out the
monetary limit for each employee with respect to the processing of transactions
in a customer's account. Withdrawals from customer accounts are controlled by
dual authorization. Senior officers have delegated power to authorize larger
withdrawals. ICICI Bank's operating system validates the check number and
balance before permitting withdrawals. Cash transactions over Rs. 1 million (US$
23,041) are subject to special scrutiny to avoid money laundering. ICICI Bank's
banking software has multiple security features to protect the integrity of
applications and data.
Operational Controls and Procedures for Internet Banking
In order to open an Internet banking account, the customer must provide us
with documentation to prove the customer's identity, such as a copy of the
customer's passport, a photograph and specimen signature of the customer. After
verification of this documentation, we open the Internet banking account and
issue the customer a user ID and password to access his account online.
Operational Controls and Procedures in Regional Processing Centers &
Central Processing Centers
To improve customer service at our physical locations, we handle
transaction processing centrally by taking away such operations from branches.
We have centralized operations at regional processing centers located at 15
cities in the country. These regional processing centers process clearing checks
and inter-branch transactions, make inter-city check collections, and engage in
back-office activities for account opening, standing instructions and
auto-renewal of deposits.
In Mumbai, we have centralised transaction processing on a nation-wide
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 postdated checks 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 brokering services and recovery of service
charges for accounts for holding shares in book-entry form.
66
Operational Controls and Procedures in Treasury
ICICI Bank has a high level of automation in trading operations. ICICI Bank
uses technology to monitor risk limits and exposures. ICICI Bank's front office,
back office and accounting and reconciliation functions are fully segregated in
both the domestic treasury and foreign exchange treasury. The respective middle
offices use various risk monitoring tools such as counterparty limits, position
limits, exposure limits and individual dealer limits. Procedures for reporting
breaches in limits are also in place.
ICICI Bank's front office treasury operations for rupee transactions
consist of operations in fixed income securities, equity securities and
inter-bank money markets. ICICI Bank's dealers analyze the market conditions and
take views on price movements. Thereafter, they strike deals in conformity with
various limits relating to counterparties, securities and brokers. The deals are
then forwarded to the back office for settlement.
Trade strategies are discussed frequently and decisions are taken based on
market forecasts, information and liquidity considerations. Trading operations
are conducted in conformity with the code of conduct prescribed by internal and
regulatory guidelines.
The Treasury Middle Office Group, which reports to the Deputy Managing
Director monitors counterparty limits, evaluates the mark-to-market impact on
various positions taken by dealers and monitors market risk exposure of the
investment portfolio and adherence to various market risk limits.
ICICI Bank's back office undertakes the settlement of funds and securities.
The back office has procedures and controls for minimizing operational risks,
including procedures with respect to deal confirmations with counterparties,
verifying the authenticity of counterparty checks and securities, ensuring
receipt of contract notes from brokers, monitoring receipt of interest and
principal amounts on due dates, ensuring transfer of title in the case of
purchases of securities, reconciling actual security holdings with the holdings
pursuant to the records and reports any irregularity or shortcoming observed.
Anti-money Laundering Controls
The Reserve Bank of India issued detailed guidelines to banks on know your
customer and anti-money laundering in August 2002. The Indian Parliament also
passed the Prevention of Money Laundering Act in 2002. However, the provisions
of this Act are yet to be declared effective by the government of India. ICICI
Bank is in compliance with the guidelines of the Reserve Bank of India. Our
board of directors has approved for implementation an anti-money laundering
policy which would apply to all ICICI Bank's business operations in India and
abroad. A Money Laundering Reporting Officer has been designated for
implementing and monitoring compliance with this policy. The Audit Committee of
the board of directors supervises the implementation of the anti-money
laundering policy. The anti-money laundering policy has been designed using a
risk-based approach and is based on two pillars: know your customer and
monitoring and reporting of suspicious transactions. The business groups are
required to undertake risk profiling of various customer segments and products,
and classify them into high, medium and low-risk categories. The anti-money
laundering framework seeks to institute a process of customer identification and
verification depending on the nature of the customer and the transactions. A
business relationship may be commenced only after establishing and verifying the
identity of the customer and understanding the nature of the business the
customer expects to conduct. The ultimate beneficiary of the relationship and
the purpose of commencing the relationship must also be established. In respect
of unusual or suspicious transactions or when the customer moves from a low-risk
to high-risk profile, appropriate enhanced due-diligence measures are required
to be adopted.
67
Global risk management framework
We have adopted a global risk management framework for our international
banking operations, including overseas branches, offshore banking units and
subsidiaries. Under this framework, our credit, treasury investment, asset
liability management and anti-money laundering policies apply to all our
overseas branches and offshore banking units, with modifications to meet local
regulatory or business requirements. These modifications may be made only with
the approval of the appropriate committee of our board of directors. All
overseas banking subsidiaries are required to adopt risk management policy
frameworks to be approved by their board of directors or an appropriate
committee of their board of directors, based on applicable laws and regulations
as well as our corporate governance and risk management framework. The overseas
banking subsidiaries are required to adopt a process for formulation of policies
which involves seeking the guidance and recommendations of the related groups in
ICICI Bank.
The Compliance and Audit Group is responsible for implementing and
monitoring the global risk management framework. The Compliance and Audit Group
plays an oversight role in respect of regulatory compliance with both local and
Indian regulatory requirements. Key risk indicators pertaining to our
international banking operations are presented to the Risk Committee of our
board of directors on a quarterly basis.
Risk measurement and modeling
We are in the process of implementing a measurement approach to arrive at
regulatory capital allocation for operational risk. We have initiated work on
modeling the impact of losses arising out of operational risk in different
processes. These models, based on statistical methods, seek to facilitate the
identification of processes that are prone to very high risk and assist us
further in developing the necessary controls to reduce operational risk.
Audit
The Internal Audit Group, which is part of the Compliance and 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
audit plan for every fiscal year is approved by the Audit Committee of our board
of directors.
The Internal Audit Group also has a dedicated team responsible for
information technology security audits. The annual audit plan covers various
components of information technology including applications, databases, networks
and operating systems.
The Reserve Bank of India requires banks to have a process of concurrent
audits at branches handling large volumes, to cover a minimum of 50.0% of
business volumes. ICICI Bank has a process of concurrent audits, using external
accounting firms. Concurrent audits are also carried out at centralized and
regional processing centers operations to ensure existence of and adherence to
internal controls.
The Internal Audit Group has formed a separate International Banking Audit
Group for audit of international branches, representative offices and
subsidiaries.
Legal Risk
The uncertainty of the enforceability of the obligations of our customers
and counter-parties, including the foreclosure on collateral, creates legal
risk. Changes in laws and regulations could adversely affect us. Legal risk is
higher in new areas of business where the law is often untested by the courts.
We seek to minimize legal risk by using stringent legal documentation, employing
68
procedures designed to ensure that transactions are properly authorized and
consulting internal and external legal advisors.
Derivative Instruments Risk
We enter into interest rate and currency derivative transactions primarily
for the purpose of hedging interest rate and foreign exchange mismatches and
also engage in trading of derivative instruments on our own account. We provide
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. Our derivative
transactions are subject to counterparty risk to the extent particular obligors
are unable to make payment on contracts when due.
Risk management in key subsidiaries
ICICI Securities provides investment banking services, including corporate
advisory, fixed income and equity services, to corporate customers. All
investment banking mandates, including underwriting commitments, are approved by
the Commitments Committee comprising the Managing Director and CEO and relevant
group heads, of ICICI Securities. ICICI Securities is a primary dealer and has
government of India securities as a significant proportion of its portfolio. It
has a corporate risk management group for managing principally the credit and
market risks arising out of the various activities of the company.
ICICI Prudential Life Insurance is exposed to business risks arising out of
the nature of products and underwriting, and market risk arising out of the
investments made out of the corpus of premiums collected and the returns
guaranteed to policyholders. ICICI Prudential Life Insurance believes it has a
well-developed framework for assessing and managing these risks. We believe it
has the largest team of underwriters among private sector insurance companies in
India. The key risks and the risk management framework are periodically reviewed
by the Risk Management and Audit Committee of its board of directors. The
Investment Committee oversees investment-related risk management by approving
and reviewing the implementation of the investment policy within the norms
stipulated by the Insurance Regulatory and Development Authority. ICICI
Prudential Life Insurance has an asset-liability management framework for its
investment related risks. At year-end fiscal 2004, linked insurance plans
constituted about 48.0% of the portfolio. These are exposed to low market risk
as the returns are linked to the value of underlying investments. In order to
manage the interest rate risk on the non-linked portfolio, ICICI Prudential Life
Insurance has hedged the single premium non-participating portfolio by duration
matching, re-balanced at monthly intervals. For the participating portfolio,
ICICI Prudential Life Insurance has adopted an asset allocation strategy which
includes investments in equities. The equity portfolio is benchmarked to a stock
market index. ICICI Prudential Life Insurance follows a disciplined approach to
portfolio construction to manage the volatility of equity investments and
achieve superior equity asset class returns over the long term. The portfolio
largely comprises index stocks and is constructed with small limits for sector
and stock deviation vis-a-vis index stock weighs. In addition, there are limits
on exposures to companies, groups and industries.
ICICI Lombard General Insurance is principally exposed to risks arising out
of the nature of business underwritten and credit risk on its investment
portfolio. In respect of business risk, ICICI Lombard General Insurance seeks to
diversify its insurance portfolio across industry sectors and geographical
regions. It focuses on product segments that have historically experienced low
loss ratios. It also has the ability to reduce the risk retained on its own
balance sheet by re-insuring a part of the risks underwritten. Its investments
are governed by the investment policy approved by its board of directors within
the norms stipulated by the Insurance Regulatory and Development Authority. The
Investment Committee overseas the implementation of this policy and reviews it
periodically. Exposure to any single entity is normally restricted to 5.0% of
the portfolio and to any industry to
69
10.0% of the portfolio. Investments in debt instruments are generally restricted
to instruments with a domestic credit rating of AA or higher.
Controls and Procedures
ICICI Bank's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of ICICI Bank's "disclosure controls and procedures"
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended) as of March 31, 2004 and concluded that, as of the date of their
evaluation, ICICI Bank's disclosure controls and procedures were effective to
ensure that information required to be disclosed by ICICI Bank in the reports
that it files or submits under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There has been no change in ICICI Bank's internal control over financial
reporting that has occurred during the fiscal year ended March 31, 2004, that
has materially affected, or is reasonably likely to materially affect, ICICI
Bank's internal control over financial reporting.
Loan Portfolio
Our gross loan portfolio, which includes loans structured as debentures and
preferred stock, was Rs. 795.3 billion (US$ 18.3 billion) at year-end fiscal
2004, an increase of 16.2% over the gross loan portfolio of Rs. 684.6 billion
(US$ 15.8 billion) at year-end fiscal 2003. At year-end fiscal 2003, the gross
loan portfolio increased 22.2% to Rs. 684.6 billion (US$ 15.8 billion) as
compared to ICICI's gross loan portfolio of Rs. 560.2 billion (US$ 12.9 billion)
at year-end fiscal 2002. At year-end fiscal 2002, ICICI's gross loan portfolio
decreased 11.8% to Rs. 560.2 billion (US$ 12.9 billion) from Rs. 635.1 billion
(US$ 14.6 billion) at year-end fiscal 2001, primarily due to securitization and
sell-down of ICICI's loan portfolio. At year-end fiscal 2004, approximately
88.7% of our gross loans were rupee loans. At year-end fiscal 2004, our balance
outstanding in respect of loans outside India was Rs. 11.4 billion (US$ 263
million), representing approximately 1.4% of our total gross loan portfolio.
Loan Portfolio by Categories
The following table sets forth, at the dates indicated, our gross rupee and
foreign currency loans by business category.
At March 31, (1)
-------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------------------------------------------------------------------------
(in millions)
Wholesale banking(2) Rs.459,837 Rs.511,312 Rs.410,556 Rs.385,143 Rs.316,801 US$ 7,300
Rupee................................. 371,257 428,782 342,068 297,030 244,668 5,638
Foreign currency...................... 88,581 82,530 68,488 88,113 72,133 1,662
Working capital finance 75,606 44,442 42,225 74,422 80,505 1,855
Rupee................................. 72,317 42,592 39,943 70,092 63,268 1,458
Foreign currency...................... 3,289 1,850 2,282 4,330 17,237 397
Leasing and related activities (3) 35,254 39,741 24,332 17,862 16,015 369
Rupee................................. 33,787 38,258 22,879 17,862 16,015 369
Foreign currency ..................... 1,467 1,483 1,453 - - -
Consumer loans and credit card
receivables 6,679 27,106 72,789 188,254 311,907 7,187
Rupee ................................ 6,679 27,106 72,789 188,254 311,690 7,182
Foreign currency ..................... - - - - 217 5
Other(4) 18,156 12,457 10,346 18,959 70,059 1,614
Rupee ................................ 24,835 39,563 83,135 18,959 70,044 1,614
Foreign currency ..................... - - - - 15 -
Gross loans
Rupee ............................... 502,196 549,195 488,025 592,197 705,685 16,260
Foreign currency ..................... 93,337 85,863 72,223 92,443 89,602 2,065
-------------------------------------------------------------------------
Total gross loans ...................... 595,533 635,058 560,248 684,640 795,287 18,325
70
Allowance for loan losses............... (34,085) (33,035) (36,647) (54,219) (66,767) (1,538)
-------------------------------------------------------------------------
Net loans .............................. Rs.561,448 Rs.602,023 Rs.523,601 Rs.630,421 Rs.728,520 US$ 16,786
=========================================================================
--------------
(1) Data for fiscal 2003 and 2004 is not comparable to fiscal 2001 and 2002, as
data for fiscal 2001 and 2002 is only for ICICI and does not include ICICI
Bank, as ICICI Bank was accounted for by the equity method in those fiscal
years. Also, data for fiscal 2001 and 2002 is not comparable with fiscal
2000 due to deconsolidation of ICICI Bank effective April 1, 2000.
(2) Wholesale banking includes project finance, corporate finance and
receivable financing but excludes leasing and related activities.
(3) Leasing and related activities includes leasing and hire purchase. (4)
Other includes bills discounted and inter-corporate deposits
The proportion of foreign currency loans to total gross loans has decreased
from 15.7% of ICICI's total gross loans at year-end fiscal 2000 to 11.3% of our
gross loans at year-end fiscal 2004 due to a decrease in demand for these loans.
Collateral -- Completion, Perfection and Enforcement
Our loan portfolio consists largely of project and corporate finance and
working capital loans to corporate borrowers, and loans to retail customers for
financing purchase of residential property, vehicles, consumer durable products,
medical equipment and farm and construction equipment, and personal loans and
credit card receivables. Corporate finance and project finance loans are
typically secured by a first lien on fixed assets, which normally consists of
property, plant and equipment. These security interests are perfected by the
registration of these interests within 30 days with the Registrar of Companies
pursuant to the provisions of the Indian Companies Act. We may also take
security of a pledge of financial assets like marketable securities, corporate
guarantees and personal guarantees. This registration amounts to a constructive
public notice to other business entities. Working capital loans are typically
secured by a first lien on current assets, which normally consist of inventory
and receivables. Additionally, in some cases, we may take further security of a
first or second lien on fixed assets, a pledge of financial assets like
marketable securities, corporate guarantees and personal guarantees. A
substantial portion of our loans to retail customers is also secured by a first
lien on the assets financed (predominantly property and vehicles). In general,
our loans are over-collateralized. In India, there are no regulations
stipulating 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 corporate borrower makes an application for relief to a specialized
quasi-judicial authority called the Board for Industrial and Financial
Reconstruction, foreclosure and enforceability of collateral is stayed. In
fiscal 2003, the Indian Parliament passed the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002, which
strengthened the ability of lenders to resolve non-performing assets by granting
them greater rights as to enforcement of security and recovery of dues. Although
several petitions challenging the constitutional validity of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 had been filed with the Indian Supreme Court after its enactment by the
Indian Parliament, the Indian Supreme Court, in April 2004, upheld the
constitutionality of the Act, other than the requirement originally included in
the Act that the borrower deposit 75.0% of the dues with the debt recovery
tribunal as a precondition for appeal by the borrower against the enforcement
measures. The government of India, while announcing its budget for fiscal 2005,
has proposed to amend the Act to further strengthen the recovery process. See
"Overview of the Indian Financial Sector - Recent Structural Reforms -
Legislative Framework for Recovery of Debts due to Banks".
We recognize that our ability to realize the full value of the collateral
in respect of current assets is difficult, due to, among other things, delays on
our part in taking immediate action, delays in bankruptcy foreclosure
proceedings, defects in the perfection of collateral and fraudulent transfers by
71
borrowers. However, cash credit facilities are so structured that we are able to
capture the cash flows of our customers for recovery of past due amounts. In
addition, we have a right of set-off for amounts due to us on these facilities.
Also, we regularly monitor the cash flows of our working capital loan customers
so that we can take any actions required before the loan becomes impaired. On a
case-by-case basis, we may also stop or limit the borrower from drawing further
credit from its facility.
Loan Concentration
We follow a policy of portfolio diversification and evaluate our total
financing exposure in a particular industry in light of our forecasts of growth
and profitability for that industry. ICICI Bank's Risk Management Group monitors
all major sectors of the economy and specifically follows industries in which
ICICI Bank has credit exposures. We seek to respond to any economic weakness in
an industrial segment by restricting new credits to that industry segment and
any growth in an industrial segment by increasing new credits to that industry
segment, resulting in active portfolio management. ICICI Bank's policy is to
limit its loan portfolio to any particular industry (other than retail loans) to
15.0%. With effect from June 1, 2004, this limit has been revised to 12.0%.
Pursuant to the guidelines of the Reserve Bank of India, ICICI Bank's
credit exposure to individual borrowers must not exceed 15.0% of its capital
funds, comprising Tier 1 and Tier 2 capital calculated pursuant to the
guidelines of the Reserve Bank of India, under Indian GAAP. Credit exposure to
individual borrowers may exceed the exposure norm of 15.0% of a bank's capital
funds by an additional 5.0% (i.e. up to 20.0%) provided the additional credit
exposure is on account of infrastructure financing. ICICI Bank's exposure to a
group of companies under the same management control must not exceed 40.0% of
its capital funds unless the exposure is in respect of an infrastructure
project. In that case, the exposure to a group of companies under the same
management control may be up to 50.0% of ICICI Bank's capital funds. With effect
from June 1, 2004, banks may, in exceptional circumstances, with the approval of
their boards, enhance the exposure by 5.0% of capital funds (i.e., 20.0% of
capital funds for an individual borrower and 45.0% of capital funds for a group
of companies under same management), making appropriate disclosures in their
annual reports. Pursuant to the Reserve Bank of India guidelines, exposure for
funded facilities is calculated as the total approved limit or the outstanding
funded amount, whichever is higher (for term loans, as undisbursed commitments
plus the outstanding amount). Exposure for non-funded facilities is calculated
as 100.0% of the approved amount or the outstanding non-funded amount whichever
is higher. At year-end fiscal 2004, ICICI Bank was in compliance with these
limits, except in the case of three borrowers to whom its exposure was in excess
of the individual borrower exposure limit and one group of companies under the
same management where its exposure was in excess of the exposure limit for a
group of companies under the same management. The Reserve Bank of India has
granted its approval for exceeding the exposure limit in the case of these
individual borrowers and the group of companies under the same management
control.
The following table sets forth, at the dates indicated, our gross loans
outstanding, including loans structured as debentures and preferred stock, by
the borrower's industry or economic activity.
At March 31,(1)
-----------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-----------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Consumer loans and
credit card
receivables..............Rs.6,679 1.1% Rs. 27,106 4.3% Rs. 72,789 13.0% Rs.188,254 27.5% Rs. 311,907 US$ 7,187 39.2%
Iron and steel............. 59,246 9.9 70,547 11.1 71,272 12.7 72,473 10.6 62,354 1,437 7.8
Power...................... 56,162 9.4 66,368 10.5 61,159 10.9 56,091 8.2 45,199 1,041 5.7
Services................... 62,997 10.6 74,425 11.7 47,676 8.5 45,443 6.6 33,435 770 4.2
Textiles................... 42,019 7.1 47,052 7.4 40,867 7.3 40,279 5.9 29,941 690 3.8
Telecom.................... 15,903 2.7 20,244 3.2 25,547 4.6 27,458 4.0 27,919 643 3.5
Crude petroleum and
petroleum refining....... 51,338 8.6 54,822 8.6 32,099 5.7 24,556 3.6 20,807 479 2.6
Electronics................ 12,597 2.1 15,032 2.4 17,817 3.2 20,722 3.0 18,239 420 2.3
Cement..................... 19,559 3.3 25,709 4.0 19,088 3.4 18,774 2.7 17,168 396 2.2
Metal products............. 9,783 1.7 7,924 1.2 6,912 1.2 9,094 1.3 15,716 362 2.0
Other (2).................. 259,250 43.5 225,829 35.6 165,022 29.5 181,496 26.6 212,602 4,967 26.7
----------------------------------------------------------------------------------------------------------
Gross loans...............Rs.595,53 100.0% Rs.635,058 100.0% Rs.560,248 100.0% Rs.684,640 100.0% Rs. 795,287 US$18,325 100.0%
========= ===== ========== ===== ========== ===== ========== ===== =========== ========= =====
72
Allowance for
loan losses............ (34,085) (33,035) (36,647) (54,219) (66,767) (1,538)
------- ------- ------- ------- ------- ------
Net loans................Rs.561,448 Rs.602,023 Rs.523,601 Rs.630,421 Rs.728,520 US$16,786
========== ========== ========== ========== ========== =========
------------
(1) Data for fiscal 2003 and fiscal 2004 is not comparable to fiscal 2001 and
2002, as data for fiscal 2001 and 2002 is only for ICICI and does not
include ICICI Bank, as ICICI Bank was accounted for by the equity method in
those fiscal years. Also, data for fiscal 2001 and 2002 is not comparable
with fiscal 2000 due to deconsolidation of ICICI Bank effective April 1,
2000.
(2) Others principally include transport equipment, basic chemicals,
fertilizers and pesticides, transportation, paper and paper products,
electrical equipment, food products, petrochemicals, man-made fibres,
machinery, sugar, plastics, non-ferrous metals, drugs, mining, rubber and
rubber products, shipping, agriculture, construction, printing, mineral
products, glass and glass products, watches, healthcare, gems and jewelry,
leather and wood products industries.
Our gross loan portfolio at year-end fiscal 2004 increased by 16.2%
compared to the gross loan portfolio at year-end fiscal 2003. The largest
increase was in consumer loans and credit card receivables, which constituted
39.2% of gross loans at year-end fiscal 2004 compared to 27.5% at year-end
fiscal 2003 and 13.0% of ICICI's gross loan portfolio at year-end fiscal 2002.
Our gross loans to the iron and steel sector as a percentage of gross loans
decreased to 7.8% at year-end fiscal 2004 compared to 10.6% at year-end fiscal
2003. Our gross loans to the power sector as a percentage of gross loans
decreased to 5.7% at year-end fiscal 2004 compared to 8.2% at year-end fiscal
2003. Consumer loans and credit card receivables accounted for 7.2% of our gross
other impaired loans at year-end fiscal 2004. The iron and steel sector
accounted for 19.6% of our gross restructured loans and 11.2% of our gross other
impaired loans at year-end fiscal 2004. The power sector accounted for 0.8% of
our gross restructured loans and 23.7% of our gross other impaired loans at
year-end fiscal 2004. See also "-Impaired Loans".
At year-end fiscal 2004, our 20 largest borrowers accounted for
approximately 18.6% of our gross loan portfolio (gross of unearned income and
security deposits), with the largest borrower accounting for approximately 2.2%
of our gross loan portfolio. The largest group of companies under the same
management control accounted for approximately 4.5% of our gross loan portfolio.
Geographic Diversity
Except as described below, our portfolios were geographically diversified
throughout India, primarily reflecting the location of our corporate borrowers.
The state of Maharashtra, which is the most industrialized state in India,
accounted for the largest proportion of our gross loans outstanding at year-end
fiscal 2004.
Directed Lending
The Reserve Bank of India requires banks to lend to certain sectors of the
economy. Such directed lending is comprised of priority sector lending, export
credit and housing finance.
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend 40.0% of their net bank credit (total domestic loans less marketable debt
instruments and certain exemptions permitted by the Reserve Bank of India from
time to time) to certain specified sectors called priority sectors. Priority
sectors include small-scale industries, the agricultural sector, food and
agri-based industries, small businesses and housing finance up to certain
limits. Out of the 40.0%, banks are required to lend a minimum of 18.0% of their
net bank credit to the agriculture sector and the balance to certain specified
sectors, including small scale industries (defined as manufacturing, processing
and services businesses with a limit on investment in plant and machinery of Rs.
10 million), small businesses, including retail merchants, professional and
other self employed persons and road and water transport operators, housing
loans up to certain limits and to specified state financial corporations and
state industrial development corporations.
73
While granting its approval for the amalgamation, the Reserve Bank of India
stipulated that since ICICI's loans transferred to us were not subject to the
priority sector lending requirement, we are required to maintain priority sector
lending of 50.0% of our net bank credit on the residual portion of our advances
(i.e. the portion of our total advances excluding advances of ICICI at year-end
fiscal, 2002, henceforth referred to as residual net bank credit). This
additional 10.0% priority sector lending requirement will apply until such time
as our aggregate priority sector advances reach a level of 40.0% of our total
net bank credit. The Reserve Bank of India's existing instructions on
sub-targets under priority sector lending and eligibility of certain types of
investments/ funds for qualification as priority sector advances apply to us.
We are required to comply with the priority sector lending requirements at
the end of each fiscal year. Any shortfall in the amount required to be lent to
the priority sectors may be required to be deposited with government sponsored
Indian development banks like the National Bank for Agriculture and Rural
Development and the Small Industries Development Bank of India. These deposits
have a maturity of up to five years and carry interest rates lower than market
rates.
At year-end fiscal 2004, our priority sector loans were Rs. 143.81 billion
(US$ 3.3 billion), constituting 84.4% of our residual net bank credit against
the requirement of 50.0%. The following table sets forth our priority sector
loans, at year-end fiscal 2004, broken down by the type of borrower.
% of residual
net bank credit
At March 31, at March 31,
---------------------------------- ----------------------
2004 2004 2004
----------------- ---------------- ----------------------
(in millions, except percentages)
Small scale industries............... Rs. 2,916 US$ 67 1.7%
Others including small businesses.... 101,352 2,335 59.5
Agricultural sector.................. 39,540 911 23.2
----------------- ---------------- ----------------------
Total................................ Rs. 143,808 US$ 3,313 84.4%
================= ================ ======================
Export Credit
As part of directed lending, the Reserve Bank of India also requires banks
to make loans to exporters at concessional rates of interest. Export credit is
provided for pre-shipment and post-shipment requirements of exporter borrowers
in rupees and foreign currencies. At the end of the fiscal year, 12.0% of a
bank's net bank credit is required to be in the form of export credit. This
requirement is in addition to the priority sector lending requirement but
credits extended to exporters that are small scale industries or small
businesses may also meet part of the priority sector lending requirement. The
Reserve Bank of India provides export refinancing for an eligible portion of
total outstanding export loans at the bank rate prevailing in India from time to
time. The interest income earned on export credits is supplemented through fees
and commissions earned from these exporter customers from other fee-based
products and services taken by them from us, such as foreign exchange products
and bill handling. At year-end fiscal 2004, our export credit was Rs. 6.0
billion (US$ 138 million), constituting 3.3% of our residual net bank credit.
Housing Finance
The Reserve Bank of India requires banks to lend up to 3.0% of their
incremental deposits in the previous fiscal year for housing finance. This can
be in the form of home loans to individuals or investments in the debentures and
bonds of the National Housing Bank and housing development institutions
recognized by the government of India. Housing finance also qualifies as
priority sector lending. At year-end fiscal 2004, our housing finance qualifying
as priority sector advances was Rs. 91.4 billion (US$ 2.1 billion) and was well
above the minimum requirement prescribed by the Reserve Bank of India.
74
Impaired Loans
The following discussion on impaired loans is based on US GAAP. For
classification of impaired loans under Indian regulatory requirements, see
"Supervision and Regulation - Loan Loss Provisions and Non-Performing Assets".
Impact of Economic Environment on the Industrial Sector
In the past few years the Indian economy was impacted by negative trends in
the global marketplace, particularly in the commodities markets, and
recessionary conditions in various economies, which impaired the operating
environment for the industrial sector. The manufacturing sector was also
impacted by several other factors, including increased competition arising from
economic liberalization in India and volatility in industrial growth and
commodity prices. This led to stress on the operating performance of Indian
corporations and the impairment of a significant amount of loan assets in the
financial system, including loan assets of ICICI and ICICI Bank. Certain Indian
corporations came to terms with this new competitive reality through a process
of restructuring and repositioning, including rationalization of capital
structures and production capacities. The process of restructuring continued
during fiscal 2004. The increase in commodity prices during fiscal 2003 and
fiscal 2004 had a favorable impact on the operations of corporations in several
sectors. Our total gross impaired loans declined in fiscal 2004 due to
recoveries and reclassification of loans as unimpaired based on satisfactory
performance of the borrower accounts as per the contractual terms of repayment
of the loan.
Recognition of Impaired Loans
We identify a loan as impaired when it is probable that we will be unable
to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Until year-end fiscal 2003, a loan was
considered to be impaired if interest or principal was overdue for more than 180
days. From fiscal 2004, an asset is classified as impaired when principal or
interest has remained overdue for more than 90 days, except in case of certain
categories of agricultural loans where on extended period of 180 days, linked to
agricultural production cycle, is stipulated by the Reserve Bank of India. In
addition, delays or shortfalls in loan repayments are evaluated along with other
factors to determine if a loan should be placed on non-accrual status.
Generally, loans with delinquencies below 90 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, when a loan is placed on non-accrual status,
interest accrued and uncollected on the loan in the current fiscal year is
reversed from income, and interest accrued and uncollected from the prior year
is charged off against the allowance for loan losses. Thereafter, interest on
non-accrual loans is recognized as interest income only to the extent that cash
is received and future collection of principal is not in doubt. When borrowers
demonstrate over an extended period the ability to repay a loan in accordance
with the contractual terms of a loan, which we had classified as non-accrual,
the loan is returned to accrual status.
We classify a loan as a troubled debt restructuring where we have made
concessionary modifications, that we would not otherwise consider, to the
contractual terms of the loan to a borrower experiencing financial difficulties.
Such loans are placed on a non-accrual status. For these loans, cash receipts
are normally 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.
75
Consumer loans are generally identified as impaired when principal or
interest has remained overdue for more than 90 days. Consumer loans when
identified as impaired are placed on non-accrual status.
The value of impaired loans is measured as the present value of expected
future cash flows discounted at the loan's effective interest rate, at the
loan's observable market price, or the fair value of the collateral if the
recovery of the loan is solely collateral dependent. If the value of the
impaired loan is less than the recorded investment in the loan, we recognize
this impairment by creating a valuation allowance with a corresponding charge to
the provision for loan losses.
Our gross restructured loans increased 10.2% during fiscal 2004 to Rs.
162.4 billion (US$ 3.7 billion) at year-end fiscal 2004, from Rs. 147.4 billion
(US$ 3.4 billion) at year-end fiscal 2003. This was primarily due to a
restructuring of loans to companies in the crude petroleum and refining and
telecom industries and reclassification of other impaired loans as restructured
or transferred to an asset reconstruction company during the year. However, this
was offset, in part, by reclassification of certain loans as unimpaired based on
satisfactory performance of the borrower accounts as per the contractual terms
of repayment of the loan. Gross other impaired loans decreased 39.6% during
fiscal 2004 to Rs. 50.2 billion (US$ 1.2 billion) at year-end fiscal 2004, from
Rs. 83.2 billion (US$ 1.9 billion) at year-end fiscal 2003. This was primarily
due to reclassification of other impaired loans that were restructured or
transferred to an asset reconstruction company during the year as restructured
loans and reclassification of certain loans as unimpaired based on satisfactory
performance of the borrower accounts as per the contractual terms of repayment
of the loan. See also "-- Impact of Economic Environment on the Industrial
Sector". As a percentage of net loans, net restructured loans were 16.7% at
year-end fiscal 2004 compared to 19.5% at year-end fiscal 2003 and net other
impaired loans were 3.9% at year-end fiscal 2004 compared to 8.8% at year-end
fiscal 2003. During fiscal 2004, we transferred impaired loans of Rs. 23.0
billion (US$ 530 million) to Asset Reconstruction Company (India) Limited (See
"Overview of the Indian Financial Sector - Legislative Framework for Recovery of
Debts due to Banks" and "Supervision and Regulation - Regulations Relating to
Sale of Assets to Asset Reconstruction Companies"), of which Rs. 2.0 billion
(US$ 46 million) was recognized as a sale in our US GAAP financial statements
and Rs. 21.0 billion (US$ 484 million) is included in our restructured loans.
The following table sets forth, at the dates indicated, our gross
restructured rupee and foreign currency loan portfolio by business category.
At March 31,
---------------------------------------------------------------------
2000 2001 2002 2003 2004
---------------------------------------------------------------------
(in millions, except percentages)
Wholesale banking(1)................Rs. 18,513 Rs. 37,726 Rs. 84,048 Rs.135,421 Rs.149,724 US$ 3,450
Rupee............................. 11,896 25,190 60,017 83,074 115,262 2,656
Foreign currency.................. 6,617 12,536 24,031 52,347 34,462 794
Working capital finance............. 33 818 5,283 11,084 11,525 266
Rupee............................. 33 818 5,283 11,084 11,525 266
Foreign currency.................. - - - - - -
Leasing and related activities(2)... - 5,137 5,652 886 1,149 26
Rupee............................. - 5,137 5,652 886 1,149 26
Foreign currency.................. - - - - - -
Other(3)............................ - - 105 - - -
Rupee............................. - - 105 - - -
Foreign currency.................. - - - - - -
Total restructured loans
Rupee............................. 11,929 31,145 71,057 95,044 127,937 2,948
Foreign currency.................. 6,617 12,536 24,031 52,347 34,462 794
---------------------------------------------------------------------
Gross restructured loans............ 18,546 43,681 95,088 147,391 162,398 3,742
Allowance for loan losses........... (7,751) (11,372) (17,722) (24,732) (40,981) (944)
---------------------------------------------------------------------
Net restructured loans..............Rs. 10,795 Rs. 32,309 Rs. 77,366 Rs.122,659 Rs.121,417 US$ 2,798
=====================================================================
Gross loan assets...................Rs.595,533 Rs.635,058 Rs.560,248 Rs.684,640 Rs.795,287 US$18,325
76
Net loan assets(4).................. 561,448 602,023 523,601 630,421 728,520 16,786
Gross restructured loans as a
percentage of gross loan assets... 3.11% 6.88% 16.97% 21.53% 20.42%
Net restructured loans as a
percentage of net loan assets..... 1.92% 5.37% 14.78% 19.45% 16.67%
-------------------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities.
(2) Includes leasing and hire purchase.
(3) Other includes consumer loans and credit card receivables, bills discounted
and inter-corporate deposits.
(4) Net of provisions including unallocated provisions on lending assets not
specifically identified as restructured loans or other impaired loans.
The following table sets forth, at the dates indicated, our gross other
impaired rupee and foreign currency loan portfolio by business category.
At March 31,
---------------------------------------------------------------------
2000 2001 2002 2003 2004
---------------------------------------------------------------------
(in millions, except percentages)
Wholesale banking(1)..................Rs. 45,616 Rs. 39,430 Rs. 48,093 Rs. 67,906 Rs. 42,842 US$ 987
Rupee................................. 29,714 23,514 32,847 50,864 34,945 805
Foreign currency.................... 15,902 15,916 15,246 17,042 7,897 182
Working capital finance............... 1,420 1,234 1,699 11,907 2,978 69
Rupee............................... 1,420 1,234 1,699 11,907 2,978 69
Foreign currency.................... - - - - - -
Leasing and related activities(2)..... 2,965 899 731 1,550 746 17
Rupee............................... 2,965 899 731 1,550 746 17
Foreign currency.................... - - - - - -
Other(3).............................. 573 181 231 1,793 3,672 85
Rupee............................... 573 181 231 1,793 3,672 85
Foreign currency.................... - - - - - -
Total other impaired loans
Rupee............................... 34,672 25,828 35,508 66,114 42,341 976
Foreign currency.................... 15,902 15,916 15,246 17,042 7,897 182
---------------------------------------------------------------------
Gross other impaired loans............ 50,574 41,744 50,754 83,156 50,238 1,158
Allowance for loan losses............. (26,334) (21,663) (17,567) (27,837) (21,474) (495)
---------------------------------------------------------------------
Net other impaired loans..............Rs. 24,240 Rs. 20,081 Rs. 33,187 Rs. 55,319 Rs. 28,764 US$ 663
=====================================================================
Gross loan assets.....................Rs.595,533 Rs.635,058 Rs.560,248 Rs.684,640 Rs.795,287 US$18,325
Net loan assets(4).................... 561,448 602,023 523,601 630,421 728,520 16,786
Gross other impaired loans as a
percentage of gross loan assets..... 8.49% 6.57% 9.06% 12.15% 6.32%
Net other impaired loans as a
percentage of net loan assets....... 4.32% 3.34% 6.34% 8.77% 3.95%
-----------------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities.
(2) Includes leasing and hire purchase.
(3) Other includes consumer loans and credit card receivables, bills discounted
and inter-corporate deposits.
(4) Net of provisions including unallocated provisions on lending assets not
specifically identified as restructured loans or other impaired loans.
77
The following table sets forth, at the dates indicated, gross restructured
loans by borrowers' industry or economic activity and as a percentage of total
gross restructured loans.
At March 31,
--------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
--------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Iron and steel .......... Rs. 1,461 7.9% Rs. 7,270 16.6% Rs.18,013 18.9% Rs. 52,295 35.5% Rs. 31,839 US$ 734 19.6%
Crude petroleum and
refining............... 50 0.3 50 0.1 15 0.0 13 0.0 17,462 402 10.8
Textiles................. 2,276 12.3 12,437 28.5 21,468 22.6 15,660 10.6 16,356 377 10.1
Telecom.................. - - - - - - 3,968 2.7 8,674 200 5.3
Cement................... 300 1.6 888 2.0 3,454 3.6 10,102 6.9 7,447 172 4.6
Transport
equipment.............. 13 0.1 418 1.0 5,857 6.2 7,219 4.9 7,282 168 4.5
Paper and paper
products............... 338 1.8 2,211 5.1 6,076 6.4 5,669 3.8 6,971 161 4.3
Fertilizers and
pesticides............. 76 0.4 141 0.3 3,695 3.9 3,168 2.1 6,308 145 3.9
Metal
products............... 171 0.9 761 1.7 636 0.7 1,030 0.7 6,210 143 3.8
Electronics.............. 933 5.0 854 2.0 899 0.9 5,555 3.8 5,855 135 3.6
Sugar.................... 570 3.1 446 1.0 2,859 3.0 4,250 2.9 4,678 108 2.9
Man-made
fibers................. 3,456 18.6 4,561 10.4 5,759 6.1 4,641 3.1 4,297 99 2.6
Machinery................ 283 1.5 902 2.1 1,336 1.4 3,773 2.6 3,674 85 2.3
Plastics................. 2,525 13.6 2,586 5.9 2,738 2.9 4,829 3.3 3,471 80 2.1
Services................. 1,098 5.9 1,605 3.7 2,710 2.8 4,589 3.1 2,915 67 1.8
Basic
chemicals.............. 1,527 8.2 1,306 3.0 1,991 2.1 1,983 1.3 2,886 67 1.8
Petrochemicals........... 710 3.8 937 2.1 853 0.9 3,793 2.6 2,685 62 1.7
Drugs.................... - - 27 0.1 189 0.2 356 0.2 2,276 52 1.4
Electrical
equipment.............. 235 1.3 1,035 2.4 1,713 1.8 1,086 0.7 1,957 45 1.2
Power.................... 28 0.2 2,278 5.2 915 0.9 1,229 0.9 1,284 30 0.8
Non-ferrous
metals................. 214 1.2 180 0.4 1,337 1.4 1,164 0.8 1,144 26 0.7
Tea...................... - - - - 299 0.3 375 0.3 951 22 0.6
Food
products............... 655 3.5 707 1.6 434 0.5 550 0.4 589 14 0.4
Rubber and rubber
products............... 143 0.8 169 0.4 460 0.5 449 0.3 500 12 0.3
Others (1) .............. 1,484 8.0 1,912 4.4 11,382 12.0 9,645 6.5 14,687 338 9.0
----------------------------------------------------------------------------------------------------------
Gross restructured loans. Rs.18,546 100.0% Rs.43,681 100.0% Rs.95,088 100.0% Rs.147,391 100.0% Rs.162,398 US$3,742 100.0%
====== ====== ====== ====== =====
Aggregate allowance for
loan losses............ (7,751) (11,372) (17,722) (24,732) (40,981) (944)
--------- --------- ---------- ----------- ---------------------
Net restructured loans... Rs.10,795 Rs.32,309 Rs. 77,366 Rs. 122,659 Rs.121,417 US$2,798
========= ========= ========== =========== =====================
--------------
(1) Others principally includes shipping, real estate, construction, wood,
non-bank finance companies, glass, computer software, agriculture,
vegetable oil, fishing, printing, floriculture, leather, other chemicals
and consumer loans and credit card receivables.
The following table sets forth, at the dates indicated, gross other
impaired loans by borrowers' industry or economic activity and as a percentage
of total gross other impaired loans.
At March 31,
-------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Power .................. Rs. 71 0.00% Rs. - - % Rs. 6,009 11.90% Rs.17,733 21.30% Rs.11,890 US$ 274 23.7%
Iron and steel .......... 4,942 9.8 5,894 14.1 5,899 11.6 8,481 10.2 5,632 130 11.2
Petrochemicals ......... 169 0.3 86 0.2 3,440 6.8 4,029 4.8 3,651 84 7.3
Basic chemicals ......... 2,879 5.7 2,075 5.0 4,412 8.7 4,624 5.6 3,021 70 6.0
Textiles ............... 5,978 11.8 6,041 14.5 4,250 8.4 4,964 6.0 2,351 54 4.7
Electrical equipment .... 1,653 3.3 1,652 4.0 2,008 4.0 3,178 3.8 1,873 43 3.7
Services ............... 2,015 4.0 1,324 3.2 416 0.8 2,255 2.7 1,873 43 3.7
78
Transport equipment ..... 852 1.7 761 1.8 715 1.4 790 1.0 1,784 41 3.6
Electronics ............ 2,537 5.0 1,456 3.5 1,281 2.5 2,166 2.6 1,456 34 2.9
Machinery .............. 1,802 3.6 919 2.2 2,596 5.1 1,759 2.1 1,235 28 2.5
Construction............. 975 1.9 612 1.4 510 1.0 1,202 1.5 1,160 27 2.3
Food products ........... 2,663 5.3 2,415 5.8 1,389 2.8 1,323 1.6 1,126 26 2.2
Metal products .......... 3,284 6.5 2,970 7.1 2,628 5.2 7,003 8.4 1,124 26 2.2
Paper and paper products 3,147 6.2 2,456 5.9 2,199 4.3 1,582 1.9 950 22 1.9
Man-made fibers ......... 4,092 8.1 2,129 5.1 1,802 3.6 1,661 2.0 884 20 1.8
Cement ................. 1,371 2.7 1,972 4.7 1,287 2.5 1,779 2.1 870 20 1.7
Plastics ............... 1,312 2.6 1,280 3.1 1,137 2.2 1,142 1.4 684 16 1.4
Drugs .................. 2,481 4.9 2,401 5.7 2,544 5.0 2,588 3.2 412 9 0.8
Rubber and rubber products 485 1.0 335 0.8 328 0.6 328 0.4 288 7 0.6
Other chemicals ........ 48 0.1 45 0.1 92 0.2 357 0.4 259 6 0.5
Non-ferrous metals ..... 639 1.3 503 1.2 447 0.9 447 0.5 253 6 0.5
Fertilizers and
pesticides ........... 442 0.9 193 0.5 163 0.3 3,282 3.9 71 2 0.1
Sugar .................. 951 1.9 1,461 3.5 722 1.4 1,262 1.5 70 2 0.1
Others (1) ............. 5,786 11.4 2,764 6.6 4,480 8.8 9,221 11.1 7,321 169 14.6
------------------------------------------------------------------------------------------------------
Gross other impaired
loans.................. Rs. 50,574 100.0% Rs.41,744 100.0% Rs.50,754 100.0% Rs.83,156 100.0% Rs.50,238 US$ 1,158 100.0%
====== ====== ====== ===== =====
Aggregate allowance for (26,334) (21,663) (17,567) (27,837) (21,474) (495)
loan losses........... ---------- --------- --------- --------- ---------------------
Net other impaired loans Rs. 24,240 Rs.20,081 Rs.33,187 Rs.55,319 Rs.28,764 US$ 663
========== ========= ========= ========= =====================
--------------
(1) Includes Rs. 3.6 billion (US$ 84 million) of consumer loans and credit card
receivables. Others also include telecom, non-bank finance companies,
shipping, vegetable oil, health care, printing, computer software, road,
wood, mineral product, tea, glass, agriculture, fishing, trade, leather,
gems and jewelry, crude petroleum and mining.
The largest proportion of our restructured and other impaired loans was to
the iron and steel, textiles, crude petroleum and refining and power industries.
There is a risk that restructured and other impaired loans in each of these and
other sectors could increase if Indian economic conditions deteriorate, there is
a negative trend in global commodity prices or projects under implementation are
unable to achieve profitable commercial operations.
Iron and steel. Until fiscal 2003, a persistent downward trend in
international steel prices to historic lows had a significant impact on
companies in this sector. In addition, a significant reduction in import tariffs
in India led to price competition from certain countries, significantly reducing
domestic prices. In fiscal 2004, the sector witnessed an increase in prices as
well as an increase in exports resulting in overall improved performance. While
most of the projects for which we have loans outstanding have now been
completed, a part of these loans is for projects still under implementation. At
year-end fiscal 2004, we had classified 51.1% of our gross loans in this sector
as restructured loans and 9.0% as other impaired loans.
Textiles. Over the last few years, the textiles sector was adversely
affected by the impact of erratic monsoons on cotton production, the South-east
Asian economic crisis, the small economic size and unviable capacity of several
textile units and competitive pressures from other low cost textile producing
countries. A substantial portion of our loans to this sector has been classified
as impaired. At year-end fiscal 2004, we had classified 54.6% of our gross loans
in this sector as restructured loans and 7.9% as other impaired loans.
Crude petroleum and refining. At year-end fiscal 2004, we had classified
83.9% of our total loans to the crude petroleum and refining sector as
restructured loans. Restructured loans include loans to a large private sector
refinery project, the implementation of which was delayed due to natural
calamities and other factors, resulting in an overrun in the cost of the project
compared to the original appraised cost. The Corporate Debt Restructuring Forum
(see "Overview of the Indian Financial Sector - Corporate Debt Restructuring
Forum") has approved the restructuring of this project.
79
Power. At year-end fiscal 2004, we classified 2.8% of our total loans to
the power sector as restructured loans and 26.3% as other impaired loans. Other
impaired loans primarily include loans to a large private sector power
generation project in the state of Maharashtra, the implementation of which is
currently suspended on account of a dispute between the power project and the
purchaser, the state electricity board. The matter is currently pending before
the Indian courts, while parallel efforts are continuing for an out of court
settlement, including re-negotiation of the power tariff. The principal sponsor
of the project has filed for bankruptcy in the United States. The assets of the
project are in the possession of a receiver appointed by the High Court of
Judicature at Bombay on a plea by the lenders to the project, including us.
Efforts are continuing to sell the project to new sponsors.
Interest Foregone
The following table sets forth, for the periods indicated, the amount of
interest foregone by us in respect of loans on which accrual of interest was
suspended at the respective fiscal year-end.
Interest foregone
(in billions)
---------------------------
Fiscal 2000............................ Rs. 12.4 US$ 0.3
Fiscal 2001............................ 14.3 0.3
Fiscal 2002............................ 16.1 0.4
Fiscal 2003............................ 17.9 0.4
Fiscal 2004............................ 12.9 0.3
During fiscal 2004, interest income of Rs. 9.1 billion (US$ 209 million)
was recognized on impaired loans on a cash basis.
Impaired Loans Strategy
Our Special Asset Management Group is responsible for finding early
solutions for large and complex impaired loans. This group works closely with
other banks and financial institutions and uses outside experts and specialized
agencies for due diligence, valuation and legal advice to expedite early
resolution. The group also seeks to leverage our corporate relationships to
facilitate quicker resolution of impaired loans. It consists of professionals
with significant experience in credit management supported by a team of
dedicated legal professionals.
We place great emphasis on recovery and settlement of our stressed asset
portfolio and impaired loans. Methods for resolving impaired loans include:
o early enforcement of collateral through judicial means;
o encouraging the consolidation of troubled borrowers in fragmented
industries with stronger industry participants;
o encouraging the financial restructuring of troubled borrowers; and
o encouraging modernization of existing plants through technology
upgrades.
Further, we have taken concrete measures to enhance the security structures
in accounts that may be under stress, including through: o the pledge of
sponsor's shareholding;
o the right to convert debt into equity at par;
o ensuring effective representation in the board of directors of these
companies;
o continuous monitoring of the physical performance of the borrower's
operations through independent technical consultants; and
o escrow mechanisms to capture cash flows.
80
We are seeking to leverage recent positive developments in the Indian
financial system that facilitate financial restructuring of troubled borrowers
and recovery through enforcement of collateral. These include the constitution
of a Corporate Debt Restructuring Forum, consisting of financial institutions
and banks, by the Reserve Bank of India, the enactment of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 and the setting up of an asset reconstruction company to acquire impaired
loans from banks and financial institutions. See "Overview of the Indian
Financial Sector - Recent Structural Reforms- Legislative Framework for Recovery
of Debts due to Banks". However, there can be no assurance of the extent to
which, if at all, these developments will have a positive impact on our recovery
and settlement efforts.
Allowance for Loan Losses
The following table sets forth, at the dates indicated, movements in our
allowances for loan losses.
At March 31,
-----------------------------------------------------------------------
2000 2001 2002 2003 2004
-----------------------------------------------------------------------
(in millions)
Aggregate allowance for loan losses
at the beginning of the year............... Rs. 28,524 Rs.34,085 Rs.33,035 Rs.36,647 Rs.54,219 US$ 1,249
Less: Effect of deconsolidation of subsidiary
on allowance for loan losses............... - (747) - - - -
Add: Effect of reverse acquisition on
allowance for loan losses.................. - - - 1,297 - -
Add: Provisions for loan losses
Wholesale banking(1)....................... 5,571 9,097 9,069 16,601 18,940 436
Working capital finance.................... 518 479 513 2,237 77 2
Leasing and related activities (2)......... 279 249 6 231 (48) (1)
Others (3)................................. (5) 67 155 580 1,086 25
Total provisions for loan losses............. Rs. 6,363 Rs. 9,892 Rs. 9,743 Rs. 19,649 Rs.20,055 US$ 462
Write offs(4)................................ (802) (10,195) (6,131) (3,374) (7,507) (173)
Aggregate allowance for loan losses -----------------------------------------------------------------------
at the end of the year..................... Rs.34,085 Rs.33,035 Rs.36,647 Rs. 54,219 Rs.66,767 US$ 1,538
-----------------------------------------------------------------------
Ratio of net provisions for loan losses
during the period to average loans
outstanding................................ 1.2% 1.7% 1.6% 3.2% 3.0%
------------
(1) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities. Provisions include unallocated
provisions on lending assets not specifically identified as restructured
loans or other impaired loans.
(2) Includes leasing and hire purchase.
(3) Includes consumer loans and credit card receivables, bills discounted and
inter-corporate deposits.
(4) Until year-end fiscal 2000, ICICI followed a policy whereby loan balances
were not charged-off against the allowance for loan losses. This policy was
in response to the regulatory environment governing debt recovery
proceedings in India. During fiscal 2001, changes in the tax laws
necessitated that loan balances deemed unrecoverable be charged-off against
the allowance for credit losses. Accordingly, ICICI charged-off significant
loan balances deemed unrecoverable in fiscal 2001 and fiscal 2002.
We conduct a comprehensive analysis of our loan portfolio on a periodic
basis. The analysis considers both qualitative and quantitative criteria
including, among others, the account conduct, future prospects, repayment
history and financial performance. This comprehensive analysis includes an
account by account analysis of the entire loan portfolio, and an allowance is
made for any probable loss on each account. In estimating the allowance, we
consider the net realizable value on a present value basis by discounting the
future cash flows over the expected period of recovery. Further, we also
consider past history of loan losses and value of underlying collateral. For
further discussions on allowances for loan losses, see "Operating and Financial
Review and Prospects".
81
Under US GAAP, the analysis of the provisions for restructured and other
impaired loans requires that we take into account the time delay in our ability
to foreclose upon and sell collateral. The net present value of a restructured
and other impaired loan includes the net present value of the underlying
collateral, if any. As a result, even though our loans are generally
over-collateralized, additional allowances are required under US GAAP because US
GAAP takes into account the time value of money.
Each portfolio of smaller-balance, homogenous loans, including consumer
mortgage, instalment, revolving credit and most other consumer loans, is
individually evaluated for impairment. The allowance for loan losses attributed
to these loans is established via a process that includes an estimate of
probable losses inherent in the portfolio, based upon various statistical
analysis. These include migration analysis, in which historical delinquency and
credit loss experience is applied to the current ageing of the portfolio,
together with an analysis that reflects current trends and conditions. The use
of different estimates or assumptions could produce different provisions for
smaller balance homogeneous loan losses.
For restructured and other impaired loans in excess of Rs. 100 million (US$
2 million), which were 81.5% of our gross restructured and other impaired loan
portfolio at year-end fiscal 2004, we followed a detailed process for each
account to determine the allowance for loan losses to be provided. For the
balance of smaller loans in the restructured and other impaired loan portfolio,
we follow the classification detailed below for determining the allowance for
loan losses.
Settlement Cases
Settlement cases include cases in which we are in the process of entering
into a "one-time settlement" because we believe that the potential to recover
the entire amount due (the gross principal plus outstanding interest, including
penalty interest) in these cases is limited. In our experience, we recover about
85.0% on a present value basis, as a result of negotiated settlements.
Enforcement Cases
Enforcement cases are those cases (excluding cases referred to the Board
for Industrial and Financial Reconstruction or BIFR) in which we have commenced
litigation. We expect that only the secured portion of these loans is
recoverable, after a specified number of years from the date the loan is
recalled. The realizable value of these loans on a present value basis is
determined by discounting the estimated cash flow at the end of the specified
number of years from the date of the recall by the average interest implicit in
these loans.
Non-Enforcement BIFR Cases
Non-enforcement BIFR cases include cases which have been referred to the
Board for Industrial and Financial Reconstruction, which are further categorized
into accounts where the plant is under operation and accounts where the plant is
closed. We expect that in accounts where the plant is operational, the secured
portion of the loan is recoverable over specified annual payments. In respect of
those accounts where the plant is closed, we expect that the secured portion of
the loan will be recoverable at the end of a specified number of years based
upon historical experience.
Non-Enforcement Non-BIFR Cases
Non-enforcement non-BIFR cases include cases, which are neither under
litigation nor referred to the Board for Industrial and Financial
Reconstruction. This category is also divided into accounts where the plant is
under operation and accounts where the plant is closed. We expect that in those
accounts where the plant is operational, the secured portion of the loan is
recoverable over specified annual payments together with a recovery in interest
due at a specified rate. In respect of those loans where the plant is closed, we
expect that the secured portion of the loan will be recoverable over specified
annual payments.
82
The following table sets forth, for the period indicated, the results of
our restructured and other impaired loan classification scheme.
At March 31, 2004
-----------------------------------------------------
Percentage
expected to be Impaired
realized on a net loans, net of
Gross impaired present value allowance for
loans basis loan losses
-----------------------------------------------------
(in millions, except percentages)
Gross principal greater than Rs. 100 million......... Rs. 173,220 73.4% Rs. 127,078
Settlement cases..................................... 867 85.0 738
Enforcement cases.................................... 4,092 68.3 2,793
Non-enforcement BIFR cases........................... 1,893 41.0 777
Non-enforcement non-BIFR cases....................... 614 87.5 537
Other loans.......................................... 31,950 57.1 18,258
----------- -----------
Total................................................ Rs. 212,636 70.6% Rs. 150,181
=========== ===========
Subsidiaries and Affiliates
Prior to the amalgamation, ICICI Bank had no subsidiaries. As we are the
surviving legal entity in the amalgamation, the subsidiaries and affiliates of
ICICI have become our subsidiaries and affiliates.
The following table sets forth, for the period indicated, certain
information relating to our direct subsidiaries and affiliates at year-end
fiscal 2004.
-------------------------------------------------------------------------------------------------------------------
Shareholding Stockholders'
by ICICI Bank Total equity Assets at
Year of and direct income in at March March 31,
Name formation Activities subsidiaries fiscal 2004(1) 31, 2004(1) 2004(1)
-------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
ICICI Securities February Investment banking 99.9% Rs.3,754 Rs.4,356 Rs.29,641
Limited(2) 1993 activities
ICICI Venture Funds January Venture capital 100.0 475 399 508
Management 1988 management
Company Limited
ICICI Prudential July 2000 Life insurance 74.0 4,637 2,274 19,751
Life Insurance
Company Limited(3)
ICICI Lombard October General insurance 74.0 1,728 2,118 5,634
General Insurance 2000
Company Limited(3)
ICICI Home May Home and property 100.0 1,488 1,777 27,367
Finance 1999 financing and marketing
Company Limited
ICICI International January Offshore fund 100.0 8 23 24
Limited 1996 management
ICICI Trusteeship April Trustees for various 100.0 0.4 1 2
Services Limited 1999 funds
ICICI Investment March Investment management 100.0 8 116 123
Management 2000
Company Limited
ICICI Bank UK February Commercial banking 100.0 51 2,057 4,564
Limited 2003
83
ICICI Bank Canada September Commercial banking 100.0 10 793 869
2003
Prudential ICICI June Trustee company for 44.8 4 9 13
Trust Limited 1993 mutual fund
Prudential ICICI June Investment manager 45.0 997 970 1,124
Asset Management 1993 for Prudential Mutual
Company Limited Fund
------------------
(1) All financial information is in accordance with US GAAP.
(2) Consolidated.
(3) The results of ICICI Prudential Life Insurance Company and ICICI Lombard
General Insurance Company were not consolidated under US GAAP in fiscal
2003 and fiscal 2004, due to substantive participative rights retained by
the minority shareholders, and have been accounted for by the equity
method.
The following table sets forth, for the period indicated, information on
other significant entities required to be consolidated in our financial
statements for fiscal 2004 under US GAAP.
-------------------------------------------------------------------------------------------------------------------
Shareholding
by ICICI Bank
and venture
capital funds
or trusts to Stockholders'
which ICICI equity/ net
Bank was a Total assets Assets at
Date of majority income in at March March 31,
Name formation Activities contributory fiscal 2004(1) 31, 2004(1) 2004(1)
-------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
ICICI Infotech October Software consulting 92.5% Rs. 2,432 Rs. 1,552 Rs. 4,536
Limited(2)(3) 1993 and development and
information technology
ICICI Web Trade December Internet-based 100.0 993 362 4,055
Limited (2)(3) 1999 brokering services
ICICI OneSource December Business process 99.9(4) 1,807 325 2,636
Limited (2)(3) 2001 outsourcing and call
center services
ICICI Equity Fund March Investment in equity 100.0 380 4,845 5,741
2000 and equity-linked
securities of mid
sized Indian
companies.
ICICI Emerging Sector September Investment in 98.9 444 4,462 4,489
Fund 2002 mid-sized and early
stage companies across
sectors
ICICI Strategic February Mid-sized growth 100.0 62 6,132 6,142
Investments Fund 2003 companies for funding
capacity expansion and
growth
ICICI Eco-Net December Investment in equity 92.1 (84.4) 753.8 757.9
Internet & 2000 or equity-linked
Technology Fund securities of early stage,
unlisted internet and
technology companies.
------------------
84
(1) All financial information is in accordance with US GAAP. (2) Consolidated.
(3) Prior to the amalgamation, ICICI's entire interest in ICICI Web Trade
Limited and majority interest in ICICI Infotech Limited were transferred to
ICICI Information Technology Fund and ICICI Equity Fund respectively. The
majority interest in ICICI OneSource Limited and ICICI Infotech Limited is
currently held by ICICI Strategic Investments Fund and the minority
interest by ICICI Bank.
(4) Represents equity shareholding by ICICI Bank, and venture capital funds or
trusts to which ICICI Bank was a contributory. The shareholding by ICICI
Bank and venture capital funds or trusts to which ICICI Bank was a
contributory, on a fully diluted basis (i.e. assuming conversion of
participatory optionally convertible preference shares into equity) was
90.9% at March 31, 2004 and 66.3% at August 31, 2004.
At year-end fiscal 2004, all of our subsidiaries and affiliated companies
and entities consolidated or accounted for under the equity method under US
GAAP, were incorporated or organized in India, except the following 13
companies:
o ICICI Securities Holdings Inc., incorporated in the US;
o ICICI Securities Inc., incorporated in the US;
o ICICI Bank UK Limited, incorporated in the United Kingdom;
o ICICI Bank Canada, incorporated in Canada;
o ICICI Infotech Inc., incorporated in the US;
o ICICI Infotech Pte. Limited, incorporated in Singapore;
o ICICI Infotech Pty. Limited, incorporated in Australia;
o ICICI Infotech SDN BHD, incorporated in Malaysia;
o Semantik Solutions GmbH, incorporated in Germany;
o ICICI International Limited, incorporated in Mauritius;
o ICICI OneSource Limited, USA, incorporated in the US;
o ICICI OneSource Limited, UK, incorporated in the United Kingdom; and
o First Ring Incorporated, incorporated in the US.
ICICI Securities Holdings Inc. is a wholly-owned subsidiary of ICICI
Securities and ICICI Securities Inc. is a wholly-owned subsidiary of ICICI
Securities Holdings Inc. ICICI Securities Holdings Inc. and ICICI Securities
Inc. are consolidated in ICICI Securities' financial statements.
ICICI Infotech Inc., ICICI Infotech Pte. Limited and ICICI Infotech Pty.
Limited are wholly-owned subsidiaries of ICICI Infotech Limited and are
consolidated in its financial statements. ICICI Infotech SDN BHD is a subsidiary
of ICICI Infotech Pte. Limited and is accounted for by the equity method in the
financial statements of ICICI Infotech Limited. Semantik Solutions GmbH is a
joint venture between ICICI Infotech Limited, Fraunhofer ISST and Innova
Business Development and Holding GmbH. The shareholding of ICICI Infotech
Limited in Semantik Solutions GmbH is 50.0%. The financials of Semantik
Solutions GmbH are consolidated in the financial statements of ICICI Infotech
Limited.
ICICI OneSource Limited, USA and ICICI OneSource Limited, UK are both
wholly-owned subsidiaries of Customer Asset India Private Limited, which is a
wholly-owned subsidiary of ICICI OneSource Limited. ICICI OneSource Limited also
holds 99.8% of the equity shareholding of First Ring Incorporated.
85
In fiscal 2004, ICICI OneSource Limited acquired First Ring Incorporated, a
business process outsourcing company incorporated in the US and First Ring India
Private Limited, its wholly-owned subsidiary. In fiscal 2004, we acquired the
entire paid-up equity share capital of Transamerica Apple Distribution Finance
Private Limited. The company is now our wholly-owned subsidiary and has been
renamed ICICI Distribution Finance Private Limited.
Technology
We seek to be at the forefront of usage of technology in the financial
services sector. We use information technology as a strategic tool for our
business operations, to gain a competitive advantage and to improve our overall
productivity and efficiency. Our technology initiatives are aimed at enhancing
value, offering customers enhanced convenience and improved service while
optimizing costs. Our focus on technology emphasizes:
o Electronic and online channels to:
o offer easy access to our products and services;
o reduce distribution and transaction costs;
o reach new target customers; and
o enhance existing customer relationships.
o Application of information systems to:
o effectively market to our target customers;
o monitor and control risks; and
o identify, assess and capitalize on market opportunities.
We also seek to leverage our domestic technology capabilities in our
international operations.
Technology Organization
While we have dedicated technology groups for our products and services for
retail and corporate customers, our enterprise-wide technology initiatives are
coordinated by the Technology Management Group.
Banking Application Software
We use a banking application software that is flexible and scaleable and
allows us to effectively and efficiently serve our growing customer base. In
fiscal 2003, our core banking software was upgraded and enabled with
multi-currency features. A central stand-in server provides services all days of
the week, throughout the year, to delivery channels. The server stores the
latest customer account balances, which are continuously streamed from the core
banking database. We have a data center in Mumbai for centralized data base
management, data storage and retrieval.
Electronic and Online Channels
We use a combination of physical and electronic delivery channels to
maximize customer choice and convenience, which has helped the differentiation
of our products in the marketplace. Our branch banking software is flexible and
scaleable and integrates well with its electronic delivery channels. Our ATMs
are sourced from some of the world's leading vendors. These ATMs work with the
branch banking software. At year-end fiscal 2004, we had 1,790 ATMs across
India. We were one of the first banks to offer online banking facilities to our
customers. We now offer a number of online banking services to our customers for
both corporate and retail products and services. Our telephone banking call
centers have a total seating capacity of 1,750 seats, across two locations, at
Mumbai and Hyderabad. These telephone banking call centers use an Interactive
Voice Response System. In fiscal 2003, we upgraded the existing hardware and
deployed a new integrated Interactive Voice Response System to enhance capacity.
The call centers are based on the latest technology and provide an
86
integrated customer database that allows the call agents to get a complete
overview of the customer's relationship with us. The database enables customer
segmentation and assists the call agent in identifying cross-selling
opportunities.
We launched mobile banking services in India in March 2000, in line with
our strategy to offer multi-channel access to our customers. This service has
now been extended to all mobile telephone service providers across India and
non-resident Indian customers in the United States of America, the United
Kingdom, the Middle East and Singapore.
High-Speed Electronic Communications Infrastructure
We have a nationwide data communications network linking all our channels
and 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.
Treasury and Operations relating to Commercial Banking for Corporate
Customers
We use technology to monitor risk limits and exposures. We have invested
significantly to acquire advanced systems from some of the world's leading
vendors and connectivity to the SWIFT network. In fiscal 2003, we successfully
centralized our corporate banking back office operations and rolled out a
business process management solution to automate our activities in the areas of
trade services and general banking operations. Through integration of the
workflow system with the imaging and document management system, we have
achieved substantial savings and practically eliminated the use of paper for
these processes.
In fiscal 2004, we have centralized the systems of the treasuries of all
our international branches and subsidiaries. As a result, the processing of
transactions as well as the applications used for deal entry are now centrally
located and maintained out of India.
Customer Relationship Management
We have implemented a customer relationship management solution for
automation of customer handling in all key retail products. Our customer
relationship management solution enables various channels to service the
customer needs at all touch points, and across all products and services. The
solution has been deployed at the telephone banking call centers as well as a
large number of branches. We have also undertaken a retail data warehouse
initiative to achieve customer data integration at the back-office level. We
have implemented an Enterprise Application Integration initiative across our
retail and corporate products and services, to link various products, delivery
and channel systems. This initiative underpins our multi-channel customer
service strategy and seeks to deliver customer related information consistently
across access points.
Data center and disaster recovery system
While our primary data center is located in Mumbai, a separate disaster
recovery data center has been set up in another city and is connected to the
main data center in Mumbai. The disaster recovery data center has facilities to
host critical banking applications in the event of a disaster at the primary
site.
Competition
As a result of the acquisition of Bank of Madura, we became and continue to
be the largest private sector bank in India and as a result of the amalgamation,
we became and continue to be the second largest bank in India, in terms of total
assets. We face competition in all our principal areas of business from Indian
and foreign commercial banks, housing finance companies, mutual funds and
87
investment banks. We are the largest private sector bank in India and the second
largest bank among all banks in the country, in terms of total assets, with
total assets of Rs. 1,409.1 billion (US$ 32.5 billion) at year-end fiscal 2004.
Subsequent to year-end fiscal 2004, we completed a share issuance of Rs. 32.5
billion (US$ 748 million) to support growth in our various areas of business
operations. We seek to gain a competitive advantage over our competitors through
our larger size and scale of operations and by offering innovative products and
services, the use of technology, building customer relationships and developing
a team of highly motivated and skilled employees. We evaluate our competitive
position separately in respect of our products and services for retail and
corporate customers.
Commercial banking products and services for retail customers
In the retail markets, competition is primarily from foreign and Indian
commercial banks and housing finance companies. Foreign banks have product and
delivery capabilities but are likely to focus on limited customer segments and
geographical locations since they have a smaller branch network than Indian
commercial banks. Foreign banks in the aggregate had only 196 branches in India
at the end of March 2004. Indian commercial banks have wide distribution
networks but relatively less strong technological and marketing capabilities. We
seek to compete in this market through a full product portfolio, effective
distribution channels, which include agents, robust credit processes and
collection mechanisms, experienced professionals and superior technology.
Commercial banks attract the majority of retail bank deposits, historically
the preferred retail savings product in India. We have sought to capitalize on
our corporate relationships to gain individual customer accounts through payroll
management products and will continue to pursue a multi-channel distribution
strategy utilizing physical branches, ATMs, telephone banking call centers and
the Internet to reach customers. Further, following a strategy focused on
customer profiles and product segmentation, we offer differentiated liability
products to customers of various ages and income profiles. Mutual funds are
another source of competition to us. Mutual funds offer tax advantages and have
the capacity to earn competitive returns and hence, have increasingly become a
viable alternative to bank deposits.
Commercial banking products and services for corporate customers
In products and services for corporate customers, we face strong
competition primarily from public sector banks, foreign banks and other new
private sector banks. Our principal competition in these products and services
comes from public sector banks, which have built extensive branch networks that
have enabled them to raise low-cost deposits and, as a result, price their loans
and fee-based services very competitively. Their wide geographical reach
facilitates the delivery of banking products to their corporate customers
located in most parts of the country. We have been able, however, to compete
effectively because of our efficient service and prompt turnaround time that we
believe is significantly faster than public sector banks. We seek to compete
with the large branch networks of the public sector banks through our
multi-channel distribution approach and technology-driven delivery capabilities.
Traditionally, foreign banks have been active in providing trade finance,
fee-based services and other short-term financing products to top tier Indian
corporations. We effectively compete with foreign banks in cross-border trade
finance as a result of our wider geographical reach relative to foreign banks
and our customized trade financing solutions. We have established strong
fee-based cash management services and compete with foreign banks due to our
technological edge and competitive pricing strategies.
Other new private sector banks also compete in the corporate banking market
on the basis of efficiency, service delivery and technology. However, we believe
our size, capital base, strong corporate relationships, wider geographical reach
and ability to use technology to provide innovative, value-added products and
services provide us with a competitive edge.
88
In project finance, ICICI's primary competitors were established long-term
lending institutions. In recent years, Indian and foreign commercial banks have
sought to expand their presence in this market. We believe that we have a
competitive advantage due to our strong market reputation and expertise in risk
evaluation and mitigation. We believe that our in-depth sector specific
knowledge and capabilities in understanding risks and policy related issues as
well as our advisory, structuring and syndication services have allowed us to
gain credibility with project sponsors, overseas lenders and policy makers.
New business areas
Our international strategy is focused on India-linked opportunities in the
initial stages. In our international operations, we face competition from Indian
public sector banks with overseas operations, foreign banks with products and
services targeted at non-resident Indians and Indian businesses and other
service providers like remittance services. We are seeking to position ourselves
as an Indian bank offering globally-benchmarked products and services with an
extensive distribution network in India to gain a competitive advantage. We seek
to leverage our technology capabilities developed in our domestic business to
offer convenient and efficient services to our international customers. We also
seek to leverage our strong relationships with Indian corporates in our
international business.
Our insurance joint ventures face competition from existing dominant public
sector players as well as new private sector players. We believe that the key
competitive strength of our insurance joint ventures is the combination of our
experience in the Indian financial services industry with the global experience
and skills of our joint venture partners. We believe that ICICI Prudential Life
Insurance Company and ICICI Lombard General Insurance Company have built strong
product, distribution and risk management capabilities, achieving market
leadership positions in their respective businesses. ICICI Prudential Life
Insurance Company had a market share of 31% in new business written by private
sector life insurance companies in India during fiscal 2004. ICICI Lombard
General Insurance had a market share of 22% among the private sector general
insurance companies in India during fiscal 2004.
Employees
At year-end fiscal 2004 we had 18,942 employees, compared to 15,179
employees at year-end fiscal 2003. Of these, 13,549 at year-end fiscal 2004 were
employed by ICICI Bank, an increase from 10,617 at year-end fiscal 2003 and
4,820 at year-end fiscal 2002. Of our 18,942 employees at year-end fiscal 2004,
5,992 were professionally qualified, holding degrees in management, accountancy,
engineering, law, computer science, economics or banking.
Management believes that it has good relationships with its employees.
ICICI Bank has a staff center, which serves as a forum for grievances.
The financial services industry in India is undergoing unprecedented change
as deregulation gains momentum. Moreover, changing customer needs and rapid
advances in technology are continually re-defining the lines of innovation and
competition, thereby providing us with new challenges and opportunities. To meet
these challenges, we have relied extensively on our human capital, which we
believe comprises some of the best talent in the industry.
We continue to attract graduates from the premier business schools of the
country. We dedicate significant amount of senior management time to ensure that
employees remain highly motivated and perceive the organization as a place where
opportunities abound, innovation is fuelled, teamwork is valued and success is
rewarded. Employee compensation is clearly tied to performance and we encourage
the involvement of all our employees in our overall performance and
profitability through profit sharing incentive schemes based on the financial
results. A revised performance appraisal system has been implemented to assist
management in career development and succession planning.
89
ICICI Bank has an employee stock option scheme to encourage and retain high
performing employees. Pursuant to the employee stock option scheme as amended by
the Scheme of Amalgamation and further amended in September 2004, up to 5.0% of
the aggregate of our issued equity shares at the time of grant of the stock
options can be allocated under the employee stock option scheme. The stock
option will entitle eligible employees to apply for equity shares. The grant of
stock options is approved by ICICI Bank's board of directors on the
recommendations of the Board Governance and Remuneration Committee. The
eligibility of each employee is determined based on an evaluation of the
employee including employee's work performance, technical knowledge and
leadership qualities. Moreover, ICICI Bank places considerable emphasis and
value on its policy of encouraging internal communication and consultation
between employees and management. See also "Management - Compensation and
Benefits to Directors and Officers - Employee Stock Option Scheme."
ICICI Bank has a training center, where various training programs designed
to meet the changing skill requirements of its employees are conducted. These
training programs include orientation sessions for new employees and management
development programs for mid-level and senior executives. The training center
regularly offers courses conducted by faculty, both national and international,
drawn from industry, academia and ICICI Bank's own organization. Training
programs are also conducted for developing functional as well as managerial
skills. Products and operations training is also conducted through web-based
training modules.
In addition to basic compensation, employees of ICICI Bank are eligible to
receive loans from ICICI Bank at subsidized rates and to participate in its
provident fund and other employee benefit plans. The provident fund, to which
both ICICI Bank and its employees contribute a defined amount, is a savings
scheme, required by government regulation, under which ICICI Bank at present is
required to pay to employees a minimum 8.5% (9.0% until fiscal year-end 2004)
annual return. If such return is not generated internally by the fund, ICICI
Bank is liable for the difference. ICICI Bank's provident fund has generated
sufficient funds internally to meet the minimum annual return requirement since
inception of the funds. ICICI Bank has also set up a superannuation fund to
which it contributes defined amounts. In addition, ICICI Bank contributes
specified amounts to a gratuity fund set up pursuant to Indian statutory
requirements.
The following table sets forth, at the dates indicated, the approximate
number of employees in ICICI Bank and its consolidated subsidiaries and other
consolidated entities.
At March 31,
--------------------------------------------------------
2003 2004
--------------------------------------------------------
Number % to total Number % to total
--------------------------------------------------------
ICICI Bank.............................. 10,617 69.9% 13,549 71.5%
ICICI OneSource......................... 2,056 13.5 3,902 20.6
ICICI Infotech.......................... 1,302 8.6 1,141 6.0
ICICI Securities........................ 147 1.0 146 0.8
ICICI Home Finance(1)................... 927 6.1 - -
Others.................................. 130 0.9 204 1.1
--------------------------------------------------------
Total number of employees............... 15,179 100.0% 18,942 100.0%
========================================================
--------
(1) All employees of ICICI Home Finance became employees of ICICI Bank in
August 2003.
The increase in number of employees in fiscal 2004 was primarily in ICICI
Bank, which has grown its business and distribution capabilities and in ICICI
OneSource, as a result of both organic and inorganic growth in its business.
The following table sets forth, the approximate number of employees in
ICICI Bank and its consolidated subsidiaries and other consolidated entities at
August 31, 2004:
---------------------------------
Number % to total
---------------------------------
90
ICICI Bank................................. 14,890 62.5%
ICICI OneSource............................ 4,301 18.0%
ICICI Home Finance......................... 2,554 10.7%
ICICI Infotech............................. 1,709 7.2%
ICICI Securities........................... 149 0.6%
Others..................................... 238 1.0%
---------------------------------
23,841 100.0%
=================================
The increase in number of employees during the period April 1 to August 31,
2004 was primarily on account of recruitment of employees by ICICI Home Finance.
The results of ICICI Prudential Life Insurance Company and ICICI Lombard
General Insurance Company have been accounted for under the equity method due to
substantive participative rights retained by the minority shareholders. ICICI
Prudential Life insurance had 3,298 employees at year-end fiscal 2004 and 4,302
employees at August 31, 2004. ICICI Lombard General Insurance had 555 employees
at year-end fiscal 2004 and 970 employees at August 31, 2004.
In July 2003, ICICI Bank offered an Early Retirement Option to its
employees. All employees who had completed 40 years of age and seven years of
service with ICICI Bank (including periods of service with Bank of Madura,
ICICI, ICICI Personal Financial Services and ICICI Capital Services which were
amalgamated with and into ICICI Bank) as of July 31, 2003 were eligible for the
Early Retirement Option. Out of approximately 2,350 eligible employees,
approximately 1,495 employees exercised the Option. The amount payable to these
employees was the lesser of the amount equal to:
o 3 months' salary for every completed year of service, and
o 1 month's salary for the number of months of service left.
The above payment was subject to an overall limit of Rs. 2.0 million (US$
46,083) for employees at the level of Joint General Manager and below, and Rs.
2.5 million (US$ 57,604) for employees at the level of General Manager and
Senior General Manager. For the purpose of this computation, salary included
basic pay and dearness allowance but excluded all other allowances. The
termination benefits in respect of the plan aggregated Rs. 1.9 billion (US$ 44
million), which has been reflected in the income statement under salaries and
employee benefits.
Properties
ICICI Bank's registered office is located at Landmark, Race Course Circle,
Vadodara 390 007, Gujarat, India. ICICI Bank's corporate headquarters are
located at ICICI Bank Towers, Bandra-Kurla Complex, Mumbai 400 051, Maharashtra,
India.
ICICI Bank had a principal network consisting of 413 branches, 56 extension
counters and 1,790 ATMs at year-end fiscal 2004. These facilities are located
throughout India. 42 of these facilities are located on properties owned by
ICICI Bank, while the remaining facilities are located on leased properties. In
addition to the branches, extension counters and ATMs, ICICI Bank has 18
controlling/administrative offices including the registered office at Vadodara
and the corporate headquarters at Mumbai, 14 regional processing centers in
various cities and one central processing center at Mumbai. We also have one
offshore banking unit each at Mumbai, Singapore and Bahrain. ICICI Bank has 929
apartments and two residential facilities for its employees. ICICI Bank also
provides residential and holiday home facilities to employees at subsidized
rates. Our subsidiaries and other consolidated entities own eight properties and
also have 199 properties on lease. The net book value of all properties and
equipment at year-end fiscal 2004 was Rs. 23.2 billion (US$ 534 million).
Legal and Regulatory Proceedings
We are involved in a number of legal proceedings in the ordinary course of
our business. However, excluding the legal proceedings discussed below, we are
not a party to any proceedings and
91
no proceedings are known by us to be contemplated by governmental authorities or
third parties, which, if adversely determined, may have a material adverse
effect on our financial condition or results of operations.
At August 31, 2004, there were 21 litigations (involving a claim of Rs.
10.0 million and more) against us, in the aggregate amount of approximately Rs.
104.4 billion (US$ 2.4 billion) (to the extent quantifiable and including
amounts claimed jointly and severally from us and other parties). At August 31,
2004, two litigations were pending against our directors in an aggregate amount
of Rs. 56.3 billion (US$ 1.3 billion) (to the extent quantifiable).
At year-end fiscal 2004, we had been assessed an aggregate of Rs. 25.2
billion (US$ 579 million) in excess of the provision made in our accounts, in
income tax, interest tax, wealth tax and sales tax demands by the government of
India's tax authorities for past years. We have appealed each of these tax
demands. Management believes that the tax authorities are not likely to be able
to substantiate their income tax, interest tax, wealth tax and sales tax
assessment for the following reasons:
o We have received favorable decisions from the appellate authorities
with respect to Rs. 1.3 billion (US$ 30 million) of the assessment.
The income tax authorities have appealed these decisions to higher
appellate authorities and the same are pending adjudication.
o We have received a favorable decision of the Supreme Court of India in
respect of writ petitions filed by us relating to the sales tax issues
that are currently being appealed by us with respect to Rs. 326.9
million (US$ 8 million) of the assessment.
o In our appeal of the assessments of income tax, interest tax and
wealth tax aggregating to Rs 23.5 billion (US$ 541 million), we are
relying on favorable precedents of the appellate court and expert
opinions.
Of the Rs.25.2 billion (US$ 579 million), a major portion relates to the
treatment of depreciation claim on leased assets. In respect of depreciation
claimed by us for fiscal 1993 on two sale and lease back transactions, the
Income Tax Appellate Tribunal, Mumbai held in August 2003 that these
transactions were tax planning tools and no depreciation was allowable. As the
Income Tax Appellate Tribunal's decision is based on the facts of two specific
transactions, we believe that the Income Tax Appellate Tribunal's decision will
not have an adverse tax impact on other sale and lease back transactions entered
into by us. The tax impact of this decision is Rs. 189 million (US$ 4 million).
We have appealed against this decision and based on expert advice, we believe
that we will receive a favorable decision in the matter. Moreover, the lease
agreements provide for variation in the lease rental to offset any loss of
depreciation benefit to us. We have not provided for this tax demand but have
disclosed it as a contingent liability.
Our impaired loans in the power sector primarily include loans to a large
private sector power generation project in the state of Maharashtra, the
implementation of which is currently suspended on account of a dispute between
the power company and the purchaser, the state electricity board. This dispute
has, in turn, generated a number of parallel disputes, in both Indian courts and
foreign litigation forums. The principal sponsor of the power company has filed
for bankruptcy in the United States. The Indian lenders to the project sought an
injunction before the Indian courts in order to preserve and protect the
lenders' security interests in the collateral. The power company has filed a
counterclaim against this injunction. As a result of their guarantee to certain
foreign lenders, the government of India and the state of Maharashtra are also
involved in this matter. In addition, an arbitration proceeding in London has
been brought against us and other Indian lenders in an aggregate amount of US$
534 million. We and the other Indian lenders are pursuing our defense and
counter-claims in the arbitration. A number of significant stakeholders are
making efforts to resolve the overall situation and bring the project into use.
These include, among other things, efforts for an out-of-court settlement,
including renegotiation of the power tariff and the sale of the project to new
sponsors. Taking into account the overall situation, the nature of the
stakeholders involved and the
92
strength of our defenses and counterclaims in the
London arbitration, in our judgment the risk of an adverse final judgment in the
London arbitration is very low.
In April 1999, ICICI filed a suit before the High Court of Judicature at
Bombay against Mardia Chemicals Limited for recovery of amounts totaling Rs. 1.4
billion (US$ 32 million) due from Mardia Chemicals. The suit was subsequently
transferred to the Debt Recovery Tribunal, Mumbai. In July 2002, ICICI Bank
issued a notice to Mardia Chemicals under the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Ordinance, 2002
(subsequently passed as an Act by the Indian Parliament) demanding payment of
its outstanding dues. In August 2002, Mardia Chemicals filed a suit in the city
civil court at Ahmedabad against ICICI Bank, Mr. K. V. Kamath, Managing Director
& CEO and Ms. Lalita D. Gupte, Joint Managing Director, for an amount of Rs.
56.3 billion (US$ 1.3 billion) on the grounds that Mardia Chemicals had
allegedly suffered financial losses on account of ICICI's failure to provide
adequate financial facilities, ICICI's recall of the advanced amount and ICICI's
filing of a recovery action against it. The city civil court held that the suit
should have been filed in the pending proceedings before the Debt Recovery
Tribunal, Mumbai. Mardia Chemicals filed an appeal before the High Court of
Gujarat, which dismissed the appeal and ordered that the claim against ICICI
Bank be filed before the Debt Recovery Tribunal, Mumbai and the claim against
Mr. K.V. Kamath and Ms. Lalita D. Gupte be continued before the city civil court
at Ahmedabad. The Debt Recovery Tribunal has admitted the counterclaim filed by
Mardia Chemicals Limited. In June 2003, the promoters of Mardia Chemicals in
their capacity as guarantors of loans given by ICICI to Mardia Chemicals filed a
civil suit in the city civil court at Ahmedabad against ICICI Bank for an amount
of Rs. 20.8 billion (US$ 479 million) on the grounds of loss of investment and
loss of profit on investment. ICICI Bank has filed its reply seeking dismissal
of the suit and the matter is currently pending before the City Civil Court,
Ahmedabad.
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$ 4 million) due
from Esslon Synthetics. In May 2001, the guarantor filed a counter-claim for an
amount of Rs. 1.0 billion (US$ 23 million) against ICICI and other lenders who
had extended financial assistance to Esslon Synthetics on the grounds that he
had been coerced by officers of the lenders into signing an agreement between
LML Limited, Esslon Synthetics and the lenders on account of which he suffered,
among other things, loss of business. Esslon Synthetics Limited has filed an
application to amend the counterclaim in January 2004. ICICI Bank has filed its
reply to the application for amendment. The matter is currently still pending.
ICICI had filed a recovery suit in 2001 in the Debt Recovery Tribunal,
Mumbai against Dynamic Logistics Limited for Rs. 350 million (US$ 8 million).
Dynamic Logistics Limited filed a counterclaim for Rs. 1.3 billion (US$ 30
million) in the Debt Recovery Tribunal, Mumbai. The Debt Recovery Tribunal
passed an order stating that the claim has to be tried at Pune. We are appealing
this order.
Management believes, based on consultation with counsel, that the legal
proceedings instituted by each of Mardia Chemicals, Esslon Synthetics and
Dynamic Logistics Limited against us are frivolous and untenable and their
ultimate resolution will not have a material adverse effect on our results of
operations, financial condition or liquidity.
93
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Our selected financial and other data for and at year-end fiscal 2004 and
year-end fiscal 2003 have been derived from our consolidated financial
statements, prepared in accordance with US GAAP. Our financial statements for
fiscal 2004 and fiscal 2003 have been audited by KPMG LLP, UK, independent
accountants. Our financial statements for fiscal 2003 included in our annual
report in Form 20-F for fiscal 2003 were audited by KPMG, India, independent
accountants. This change was made at the request of KPMG, India. The change is
likely to be transitory and we expect to reappoint KPMG, India, as our
independent accountants for audit of financial statements prepared in accordance
with US GAAP, once it has successfully completed its registration with the
United States Public Company Accounting Oversight Board. The selected financial
and other data for ICICI for and at year-end fiscal 2000, 2001 and 2002 have
been derived from ICICI's consolidated financial statements, prepared in
accordance with US GAAP. These financial statements have been audited by KPMG,
India, independent accountants.
Following the approval of shareholders, the High Court of Gujarat at
Ahmedabad and the High Court of Judicature at Bombay, the Reserve Bank of India
approved the amalgamation of ICICI, ICICI Personal Financial Services and ICICI
Capital Services with and into ICICI Bank on April 26, 2002. The Statement on
Financial Accounting Standard No. 141 on "Business Combinations", issued by the
Financial Accounting Standards Board, requires that business combinations be
accounted for in the period in which the combination is consummated.
Accordingly, under US GAAP, the amalgamation has been reflected in the financial
statements contained in this annual report for fiscal 2003, as it was
consummated in April 2002. The effective date of the amalgamation for accounting
purposes under US GAAP was April 1, 2002. Under US GAAP, the amalgamation was
accounted for as a reverse acquisition. This means that ICICI was recognized as
the accounting acquirer in the amalgamation, although ICICI Bank was the legal
acquirer and the surviving entity. Accordingly, the financial data contained in
this annual report for fiscal 2002 and prior years, except where specifically
stated otherwise, present the assets, liabilities and results of operations of
ICICI. Following the amalgamation, the other subsidiaries and affiliates of
ICICI have become subsidiaries and affiliates of ICICI Bank.
On the date of amalgamation, ICICI held a 46% ownership interest in ICICI
Bank. Accordingly, the acquisition of the balance 54% ownership interest was
accounted for as a step acquisition. Following the acquisition, the 46%
ownership interest held by ICICI in ICICI Bank was recorded as treasury stock at
its historical carrying value. In September 2002, the treasury stock was sold to
institutional investors for Rs. 13.2 billion (US$ 303 million). The difference
between the sale proceeds and the carrying value, net of related tax effects of
Rs. 599 million (US$ 14 million), was recognized in the statement of
stockholders' equity as a capital transaction.
The financial information for ICICI for fiscal 2002 and 2001 reflect
results of ICICI Bank as an equity investment in accordance with ICICI's
ownership interest in ICICI Bank prior to the amalgamation. The financial
information for ICICI for fiscal 2000 reflects results of ICICI Bank as a
consolidated entity. 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 year ended
March 31, 2000. As a result, the financial statements for fiscal 2002 and 2001
are not strictly comparable with those for fiscal 2000.
The consolidation of ICICI's majority ownership interest in two insurance
companies, ICICI Prudential Life Insurance Company Limited and ICICI Lombard
General Insurance Company
94
Limited, in each of fiscal 2001 and 2002 was deemed inappropriate because of
substantive participative rights retained by the minority shareholders.
Accordingly, such investees were no longer consolidated but were accounted for
by the equity method in fiscal 2003. Prior period financial statements have been
restated and as a result, the financial statements for fiscal 2001 and 2002
contained in this annual report are not the same as those contained in our
annual report for fiscal 2002. There is no resultant impact on the net income or
the stockholders' equity for fiscal 2001 and 2002.
You should read the following data with the more detailed information
contained in "Operating and Financial Review and Prospects" and our consolidated
financial statements. Historical results do not necessarily predict the results
in the future.
Year ended March 31,
-----------------------------------------------------------------------
2000 2001 2002 2003 2004 2004 (1)
-----------------------------------------------------------------------
(in millions, except per common share data)
Selected income statement data:
Interest income ......................... Rs.79,296 Rs. 79,759 Rs. 78,600 Rs. 97,714 Rs. 90,688 US$ 2,090
Interest expense ........................ (67,492) (67,893) (69,520) (83,208) (72,375) (1,668)
-------------------------------------------------------------------------
Net interest income ..................... 11,804 11,866 9,080 14,506 18,313 422
Dividends ............................... 1,502 345 267 389 431 10
-------------------------------------------------------------------------
Net interest income, including
dividends ............................. 13,306 12,211 9,347 14,895 18,744 432
Provisions for loan losses .............. (6,363) (9,892) (9,743) (19,649) (20,055) (462)
-------------------------------------------------------------------------
Net interest income/(loss), including
dividends, after provisions for loan
losses................................. 6,943 2,319 (396) (4,754) (1,311) (30)
Non-interest income ..................... 9,815 9,243 8,148 13,253 36,678 845
-------------------------------------------------------------------------
Net revenue ............................. 16,758 11,562 7,752 8,499 35,367 815
Non-interest expense ................... (5,302) (5,479) (7,596) (18,609) (27,101) (624)
Equity in earnings/(loss) of
affiliates ............................ 20 735 294 (958) (1,437) (33)
Minority interest ...................... (361) 1 83 24 28 1
-------------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of accounting
changes ............................... 11,115 6,819 533 (11,044) 6,857 158
Income tax (expense)/benefit ............ (2,033) (189) (251) 3,061 (1,638) (38)
-------------------------------------------------------------------------
Income /(loss) before cumulative
effect of accounting changes, net
of tax ................................ 9,082 6,630 282 (7,983) 5,219 120
Cumulative effect of accounting
changes, net of tax(2)................. 249 - 1,265 - - -
-------------------------------------------------------------------------
Net income/(loss)........................ Rs.9,331 Rs. 6,630 Rs. 1,547 Rs. (7,983) Rs. 5,219 US$ 120
Per common share(3)
Net income/(loss) from continuing
operations
- Basic(4) .............................. Rs.28.90 Rs. 16.88 Rs. 3.94 Rs.(14.18) Rs. 8.50 US$ 0.20
Net income/(loss) from continuing
operations
- Diluted(5) ............................ 27.54 16.81 3.94 (14.18) Rs. 8.43 0.19
Dividends(6) ............................ 11.00 11.00 22.00 - 7.50 0.17
Book value .............................. 180.58 193.35 181.70 150.42 153.35 3.53
Common shares outstanding at end of
period (in millions of common shares)... 393 393 393 613 616
Weighted average common shares outstanding
- Basic (in millions of common shares).. 323 393 393 563 614
Weighted average common shares outstanding
- Diluted (in millions of common
shares)............................... 344 393 393 563 619
---------
(1) Rupee amounts for fiscal 2004 have been translated into US dollars using
the noon buying rate of Rs. 43.40 = US$ 1.00 in effect on March 31, 2004.
(2) 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. The excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities
assumed shall be recognized as goodwill. SFAS No. 141 specifies 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 need not be accounted separately.
The excess of the fair value of the net assets over the cost of acquired
entity is allocated pro rata to specified non-financial assets and
remaining excess, if any, is recognized as an extraordinary gain. As of
April 1, 2001, ICICI had an unamortized deferred credit of Rs. 1.3 billion
(US$ 29 million) relating to the excess of the fair value of assets
acquired over the
95
cost of acquisition of SCICI. As required by SFAS No. 141, in conjunction
with the early adoption of SFAS No. 142, the unamortized deferred credit as
of April 1, 2001, was written-off and recognized as the effect of a change
in the accounting principle.
(3) For fiscal years 2000, 2001 and 2002, based on the exchange ratio of 1:2
in which the shareholders of ICICI were issued shares of ICICI Bank,
number of shares has been adjusted by dividing by two. Hence, these
numbers are different from the numbers reported in the annual report on
Form 20-F for fiscal 2002.
(4) Represents net income/(loss) before dilutive impact.
(5) Represents net income / (loss) adjusted for full dilution. All convertible
instruments are assumed to be converted to common shares at the beginning
of the year, at prices that are most advantageous to the holders of these
instruments. For the purpose of calculating diluted earnings per share, the
net income was adjusted for interest (after tax) on convertible instruments
only for fiscal 2000, as the convertible bonds were almost entirely
converted/redeemed in fiscal 2001. Shares assumed to be issued have been
weighted for the period the convertible instruments are outstanding.
Options to purchase 2,546,675, 7,015,800, 12,610,275 and 1,098,225 equity
shares granted to employees at a weighted average exercise price of Rs.
226.0, Rs. 81.3, Rs. 154.7 and Rs. 266.6 were outstanding in fiscal 2001,
2002, 2003 and 2004, respectively, but were not included in the computation
of diluted earnings per share because the exercise price of the options was
greater than the average market price of the equity shares during the
period. In fiscal 2003, we reported a net loss and accordingly all
outstanding options at year-end fiscal 2003 are anti-dilutive.
(6) 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, the
interim dividend for fiscal 2002 was paid by ICICI during fiscal 2002. We
declared a dividend of Rs. 7.50 per equity share for fiscal 2003, which was
paid in August 2003, i.e. in fiscal 2004. We have declared a dividend of
Rs. 7.50 per equity share for fiscal 2004, which was paid out in September
2004, i.e. in fiscal 2005. The dividend per equity share shown above is
based on the total amount of dividends paid out on the equity shares during
the year, exclusive of dividend tax. This was different from the dividend
declared for the year. In US dollars, dividend was US$ 0.25 per equity
share in fiscal 2000 and 2001, US$ 0.51 per equity share in fiscal 2002 and
US$ 0.17 per equity share in fiscal 2004.
(7) Certain reclassifications have been made in the financial statements of
prior years to conform to classifications used in the current year. These
changes have no impact on previously reported results of operations or
stockholders' equity.
96
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of average total assets for the
respective period.
Year ended March 31,
---------------------------------------------------------------------
2000 2001 2002 2003 2004
---------------------------------------------------------------------
Selected income statement data:
Interest income........................... 11.23% 11.29% 10.53% 8.63% 7.14%
Interest expense ......................... (9.56) (9.61) (9.31) (7.35) (5.70)
---------------------------------------------------------------------
Net interest income ...................... 1.67 1.68 1.22 1.28 1.44
Dividends ................................ 0.21 0.05 0.04 0.03 0.03
---------------------------------------------------------------------
Net interest income, including dividends.. 1.88 1.73 1.25 1.32 1.48
Provisions for loan losses ............... (0.90) (1.40) (1.31) (1.73) (1.58)
---------------------------------------------------------------------
Net interest income/(loss), including
dividends, after provisions for loan
losses................................... 0.98 0.33 (0.05) (0.42) (0.10)
Non-interest income....................... 1.39 1.31 1.09 1.17 2.89
---------------------------------------------------------------------
Net revenue............................... 2.37 1.64 1.04 0.75 2.79
Non-interest expense...................... (0.75) (0.78) (1.02) (1.64) (2.13)
Equity in earnings/(loss) of affiliates... 0.00 0.10 0.04 (0.08) (0.11)
Minority interest......................... (0.05) 0.00 0.01 0.00 0.00
---------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of accounting
changes.................................. 1.57 0.97 0.07 (0.98) 0.54
Income tax (expense)/benefit.............. (0.29) (0.03) (0.03) 0.27 (0.13)
---------------------------------------------------------------------
Income/(loss) before cumulative effect of
accounting changes, net of tax .......... 1.28 0.94 0.04 (0.70) 0.41
Cumulative effect of accounting changes,
net of tax .............................. 0.04 - 0.17 - -
---------------------------------------------------------------------
Net income/(loss) ........................ 1.32% 0.94% 0.21% (0.70)% 0.41%
---------------------------------------------------------------------
At March 31,
-----------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2004(1)
-----------------------------------------------------------------------------------
(in millions, except percentages)
Selected balance sheet data:
Total assets ...........................Rs. 774,279 Rs. 739,892 Rs. 743,362 Rs. 1,180,263 Rs. 1,409,131 US$ 32,468
Securities ............................... 18,871 18,861 60,046 280,621 310,368 7,151
Loans, net(2) ............................ 561,448 602,023 523,601 630,421 728,520 16,786
Troubled debt restructuring
(restructured loans), net .............. 10,795 32,309 77,366 122,659 121,417 2,798
Other impaired loans, net ................ 24,240 20,081 33,187 55,319 28,764 663
Total liabilities ........................ 699,073 663,829 671,754 1,087,926 1,313,556 30,266
Long-term debt ........................... 436,320 492,882 511,458 400,812 373,449 8,605
Deposits ................................. 96,682 6,072 7,380 491,290 684,955 15,782
Redeemable preferred stock(3) ............ 10,207 698 772 853 944 22
Stockholders' equity ..................... 70,908 75,927 71,348 92,213 94,525 2,178
Common stock ............................ 3,916 3,924 3,922 6,127 6,164 142
Period average(4):
Total assets ............................. 706,066 706,343 746,330 1,132,638 1,269,638 29,254
Interest-earning assets .................. 612,452 615,164 641,141 924,573 1,017,009 23,433
Loans, net(2) ............................ 513,421 570,989 591,398 606,496 662,752 15,271
Total liabilities(5) ..................... 650,794 631,324 670,750 1,038,377 1,173,961 27,050
Interest-bearing liabilities ............. 583,609 576,474 613,401 905,226 977,941 22,533
Long-term debt ........................... 436,718 462,916 504,103 455,347 382,674 8,817
Stockholders' equity ....................Rs. 55,272 Rs. 75,019 Rs. 75,580 Rs. 94,261 Rs. 95,678 US$ 2,205
Profitability:
Net income/(loss) as a percentage of:
Average total assets .................. 1.32% 0.94% 0.21% (0.70)% 0.41%
Average stockholders' equity .......... 16.88 8.84 2.05 (8.47) 5.45
97
Year ended March 31,
---------------------------------------------------------------------
2000 2001 2002 2003 2004
---------------------------------------------------------------------
Average stockholders' equity
(including redeemable preferred
stock(6)............................. 15.95 8.89 2.12 (8.31) 5.50
Dividend payout ratio(7) ................. 28.3 52.90 635.20 - 88.10
Spread(8) ................................ 1.38 1.19 0.93 1.38 1.52
Net interest margin(9) ................... 1.93 1.93 1.42 1.57 1.80
Cost-to-income ratio(10) ................. 22.93 25.54 43.42 66.11 48.90
Cost-to-average assets ratio(11) ......... 0.75 0.78 1.02 1.64 2.13
Capital:
Average shareholders' equity as a
percentage of average total assets...... 7.83 10.62 10.13 8.32 7.54
Average stockholders' equity
(including redeemable preferred
stock) as a percentage of average
total assets (12)....................... 9.30 10.95 10.23 8.39 7.61
At or for the year ended March 31,
---------------------------------------------------
2000 2001 2002 2003 2004
---------------------------------------------------
(in percentages)
---------------------------------------------------
Asset quality:
Net restructured loans as a percentage of net loans........ 1.92% 5.37% 14.78% 19.45% 16.67%
Net other impaired loans as a percentage of net loans...... 4.32 3.34 6.34 8.77 3.95
Allowance for loan losses on restructured loans as a
percentage of gross restructured loans................... 41.79 26.03 18.64 16.78 25.23
Allowance for loan losses on other impaired loans as a
percentage of gross impaired loans....................... 52.07 51.89 34.61 33.48 42.74
Allowance for loan losses as a percentage of gross loans... 5.72 5.20 6.54 7.92 8.40
----------
(1) Rupee amounts for fiscal 2004 have been translated into US dollars using
the noon buying rate of Rs. 43.40 = US$ 1.00 in effect on March 31, 2004.
(2) Net of allowance for loan losses, security deposits and unearned income in
respect of restructured and other impaired loans and allowances for loans
not specifically identified as restructured or other impaired loan.
(3) ICICI had issued preferred stock redeemable at face value after 20 years.
Banks in India are not currently allowed to issue preferred stock. However,
we are currently exempt from this restriction.
(4) For fiscal years 2000, 2002, 2003 and 2004, the average balances are the
average of quarterly balances outstanding at the end of March of the
previous fiscal year, June, September, December and March of that fiscal
year. For fiscal 2001, the average balances are the average of quarterly
balances outstanding at the end of June, September, December and March of
that fiscal year.
(5) Represents the average of the quarterly balance of total liabilities and
minority interest.
(6) Represents the ratio of net income plus dividend on redeemable preferred
stock to the sum of average stockholders' equity and average redeemable
preferred stock. Under Indian tax laws, dividend on preferred stock is not
tax deductible.
(7) Represents the ratio of total dividends paid on common stock, exclusive of
dividend distribution tax, as a percentage of net income.
(8) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest income to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(9) Represents the ratio of net interest income to average interest-earning
assets. The difference in net interest margin and spread arises due to the
difference in the amount of average interest-earning assets and average
interest-bearing liabilities. If average interest-earning assets exceed
average interest-bearing liabilities, net interest margin is greater than
spread, and if average interest-bearing liabilities exceed average
interest-earning assets, net interest margin is less than spread.
(10) Represents the ratio of non-interest expense to the sum of net interest
income, dividend and non-interest income.
(11) Represents the ratio of non-interest expense to average total assets.
(12) ICICI Bank's capital adequacy is computed in accordance with the Reserve
Bank of India's guidelines and is based on unconsolidated financial
statements prepared in accordance with Indian GAAP. At year-end fiscal
2004, ICICI Bank's total capital adequacy ratio was 10.4% with Tier 1
capital adequacy ratio of 6.1% and Tier 2 capital adequacy ratio of 4.3%.
ICICI Bank has raised additional capital through a public issue of equity
shares aggregating to Rs. 32.5 billion (US$ 748 million), after year-end
fiscal 31, 2004.
98
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial
condition and results of operations together with our consolidated audited
financial statements. The following discussion is based on our audited financial
statements and accompanying notes, which have been prepared in accordance with
US GAAP.
Introduction
Our loan portfolio, financial condition and results of operations have
been, and in the future, are expected to be influenced by economic conditions in
India and certain global developments, particularly in commodity prices relating
to the business activities of our corporate customers and by economic conditions
in the United States and other countries influencing inflation and interest
rates in India. For ease of understanding the discussion of our results of
operations that follows, you should consider the introductory discussion of
these macroeconomic factors. In addition, for a meaningful comparison of our
results of operations for these years, you should also consider the amalgamation
and the effect of other acquisitions.
Indian Economy
The rate of growth of GDP was 5.8% in fiscal 2002, 4.0% in fiscal 2003 and
8.2% (as per the latest available estimates) in fiscal 2004. The slowdown in
growth in fiscal 2003 was caused primarily by a negative growth in the
agriculture sector because of insufficient rainfall and resulting drought
conditions prevailing in the country. The agriculture sector, which had grown by
6.5% in fiscal 2002, recorded a negative growth of 5.2% in fiscal 2003. The
industrial sector grew by 6.4% in fiscal 2003 after a low growth of 3.4% in
fiscal 2002.The higher growth rate during fiscal 2004 was primarily due to the
agricultural recovery, increase in industrial production and sustained growth of
the services sector. Agriculture, industry and services sectors grew by 9.1%,
6.5% and 8.4% respectively during fiscal 2004. Industrial growth in fiscal 2004
was supported primarily by growth in construction and manufacturing activities.
The average annual rate of inflation measured by the Wholesale Price Index
increased to 5.5% in fiscal 2004 from 3.2% in fiscal 2003. Fuel price inflation
increased to 6.2% in fiscal 2004, up from 5.5% in fiscal 2003. The Indian rupee
appreciated by 8.7% vis-a-vis the US dollar during fiscal 2004, strengthening
from Rs. 47.50 per US$ 1.00 at year-end fiscal 2003 to Rs. 43.40 per US$ 1.00 at
year-end fiscal 2004. The rupee, however, depreciated against the pound
sterling, euro and yen primarily because of the weakening of the US dollar
against these currencies.
During fiscal 2005 to date, there has been an increase in inflationary
trends in India, and a depreciation of the rupee vis-a-vis the US dollar. While
the average annual rate of inflation measured by the Wholesale Price Index was
4.5% in fiscal 2005 (through August 28, 2004), the year-on-year rate of
inflation for the week ended September 11, 2004 was 7.9%. These inflationary
trends are primarily due to the increase in oil prices as well as prices of
certain commodities. Recently there has been an increase in the international
crude oil prices. Given that India imports approximately 70.0% of its
requirements of crude oil which constituted approximately 26.7% of total imports
in fiscal 2004, an increase in international oil prices affects the Indian
economy. However, the average annual rate of inflation measured by the Consumer
Price Index for industrial workers was 3.2% for July 2004. The rupee has
depreciated against the US dollar during fiscal 2005 (through August 31, 2004)
by 6.7%. Foreign exchange reserves were US$ 118.3 billion at September 10, 2004.
The impact of these and other factors and the overall growth in industry,
agriculture and services during fiscal 2005 will affect the performance of the
banking sector as it will affect the level of credit disbursed by banks, and the
overall growth prospects of our business, including our ability to grow, the
quality of our assets, the value of our investment portfolio and our ability to
implement our strategy.
99
Banking Sector
According to the Reserve Bank of India's data, total deposits of all
scheduled commercial banks increased by 17.7% in fiscal 2001, 14.3% in fiscal
2002, 12.4% in fiscal 2003 and 17.7% in fiscal 2004. In fiscal 2001, growth in
bank deposits was high mainly as a result of the India Millennium Deposits
(approximately Rs. 256.6 billion) raised by the State Bank of India to augment
the overall foreign exchange reserves of the country. Excluding the India
Millennium Deposits, bank deposits would have risen by 14.8% in fiscal 2001. In
fiscal 2002, excluding the India Millennium Deposits outstanding at year-end
fiscal 2001, the growth in deposits was 14.6%. Growth in deposits in fiscal 2003
includes the impact of the amalgamation, as some of ICICI's liabilities which
were not included in banking deposits at year-end fiscal 2002, were included at
year-end fiscal 2003. During fiscal 2005, deposits have grown by 5.9% through
August 20, 2004. Bank credit of scheduled commercial banks grew by 18.4% in
fiscal 2001, 22.8% in fiscal 2002, 14.7% in fiscal 2003, 15.5% during fiscal
2004 and 7.4% during fiscal 2005 through August 20, 2004. Credit growth in
fiscal 2003 was high mainly due to the impact of the amalgamation, as ICICI's
credit was included in total banking system credit at year-end fiscal 2003 but
not included at year-end fiscal 2002.
In the last five fiscal years, there has been a downward movement in
interest rates, barring intra-year periods when interest rates were higher
temporarily due to extraneous circumstances. This movement was principally due
to the Reserve Bank of India's policy of assuring adequate liquidity in the
banking system and generally lowering the rate at which it would lend to Indian
banks to ensure that borrowers have access to funding at competitive rates.
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.
The following table sets-forth the bank rate, repo rate (In India, it is defined
as the annualized interest earned by the lender in a repurchase transaction
between two banks or between a bank and the Reserve Bank of India), average
deposit rates and average prime lending rates of five major public sector banks
for the last six years.
Average deposit rate Average prime
for over one year lending rate
Fiscal year Bank rate Repo rate term (range) (range)
---------------------------------------------------------------------------------------------------------
(in percentages)
2000............................. 8.0 7.0 8.0-10.5 12.0-12.5
2001............................. 7.0 7.0 8.5-10.0 11.0-12.0
2002............................. 6.50 6.0 8.0-8.5 11.0-12.0
2003............................. 6.25 5.0 5.25-8.50 10.75-12.00
2004............................. 6.0 4.5 5.00-6.25 10.50-11.50
2005 (through August 20, 2004)... 6.0 4.5 4.25-5.50 10.25-11.00
----------
Source: Reserve Bank of India: Handbook of Statistics on Indian Economy, 2002,
Annual Report 2003-2004 and Weekly Statistical Supplements.
The inflationary trends in fiscal 2005 have resulted in an increase in
benchmark secondary market yields on government securities, but have not had an
impact on lending or deposit rates. In fiscal 2005, the yield on 10-year
government securities touched a high of 6.8% on August 11, 2004, before coming
down to 6.2% on September 16, 2004. The Reserve Bank of India has not changed
the bank rate or the repo rate during fiscal 2005. However, on September 11,
2004, the Reserve Bank of India announced an increase in the cash reserve ratio,
which is the percentage of their net demand and time liabilities that banks are
required to maintain in the form of cash balances with the Reserve Bank of
India, from 4.50% to 4.75% effective September 18, 2004 and 5.00% effective
October 2, 2004.
100
Amalgamation
Following the approval of shareholders, the High Court of Gujarat at
Ahmedabad and the High Court of Judicature at Bombay, the Reserve Bank of India
approved the amalgamation of ICICI, ICICI Personal Financial Services and ICICI
Capital Services with and into ICICI Bank on April 26, 2002. The Statement on
Financial Accounting Standards No. 141 "Business Combinations", issued by the
Financial Accounting Standards Board, requires that business combinations be
accounted for in the period in which the combination is consummated.
Accordingly, under US GAAP, the amalgamation has been reflected in the financial
statements for fiscal 2003, as it was consummated in April 2002. The effective
date of the amalgamation for accounting purposes under US GAAP was April 1,
2002. Under US GAAP, the amalgamation was accounted for as a reverse
acquisition. This means that ICICI was recognized as the accounting acquirer in
the amalgamation, although ICICI Bank was the legal acquirer and the surviving
entity. Accordingly, the financial data for fiscal 2002 and prior years, except
where specifically stated otherwise, present the assets, liabilities and results
of operations of ICICI. The financial information for ICICI for fiscal 2002 and
2001 reflect results of ICICI Bank as an equity investment in accordance with
ICICI's ownership interest in ICICI Bank prior to the amalgamation. The
financial information for ICICI for fiscal 2000 reflects results of ICICI Bank
as a consolidated entity. Following the amalgamation, the other subsidiaries and
affiliates of ICICI have become subsidiaries and affiliates of ICICI Bank.
On the date of amalgamation, ICICI held 46% ownership interest in ICICI
Bank. Accordingly, the acquisition of the balance 54% ownership interest has
been accounted for as a step acquisition. Following the acquisition, the 46%
ownership interest held by ICICI in ICICI Bank was recorded as treasury stock at
its historical carrying value. In September 2002, the treasury stock was sold to
institutional investors for Rs. 13.2 billion (US$ 303 million). The difference
between the sale proceeds and the carrying value, net of related tax effects of
Rs. 599 million (US$ 14 million), was recognized in the statement of
stockholders' equity as a capital transaction.
The total purchase price for the acquisition was Rs. 14.1 billion (US$ 325
million) including fair value of common stock issued on reverse acquisition of
Rs. 12.0 billion (US$ 276 million). Intangible assets of Rs. 5.5 billion (US$
127 million), relating to customer and deposit relationships is being amortized
over a period of 10 years. Goodwill recognized in this transaction was Rs. 819
million (US$ 19 million).
Effect of Other Acquisitions
In fiscal 2004, ICICI Bank acquired 100.0% ownership interest in
Transamerica Apple Distribution Finance Private Limited for a cash consideration
of Rs. 757 million (US$ 17 million).
In fiscal 2004, ICICI OneSource, an entity consolidated in our US GAAP
financial statements, acquired 99.8% ownership interest in First Ring Inc. The
business combination was accounted for by the purchase method and accordingly
the consolidated financial statements for fiscal 2004 include the results of
operations of First Ring Inc. The business combination resulted in goodwill of
Rs. 616 million (US$ 14 million) as the purchase price was more than the fair
value of net assets acquired.
In fiscal 2003, ICICI Infotech, an entity consolidated in our US GAAP
financial statements, acquired the remaining 50.0% ownership interest in
Tricolor Infotech International Inc., Mauritius for a cash consideration of Rs.
110 million (US$ 3 million). The assets of Tricolor Infotech International Inc.
amounted to Rs. 35 million (US$ 806,452). The business combination was accounted
for by the purchase method and accordingly the consolidated financial statements
for fiscal 2003 include the results of operations of Tricolor Infotech
International Inc. The business combination resulted in goodwill of Rs. 18
million (US$ 414,747) as the purchase price was more than the fair value of net
assets acquired.
In fiscal 2003, ICICI OneSource acquired a 100.0% ownership interest in
Customer Asset India Private Limited, a company engaged in the business of
providing contact center services through its
101
offshore contact center at Bangalore, for cash consideration aggregating Rs. 959
million (US$ 22 million). The business combination was accounted for by the
purchase method and accordingly our consolidated financial statements for fiscal
2003 include the results of operations of Customer Asset India Private Limited.
The business combination resulted in goodwill of Rs. 617 million (US$ 14
million) as the purchase price was more than the fair value of net assets
acquired.
During fiscal 2001, ICICI Infotech acquired the following software
development and services companies based in the United States: Ivory
International Inc., Objects Xperts Inc. and Command Systems Inc. ICICI also
acquired Ajax Software Solutions, a software development company based in India.
The business combinations were accounted for under the purchase method and the
revenues and total assets of the acquired companies were immaterial to ICICI's
consolidated results of operations and financial position for fiscal 2001.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which requires that business combinations involving
financial institutions within its scope, be accounted for under SFAS No. 141.
Previously, generally accepted accounting principles for acquisitions of
financial institutions provided for recognition of the excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. Under SFAS No.
147, such excess is accounted for as goodwill. Adoption of SFAS No. 147 resulted
in a reclassification of a previously recorded unidentifiable intangible asset
of Rs. 581 million (US$ 13 million) and deferred tax liability of Rs. 208
million (US$ 5 million) to goodwill with effect from April 1, 2001. Further, as
required by SFAS No. 147, ICICI reversed the amortization expense of Rs. 290
million (US$ 7 million) and the related income tax benefit of Rs. 103 million
(US$ 2 million), by restating the results for fiscal 2002.
ICICI adopted SFAS No. 142 on April 1, 2001, which resulted in
reclassification of existing goodwill and intangible assets. In fiscal 2002,
ICICI recorded goodwill of Rs. 354 million (US$ 8 million) relating to
acquisitions of certain software services companies in fiscal 2001, of which
goodwill of Rs. 70 million (US$ 2 million) had been recorded pending final
allocation as of March 31, 2002. The revenues and total assets of the acquired
companies were immaterial to the consolidated results of operations and
financial position of ICICI. Substantially all goodwill at year-end fiscal 2002,
related to the software development and services reporting unit of ICICI. No
goodwill impairment loss was recorded during fiscal 2002, 2003 and 2004. 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. 1.3 billion (US$ 29 million) related to an excess of the
fair value of assets acquired over the cost of acquisition of SCICI, a
diversified lending institution acquired by ICICI in fiscal 1997. As required by
SFAS No. 141, in conjunction with the early adoption of SFAS No. 142, the
unamortized deferred credit as of April 1, 2001, has been written-off and
recognized as the effect of a change in accounting principle.
Deconsolidation of ICICI Bank for fiscal 2001 and 2002
ICICI's consolidated subsidiaries for and at year-end fiscal 2002 and
year-end fiscal 2001 did not include ICICI Bank. Effective March 10, 2001, ICICI
Bank acquired Bank of Madura, an old private sector bank in India, in an all
stock merger and, as a result, the ownership interest of ICICI was reduced from
62.2% to 55.6%. In addition, during March 2001, ICICI reduced its interest in
ICICI Bank to 46% through sales of equity shares in the Indian secondary markets
to institutional investors. This was in line with the Reserve Bank of India's
directive that ICICI reduce its interest in ICICI Bank to not more than 40% over
a period of time. As a result of the foregoing, ICICI Bank ceased to be one of
ICICI's subsidiaries as of March 22, 2001 and was accounted for under the equity
method of accounting from April 1, 2000, the beginning of the fiscal year in
which ICICI's majority ownership interest in ICICI Bank was deemed to be
temporary. ICICI Bank continued to be reported
102
on a consolidated basis for the fiscal 2000. As a result, ICICI's financial
statements for fiscal 2002 and 2001 are not strictly comparable with those for
fiscal 2000.
Change in accounting basis for insurance subsidiaries
The consolidation of ICICI's majority ownership interest in the two
insurance companies, ICICI Prudential Life Insurance Company and ICICI Lombard
General Insurance Company, incorporated in each of fiscal 2001 and 2002 was
deemed inappropriate in fiscal 2003 because of substantive participative rights
retained by the minority shareholders. Accordingly, such investees are no longer
consolidated but are accounted for by the equity method from fiscal 2003. Prior
period financial statements have been restated and as a result, the financial
statements for fiscal 2001 and 2002 contained in this annual report are not the
same as those contained in our annual report for fiscal 2002. There is no
resultant impact on net income or stockholders' equity for fiscal 2001 and 2002.
Results of Operations
We offer products and services in the areas of commercial banking to
corporate and retail customers, both domestic and international, investment
banking and other products including insurance.
Our commercial banking products and services for retail customers include
both retail loans and retail liability products and services. We offer a wide
range of retail credit products including home loans, automobile loans,
commercial vehicle loans, two wheeler loans, dealer financing, personal loans,
credit cards, loans against time deposits and loans against shares. Our
commercial banking operations for corporate customers include a range of
products and services for India's leading corporations and growth-oriented
middle market businesses, including loan products and fee and commission-based
products and services. Our primary source of funding after the amalgamation is
deposit taking from corporate and retail customers, while ICICI's primary source
of funding was borrowings. We continue to meet a part of our funding
requirements through borrowings in the Indian and international markets.
Our investment banking business includes ICICI Bank's treasury operations.
ICICI Bank's treasury operations include maintenance and management of
regulatory reserves, proprietary trading in equity, fixed income and foreign
exchange, a range of products and services for corporate customers, such as
forward contracts and interest rate and currency swaps, and foreign exchange
products and services. Our investment banking business also includes corporate
advisory services, brokering and fixed income operations, including primary
dealership in government securities and proprietary operations in various money
market instruments, all of which are undertaken by ICICI Securities Limited, our
investment banking subsidiary. Funds managed by our subsidiary ICICI Venture
Funds Management Company Limited provide venture capital funding to start-up
companies, as well as private equity to a range of companies.
Our other businesses include life insurance and non-life insurance. ICICI
Prudential Life Insurance Company, our joint venture with Prudential plc, offers
a range of life insurance products to individuals in India. ICICI Lombard
General Insurance Company, our joint venture with Lombard Canada Limited, offers
property and other non-life insurance products to companies and individuals in
India. While we own the majority interests in both ICICI Prudential Life
Insurance Company and ICICI Lombard General Insurance Company, these investees
are accounted for by the equity method in our financial statements in view of
the substantive participative rights retained by the joint venture partners.
While our operations and assets are primarily located in India, we have
also established subsidiaries in the United Kingdom and Canada, branches in
Singapore and Bahrain and representative offices in the United States, China,
United Arab Emirates and Bangladesh. We have also received regulatory approval
to establish up a representative office in South Africa and propose to establish
a subsidiary in Russia.
103
Consequent to the amalgamation, the businesses formerly conducted by ICICI
became subject for the first time to various regulations applicable to banks.
These include the prudential reserve and liquidity requirements, namely the
statutory liquidity ratio under Section 24 of the Indian Banking Regulation Act,
1949 and the cash reserve ratio under Section 42 of the Reserve Bank of India
Act, 1934. The statutory liquidity ratio is required to be maintained in the
form of government of India securities and other approved securities, currently
a minimum of 25.0% of our net demand and time liabilities. The cash reserve
ratio is required to be maintained in the form of cash balances with the Reserve
Bank of India, which has increased the cash reserve ratio from 4.50% to 4.75% of
our net demand and time liabilities, excluding inter-bank deposits, effective
September 18, 2004 and to 5.00% effective October 2, 2004. In addition to the
above, the directed lending norms of Reserve Bank of India require commercial
banks to lend 40.0% of their net bank credit to specific sectors (known as
priority sectors), such as agriculture, small-scale industry, small businesses
and housing finance. 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 Reserve Bank of India's approval to the
amalgamation, we are required to maintain a total of 50.0% of our net bank
credit on the residual portion of our advances (i.e., the portion of our total
advances excluding advances of ICICI at year-end fiscal 2002) in the form of
priority sector 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 our net bank credit. The Reserve Bank
of India's existing instructions on sub-targets under priority sector lending
and eligibility of certain types of investments and funds for reckoning as
priority sector advances also apply to us. See "Supervision and Regulation -
Directed Lending - Priority Sector Lending" and "Business - Loan Portfolio -
Directed Lending - Priority Sector Lending".
Consequent to the amalgamation, while we have benefited from our lower cost
of funding as a bank compared to ICICI as a non-bank financial institution, the
requirement to maintain statutory liquidity ratio and cash reserve ratio on
historic liabilities of ICICI has adversely impacted our spread. Maintenance of
the statutory liquidity ratio and cash reserve ratio has resulted in a large
investment in government securities and maintenance of cash balances with the
Reserve Bank of India, both of which earn low yields compared to loan assets.
The increase in investment in government securities has substantially increased
our exposure to market risk. In a declining interest rate environment, we made
gains on sale of government securities. A rise in interest rates would cause the
value of our fixed income portfolio to decline and adversely affect the income
from our treasury operations.
Long-term project finance was a major proportion of ICICI's asset portfolio
and continues to be a significant portion of our loan portfolio, though we have
diversified our lending towards retail loans and working capital financing. Over
the past several years, we and ICICI experienced a high level of impaired loans
in our loan portfolio as a result of downturn in certain global commodity
markets, increased competition in India, the high level of debt in the financing
of projects and capital structures of Indian companies and high interest rates
in the Indian economy during the period in which a large number of projects
contracted their borrowings, as well as delays experienced in enforcement of
collateral when borrowers defaulted on their obligations to us. Our loan
portfolio includes loans to projects under implementation and there are risks
and uncertainties associated with the timely completion and viability of these
projects. Our retail loans have grown rapidly and the level of impaired loans in
our retail portfolio could increase if there is a rise in unemployment,
prolonged recessionary conditions and a sharp and sustained rise in interest
rates in India.
Average Balance Sheet
For fiscal years 2002, 2003 and 2004, 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. The average yield
on average interest-earning assets is the ratio of interest income to average
interest-earning assets. The amortized portion of loan origination fees (net of
loan origination costs) was included in interest income on loans, representing
an adjustment to the yield. The average cost on average interest-bearing
liabilities is the ratio of interest expense to average interest-bearing
liabilities. The average balances of loans include impaired loans and are net of
allowance for loan
104
losses that have been allocated on a pro-rata basis to rupee loans and foreign
currency loans, based on the proportion of impaired rupee loans and impaired
foreign currency loans. We did not recalculate tax-exempt income on a
tax-equivalent basis because we believed that the effect of doing so would not
be significant. Total interest income also includes other interest income, which
is primarily interest on refund of income tax.
The following table sets forth, for the periods indicated, the average
balances of the assets and liabilities outstanding, which are major components
of interest income, interest expense and net interest income. The average
balances of loans include impaired loans and are net of allowance for loan
losses.
Year ended March 31,
----------------------------------------------------------------------------------------------------
2002 2003 2004
----------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balanc expense cost Balance expense cost balance expense cost
----------------------------------------------------------------------------------------------------
(in millions, except percentages)
----------------------------------------------------------------------------------------------------
Assets:
Cash, cash equivalents
and trading assets:
Rupee................... Rs. 28,592 Rs. 1,883 6.59% Rs. 58,204 3,937 6.76% Rs. 68,104 Rs. 4,483 6.58%
Foreign currency ....... 9,422 200 2.12 15,712 195 1.24 9,404 174 1.85
--------------------- ---------------------- -----------------------
Total cash, cash
equivalents and
trading
assets.................. 38,015 2,083 5.48 73,916 4,132 5.59 77,508 4,657 6.01
Securities--debt:
Rupee .................. 11,728 1,180 10.06 244,161 16,633 6.81 276,432 15,261 5.52
Foreign currency ....... - - - - - - 317 3 0.95
--------------------- ---------------------- -----------------------
Total securities--debt ... 11,728 1,180 10.06 244,161 16,633 6.81 276,749 15,264 5.52
Loans, net:
Rupee .................. 521,169 69,725 13.38 541,868 70,917 13.09 592,048 64,791 10.94
Foreign currency ....... 70,230 5,512 7.85 64,628 4,163 6.44 70,704 4,430 6.27
--------------------- ---------------------- -----------------------
Total loans, net ......... 591,399 75,237 12.72 606,496 75,080 12.38 662,752 69,221 10.44
Other interest income .... - 100 - - 1,869 - 1,546 -
Interest-earning assets:
Rupee .................. 561,489 72,889 12.98 844,233 93,356 11.06 936,584 86,081 9.19
Foreign currency ....... 79,652 5,711 7.17 80,340 4,358 5.42 80,425 4,607 5.73
--------------------- ---------------------- -----------------------
Total interest-earning
assets.................. 641,141 78,600 12.26 924,573 97,714 10.57 1,017,009 90,688 8.92
Securities--equity:
Rupee .................. 31,434 267 0.85 29,379 389 1.32 28,561 431 1.51
Foreign currency ....... - - - - - - - - -
--------------------- ---------------------- -----------------------
Total securities--equity.. 31,434 267 0.85 29,379 389 1.32 28,561 431 1.51
Earning assets:
Rupee .................. 592,922 73,156 12.34 873,613 93,745 10.73 965,145 86,512 8.96
Foreign currency ....... 79,652 5,711 7.17 80,340 4,358 5.42 80,425 4,607 5.73
--------------------- ---------------------- -----------------------
Total earning assets ..... 672,575 78,867 11.73 953,953 98,103 10.28 1,045,570 91,119 8.71
Cash and cash equivalents. 6,720 - 45,585 - 54,929 -
Acceptances .............. 3,552 - 26,496 - 50,706 -
Property and equipment ... 13,375 - 18,826 - 22,188 -
Other assets ............. 50,109 - 87,778 - 96,245 -
--------------------- ---------------------- -----------------------
Total non-earning
assets.................... 73,755 - 178,685 - 224,068 -
--------------------- ---------------------- -----------------------
Total assets ............ Rs.746,330 Rs.78,867 Rs.1,132,638 Rs.98,103 Rs. 91,119 1,269,638
===================== ====================== =======================
105
Year ended March 31,
----------------------------------------------------------------------------------------------------
2002 2003 2004
----------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense cost Balance expense cost balance expense cost
----------------------------------------------------------------------------------------------------
(in millions, except percentages)
----------------------------------------------------------------------------------------------------
Liabilities:
Savings account deposits:
Rupee .................... Rs. - Rs. - Rs. -% Rs. 30,828 Rs. 914 2.96% Rs. 56,843 Rs. 1,348 Rs. 2.37%
Foreign currency ......... - - - 46 - 0.67 71 - 0.42
---------------------- ------------------------ ------------------------
Total savings account
deposits ................... - - - 30,874 914 2.96 56,914 1,348 2.37
Time deposits:
Rupee .................... 6,618 744 11.24 315,688 24,688 7.82 454,896 28,918 6.36
Foreign currency ......... 0 0 - 11,456 431 3.76 14,693 414 2.82
---------------------- ------------------------ ------------------------
Total time deposits ........ 6,618 744 11.24 327,144 25,119 7.68 469,589 29,332 6.25
Long-term debt:
Rupee .................... 424,745 54,387 12.80 390,602 45,661 11.69 330,443 36,425 11.02
Foreign currency ......... 79,358 5,337 6.72 64,745 2,420 3.74 52,231 1,896 3.63
---------------------- ------------------------ ------------------------
Total long-term debt ....... 504,103 59,724 11.85 455,347 48,081 10.56 382,674 38,321 10.01
Redeemable preferred stock.. 735 74 10.07 813 82 10.09 899 91 10.12
Trading account and other
liabilities:
Rupee..................... 85,057 8,217 9.66 75,983 8,590 11.31 48,020 2,960 6.16
Foreign currency.......... 16,888 761 4.50 15,065 423 2.81 19,845 323 1.63
---------------------- ------------------------ ------------------------
Total trading account and
other liabilities .......... 101,945 8,978 8.81 91,048 9,013 9.90 67,865 3,283 4.84
Interest-bearing
liabilities:
Rupee .................... 517,155 63,423 12.26 813,913 79,935 9.82 891,101 69,742 7.83
Foreign currency ......... 96,246 6,097 6.34 91,313 3,274 3.59 86,840 2,633 3.03
---------------------- ------------------------ ------------------------
Total interest-bearing
liabilities............... 613,401 69,520 11.33 905,226 83,209 9.19 977,941 72,375 7.40
Non-interest-bearing
deposits:
Rupee .................... - - 31,172 - 53,941 -
Foreign currency ......... - - - - 149 -
----------------------------------------------------------------------------------------------------
Total non-interest-bearing
deposits ............... - - 31,172 - 54,090 -
Other liabilities .......... 57,349 - 101,979 - 141,930 -
----------------------------------------------------------------------------------------------------
Total non-interest-bearing
liabilities .............. 57,349 - 133,151 - 196,020 -
Total liabilities .......... Rs. 670,750 Rs. 69,520 Rs. 1,038,377 Rs.83,209 Rs. 1,173,961 Rs. 72,375
---------------------- ------------------------ ------------------------
Stockholders' equity........ Rs. 75,580 - Rs. 94,261 - Rs. 95,678 -
---------------------- ------------------------ ------------------------
Total liabilities and
stockholders' equity ....... Rs. 746,330 Rs. 69,520 Rs. 1,132,638 Rs.83,209 Rs. 1,269,639 Rs. 72,375
====================== ======================== ========================
Analysis of changes in interest income and interest expense volume and rate
analysis
The following table sets forth, for the periods indicated, the changes in
the components of net interest income. The changes in net interest income
between periods have been reflected as attributed either to volume or rate
changes. For the purpose of this table, changes, which are due to both volume
and rate, have been allocated solely to volume.
106
Fiscal 2003 vs. Fiscal 2002 Fiscal 2004 vs. Fiscal 2003
---------------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
---------------------------------------------------------------------------------
Change in Change in
average Change in average Change in
Net change volume average rate Net change volume average rate
---------------------------------------------------------------------------------
(in millions)
Interest income:
Cash, cash equivalents and
trading assets:
Rupee ........................... Rs. 2,054 Rs. 2,003 Rs. 51 Rs. 546 Rs. 652 Rs. (106)
Foreign currency ................ (5) 78 (83) (21) (117) 96
---------------------------------------------------------------------------------
Total cash, cash equivalents and
trading assets.................... 2,049 2,081 (32) 525 535 (10)
Securities:
Rupee ........................... 15,453 15,834 (381) (1,372) 1,782 (3,154)
Foreign currency ................ - - - 3 3 -
---------------------------------------------------------------------------------
Total securities ................... 15,453 15,834 (381) (1,369) 1,785 (3,154)
Loans:
Rupee ........................... 1,192 2,709 (1,517) (6,126) 5,491 (11,617)
Foreign currency ................ (1,349) (361) (988) 267 381 (114)
---------------------------------------------------------------------------------
Total loans ........................ (157) 2,348 (2,505) (5,859) 5,872 (11,731)
Other interest income .............. 1,769 1,769 - (323) (323) -
---------------------------------------------------------------------------------
Total interest income:
Rupee ........................... 20,468 22,315 (1,848) (7,275) 7,602 (14,877)
Foreign currency ................ (1,354) (283) (1,071) 249 267 (18)
---------------------------------------------------------------------------------
Total interest income .............. Rs. 19,114 Rs. 22,032 Rs. (2,919) Rs. (7,026) Rs. 7,869 Rs.(14,895)
Interest expense:
Savings account deposits:
Rupee ........................... Rs. 914 Rs. 914 - Rs. 434 Rs. 617 Rs. (183)
Foreign currency ................ 0.31 0.31 - - - -
---------------------------------------------------------------------------------
Total savings account deposits ..... Rs. 914 Rs. 914 - Rs. 434 Rs. 617 Rs. (183)
Time deposits:
Rupee ........................... 23,944 24,171 (226) 4,230 8,850 (4,620)
Foreign currency ................ 431 431 - (17) 91 (108)
---------------------------------------------------------------------------------
Total time deposits ................ 24,375 24,601 (226) 4,213 8,941 (4,728)
Long-term debt:
Rupee ........................... (8,726) (3,991) (4,735) (9,236) (6,631) (2,605)
Foreign currency ................ (2,917) (546) (2,371) (524) (454) (70)
---------------------------------------------------------------------------------
Total long-term debt ............... (11,643) (4,537) (7,106) (9,760) (7,085) (2,675)
Redeemable preferred stock(1) ...... 8 8 - 9 9 -
Trading account and other liabilities:
Rupee ........................... 373 (1,026) 1,399 (5,630) (1,724) (3,906)
Foreign currency ................ (338) (51) (287) (100) 78 (178)
---------------------------------------------------------------------------------
Total trading account and other
liabilities ..................... 35 (1,077) 1,112 (5,730) (1,646) (4,084)
Total interest expense:
Rupee ........................... 16,513 20,075 (3,562) (10,193) 1,121 (11,314)
Foreign currency ................ (2,824) (166) (2,658) (641) (285) (356)
=================================================================================
Total interest expense ............. Rs. 13,689 Rs. 19,909 Rs. (6,220) Rs. (10,834) Rs. 836 Rs.(11,670)
Net interest income:
Rupee ........................... 3,955 2,240 1,715 2,918 6,481 (3,563)
Foreign currency ................ 1,470 (117) 1,587 890 552 338
=================================================================================
Total net interest income .......... Rs. 5,425 Rs. 2,123 Rs. 3,301 Rs. 3,808 Rs. 7,033 Rs. (3,225)
=================================================================================
----------
(1) Banks in India are not allowed to issue preferred stock. However, we have
been currently exempted from this restriction.
107
Yields, Spreads and Margins
The following table sets forth, for the periods indicated, the yields,
spreads and net interest margins on interest-earning assets.
Year ended March 31,
-----------------------------------------------------------------
2000 2001 2002 2003 2004
-----------------------------------------------------------------
(in millions, except percentages)
Interest income......................... Rs. 79,296 Rs. 79,759 Rs. 78,600 Rs. 97,714 Rs. 90,688
Average interest-earning assets......... 612,452 615,164 641,141 924,573 1,017,009
Interest expense........................ 67,492 67,893 69,520 83,208 72,375
Average interest-bearing liabilities.... 583,609 576,474 613,401 905,226 977,941
Average total assets.................... 706,066 706,343 746,330 1,132,638 1,269,638
Average interest-earning assets as a
percentage of average total assets.... 86.74% 87.09% 85.91% 81.63% 80.10%
Average interest-bearing liabilities as a
percentage of average total assets.... 82.66 81.61 82.19 79.92 77.03
Average interest-earning assets as a
percentage of average interest-bearing
liabilities........................... 104.94 106.71 104.52 102.14 103.99
Yield................................... 12.95 12.97 12.26 10.57 8.92
Rupee................................. 14.20 13.66 12.98 11.06 9.19
Foreign currency...................... 7.57 9.04 7.17 5.42 5.73
Cost of funds........................... 11.56 11.78 11.33 9.19 7.40
Rupee................................. 12.77 12.77 12.26 9.82 7.83
Foreign currency...................... 5.66 6.84 6.34 3.59 3.03
Spread (1).............................. 1.38 1.19 0.93 1.38 1.52
Rupee................................. 1.42 0.89 0.72 1.24 1.36
Foreign currency...................... 1.91 2.19 0.84 1.84 2.69
Net interest margin (2)................. 1.93 1.93 1.42 1.57 1.80
Rupee................................. 1.75 1.93 1.69 1.59 1.74
Foreign currency...................... 2.70 1.90 -0.48 1.35 2.45
----------
(1) Spread is the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest income to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(2) Net interest margin is the ratio of net interest income to average
interest-earning assets. The difference in net interest margin and spread
arises due to the difference in amount of average interest-earning assets
and average interest-bearing liabilities. If average interest-earning
assets exceed average interest-bearing liabilities, net interest margin is
greater than the spread and if average interest-bearing liabilities exceed
average interest-earning assets, net interest margin is less than the
spread.
Fiscal 2004 to Fiscal 2003
Summary
Net income after tax amounted to Rs. 5.2 billion (US$ 120 million) in
fiscal 2004 compared to a loss of Rs. 8.0 billion (US$ 184 million) in fiscal
2003, primarily due to a 176.8% increase in non-interest income to Rs. 36.7
billion (US$ 845 million) in fiscal 2004 from Rs. 13.3 billion (US$ 305 million)
in fiscal 2003 and a 26.2% increase in net interest income before provisions for
loan losses to Rs. 18.3 billion (US$ 422 million) in fiscal 2004 from Rs. 14.5
billion (US$ 334 million) in fiscal 2003. We made a profit on average assets of
0.4% for fiscal 2004 compared to a net loss on average
108
assets of 0.7% for fiscal 2003 and a profit on average stockholders' equity of
5.5% for fiscal 2004 compared to a net loss on average stockholders' equity of
8.5% for fiscal 2003.
o Net interest income (excluding dividends) before provisions for loan
losses increased 26.2% to Rs. 18.3 billion (US$ 422 million) in fiscal
2004 from Rs. 14.5 billion (US$ 334 million) in fiscal 2003,
reflecting an increase of 10.0% in the average volume of
interest-earning assets and increase of 14 basis points in the spread.
o Non-interest income increased by 176.8% in fiscal 2004 to Rs. 36.7
billion (US$ 845 million) from Rs. 13.3 billion (US$ 305 million) in
fiscal 2003, primarily due to increase in gains from securities
transactions by Rs. 13.1 billion (US$ 302 million) and increase in
income from fees, commission and brokerage by Rs. 3.6 billion (US$ 83
million).
o Non-interest expense increased 45.6% in fiscal 2004 to Rs. 27.1
billion (US$ 624 million) from Rs. 18.6 billion (US$ 429 million) in
fiscal 2003, primarily due to 85.3% increase in employee expenses
(employee expenses in fiscal 2004 includes Early Retirement Option
expense of Rs. 1.9 billion (US$ 44 million)) and 33.5% increase in
administration expenses.
o Provisions for loan losses increased to Rs. 20.1 billion (US$ 462
million) in fiscal 2004 from Rs. 19.6 billion (US$ 453 million) in
fiscal 2003.
o Gross restructured loans increased 10.2% to Rs. 162.4 billion (US$ 3.7
billion) at year-end fiscal 2004 from Rs. 147.4 billion (US$ 3.4
billion) at year-end fiscal 2003. Gross other impaired loans decreased
40.0% to Rs. 50.2 billion (US$ 1.2 billion) at year-end fiscal 2004
from Rs. 83.2 billion (US$ 1.9 billion) at year-end fiscal 2003.
o Total assets increased 19.4% to Rs. 1,409.1 billion (US$ 32.5 billion)
at year-end fiscal 2004 compared to Rs. 1,180.3 billion (US$ 27.2
billion) at year-end fiscal 2003 with trading account assets
increasing by 89.6% and loans increasing by 15.6%.
Net Interest Income
The following table sets forth, for the periods indicated, the principal
components of net interest income, excluding income from dividends.
Year ended March 31,
-------------------------------------------------------------------
2004/2003
2003 2004 2004 % change
-------------------------------------------------------------------
(in millions, except percentages)
Interest income ........................ Rs. 97,714 Rs. 90,688 US$ 2,090 (7.2)%
Interest expense ....................... (83,208) (72,375) (1,668) (13.0)
---------------------------------------------------
Net interest income, excluding income
from dividends ......................... Rs. 14,506 Rs. 18,313 US$ 422 26.2%
===================================================
Net interest income increased 26.2% to Rs. 18.3 billion (US$ 422 million)
in fiscal 2004 from Rs. 14.5 billion (US$ 334 million) in fiscal 2003 reflecting
mainly the following:
o an increase of Rs. 92.4 billion (US$ 2.1 billion) or 10.9% in the
average volume of interest-earning rupee assets;
o an increase of Rs. 85 million (US$ 2 million) or 0.1% in the average
volume of interest-earning foreign currency assets;
o an increase in rupee spread to 1.4% in fiscal 2004 from 1.2% in fiscal
2003; and
o an increase in foreign currency spread to 2.7% in fiscal 2004 from
1.8% in fiscal 2003.
109
The average volume of interest-earning rupee assets increased by 10.9% or
Rs. 92.4 billion (US$ 2.1 billion) to Rs. 936.6 billion (US$ 21.6 billion)
during fiscal 2004 from Rs. 844.2 billion (US$ 19.5 billion) during fiscal 2003,
primarily due to the increase in the volume of loans. Our average volume of
loans increased by 9.3% to Rs. 662.8 billion (US$ 15.3 billion) in fiscal 2004
from Rs. 606.5 billion (US$ 14.0 billion) in fiscal 2003. The average volume of
rupee loans increased by 9.3% or Rs. 50.2 billion (US$ 1.2 billion) to Rs. 592.0
billion (US$ 13.6 billion) in fiscal 2004 from Rs. 541.9 billion (US$ 12.5
billion) in fiscal 2003. This increase in average loans was primarily due to
increased disbursements of retail finance loans offset, in part, by
sell-down/securitization and repayments of loans. The average volume of foreign
currency loans increased 9.4% to Rs. 70.7 billion (US$ 1.6 billion) in fiscal
2004 from Rs. 64.6 billion (US$ 1.5 billion) in fiscal 2003.
Our gross loans increased 16.2% to Rs. 795.3 billion (US$ 18.3 billion) at
year-end fiscal 2004 from Rs. 684.6 billion (US$ 15.8 billion) at year-end
fiscal 2003. Gross rupee loans at year-end fiscal 2004 increased 19.2% to Rs.
705.7 billion (US$ 16.3 billion) compared to Rs. 592.2 billion (US$ 13.6
billion) at year-end fiscal 2003 and gross foreign currency loans at year-end
fiscal 2004 declined 3.1% to Rs. 89.6 billion (US$ 2.1 billion) compared to Rs.
92.4 billion (US$ 2.1 billion) at year-end fiscal 2003. Gross consumer loans and
credit card receivables at year-end fiscal 2004 increased 65.7% to Rs. 311.9
billion (US$ 7.2 billion) from Rs. 188.3 billion (US$ 4.3 billion) at year-end
fiscal 2003. Our project and corporate finance and working capital finance loans
decreased 13.4% to Rs. 400.2 billion (US$ 9.2 billion) at year-end fiscal 2004
compared to Rs. 462.3 billion (US$ 10.7 billion) at year-end fiscal 2003.
Investment in government of India securities increased by Rs. 20.2 billion
(US$ 464 million) to Rs. 291.0 billion (US$ 6.7 billion) at year-end fiscal 2004
from Rs. 270.8 billion (US$ 6.2 billion) at year-end fiscal 2003 primarily due
to compliance with the statutory liquidity ratio on ICICI Bank's liabilities.
The average volume of cash, cash equivalents and trading account assets
increased by 4.9% to Rs. 77.5 billion (US$ 1.8 billion) in fiscal 2004 from Rs.
73.9 billion (US$ 1.7 billion) in fiscal 2003. Cash, cash equivalents and
trading account assets increased by 55.4% to Rs. 174.1 billion (US$ 4.0 billion)
at year-end fiscal 2004 from Rs. 112.1 billion (US$ 2.6 billion) at year-end
fiscal 2003. Trading account assets increased by Rs. 35.5 billion (US$ 818
million) primarily due to deployment of surplus cash in reverse repurchase
transactions.
While both interest income and interest expense declined in line with the
declining interest rate trend in the market, interest expense declined more
sharply than interest income. Total interest income (excluding dividend)
decreased 7.2% to Rs. 90.7 billion (US$ 2.1 billion) for fiscal 2004 from Rs.
97.7 billion (US$ 2.3 billion) for fiscal 2003 primarily due to a decline of 187
basis points in the yield on interest-earning rupee assets, off-set, in part, by
an increase of 11.1% in the average interest- earning rupee assets to Rs. 936.6
billion (US$ 21.6 billion) in fiscal 2004 from Rs. 844.2 billion (US$ 19.5
billion) in fiscal 2003. The yield on interest-earning rupee assets decreased
187 basis points to 9.2% in fiscal 2004 from 11.1% in fiscal 2003 primarily due
to a general decline in interest rates in the economy. There was a decline of
194 basis points in the yield on loans from 12.4% in fiscal 2003 to 10.4% in
fiscal 2004.
Total interest expense decreased 13.0% to Rs. 72.4 billion (US$ 1.7
billion) in fiscal 2004 from Rs. 83.2 billion (US$ 1.9 billion) in fiscal 2003
primarily due to a decline of 1.8% in the cost of liabilities off-set, in part
by 8.0% increase in average interest bearing liabilities to Rs. 977.9 billion
(US$ 22.5 billion) in fiscal 2004 from Rs. 905.2 billion (US$ 20.9 billion) in
fiscal 2003. The average cost of rupee liabilities decreased 199 basis points to
7.8% in fiscal 2004 from 9.8% in fiscal 2003 primarily due to increase in lower
cost deposits and a general decline in interest rates in fiscal 2004. Average
deposits, with an average cost of 5.8% in fiscal 2004, constituted 53.8% of
total average interest-bearing liabilities compared to 40.0% of the total
average interest-bearing liabilities with an average cost of 7.3% in fiscal
2003. While the average cost of long-term rupee debt decreased to 11.0% from
11.7%, the average cost of short-term rupee borrowings decreased to 6.2% in
fiscal 2004 from 11.3% in fiscal 2003. The average cost of foreign currency
liabilities decreased 56 basis points
110
to 3.0% in fiscal 2004 from 3.6% in fiscal 2003. The foreign currency spread
increased 85 basis points to 2.7% in fiscal 2004 from 1.8% in fiscal 2003. The
yield on the company's interest-earning foreign currency assets increased 31
basis points to 5.7% in fiscal 2004 from 5.4% in fiscal 2003.
The spread increased by 14 basis points to 1.5% in fiscal 2004 from 1.4% in
fiscal 2003 as rupee spread increased by 12 basis points and foreign currency
spread increased by 85 basis points. While our spread has increased, it still
continues to be lower than that of other banks in India primarily due to
maintenance of statutory liquidity ratio and cash reserve ratio on ICICI's
liabilities, which were not subject to these ratios prior to the amalgamation.
While our cost of deposits is in line with the cost of deposits of other banks
in India, our total cost of funding is higher compared to other banks in India
as a result of the higher-cost borrowings of ICICI. As a result of the 1.8%
decline in the cost of funds, offset, in part by a 1.7% decline in the yield on
average interest-earning assets, net interest margin increased to 1.8% for
fiscal 2004 from 1.6% for fiscal 2003.
Non-Interest Income
The following table sets forth, for the periods indicated, the principal
components of non-interest income.
Year ended March 31,
--------------------------------------------------------------
2004/2003
2003 2004 2004 % change
--------------------------------------------------------------
(in millions, except percentages)
Fees, commission and brokerage................... Rs. 5,397 Rs. 8,988 US$ 207 66.5%
Trading account revenue (1)...................... 3,075 4,433 102 44.2
Securities transactions (2)...................... (322) 12,800 295 -
Foreign exchange transactions (3)................ 92 2,061 47 2,140.2
Gain on sale of loans............................ 3,120 4,687 108 50.2
Software development and services................ 1,062 903 21 (15.0)
Profit on sale of certain premises and equipment. 16 345 8 2,056.3
Other income..................................... 813 2,461 57 202.7
----------------------------------------------
Total non-interest income........................ Rs. 13,253 Rs. 36,678 US$ 845 176.8%
==============================================
----------
(1) Primarily reflects income from trading in government of India securities
and corporate debt securities.
(2) Primarily reflects capital gains/(losses) realized on the sale of
securities, including fixed income and equity, venture capital investments
and revenues from investment banking subsidiary less other than temporary
diminution.
(3) Arises primarily from purchase and sale of foreign exchange on behalf of
corporate clients and revaluation of foreign currency assets and
liabilities and outstanding forward contracts.
Non-interest income increased by 176.8% in fiscal 2004 to Rs. 36.7 billion
(US$ 845 million), from Rs. 13.3 billion (US$ 305 million) in fiscal 2003
primarily due to an increase in gains from securities transactions, an increase
in income from foreign exchange transactions and increase in income from fees,
commission and brokerage.
Fees, commission and brokerage increased 66.5% to Rs. 9.0 billion (US$ 207
million) in fiscal 2004 from Rs. 5.4 billion (US$ 124 million) in fiscal 2003
primarily due to growth in retail banking fee income arising from credit cards
and retail liability product income like account servicing charges, and an
increase in transaction banking fee income from corporate banking.
Trading account revenue primarily consisted of income from trading in
government of India securities and corporate debt securities. Trading account
revenue increased 44.2% to Rs. 4.4 billion (US$ 102 million) during fiscal 2004
compared to Rs. 3.1 billion (US$ 71 million) in fiscal 2003 due to an increase
in trading profits on government of India securities and corporate debt
securities as a result of the declining interest rate environment.
The gain on securities transactions increased by Rs. 13.1 billion (US$ 302
million) to Rs. 12.8 billion (US$ 295 million) during fiscal 2004 as compared to
a loss of Rs. 322 million (US$ 7 million)
111
in fiscal 2003 primarily due to an increase in net gains realized on securities
available for sale to Rs. 13.7 billion (US$ 317 million) from Rs. 1.8 billion
(US$ 42 million) in fiscal 2003 as we capitalized on a declining interest rate
environment and also realized capital gains on the sale of investments primarily
relating to ICICI's project finance portfolio. The 10-year government of India
securities rate declined by 105 basis points to 5.16% at year-end fiscal 2004
from 6.21% at year-end fiscal 2003. The benchmark S&P CNX Nifty index of the
National Stock Exchange of India almost doubled from 977.0 at April 1, 2003 to
1,771.9 at March 31, 2004.
This level of trading account revenue and gain on securities transactions
is a result of specific market conditions and may not be repeated in future
periods.
Income from foreign exchange transactions increased by Rs. 2.0 billion (US$
45 million) to Rs. 2.1 billion (US$ 47 million) in fiscal 2004 from Rs. 92
million (US$ 2 million) in fiscal 2003, primarily due to our enhanced focus on
this segment.
In fiscal 2004, gain on the sale of loans (including credit substitutes)
increased by 50.2% to Rs. 4.7 billion (US$ 108 million) from Rs. 3.1 billion
(US$ 72 million) in fiscal 2003. We view securitization and sell-down of
corporate and retail loans as a key element of our business strategy, seeking to
leverage our strong origination capabilities to meet the investment requirements
of other financial intermediaries that have access to funding but relatively
limited origination capabilities.
Income from software development and services decreased 15.0% to Rs. 903
million (US$ 21 million) in fiscal 2004 from Rs. 1.1 billion (US$ 24 million) in
fiscal 2003. Non-interest income also included a gain of Rs. 345 million (US$ 8
million) on the sale of premises and equipment in fiscal 2004 as compared to Rs.
16 million (US$ 368,664) in fiscal 2003. Other income has also increased on
account of increase in income from transaction processing services rendered by
the ICICI OneSource Limited to Rs. 1.8 billion (US$ 40 million) in fiscal 2004
from Rs. 696 million (US$ 16 million) in fiscal 2003.
Non-Interest Expense
The following table sets forth, for the periods indicated, the principal
components of non-interest expense.
Year ended March 31,
----------------------------------------------------------
2004/2003
2003 2004 2004 % change
----------------------------------------------------------
(in millions, except percentages)
Employee expense:
Salaries .................................... Rs. 4,686 Rs. 7,198 US$ 166 53.6%
Employee benefits ........................... 697 2,778 64 298.6
--------------------------------------------
Total employee expense ........................ 5,383 9,976 230 85.3
Premises and equipment expense ................. 4,784 6,029 139 26.0
Administration and other expense ............... 7,797 10,411 240 33.5
Amortization of goodwill and intangible assets 645 685 16 6.2
--------------------------------------------
Total non-interest expense .................... Rs. 18,609 Rs. 27,101 US$ 624 45.6%
============================================
Non-interest expense increased by 45.6% in fiscal 2004 to Rs. 27.1 billion
(US$ 624 million) from Rs. 18.6 billion (US$ 429 million) in fiscal 2003
primarily due to an increase in employee expenses and administration expense.
Employee expenses increased 85.3% to Rs. 10.0 billion (US$ 230 million) in
fiscal 2004 from Rs. 5.4 billion (US$ 124 million) in fiscal 2003, primarily due
to increase in the number of employees to 20,169 at year-end fiscal 2004 from
15,179 at year-end fiscal 2003. The increase in employees is commensurate with
the growth in our retail business. We had implemented an Early Retirement Option
Scheme for 1,495 employees in July 2003. An amount of Rs. 1.9 billion (US$ 44
million) has been expensed (included in employee benefits) on account of the
ex-gratia payments under the Early
112
Retirement Option Scheme, termination benefits and leave encashment in excess of
the provisions made (net of tax benefits).
Premises and equipment expense increased 26.0% to Rs. 6.0 billion (US$ 139
million) in fiscal 2004 from Rs. 4.8 billion (US$ 110 million) in fiscal 2003,
primarily due to increased maintenance and depreciation expenses on premises,
branches, ATM's, computers and computer software. The number of ATM's increased
from 1,675 at year-end fiscal 2003 to 1,790 at year-end fiscal 2004 and the
number of branches and extension counters increased from 446 at year-end fiscal
2003 to 469 at year-end fiscal 2004.
Administrative and other expenses increased 33.5% to Rs. 10.4 billion (US$
240 million) in fiscal 2004 from Rs. 7.8 billion (US$ 180 million) in fiscal
2003, primarily due to an increase in the retail business expenses and increase
in general business volumes.
Provisions for Loan Losses
The following table set forth, at the dates indicated, certain information
regarding restructured and other impaired loans.
At March 31,
--------------------------------------------------------------
2004/2003
2003 2004 2004 % change
--------------------------------------------------------------
(in millions, except percentages)
Gross restructured loans.......................... Rs. 147,391 Rs. 162,398 US$ 3,742 10.2%
Allowance for loan losses on restructured loans... (24,732) (40,981) (944) 65.7
--------------------------------------------
Net restructured loans............................ 122,659 121,417 2,798 (1.0)
--------------------------------------------
Gross other impaired loans........................ 83,156 50,238 1,158 (39.6)
Allowance for loan losses on other impaired loans. (27,837) (21,474) (495) (22.9)
--------------------------------------------
Net other impaired loans.......................... 55,319 28,764 663 (48.0)
--------------------------------------------
Gross restructured and other impaired loans....... 230,547 212,636 4,899 (7.8)
Allowance for loan losses(1)...................... (52,569) (62,455) (1,439) (18.8)
--------------------------------------------
Net restructured and other impaired loans......... 177,978 150,181 3,460 (15.6)
--------------------------------------------
Gross total loans................................. 684,640 795,287 18,325 16.16
Net total loans................................... 630,421 728,520 16,786 15.6
Gross restructured loans as a percentage of gross
loans........................................... 21.53% 20.42%
Gross other impaired loans as a percentage of
gross loans..................................... 12.15 6.32
Net restructured loans as a percentage of net loans 19.45 16.67
Net other impaired loans as a percentage of net
loans........................................... 8.77 3.95
Allowance for loans losses on restructured loans
as a percentage of gross restructured loans..... 16.78 25.23
Allowance for loan losses on other impaired loans
as a percentage of gross other impaired loans... 33.48 42.74
Allowance on loan losses as a percentage of gross
loans........................................... 7.92 8.40
----------
(1) Does not include provisions on loans not specifically identified as
restructured or other impaired loans.
The following table sets forth, for the periods indicated, certain
information regarding provisions for loan losses.
Year ended March 31,
------------------------------------------------------------
2004/2003
2003 2004 2004 % change
------------------------------------------------------------
(in millions, except percentages)
Total provisions for the year.................. Rs. 19,649 Rs. 20,055 US$ 462 2.1%
Provision for loans losses as a percentage of
net loans...................................... 3.12% 2.75%
113
Gross restructured loans increased 10.2% during fiscal 2004 to Rs. 162.4
billion (US$ 3.7 billion) at year-end fiscal 2004, from Rs. 147.4 billion (US$
3.4 billion) at year-end fiscal 2003 primarily due to restructuring of loans to
companies in the crude petroleum and refining and telecom industries and
reclassification of other impaired loans that were restructured or transferred
to an asset reconstruction company during the year, offset, in part, by
reclassification of certain loans as unimpaired based on satisfactory
performance of the borrower accounts as per the contractual terms of repayment
of the loan. Gross other impaired loans decreased 39.6% during fiscal 2004 to
Rs. 50.2 billion (US$ 1.2 billion) at year-end fiscal 2004, from Rs. 83.2
billion (US$ 1.9 billion) at year-end fiscal 2003 primarily due to
reclassification of other impaired loans that were restructured or transferred
to an asset reconstruction company during the year as restructured loans and
reclassification of certain loans as unimpaired based on satisfactory
performance of the borrower accounts as per the contractual terms of repayment
of the loan. As a percentage of net loans, net restructured loans were 16.7% at
year-end fiscal 2004 compared to 19.5% at year-end fiscal 2003 and net other
impaired loans were 3.9% at year-end fiscal 2004 compared to 8.8% at year-end
fiscal 2003. During fiscal 2004, we transferred impaired loans of Rs. 23.0
billion (US$ 530 million) to Asset Reconstruction Company (India) Limited (See
"Overview of the Indian Financial Sector - Legislative Framework for Recovery of
Debts due to banks" and "Supervision and Regulation - Regulations Relating to
Sale of Assets to Asset Reconstruction Companies"), of which Rs. 2.0 billion
(US$ 46 million) was recognized as a sale in our US GAAP financial statements
and Rs. 21.0 billion (US$ 484 million) is included in our restructured loans.
Provisions for loan losses for fiscal 2004 increased 2.1% to Rs. 20.1
billion (US$ 462 million) from Rs. 19.6 billion (US$ 453 million) in fiscal
2003. The coverage ratio on gross restructured loans increased to 25.2% at
year-end fiscal 2004 from 16.8% at year-end fiscal 2003. The coverage ratio on
other impaired loans increased to 42.7% at year-end fiscal 2004 from 33.5% at
year-end fiscal 2003.
We identify a loan as impaired when it is probable that we will be unable
to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Until year-end fiscal 2003, a loan was
considered to be impaired if interest or principal was overdue for more than 180
days. From fiscal 2004, an asset is classified as impaired when principal or
interest has remained overdue for more than 90 days except in case of certain
categories of agricultural loans where an extended period of 180 days, linked to
agricultural production cycle is used. In addition, delays or shortfalls in loan
repayments are evaluated along with other factors to determine if a loan should
be placed on non-accrual status. Generally, loans with delinquencies below 90
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, on placement of
the loan 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 of cash received and future collection of principal is
not in doubt. When borrowers demonstrate over an extended period the ability to
repay a loan in accordance with the contractual terms of a loan, which we had
classified as non-accrual, the loan is returned to accrual status.
We classify a loan as a troubled debt restructuring where we have made
concessionary modifications, that we would not otherwise consider, to the
contractual terms of the loan to a borrower experiencing financial difficulties.
Such loans are placed on a non-accrual status. For these loans, cash receipts
are normally 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.
114
Consumer loans are generally identified as impaired when principal or
interest has remained overdue for more than 90 days. Consumer loans when
identified as impaired are placed on non-accrual status.
The value of impaired loans is measured as the present value of expected
future cash flows discounted at the loan's effective interest rate, at the
loan's observable market price, or the fair value of the collateral if the
recovery of the loan is solely collateral dependent. If the value of the
impaired loan is less than the recorded investment in the loan, we recognize
this impairment by creating a valuation allowance with a corresponding charge to
the provision for loan losses.
We conduct a comprehensive analysis of our loan portfolio on a periodic
basis. The analysis considers both qualitative and quantitative criteria
including, among others, the account conduct, future prospects, repayment
history and financial performance amongst others. For restructured and other
impaired loans in excess of Rs. 100 million (US$ 2 million), which were 81.5% of
the gross impaired loan portfolio at year-end fiscal 2004, we follow a detailed
process for each loan to determine the allowance for loan losses to be provided.
For the balance of smaller loans in the restructured and other impaired loan
portfolio, we follow the classification detailed under "Business--Impaired
Loans--Allowance for Loan Losses" for determining the allowance for loan losses.
Our impaired loan portfolio is composed largely of project finance and other
term loans where we have a security interest and first lien on all the fixed
assets and a second lien on all the current assets of the borrower. ICICI
typically lent between 60.0% and 80.0% of the appraised value of collateral.
Hence, all of ICICI's loans have historically been sufficiently
over-collateralized so that once collateral was realized, ICICI typically
recovered the full principal along with a small portion of interest claims.
However, recoveries may be subject to delays of up to several years, due to the
long legal collection process in India. As a result, we make an allowance for
loans based on the time value of money or the present value of expected
realizations of collateral, which takes into account the delay we would
experience before recovering its principal. The time to recovery, expected
future cash flows and realizable value for collateral are periodically reviewed
in estimating the allowance.
We believe that the process for ascertaining allowance for loan losses
described above adequately captures the expected losses on our entire loan
portfolio.
Income Tax Expense
Income tax expense amounted to Rs. 1.6 billion (US$ 38 million) in fiscal
2004 compared to income tax benefit of Rs. 3.1 billion (US$ 71 million) in
fiscal 2003. The effective rate of tax expense was 23.9% in fiscal 2004 compared
to effective rate of tax benefit of 27.7% in fiscal 2003. The effective tax rate
of 23.9% in fiscal 2004 was lower compared to statutory tax rate of 35.9%
primarily due to exempt interest and dividend income and the charging of certain
income at rates other than statutory tax rate. See Note 29 of our consolidated
financial statements for a further discussion on income tax.
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal
components of assets.
At March 31,
-----------------------------------------------------------------
2004/2003
2003 2004 2004 % change
-----------------------------------------------------------------
(in millions, except percentages)
Cash and cash equivalents...................... Rs. 72,453 Rs. 98,985 US$ 2,281 36.6%
Trading account assets(1) ..................... 39,634 75,155 1,732 89.6
Securities, excluding venture capital
investments(2) .............................. 276,917 305,226 7,033 10.2
Venture capital investments ................... 3,704 5,142 118 38.8
Investments in affiliates ..................... 2,615 3,619 83 38.4
115
At March 31,
-----------------------------------------------------------------
2004/2003
2003 2004 2004 % change
-----------------------------------------------------------------
(in millions, except percentages)
Loans, net:
Rupee ...................................... 594,955 705,685 16,259 18.6
Foreign currency ........................... 89,685 89,602 2,065 (0.1)
Less: Allowances ........................... (54,219) (66,767) (1,538) 23.1
-------------------------------------------------
Total loans, net .............................. 630,421 728,520 16,786 15.6
Acceptances ................................... 43,252 65,142 1,501 50.6
Property and equipment ........................ 21,215 23,183 534 9.3
Other assets .................................. 90,052 104,159 2,400 15.7
-------------------------------------------------
Total assets .................................. Rs. 1,180,263 Rs. 1,409,131 US$ 32,468 19.4%
=================================================
----------
(1) Primarily includes government of India securities and corporate debt
securities.
(2) Primarily includes government of India securities and to a much smaller
extent, corporate debt securities and equity securities.
Our total assets increased 19.4% to Rs. 1,409.1 billion (US$ 32.5 billion)
at year-end fiscal 2004 compared to Rs. 1,180.3 billion (US$ 27.2 billion) at
year-end fiscal 2003, primarily due to an increase in loans, trading account
assets and investments.
Our net loans increased 15.6% to Rs. 728.5 billion (US$ 16.8 billion) at
year-end fiscal 2004 compared to Rs. 630.4 billion (US$ 14.5 billion) at
year-end fiscal 2003, reflecting a 18.6% increase in gross rupee loans, a 0.1%
decrease in gross foreign currency loans and a 23.1% increase in allowance for
loan losses. Gross consumer loans and credit card receivables increased 65.7% to
Rs. 311.9 billion (US$ 7.2 billion) at year-end fiscal 2004 from Rs. 188.3
billion (US$ 4.3 billion) at year-end fiscal 2003 in accordance with our
strategy to grow our retail asset portfolio.
Securities, excluding venture capital investment increased 10.2% to Rs.
305.2 billion (US$ 7.0 billion) at year-end fiscal 2004 from Rs. 276.9 billion
(US$ 6.4 billion) at year-end fiscal 2003 primarily due to investments in
government securities for meeting the statutory liquidity ratio requirement.
Cash, cash equivalents and trading account assets increased 55.4% to Rs.
174.1 billion (US$ 4.0 billion) at year-end fiscal 2004 from Rs. 112.1 billion
(US$ 2.6 billion) at year-end fiscal 2003 primarily due to an increase in
reverse repurchase transactions by Rs. 29.6 billion (US$ 681 million) from Rs.
5.4 billion (US$ 124 million) at year-end fiscal 2003 to Rs. 35.0 billion (US$
806 million) at year-end fiscal 2004. Under the reverse repurchase transactions,
securities were purchased under agreements to resell after a specified time.
Such securities qualified as approved securities for statutory liquidity ratio
requirements, and were of short maturity, carrying lower risk while yielding
higher returns as compared to other short-term money market instruments. These
transactions were typically used for liquidity management.
Investment in affiliates increased to Rs. 3.6 billion (US$ 83 million) at
year-end fiscal 2004 from Rs. 2.6 billion (US$ 60 million) at year-end fiscal
2003 due to additional investment in ICICI Prudential Life Insurance Company
Limited. Acceptances increased 50.6% to Rs. 65.1 billion (US$ 1.5 billion) at
year-end fiscal 2004 from Rs. 43.3 billion (US$ 997 million) at year-end fiscal
2003 reflecting our focus on increasing revenues from non-fund based businesses.
Property and equipment increased to Rs. 23.2 billion (US$ 534 million) at
year-end fiscal 2004 from Rs. 21.2 billion (US$ 489 million) at year-end fiscal
2003.
Other assets increased 15.7% to Rs. 104.2 billion (US$ 2.4 billion) at
year-end fiscal 2004 from Rs. 90.1 billion (US$ 2.1 billion) at year-end fiscal
2003. At year-end fiscal 2004, other assets included advance tax of Rs. 33.5
billion (US$ 772 million), deferred tax asset of Rs. 7.9 billion (US$ 183
million), intangible assets of Rs. 4.5 billion (US$ 104 million) and Rs. 4.8
billion (US$ 111 million) of assets held for sale, which were primarily acquired
through foreclosure of loans.
Liabilities and Stockholders' Equity
116
The following table sets forth, at the dates indicated, the principal
components of liabilities and stockholders' equity.
At March 31,
-----------------------------------------------------------------
2004/2003 %
2003 2004 2004 change
-----------------------------------------------------------------
(in millions, except percentages)
Deposits .................................... Rs. 491,290 Rs. 684,955 US$ 15,782 39.4%
Trading account liabilities.................. 26,086 26,079 601 (0.0)
Short-term borrowings ....................... 42,095 57,364 1,322 36.3
Acceptances ................................. 43,252 65,142 1,501 50.6
Long-term debt:
Rupee ....................................... 350,633 311,668 7,181 (11.1)
Foreign currency ............................ 50,179 61,781 1,424 23.1
-----------------------------------------------
Total long-term debt ........................ 400,812 373,449 8,605 (6.8)
Other liabilities ........................... 66,658 85,443 1,969 28.2
Taxes and dividends payable ................. 16,880 20,180 465 19.5
Redeemable preferred stock(1)................ 853 944 22 10.7
-----------------------------------------------
Total liabilities ........................... 1,087,926 1,313,556 30,266 20.7
Minority interest ........................... 124 1,050 24 746.8
Stockholders' equity ........................ 92,213 94,525 2,178 2.5
-----------------------------------------------
Total liabilities and stockholders' equity... Rs. 1,180,263 Rs. 1,409,131 US$ 32,468 19.4%
===============================================
----------
(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.
Deposits increased by 39.4% to Rs. 685.0 billion (US$ 15.8 billion) at
year-end fiscal 2004 from Rs. 491.3 billion (US$ 11.3 million) at year-end
fiscal 2003. This significant growth in deposits was primarily achieved through
increased focus on retail and corporate customers by offering a wide range of
products designed to meet varied individual and corporate needs and leveraging
on our network of branches, extension counters and ATMs. Our long-term debt
decreased 6.8% to Rs. 373.5 billion (US$ 8.6 billion) at year-end fiscal 2004
from Rs. 400.8 billion (US$ 9.2 billion) at year-end fiscal 2003 on account of
11.1% decrease in long-term rupee debt and 23.1% increase in long-term foreign
currency debt. Our short-term borrowings increased 36.3% to Rs. 57.4 billion
(US$ 1.3 billion) at year-end fiscal 2004 compared to Rs. 42.1 billion (US$ 970
million) at year-end fiscal 2003. Trading account liabilities decreased
marginally by Rs. 7 million (US$ 161,290) at year-end fiscal 2004 compared to
year-end fiscal 2003. Taxes and dividends payable increased 19.5% to Rs. 20.2
billion (US$ 465 million) at year-end fiscal 2004 from Rs. 16.9 billion (US$ 389
million) at year-end fiscal 2003. The carrying amount of redeemable preferred
stock increased to Rs. 944 million (US$ 22 million) at year-end fiscal 2004 from
Rs 853 million (US$ 19.7 million) at year-end fiscal 2003. Minority interest
increased to Rs. 1.1 billion (US$ 24 million) at year-end fiscal 2004 from Rs.
124 million (US$ 3 million) at year-end fiscal 2003. Stockholders' equity
increased 2.5% at year-end fiscal 2004 to Rs. 94.5 billion (US$ 2.2 billion)
from Rs. 92.2 billion (US$ 2.1 billion) at year-end fiscal 2003.
Fiscal 2003 to Fiscal 2002
Summary
Loss (before cumulative effect of accounting changes, net of tax) amounted
to Rs. 8.0 billion (US$ 184 million) in fiscal 2003 compared to income (before
cumulative effect of accounting changes, net of tax) of Rs. 282 million (US$ 7
million) in fiscal 2002 primarily due to 101.6% increase in provisions for loan
losses to Rs. 19.6 billion (US$ 452 million) in fiscal 2003 from Rs. 9.7 billion
(US$ 224 million) in fiscal 2002. Increases in net interest income and
non-interest income were offset by the increase in non-interest expenses. After
considering the cumulative effect of accounting changes, net loss amounted to
Rs. 8.0 billion (US$ 184 million) in fiscal 2003 compared to
117
net income of Rs. 1.5 billion (US$ 36 million) in fiscal 2002. We made a loss on
average assets of 0.7% for fiscal 2003 compared to net income on average assets
of 0.2% for fiscal 2002 and loss on average stockholders' equity of 8.5% for
fiscal 2003 compared to net income on average stockholders' equity of 2.1% for
fiscal 2002.
o Net interest income (excluding dividends) before provisions for loan
losses increased 59.8% to Rs. 14.5 billion (US$ 334 million) in fiscal
2003 from Rs. 9.1 billion (US$ 209 million) in fiscal 2002, reflecting
an increase of 44.2% in the average volume of interest-earning assets
and increase of 45 basis points in the spread.
o Non-interest income increased by 62.7% in fiscal 2003 to Rs. 13.3
billion (US$ 305 million), from Rs. 8.1 billion (US$ 188 million) in
fiscal 2002, primarily due to a decrease in loss from securities
transactions by Rs. 3.3 billion (US$ 75 million), increase in gains on
sale of loans by Rs. 1.1 billion (US$ 26 million) and increase in
income from fees, commission and brokerage by Rs. 694 million (US$ 16
million).
o Non-interest expense increased 145.0% in fiscal 2003 to Rs. 18.6
billion (US$ 429 million) from Rs. 7.6 billion (US$ 175 million) in
fiscal 2002 primarily due to amalgamation and an increase in employee
expenses and other administrative costs.
o Provisions for loan losses increased to Rs. 19.6 billion (US$ 453
million) during fiscal 2003 from Rs. 9.7 billion (US$ 224 million) in
fiscal 2002
o Gross restructured loans increased 55.0% to Rs. 147.4 billion (US$ 3.4
billion) at year-end fiscal 2003 from Rs. 95.1 billion (US$ 2.2
billion) at year-end fiscal 2002. Gross other impaired loans increased
63.8% to Rs.83.2 billion (US$ 1.9 billion) at year-end fiscal 2003
from Rs. 50.7 billion (US$ 1.2 billion) at year-end fiscal 2002
o Total assets increased by 58.8% to Rs. 1,180.3 billion (US$ 27.2
billion) at year-end fiscal 2003 from Rs. 743.4 billion (US$ 17.1
billion) at year-end fiscal 2002 primarily due to an increase in
securities and loans as the result of amalgamation.
Net Interest Income
The following table sets forth, for the periods indicated, the principal
components of net interest income, excluding income from dividends.
Year ended March 31,
------------------------------------------------------------
2003/2002
2002 2003 2003 % change
------------------------------------------------------------
(in million, except percentages)
Interest income ........................... Rs. 78,600 Rs. 97,714 US$ 2,251 24.3%
Interest expense .......................... (69,520) (83,208) (1,917) 19.7
------------------------------------------------------------
Net interest income, excluding income from
dividends ............................... Rs. 9,080 Rs. 14,506 US$ 334 59.7%
============================================================
Net interest income increased 59.7% in fiscal 2003 compared to fiscal 2002
reflecting mainly the following:
o an increase of Rs. 282.7 billion (US$ 6.5 billion) or 50.3% in the
average volume of interest-earning rupee assets;
o an increase of Rs. 688 million (US$ 16 million) or 0.9% in the average
volume of interest-earning foreign currency assets;
o an increase in rupee spread to 1.2% in fiscal 2003 from 0.7% in fiscal
2002; and
o an increase in foreign currency spread to 1.8% in fiscal 2003 from
0.8% in fiscal 2002.
118
The average volume of interest-earning rupee assets increased by Rs. 282.7
billion (US$ 6.5 billion) during fiscal 2003 primarily due to the increase in
investment in government securities by Rs. 228.1 billion (US$ 5.3 billion) as we
were required to maintain statutory liquidity ratio on ICICI's liabilities,
which were not subject to this requirement prior to the amalgamation.
ICICI Bank's average volume of loans was Rs. 85.4 billion (US$ 1.9 billion)
in fiscal 2002. Subsequent to the amalgamation, our average volume of loans
increased in fiscal 2003 to Rs. 606.5 billion (US$ 14.0 billion). The average
volume of rupee loans increased by Rs. 20.7 billion (US$ 477 million) or 4.0% to
Rs. 541.9 billion (US$ 12.5 billion) in fiscal 2003 from Rs. 521.2 billion (US$
12.0 billion) in fiscal 2002. This increase in average loans was primarily due
to the addition of ICICI Bank's loans, subsequent to amalgamation, and increased
disbursements of retail finance loans, offset by securitization of loans and
repayments of existing loans. The average volume of foreign currency loans
decreased 8.0% to Rs. 64.6 billion (US$ 1.5 billion) in fiscal 2003 from Rs.
70.2 billion (US$ 1.6 billion) in fiscal 2002.
ICICI Bank's gross loans outstanding were Rs. 75.7 billion (US$ 1.7
billion) at year-end fiscal 2002. Subsequent to the amalgamation, our gross
loans increased 22.2% in fiscal 2003 to Rs. 684.6 billion (US$ 15.8 billion)
from ICICI's gross loans of Rs. 560.2 billion (US$ 12.9 billion) at year-end
fiscal 2002. Gross rupee loans at year-end fiscal 2003 increased 21.3% to Rs.
592.2 billion (US$ 13.6 billion) compared to Rs. 488.0 billion (US$ 11.2
billion) at year-end fiscal 2002 and gross foreign currency loans increased by
28.0% to Rs. 92.4 billion (US$ 2.1 billion) compared to Rs. 72.7 billion (US$
1.7 billion) at year-end fiscal 2002. Gross consumer loans and credit card
receivables at year-end fiscal 2003 increased 158.6% to Rs. 188.3 billion (US$
4.3 billion) from Rs. 72.8 billion (US$ 1.7 billion) at year-end fiscal 2002.
Our project finance and working capital finance loans decreased 0.8% to Rs.
462.3 billion (US$ 10.7 billion) at year-end fiscal 2003 compared to Rs. 458.6
billion (US$ 10.6 billion) at year-end fiscal 2002.
ICICI Bank's average volume of cash, cash equivalents and trading account
assets was Rs. 48.9 billion (US$ 1.1 billion) in fiscal 2002. The average volume
of cash, cash equivalents and trading account assets increased by 94.4% in
fiscal 2003 to Rs. 73.9 billion (US$ 1.7 billion) from Rs. 38.0 billion (US$ 876
million) in fiscal 2002 primarily due to the impact of amalgamation and
requirement of cash reserve ratio on ICICI's liabilities effective April 2002.
At year-end fiscal 2002, cash, cash equivalents and trading account assets of
ICICI were Rs. 83.9 billion (US$ 1.9 billion) and of ICICI Bank were Rs. 115.4
billion (US$ 2.7 billion). ICICI and ICICI Bank were maintaining a large amount
of cash and liquid balances at year-end fiscal 2002 to meet the statutory
reserve requirements on ICICI's liabilities. Cash, cash equivalents and trading
account assets increased by 33.7% to Rs. 112.1 billion (US$ 2.6 billion) at
year-end fiscal 2003 from Rs. 83.9 billion (US$ 1.9 billion) at year-end fiscal
2002, reflecting the addition of ICICI Bank's cash, cash equivalents and trading
assets offset, in part, by utilization of the cash and liquid balances existing
at the beginning of fiscal 2003 for investment in government securities to meet
statutory liquidity ratio requirement.
The yield on interest-earning rupee assets decreased 192 basis points to
11.1% in fiscal 2003 from 13.0% in fiscal 2002 primarily due to the significant
increase in proportion of securities acquired to meet the statutory liquidity
ratio requirement on ICICI's liabilities. Securities, which earned a yield of
6.8% in fiscal 2003 increased to 26.4% as a proportion of average
interest-earning assets from 1.8% in fiscal 2002. The yield on loans declined
due to non-accrual of income on loans recognized as impaired during the year and
reduction in rates of interest on restructured loans, as well as a general
decline in interest rates in the economy. The non-accrual of income on impaired
loans was partly offset by interest income of Rs. 2.4 billion (US$ 55 million)
which was recognized on impaired loans on a cash basis in fiscal 2003 compared
to Rs. 3.3 billion (US$ 76 million) in fiscal 2002. ICICI Bank's average volume
of deposits was Rs. 194.8 billion (US$ 4.5 billion) in fiscal 2002 with an
average cost of 7.0%, and ICICI Bank's deposits at year-end fiscal 2002 were Rs.
325.2 billion (US$ 7.5 billion). These existing deposits along with new deposits
raised during the year, being at a cost lower than ICICI's borrowings, reduced
our cost of liabilities. The average cost of rupee liabilities decreased 244
basis points to 9.8% in fiscal 2003 from 12.3% in fiscal 2002 primarily due to
acquisition of low interest-bearing deposits of ICICI Bank subsequent to
amalgamation, increase in
119
deposits and repayment of higher cost rupee liabilities of ICICI in fiscal 2003
and a general decline in interest rates in fiscal 2003. Average deposits, with a
cost of 7.3% in fiscal 2003, constituted 39.6% of total average interest-bearing
liabilities compared to 1.1% of the total average interest-bearing liabilities
with an average cost of 11.2% in fiscal 2002. While the average cost of
long-term rupee debt decreased to 11.7% from 12.8%, the average cost of
short-term rupee borrowings increased to 9.9% in fiscal 2003 from 8.8% in fiscal
2002. As the decline in average cost was higher that the decline in yield, it
resulted in an increase in rupee spread by 52 basis points to 1.2% in fiscal
2003 from 0.7% in fiscal 2002.
Our foreign currency loans are primarily floating rate US dollar
LIBOR-linked loans. The yield on the company's interest-earning foreign currency
assets decreased 175 basis points to 5.4% in fiscal 2003 from 7.2% in fiscal
2002, principally due to a decrease in LIBOR during fiscal 2003. The average
cost of foreign currency liabilities decreased 275 basis points to 3.6% in
fiscal 2003 from 6.3% in fiscal 2002. The foreign currency spread increased 100
basis points to 1.8% in fiscal 2003 from 0.8% in fiscal 2002.
The spread increased by 45 basis points to 1.4% in fiscal 2003 from 0.9% in
fiscal 2002 as rupee spread increased by 52 basis points and foreign currency
spread increased by 100 basis points. As a result of the 2.1% decline in the
cost of funds, offset, in part by a 1.7% decline in the yield on average-earning
assets, net interest margin increased to 1.57% for fiscal 2003 from 1.42% for
fiscal 2002.
Non-Interest Income
The following table sets forth, for the periods indicated, the principal
components of non-interest income.
Year ended March 31,
----------------------------------------------------------------
2003/2002
2002 2003 2003 % change
----------------------------------------------------------------
(in million, except percentages)
Fees, commission and brokerage............... Rs. 4,703 Rs. 5,397 US$ 124 14.8%
Trading account revenue (1).................. 2,442 3,075 71 25.9
Securities transactions (2).................. (3,572) (322) (7) (91.0)
17.9
Foreign exchange transactions (3)............ 78 92 2
Gain on sale of loans........................ 1,979 3,120 72 57.7
Software development and services............ 1,493 1,062 24 (28.9)
Gain on sale of stock in other subsidiaries and (100.0)
affiliates................................ 165 - -
Profit on sale of certain premises and equipment 29 16 0.4 (44.8)
Other income................................. 831 813 19 (2.2)
------------------------------------------------
Total non-interest income.................... Rs. 8,148 Rs. 13,253 US$ 305 62.7%
================================================
---------
(1) Primarily reflects income from trading in government of India securities
and corporate debt securities.
(2) Primarily reflects capital gains/(losses) realized on the sale of
securities, including fixed income and equity, venture capital investments
and revenues from investment banking subsidiary less other than temporary
diminution.
(3) Arises primarily from purchase and sale of foreign exchange on behalf of
corporate clients and revaluation of foreign currency assets and
liabilities and outstanding forward contracts.
Non-interest income increased by 62.7% in fiscal 2003 to Rs. 13.3 billion
(US$ 305 million) from Rs. 8.1 billion (US$ 188 million) in fiscal 2002
primarily due to a decrease in loss from securities transactions, increase in
fee income, commission and brokerage and gains on sale of loans and credit
substitutes.
Fees, commission and brokerage increased 14.8% to Rs. 5.4 billion (US$ 124
million) in fiscal 2003 from Rs. 4.7 billion (US$ 108 million) in fiscal 2002
primarily due to the amalgamation and increase in retail fees and corporate
transaction banking fees which offset the decrease in fees from
120
project appraisal and related activities. ICICI Bank's fees, commission and
brokerage was Rs. 1.7 billion (US$ 39 million) in fiscal 2002.
Trading account revenue primarily consisted of income from trading in
government of India securities and corporate debt securities. Trading account
revenue increased 25.9% to Rs. 3.1 billion (US$ 71 million) during fiscal 2003
compared to fiscal 2002 as we capitalized on the market opportunities in a
declining interest rate environment.
The loss from securities transactions reduced to Rs. 322 million (US$ 7
million) during fiscal 2003 as compared to Rs. 3.6 billion (US$ 82 million)
primarily due to increase in net gains realized on securities available for sale
to Rs. 1.8 billion (US$ 42 million) in fiscal 2003 from Rs. 1.2 billion (US$ 28
million) in fiscal 2002, as we capitalized on a declining interest rate
environment and a decrease in the amount of other than temporary diminution in
securities. In fiscal 2003, as part of our ongoing evaluation of the securities
portfolio, we recorded an impairment charge of Rs. 2.1 billion (US$ 48 million)
compared to Rs. 3.5 billion (US$ 81 million) in fiscal 2002 for an other than
temporary decline in the value of securities available for sale and non-readily
marketable equity securities.
Income from foreign exchange transactions arose primarily from purchase and
sale of foreign exchange on behalf of corporate clients, revaluation of foreign
currency assets and liabilities and outstanding forward contracts. Income from
foreign exchange transactions was Rs. 92 million (US$ 2 million) in fiscal 2003
compared to Rs. 78 million (US$ 2 million) in fiscal 2002.
During fiscal 2002, ICICI securitized and sold down a part of its corporate
loan portfolio, primarily with the objective of complying with regulatory
reserve requirements on its liabilities following amalgamation with ICICI Bank.
This helped in the development of a market for securitized debt in India. We
earned a profit of Rs. 3.1 billion (US$ 72 million) on securitization/sale of
loans and credit substitutes in fiscal 2003 compared to Rs. 2.0 billion (US$ 46
million) in fiscal 2002.
Income from software development and services decreased 28.9% to Rs. 1.1
billion (US$ 25 million) in fiscal 2003 from Rs. 1.5 billion (US$ 34 million) in
fiscal 2002 primarily due to decline in software revenues from ICICI Infotech
and ICICI Infotech Inc., US, on account of a decline in billing rates in both
the offshore and onsite businesses combined with a decline in business volumes
from the US market.
Non-interest income also included a gain of Rs. 16 million (US$ 368,664) on
the sale of certain premises and equipment in fiscal 2003 compared to Rs. 29
million (US$ 668,203) in fiscal 2002. Other income primarily included rental
income for fiscal 2003 & fiscal 2002.
Non-Interest Expense
The following table sets forth, for the periods indicated, the principal
components of non-interest expense.
Year ended March 31,
-----------------------------------------------------------
2003/2002
2002 2003 2003 % change
-----------------------------------------------------------
(in millions, except percentages)
Employee expense:
Salaries ................................. Rs. 2,526 Rs. 4,686 US$ 108 85.5%
Employee benefits ........................ 454 697 16 53.5
-----------------------------------------------------------
Total employee expense ..................... 2,980 5,383 124 80.6
Premises and equipment expense .............. 2,102 4,784 110 127.6
Administration and other expense ............ 2,514 7,797 180 210.1
Amortization of goodwill and intangible assets - 645 15 -
-----------------------------------------------------------
Total non-interest expense ................. Rs. 7,596 Rs. 18,609 US$ 429 145.0%
===========================================================
121
Non-interest expense increased 145.0% in fiscal 2003 to Rs. 18.6 billion
(US$ 429 million) from Rs. 7.6 billion (US$ 175 million) in fiscal 2002
primarily due to an increase in employee expenses and administration expense as
a result of the amalgamation, and growth in retail products and services.
Employee expenses increased 80.6% to Rs. 5.4 billion (US$ 124 million) in
fiscal 2003 from Rs. 3.0 billion (US$ 69 million) in fiscal 2002 primarily due
to addition of 4,820 employees of ICICI Bank who joined subsequent to
amalgamation, new employees hired during the year and an increase in salary
levels. ICICI Bank's employee expenses were Rs. 1.5 billion (US$ 35 million) in
fiscal 2002. At year-end fiscal 2003, our employees had increased by 199.8% to
15,179 employees compared to ICICI's 5,063 employees at year-end fiscal 2002,
primarily due to the addition of employees of ICICI Bank and an increase in
employees of ICICI OneSource and ICICI Home Finance, which have grown their
business and distribution capabilities.
Premises and equipment expense increased 127.6% to Rs. 4.8 billion (US$ 110
million) in fiscal 2003 from Rs. 2.1 billion (US$ 48 million) in fiscal 2002,
primarily due to the impact of amalgamation, increased technology expenses,
maintenance and depreciation expenses for ICICI centers, computers and computer
software. ICICI Bank's premises and equipment expense was Rs. 2.2 billion (US$
51 million) in fiscal 2002. The number of ATM's increased from 1,000 at year-end
fiscal 2002 to 1,675 at year-end fiscal 2003 and the number of branches and
extension counters increased from 403 at year-end fiscal 2002 to 446 at year-end
fiscal 2003.
Administrative and other expenses increased 210.1% to Rs. 7.8 billion (US$
180 million) in fiscal 2003 from Rs. 2.5 billion (US$ 58 million) in fiscal
2002, primarily due to the impact of amalgamation, an increase in the retail
business expenses and increase in general business volumes. ICICI Bank's
administrative and other expenses were Rs. 2.2 billion (US$ 51 million) in
fiscal 2002.
Provisions for Loan Losses
The following table set forth, at the dates indicated, certain information
regarding restructured and other impaired loans.
At March 31,
--------------------------------------------------------
2003/2002
2002 2003 % change
--------------------------------------------------------
(in millions, except percentages)
Gross restructured loans............................... Rs. 95,088 Rs. 147,391 US$ 3,396 55.0%
Allowance for loan losses on restructured loans........ (17,722) (24,732) (570) 39.6
------------------------------------------
Net restructured loans................................. 77,366 122,659 2,826 58.5
------------------------------------------
Gross other impaired loans............................. 50,754 83,156 1,916 63.8
Allowance for loan losses on other impaired loans...... (17,567) (27,837) (641) 58.5
------------------------------------------
Net other impaired loans............................... 33,187 55,319 1,275 66.7
------------------------------------------
Gross restructured and other impaired loans............ 145,842 230,547 5,312 58.1
Allowance for loan losses(1)........................... (35,289) (52,569) (1,212) 49.0
------------------------------------------
Net restructured and other impaired loans.............. 110,553 177,978 4,100 61.0
------------------------------------------
Gross total loans...................................... 560,248 684,640 15,775 22.2
Net total loans........................................ 523,601 630,421 14,526 20.4
Gross restructured loans as a percentage of gross
loans................................................ 16.97% 21.53%
Gross other impaired loans as a percentage of gross
loans................................................ 9.06 12.15
Net restructured loans as a percentage of net loans.... 14.78 19.46
Net other impaired loans as a percentage of net loans.. 6.34 8.77
Allowance for loans losses on restructured loans as a
percentage of gross restructured loans............... 18.64 16.78
Allowance for loan losses on other impaired loans as a
percentage of gross other impaired loans............. 34.61 33.48
Allowance on loan losses as a percentage of gross loans 6.54 7.92
---------
122
(1) Does not include provisions on loans not specifically identified as
restructured or other impaired loans.
The following table sets forth, for the periods indicated, certain
information regarding provisions for loan losses.
Year ended March 31,
-------------------------------------------------------
2003/2002
2002 2003 2003 % change
-------------------------------------------------------
(in millions, except percentages)
Total provisions charged for the year............... Rs. 9,743 Rs. 19,649 US$ 453 101.7%
Provision for loans losses as a percentage of
net loans......................................... 1.86% 3.12%
Gross restructured loans increased 55.0% to Rs. 147.4 billion (US$ 3.4
billion) at year-end fiscal 2003 from Rs. 95.1 billion (US$ 2.2 billion) at
year-end fiscal 2002, primarily due to an increase in restructuring of loans to
companies in the iron and steel, cement and electronics industries. Gross other
impaired loans increased 63.8% to Rs.83.2 billion (US$ 1.9 billion) at year-end
fiscal 2003 from Rs. 50.7 billion (US$ 1.2 billion) at year-end fiscal 2002,
primarily due to an increase in other impaired loans in respect of borrowers in
the power, metal products and fertilizer and pesticides industries. As a
percentage of net loans, net restructured loans were 19.5% at year-end fiscal
2003 compared to 14.8% at year-end fiscal 2002 and net other impaired loans were
8.8% at year-end fiscal 2003 compared to 6.3% in year-end fiscal 2002.
Provisions for loan losses increased to Rs. 19.6 billion (US$ 453 million)
during fiscal 2003 from Rs. 9.7 billion (US$ 224 million) in fiscal 2002
primarily due to an increase in gross restructured and other impaired loans by
Rs. 84.7 billion (US$ 1.9 billion) in fiscal 2003 compared to Rs. 60.4 billion
(US$ 1.4 billion) in fiscal 2002. Provisions for loan losses as a percentage of
net loans increased to 3.1% in fiscal 2003 from 1.9% in fiscal 2002. The
coverage ratio on gross restructured loans decreased to 16.8% at year-end fiscal
2003 from 18.6% at year-end fiscal 2002. The coverage ratio on other impaired
loans decreased to 33.5% at year-end fiscal 2003 from 34.6% at year-end fiscal
2002.
Income Tax Expense
Income tax benefit amounted to Rs. 3.1 billion (US$ 71 million) in fiscal
2003 compared to income tax expense of Rs. 251 million (US$ 6 million) in fiscal
2002. The effective rate of tax benefit was 27.7% in fiscal 2003 compared to
effective rate of tax expense of 47.1% in fiscal 2002. The effective tax benefit
of 27.7% in fiscal 2003 was primarily due to exempt interest and dividend income
and the charging of certain income at rates other than statutory tax rate,
partly offset by the disallowance of certain expenses for tax purposes.
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.
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal
components of assets.
At March 31,
-------------------------------------------------------------------
2003/2002
2002 2003 2003 % change
-------------------------------------------------------------------
(in millions, except percentages)
Cash and cash equivalents................... Rs. 41,476 Rs. 72,453 US$ 1,669 74.7%
Trading account assets (1) ................. 42,376 39,634 913 (6.5)
123
At March 31,
-------------------------------------------------------------------
2003/2002
2002 2003 2003 % change
-------------------------------------------------------------------
(in millions, except percentages)
Securities, excluding venture capital
investments (2) ......................... 56,125 276,917 6,381 393.4
Venture capital investments ................ 3,921 3,704 85 (5.5)
Investments in affiliates .................. 10,086 2,615 60 (74.1)
Loans, net:
Rupee ................................... 487,598 594,955 13,709 22.0
Foreign currency ........................ 72,650 89,685 2,066 23.4
Less: Allowances ........................ (36,647) (54,219) (1,249) 47.9
--------------------------------------------------
Total loans, net ........................... 523,601 630,421 14,526 20.4
Acceptances ................................ 4,783 43,252 997 804.3
Property and equipment ..................... 12,577 21,215 489 68.7
Other assets ............................... 48,417 90,052 2,075 86.0
--------------------------------------------------
Total assets ............................... Rs. 743,362 Rs. 1,180,263 US$ 27,195 58.8%
==================================================
----------
(1) Primarily includes government of India securities and corporate debt
securities.
(2) Primarily includes government of India securities and to a much smaller
extent, corporate debt securities and equity securities.
Our total assets increased 58.8% to Rs. 1,180.3 billion (US$ 27.2 billion)
at year-end fiscal 2003 compared to Rs. 743.4 billion (US$ 17.1 billion) at
year-end fiscal 2002, primarily due to an increase in securities and loans as
the result of amalgamation. ICICI Bank's total assets at year-end fiscal 2002
were Rs. 404.8 billion (US$ 9.3 billion).
Our net loans increased 20.4% to Rs. 630.4 billion (US$ 14.5 billion) at
year-end fiscal 2003 compared to Rs. 523.6 billion (US$ 12.1 billion) at
year-end fiscal 2002, reflecting a 22.0% increase in gross rupee loans, a 23.4%
increase in gross foreign currency loans and a 47.9% increase in allowance for
loan losses. Gross consumer loans and credit card receivables increased 158.6%
to Rs. 188.3 billion (US$ 4.3 billion) at year-end fiscal 2003 from Rs. 72.8
billion (US$ 1.7 billion) at year-end fiscal 2002.
Securities, excluding venture capital investment increased 393.4% to Rs.
276.9 billion (US$ 6.4 billion) at year-end fiscal 2003 from Rs. 56.1 billion
(US$ 1.3 billion) at year-end fiscal 2002 primarily due to investment in
government securities required to comply with the statutory liquidity ratio on
ICICI's liabilities. At year-end fiscal 2002, cash, cash equivalents and trading
account assets of ICICI and ICICI Bank were Rs. 83.9 billion (US$ 1.9 billion)
and Rs. 115.4 billion (US$ 2.7 billion) respectively. ICICI and ICICI Bank were
maintaining a large amount of cash and liquid balances at year-end fiscal 2002
to meet the reserve requirements on ICICI's liabilities following the
amalgamation. Cash, cash equivalents and trading account assets increased by
33.7% to Rs. 112.1 billion (US$ 2.6 billion) at year-end fiscal 2003 from Rs.
83.9 billion (US$ 1.9 billion) at year-end fiscal 2002, reflecting the addition
of ICICI Bank's cash, cash equivalents and trading assets offset, in part, by
utilization of the cash and liquid balances existing at the beginning of fiscal
2003 for investment in government securities to meet statutory liquidity ratio
requirement on ICICI's liabilities.
Trading account assets at year-end fiscal 2003 included outstanding reverse
repurchase transactions of Rs. 5.4 billion (US$ 124 million) as compared to Rs.
21.4 billion (US$ 493 million) at year-end fiscal 2002. Under these transactions
securities were purchased under agreements to resell after a specified time.
Such securities qualified as approved securities for statutory liquidity ratio
requirements, and were of short maturity, carrying lower risk while yielding
higher returns as compared to other short-term money market instruments. These
transactions were typically used for liquidity management.
Investment in affiliates declined to Rs. 2.6 billion (US$ 60 million) at
year-end fiscal 2003 from Rs. 10.1 billion (US$ 232 million) at year-end fiscal
2002 due to the step acquisition of and amalgamation with ICICI Bank.
Acceptances primarily include letters of credit issued on behalf of customers.
ICICI, being a financial institution, was restricted in its ability to issue
acceptances, unlike ICICI Bank. Following the amalgamation, we have been able to
significantly increase the issuance of acceptances by leveraging on ICICI's
strong corporate relationships. Acceptances increased to Rs.
124
43.3 billion (US$ 997 million) at year-end fiscal 2003 from Rs. 4.8 billion (US$
110 million) at year-end fiscal 2002. ICICI Bank's acceptances at year-end
fiscal 2002 were Rs. 12.6 billion (US$ 290 million).
Property and equipment increased 68.7% to Rs. 21.2 billion (US$ 489
million) at year-end fiscal 2003 from Rs. 12.6 billion (US$ 290 million) at
year-end fiscal 2002, primarily due to amalgamation with ICICI Bank.
Other assets increased 86% to Rs. 90.1 billion (US$ 2.1 billion) at
year-end fiscal 2003 from Rs. 48.4 billion (US$ 1.1 billion) at year-end fiscal
2002. Other assets at year-end fiscal 2003 included advance taxes of Rs. 28.3
billion (US$ 652 million), deferred tax asset of Rs. 6.4 billion (US$ 147
million), intangible assets of Rs. 5.1 billion (US$ 118 million) and Rs. 2.3
billion (US$ 53 million) of assets held for sale, which were primarily acquired
through foreclosure of loans.
Liabilities and Stockholders' Equity
The following table sets forth, at the dates indicated, the principal
components of liabilities and stockholders' equity.
At March 31,
----------------------------------------------------------------
2003/2002 %
2002 2003 2003 change
----------------------------------------------------------------
(in millions, except percentages)
Deposits ......................................... Rs. 7,380 Rs. 491,290 US$ 11,320 6,557.0%
Trading account liabilities....................... 17,105 26,086 601 52.5
Short-term borrowings ............................ 70,804 42,095 970 (40.5)
Acceptances ...................................... 4,783 43,252 997 804.3
Long-term debt:
8,079
Rupee ............................................ 438,704 350,633 (20.1)
1,156
Foreign currency ................................. 72,894 50,179 (31.2)
------------------------------------------------
Total long-term debt ............................. 511,598 400,812 9,235 (21.7)
Other liabilities ................................ 48,402 66,658 1,536 37.7
Taxes and dividends payable ...................... 11,050 16,880 389 52.8
Redeemable preferred stock(1)..................... 772 853 20 10.5
------------------------------------------------
Total liabilities ................................ 671,894 1,087,926 25,067 61.9
Minority interest ................................ 260 124 3 (52.3)
Stockholders' equity ............................. 71,348 92,213 2,125 29.2
------------------------------------------------
Total liabilities and stockholders' equity........ Rs. 743,502 Rs. 1,180,263 US$ 27,195 58.7%
================================================
----------
(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.
Deposits increased to Rs. 491.3 billion (US$ 11.3 billion) at year-end
fiscal 2003 from Rs. 7.4 billion (US$ 170 million) at year-end fiscal 2002.
ICICI Bank's deposits were Rs. 325.2 billion (US$ 7.5 billion) at year-end
fiscal 2002. ICICI Bank's deposits along with new deposits raised during the
year increased our volume of deposits. Unlike ICICI, we fund ourselves primarily
through deposits and not borrowings and debt. As ICICI's long-term debt and
short-term borrowings were repaid during the year in line with scheduled
maturities, both long-term debt and short-term borrowings declined
significantly. Our long-term debt decreased 21.7% to Rs. 400.8 billion (US$ 9.2
billion) at year-end fiscal 2003 from Rs. 511.6 billion (US$ 11.8 billion) at
year-end fiscal 2002 primarily due to 20.1% decrease in long-term rupee debt and
31.2% decrease in long-term foreign currency debt. Our short-term borrowings
decreased 40.5% to Rs. 42.1 billion (US$ 970 million) at year-end fiscal 2003
from Rs. 70.8 billion (US$ 1.6 billion) at year-end fiscal 2002. Going forward,
we will continue to repay ICICI's liabilities as and when they mature and raise
new resources primarily through deposits. Trading account liabilities increased
52.5% at year-end fiscal 2003 compared to year-end fiscal 2002 due to the impact
of amalgamation. Taxes and dividends payable increased 52.8% to Rs. 16.9 billion
125
(US$ 389 million) at year-end fiscal 2003 from Rs. 11.1 billion (US$ 255
million) at year-end fiscal 2002. Dividend for fiscal 2002 was paid by ICICI
before year-end fiscal 2002 unlike dividend for fiscal 2003, which we paid
subsequent to the year-end. The carrying amount of the redeemable preferred
stock increased to Rs. 853 million (US$ 20 million) at year-end fiscal 2003 from
Rs 772 million (US$ 18 million) at year-end fiscal 2002. Minority interest
decreased 52.3% to Rs. 124 million (US$ 3 million) at year-end fiscal 2003.
Stockholders' equity increased 29.2% at year-end fiscal 2003 to Rs. 92.2 billion
(US$ 2.1 billion) from Rs. 71.3 billion (US$ 1.6 billion) at year-end fiscal
2002.
Off Balance Sheet Items, Commitments and Contingencies
Foreign Exchange and Derivative Contracts
We enter into foreign exchange forwards, options, swaps and other
derivative products to enable customers to transfer, modify or reduce their
foreign exchange and interest rate risks and to manage our own interest rate and
foreign exchange positions. These instruments are used to manage foreign
exchange and interest rate risk relating to specific groups of on-balance sheet
assets and liabilities. Since adoption of SFAS No. 133 and SFAS No. 138
effective April 1, 2001, all derivatives have been recorded as assets or
liabilities on the balance sheet at their respective fair values with unrealized
gains or losses recorded either in accumulated other comprehensive income or in
the statement of income, depending on the purpose for which the derivative is
held. Derivatives that do not meet the criteria for designation as a hedge under
SFAS No. 133 at inception, or fail to meet the criteria thereafter, are
accounted for in "Other assets" with changes in fair value recorded in the
statement of income. See Note 1 - "Significant accounting policies - Derivative
instruments and hedging activities" to our consolidated financial statements.
The following table sets forth, at the dates indicated, the notional amount
of derivative contracts.
At March 31,
-----------------------------------------------------------------------------------------
Notional principal amounts Balance sheet credit exposure(1)
-----------------------------------------------------------------------------------------
2002 2003 2004 2004 2002 2003 2004 2004
-----------------------------------------------------------------------------------------
(in millions)
Interest rate products:
Swap agreements............ Rs. 87,824 Rs. 324,893 Rs. 1,456,182 US$ 33,553 Rs. 620 Rs. 137 Rs.1,552 US$ 36
Others .................... - - 43,073 992 - - 43 1
-----------------------------------------------------------------------------------------
Total interest rate products Rs. 87,824 Rs. 324,893 Rs. 1,499,255 US$ 34,545 Rs. 620 Rs. 137 Rs.1,595 US$ 37
=========================================================================================
Foreign exchange products:
Forward contracts.......... Rs. 41,873 Rs. 277,280 Rs. 620,415 US$ 14,295 (Rs.41) Rs. (116) 398 US$ 9
Swap agreements............ 20,395 14,611 46,724 1,077 328 539 263 6
Others..................... - - 44,401 1,023 - - (345) (8)
-----------------------------------------------------------------------------------------
Total foreign exchange
products................. Rs. 62,268 Rs. 291,891 Rs. 711,540 US$ 16,395 Rs. 287 Rs. 423 Rs. 316 US$ 7
=========================================================================================
---------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products on the reporting date.
The notional principal amount of interest rate products increased to Rs.
1,499.3 billion (US$ 34.5 billion) at year-end fiscal 2004 compared to Rs. 324.9
billion (US$ 7.5 billion) at year-end fiscal 2003. The notional principal amount
of foreign exchange products increased Rs. 711.5 billion (US$ 16.4 billion) at
year-end fiscal 2004 compared to Rs. 291.9 billion (US$ 6.7 billion) at year-end
fiscal 2003. This significant increase in the volumes of interest rates swaps
and foreign exchange forward contracts in fiscal 2004 was primarily due to
increased transactions carried out by us on behalf of our customers and growth
in the market for such products. The swap and forward exchange contract market
in India is a developing market. Market volumes have increased significantly
during the last fiscal year. As an active player and market-maker in swap and
forward exchange contract markets and due to the fact that reduction in
positions is generally achieved by entering into offsetting transactions
126
rather than termination/cancellation of existing transactions, we have seen a
substantial increase in the notional principal of our swap portfolio during
fiscal 2004 and 2003.
An interest rate swap does not entail exchange of notional principal and
the cash flow arises on account of the difference between the interest rate pay
and receive legs of the swap which is generally much lower than the notional
principal of the swap. A large proportion of interest rate swaps, currency swaps
and forward exchange contracts are on account of market making which involves
providing regular two-way prices to customers or inter-bank counter-parties.
This results in generation of a higher number of outstanding transactions, and
hence a large value of gross notional principal of the portfolio. For example,
if a transaction entered into with a customer is covered by an exactly opposite
transaction entered into with another counter-party, the net market risk of the
two transactions will be zero whereas, the notional principle of the portfolio
will be the sum of both transactions.
Securitization
We primarily securitize commercial loans through "pass-through"
securitizations. In fiscal 2004, we securitized loans and credit substitutes
with a carrying value of Rs. 128.3 billion (US$ 3.0 billion) compared to Rs.
51.8 billion (US$ 1.2 billion) in fiscal 2003, which resulted in gains of Rs.
4.2 billion (US$ 98 million) in fiscal 2004 compared to Rs. 2.1 billion (US$ 48
million) in fiscal 2003. The gains are reported as a component of gain on sale
of loans and credit substitutes. After the securitization, we generally continue
to maintain customer account relationships and service loans transferred to the
securitization trust. The securitizations are either with or without recourse.
In certain cases, we may enter into derivative transactions such as written put
options and interest rate swaps with the transferees.
In certain cases, we write put options, which require us to purchase, upon
request of the holders, securities issued in certain securitization
transactions. The put options seek to provide liquidity to holders of such
instruments. If exercised, we are obligated to purchase the securities at the
predetermined exercise price.
At year-end fiscal 2004, we had sold loans and credit substitutes with an
aggregate put option exercise price of Rs. 38.3 billion (US$ 882 million)
compared to Rs. 24.4 billion (US$ 562 million) at year-end fiscal 2003.
Subsequent to their initial issuance, such options have been recorded at fair
values with changes reported in the statement of operations.
Variable Interest Entities
During the year, we transferred certain impaired loans to borrower specific
funds/trusts managed by an asset reconstruction company set up under the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 and guidelines issued by the Reserve Bank of India.
The trusts/funds (which are separate legal entities) issued security receipts to
us and other transferors as consideration for the transaction. Certain transfers
did not qualify for sale accounting under SFAS No. 140 and continue to be
reflected as loans on our balance sheet. Other transfers qualified for sale
accounting but were impacted by FIN 46/FIN 46R. We have consolidated entities in
which we are the prime beneficiary at year-end fiscal 2004. Funds/trusts which
are VIEs but in which we are not the prime beneficiary have not been
consolidated.
Our venture capital subsidiary is involved with entities that may be deemed
VIEs. The FASB permitted non-registered investment companies to defer
consolidation of VIEs in which they are involved until the proposed Statement of
Position on the clarification of the scope of the Investment Company Audit Guide
is finalized. Following issuance of the Statement of Position, the FASB will
consider further modification to FIN 46R to provide an exception for companies
that qualify to apply the revised Audit Guide. We applied this deferral
provision and did not consolidate additional assets of Rs. 961 million (US$ 22
million) in potential VIEs in which we are involved at year-end fiscal
127
2004. Following issuance of the revised Audit Guide and further modification, if
any, to FIN 46R, we will assess the effect of such guidance on our venture
capital subsidiary.
Loan Commitments
We have outstanding undrawn commitments to provide loans and financing to
customers. These loan commitments aggregated Rs. 73.9 billion (US$ 1.7 billion)
at year-end fiscal 2004 compared to Rs. 48.8 billion (US$ 1.1 billion) at
year-end fiscal 2003. The interest rate on these commitments is dependent on the
lending rates on the date of the loan disbursement. Further, the commitments
have fixed expiration dates and are contingent upon the borrower's ability to
maintain specific credit standards.
Capital Commitments
We are obligated under a number of capital contracts. Capital contracts are
job orders of a capital nature, which have been committed. Estimated amounts of
contracts remaining to be executed on capital account aggregated Rs. 294 million
(US$ 7 million) at year-end fiscal 2004 compared to Rs. 264 million (US$ 6
million) at year-end fiscal 2003 signifying the unpaid amount for acquisition of
fixed assets as per contracts entered into with suppliers.
Operating Lease Commitments
We have commitments under long-term operating leases principally for
premises. The following table sets forth, a summary of future minimum lease
rental commitments at year-end fiscal 2004, for non-cancelable leases.
Lease rental commitments for fiscal, (in millions)
------------------------------------ -------------
2005 .................................................. Rs. 231
2006 .................................................. 223
2007 .................................................. 208
2008 .................................................. 174
2009 .................................................. 170
Thereafter ........................................... 150
Total minimum lease commitments ....................... Rs. 1,156
Guarantees
As a part of our financing activities, we issue guarantees to enhance the
credit standing of our customers. The guarantees are generally for a period not
exceeding 10 years. The credit risk associated with these products, as well as
the operating risks, are similar to those relating to other types of financial
instruments. We have the same appraisal process for guarantees as that for any
other loan product. Guarantees increased by 14.9% to Rs. 122.3 billion (US$ 2.8
billion) at year-end fiscal 2004 from Rs. 106.5 billion (US$ 2.5 billion) at
year-end fiscal 2003.
The following table sets forth, at the dates indicated, guarantees
outstanding.
At March 31,
-------------------------------------------------------------------------
2003/2002 2004/2003
2002 2003 % change 2004 2004 % change
-------------------------------------------------------------------------
(in millions, except percentages)
Financial guarantees(1)....... Rs. 53,037 Rs. 69,076 30.2% Rs. 57,344 US$ 1,321 (17.0)%
Performance guarantees(2)..... 21,266 37,402 75.9% 65,000 1,498 73.8
-------------------------- -------------------------
Total guarantees ............. Rs. 74,303 Rs. 106,478 43.3% Rs. 122,344 US$ 2,819 14.9%
========================== =========================
----------
128
(1) Consists of instruments guaranteeing the timely contractual payment of loan
obligations, primarily to foreign lenders on behalf of project companies.
(2) Consists of instruments guaranteeing the performance by a company of an
obligation, such as exports.
The following table sets forth contractual obligations on long-term debt,
operating lease and guarantees at year-end fiscal 2004.
Payments due by period
----------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
----------------------------------------------------------------------
(in millions)
Long term debt obligations............... Rs. 374,386 Rs. 78,326 Rs. 143,979 Rs. 69,529 Rs. 82,552
Operating lease obligations.............. 1,156 231 431 344 150
Guarantees
- Financial guarantees.................. 57,344 24,792 11,128 10,326 11,098
- Performance guarantees................ 65,000 26,544 23,070 9,565 5,821
----------------------------------------------------------------------
122,344 51,336 34,198 19,891 16,919
----------------------------------------------------------------------
Total.................................... Rs. 497,886 Rs. 129,893 Rs. 178,608 Rs. 89,764 Rs. 99,621
======================================================================
Capital Resources
ICICI Bank is subject to the capital adequacy requirements of the Reserve
Bank of India, which are primarily based on the capital adequacy accord reached
by the Basel Committee of Banking Supervision, Bank of International Settlements
in 1988. ICICI Bank is 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.
At year-end fiscal 2004, ICICI Bank's capital adequacy ratio calculated in
accordance with the Reserve Bank of India guidelines and based on its
unconsolidated financial statements prepared in accordance with Indian GAAP was
10.4%. Using the same basis of calculation, at year-end fiscal 2004 ICICI Bank's
Tier 1 capital adequacy ratio was 6.1% and its Tier 2 capital adequacy ratio was
4.3%.
ICICI Bank has raised additional Tier 1 capital through a public issue of
equity shares aggregating to Rs. 32.5 billion (US$ 748 million), after year-end
fiscal 2004.
The following table sets forth, at the dates indicated, risk-based capital,
risk-weighted assets and risk-based capital adequacy ratios computed in
accordance with the applicable Reserve Bank of India guidelines and based on
ICICI Bank's unconsolidated financial statements prepared in accordance with
Indian GAAP.
Indian GAAP
At March 31, 2004
----------------------------------
(in millions)
Tier 1 capital ............................... Rs. 55,251 US$ 1,273
Tier 2 capital ............................... 38,757 893
----------------------------------
Total capital ................................ Rs. 94,008 US$ 2,166
==================================
On- balance sheet risk weighted assets ....... Rs. 733,794 US$ 16,908
Off-balance sheet risk weighted assets ....... 173,546 3,999
----------------------------------
Total risk weighted assets ................... Rs. 907,340 US$ 20,906
==================================
Tier 1 capital adequacy ratio ................ 6.1%
Tier 2 capital adequacy ratio ................ 4.3
----------------
Total capital adequacy ratio ................. 10.4%
----------------
The principal off-balance sheet items for ICICI Bank were loan commitments,
guarantees, put options and lease and capital commitments. ICICI Bank entered
into these arrangements for normal
129
business purposes. See "-Off Balance Sheet Items, Commitments and
Contingencies". Capital was provided for these items based on the existing
capital adequacy guidelines of the Reserve Bank of India. See "Supervision and
Regulation - Capital Adequacy Requirements". Lease commitments were not expected
to materially affect capital requirements. ICICI Bank provides capital on the
put options outstanding and forward contracts and derivatives contracts
outstanding at year-end fiscal 2004 as per existing capital adequacy guidelines
of the Reserve Bank of India. In line with Reserve Bank of India guidelines,
deferred tax asset of Rs. 4.4 billion (US$ 102 million) and unamortized Early
Retirement Option expense of Rs. 1.7 billion (US$ 38 million) under Indian GAAP
have been reduced from Tier 1 capital at year-end fiscal 2004.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the risk
of unexpected increases in the cost of funding an asset portfolio at appropriate
maturities and the risk of being unable to liquidate a position in a timely
manner at a reasonable price. The goal of liquidity management is to be able,
even under adverse conditions, to meet all liability repayments on time and fund
all investment opportunities.
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. Incremental operations are principally funded by
accepting deposits from retail and corporate depositors. The deposits are
augmented by borrowings in the short-term inter-bank market and through the
issuance of bonds. Loan maturities and sale of investments also provide
liquidity. Most of the funds raised are used to extend loans or purchase
securities. Generally, deposits are of a shorter average maturity than loans or
investments.
Most of our incremental funding requirements, including replacement of
maturing liabilities of ICICI which generally had longer maturities, are met
through short-term funding sources, primarily in the form of deposits including
inter-bank deposits. However, a large portion of our assets, primarily the
assets of ICICI and our home loan portfolio, have medium or long-term
maturities, creating a potential for funding mismatches. We actively monitor our
liquidity position and attempt to maintain adequate liquidity at all times to
meet all requirements of all depositors and bondholders, while also meeting the
requirement of lending groups. We seek to establish a continuous information
flow and an active dialogue between the funding and borrowing divisions of the
organization to enable optimal liquidity management. A separate group is
responsible for liquidity management.
Another source of liquidity risk is the put options written by us on the
loans, which we have securitized. These options are binding on us and require us
to purchase, upon request of the holders, securities issued in such securitized
transactions. The options seek to provide liquidity to the security holders. If
exercised, we will be obligated to purchase the securities at the pre-determined
exercise price. All put options were out-of-the-money for the holders. At
year-end fiscal 2004, the aggregate put option exercise price of such
option-embedded loan and credit substitute sell-downs was Rs. 38.3 billion (US$
882 million).
Under the Reserve Bank of India's statutory liquidity ratio requirement, we
are required to maintain 25.0% of our total demand and time liabilities by way
of approved securities, such as government of India securities and state
government securities. We maintain the statutory liquidity ratio through a
portfolio of government of India securities that we actively manage to optimize
the yield and benefit from price movements. Until September 17, 2004, under the
Reserve Bank of India's cash reserve ratio requirements, we were required to
maintain 4.5% of our demand and time liabilities in a current account with the
Reserve Bank of India. The Reserve Bank of India increased the cash reserve
ratio to 5.0% in two stages (4.75% effective September 18, 2004 and 5.0%
effective October 2, 2004).
We also have recourse to the liquidity adjustment facility and the
refinance window, which are short-term funding arrangements provided by the
Reserve Bank of India. We maintain a substantial
130
portfolio of liquid high quality securities that may be sold on an immediate
basis to meet our liquidity needs.
We also have the option of managing liquidity by borrowing in the
inter-bank market on a short-term basis. The overnight market which is a
significant part of the inter-bank market, is susceptible to volatile interest
rates. These interest rates on certain occasions, have touched historical highs
of 100.0% and above. To curtail reliance on such volatile funding, our liquidity
management policy has stipulated daily limits for borrowing and lending in this
market. The limit on daily borrowing is more stringent than the limit set by the
Reserve Bank of India. ICICI Securities, like us, relies for a certain
proportion of its funding on the inter-bank market for overnight money and is
therefore also exposed to similar risk of volatile interest rates.
We are required to submit gap analysis on a monthly basis to the Reserve
Bank of India. Pursuant to the Reserve Bank of India guidelines, the liquidity
gap (if negative) must not exceed 20.0% of outflows in the 1-14 day and the
15-28 day time category. We prepare fortnightly maturity gap analysis to review
our liquidity position. Static gap analysis is also supplemented by a dynamic
analysis for the short-term, to enable the liability raising units to have a
fair estimate of the short-term funding requirements. In addition, we also
monitor certain liquidity ratios on a fortnightly basis.
Our bonds are rated AAA by two Indian credit rating agencies, ICRA Limited
and Credit Analysis & Research Limited. Our term deposits are rated AAA by ICRA
Limited. Our long-term foreign currency borrowings are rated Baa3 by Moody's
Investors Service and BB by Standard and Poor's. Our short-term foreign currency
ratings are Ba2/ Not Prime by Moody's Investors Service and B by Standard and
Poor's. Any downgrade in these credit ratings, or any adverse change in these
ratings relative to other banks and financial intermediaries, could adversely
impact our ability to raise resources to meet our funding requirements, which in
turn could adversely impact our liquidity position.
In April 2003, unsubstantiated rumours, believed to have originated in
Gujarat, alleged that we were facing liquidity problems, although our liquidity
position was sound. We witnessed higher than normal deposit withdrawals during
the period April 11 to 13, 2003, on account of these unsubstantiated rumours. We
successfully controlled the situation, but if such situations were to arise in
future, any failure to control such situations could result in large deposit
withdrawals, which would adversely impact our liquidity position.
Capital Expenditure
The following tables set forth, for the periods indicated, certain
information related to capital expenditure by category of fixed assets.
Fiscal 2002
--------------------------------------------------------------------------------------
Cost at
March 31, Additions/ Deletions/ Net assets at March 31,
2001 transfers transfers Depreciation 2002
--------------------------------------------------------------------------------------
(in millions)
Land........................ Rs. 1,342 Rs. - Rs. (6) Rs. 103 Rs. 1,233 US$ 28
Buildings................... 6,642 649 (83) 429 6,779 156
Equipment, furniture, and
others(1)................... 4,558 1,420 (251) 1,625 4,102 95
Construction in progress.... 739 - (269) 6 463 11
--------------------------------------------------------------------------------------
Total....................... Rs. 13,281 Rs. 2,069 Rs. (609) Rs. 2,164 Rs. 12,577 US$ 290
======================================================================================
----------
(1) Includes equipment and furniture, and others category as specified in Note
14 to our consolidated financial statements.
131
Fiscal 2003
--------------------------------------------------------------------------------------
Cost at
March 31, Additions/ Deletions/ Net assets at March 31,
2002 transfers transfers Depreciation 2003
--------------------------------------------------------------------------------------
(in millions)
Land Rs. 1,336 Rs. 199 Rs. - Rs. 82 Rs. 1,453 US$ 33
Buildings.................... 7,208 4,224 (238) 930 10,264 236
Equipment, furniture and
others (1)................. 5,727 7,808 (874) 4,234 8,427 194
Construction in progress..... 469 1,010 (402) 6 1,071 25
--------------------------------------------------------------------------------------
Total........................ Rs. 14,740 Rs. 13,241 Rs. (1,514) Rs. 5,252 Rs. 21,215 US$ 489
======================================================================================
----------
(1) Includes equipment and furniture, and others category as specified in Note
14 to our consolidated financial statements.
Fiscal 2004
-------------------------------------------------------------------------------------
Cost at
March 31, Additions/ Deletions/ Net assets at March 31,
2003 transfers transfers Depreciation 2004
-------------------------------------------------------------------------------------
(in millions)
Land Rs. 1,535 Rs. 79 Rs. (88) Rs. 207 Rs. 1,319 US$ 30
Buildings.................... 11,194 1,611 (492) 1,302 11,011 254
Equipment, furniture and
others (1)................. 12,661 3,950 (212) 6,534 9,865 227
Construction in progress..... 1,077 (89) - 988 23
-------------------------------------------------------------------------------------
Total........................ Rs. 26,467 Rs. 5,640 Rs. (881) Rs. 8,043 Rs. 23,183 US$ 534
============ ============= ============== ============== ============== =============
----------
(1) Includes equipment and furniture, and others category as specified in Note
14 to our consolidated financial statements.
Our capital expenditure on property and equipment was Rs. 5.6 billion (US$
130 million) for fiscal 2004 compared to Rs. 13.2 billion (US$ 305 million) for
fiscal 2003 and Rs. 2.1 billion (US$ 48 million) for fiscal 2002.
Capital expenditure on buildings of Rs. 1.6 billion (US$ 37 million) in
fiscal 2004 was primarily due to capital expenditure incurred on improvements to
retail branches, call centers and office premises. In fiscal 2004, capital
expenditure on equipment, furniture and others of Rs. 4.0 billion (US$ 91
million) primarily included expenses on computers and software of Rs. 1.9
billion (US$ 43 million) and expenses on ATMs of Rs. 237 million (US$ 5
million).
Capital expenditure for fiscal 2003 included capital assets acquired on
amalgamation. ICICI Bank's total fixed assets (gross) were Rs. 6.8 billion (US$
157 million) at year-end fiscal 2002, with Rs. 286 million (US$ 7 million) in
land, Rs. 2.2 billion (US$ 51 million) in buildings and Rs. 4.0 billion (US$ 92
million) in equipment, furniture and others.
Capital expenditure on buildings of Rs. 4.2 billion (US$ 97 million) in
fiscal 2003 primarily included a Rs. 2.2 billion (US$ 51 million) impact of
amalgamation and expenses on call centers and improvements in leasehold
property. Capital expenditure on equipment, furniture and others of Rs. 7.8
billion (US$ 180 million) in fiscal 2003 primarily includes Rs. 4.0 billion (US$
92 million) impact of amalgamation, Rs. 2.1 billion (US$ 48 million) expense on
computers and software, and Rs. 676 million (US$ 16 million) on ATMs.
132
Significant Changes
Except as stated in this annual report, no significant changes have
occurred to us since the date of the fiscal 2004 consolidated financial
statements contained in this annual report.
Segment Revenues and Assets
Subsequent to the amalgamation, the composition of our operating segments
has changed. Our operations are now classified into the following segments:
commercial banking segment, investment banking segment and others. Segment data
for previous periods has been reclassified on a comparable basis.
The commercial banking segment provides medium-term and long-term project
and infrastructure financing, securitization, factoring, lease financing,
working capital finance and foreign exchange services to clients. Further, it
provides deposit and loan products to retail customers. The investment banking
segment includes ICICI Bank's treasury operations and the operations of ICICI
Securities, and deals in the debt, equity and money markets and provides
corporate advisory products such as mergers and acquisition advice, loan
syndication advice and issue management services. Others consist of various
operating segments that do not meet the requirements to be reported as an
individual reportable segment as defined in SFAS No. 131 on Disclosure about
Segments of an Enterprise and Related Information.
Operating segments are defined as components of an enterprise for which
separate financial information is available that is regularly evaluated by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The chief operating decision maker evaluates performance
and allocates resources based on an analysis of various performance indicators
for each of the above reportable segments. Components of profit and loss are
evaluated for commercial banking and investment banking segments. Further, the
chief operating decision maker specifically reviews assets of our retail loan
operations, which are part of the commercial banking segment.
The results of ICICI Bank were reported under the equity method of
accounting for fiscal 2002. However, for management reporting, the entire
results of ICICI Bank continue to be reported as if the business were a
consolidated entity. The segment-wise information presented below is consistent
with the management reporting.
Commercial Banking Segment
Fiscal 2004 compared to Fiscal 2003
The commercial banking segment incurred a net loss of Rs. 4.4 billion (US$
100 million) in fiscal 2004 and a net loss of Rs. 7.8 billion (US$ 181 million)
in fiscal 2003, primarily due to provisions for loan losses of Rs. 20.0 billion
(US$ 462 million) in fiscal 2004 and Rs. 19.6 billion (US$ 453 million) in
fiscal 2003 respectively. The decrease in net loss in fiscal 2004 in comparison
with fiscal 2003 was primarily due to an increase in non-interest income partly
offset by an increase in non-interest expense.
Net interest income, including dividends, increased 13.7% to Rs. 17.7
billion (US$ 408 million) in fiscal 2004 from Rs. 15.6 billion (US$ 359 million)
in fiscal 2003 primarily due to the benefit of lower funding costs. Non-interest
income increased 217.6% to Rs. 16.4 billion (US$ 377 million) in fiscal 2004
from Rs. 5.2 billion (US$ 119 million) in fiscal 2003 primarily due to a greater
focus on fee income and increased gains on investments held as credit
substitutes. Non-interest expense increased 57.6% to Rs. 19.5 billion (US$ 449
million) in fiscal 2004 from Rs. 12.4 billion (US$ 285 million) in fiscal 2003
primarily due to enhanced operations and the growth in the retail franchise,
including maintenance of ATMs, credit card expenses, call centre expenses and
technology expenses.
133
Fiscal 2003 compared to Fiscal 2002
The commercial banking segment incurred a net loss of Rs. 7.9 billion (US$
181 million) in fiscal 2003 compared to a net income of Rs. 1.7 billion (US$ 39
million) in fiscal 2002, primarily due to an increase in provisions for loan
losses and a decrease in non-interest income.
Net interest income, including dividends, increased 16.4% to Rs. 15.6
billion (US$ 359 million) in fiscal 2003 from Rs. 13.4 billion (US$ 308 million)
in fiscal 2002 primarily due to the benefit of lower funding costs subsequent to
the amalgamation. Provisions for loan losses increased 71.5% to Rs. 19.6 billion
(US$ 453 million) in fiscal 2003 from Rs. 11.5 billion (US$ 264 million) in
fiscal 2002 primarily due to the Rs. 84.7 billion (US$ 2.0 billion) increase in
gross restructured and other impaired loans during the fiscal 2003.
Non-interest income decreased 52.2% to Rs. 5.2 billion (US$ 119 million) in
fiscal 2003 from Rs. 10.8 billion (US$ 249 million) in fiscal 2002 primarily due
to lower fee income on project finance and related activities and other than
temporary diminution on equity securities and securities where application money
had been paid but securities were yet to be allotted. Non-interest expense
increased 6.8% to Rs. 12.4 billion (US$ 285 million) in fiscal 2003 from Rs.
11.6 billion (US$ 266 million) in fiscal 2002.
Investment Banking Segment
Fiscal 2004 compared to Fiscal 2003
Net income for the investment banking segment increased 809.5% to Rs. 11.2
billion (US$ 257 million) in fiscal 2004 compared to Rs. 1.2 billion (US$ 28
million) in fiscal 2003, primarily due to an increase in non-interest income
partly offset by an increase in non-interest expense.
Net interest income, including dividends, increased to Rs. 1.2 billion (US$
28 million) in fiscal 2004 from a loss of Rs. 2.1 billion (US$ 49 million) in
fiscal 2003 primarily due to reduction in premium amortization expenses
consequent to sale of certain government securities acquired at fair value at
the time of amalgamation. These securities were marked up on the date of
amalgamation due to decline in the interest rates subsequent to their purchase.
Provision for loan losses was Rs. 15 million (US$ 345,622) in fiscal 2004
compared to Rs. 4 million (US$ 92,166) in fiscal 2003.
Non-interest income increased 147.4% to Rs. 17.4 billion (US$ 401 million)
in fiscal 2004 from Rs. 7.0 billion (US$ 162 million) in fiscal 2003 primarily
due to higher income on the fixed income portfolio in a favorable interest rate
environment and favorable equity markets. Non-interest expense increased 50.1%
to Rs. 4.7 billion (US$ 109 million) in fiscal 2004 from Rs. 3.2 billion (US$ 73
million) in fiscal 2003.
Fiscal 2003 compared to Fiscal 2002
Net income for the investment banking segment decreased 5.7% to Rs. 1.2
billion (US$ 28 million) in fiscal 2003 compared to Rs. 1.3 billion (US$ 30
million) in fiscal 2002, primarily due to a decrease in net interest income and
increase in non-interest expense, offset by an increase in non-interest income.
Net interest income, including dividends, decreased to a loss of Rs. 2.1
billion (US$ 49 million) in fiscal 2003 from Rs. 1.8 billion (US$ 41 million) in
fiscal 2002 primarily due to the low-yielding government securities acquired for
meeting statutory liquidity ratio requirement on ICICI's liabilities. Our
government securities portfolio was fair valued at the time of amalgamation and
hence was marked-up due to the decline in interest rates since the time these
securities were acquired resulting in significant increase in the amortization
expense on these securities. Provision for loan losses was Rs. 4 million (US$
92,166) in fiscal 2003 compared to Rs. 8 million (US$ 184,332) in fiscal 2002.
134
Non-interest income increased 244.4% to Rs. 7.0 billion (US$ 162 million)
in fiscal 2003 from Rs. 2.0 billion (US$ 47 million) in fiscal 2002 primarily
due to higher income on fixed income portfolio in a favorable interest rate
environment where interest rates declined steadily. Non-interest expense
increased 68.6% to Rs. 3.2 billion (US$ 73 million) in fiscal 2003 from Rs. 1.9
billion (US$ 43 million) in fiscal 2002.
Related Party Transactions
We have entered into transactions with our affiliates, directors and
employees. The following represent the significant transactions between ICICI
Bank and such related parties:
Insurance services
In fiscal 2004, we paid insurance premium to ICICI Lombard General
Insurance Company amounting to Rs. 219 million (US$ 5 million) compared to Rs.
224 million (US$ 5 million) in fiscal 2003 towards our Staff Medical Insurance
Policy.
Lease of premises and facilities
ICICI Bank has entered into lease arrangements with related parties in
respect of certain premises and facilities. In fiscal 2004, we received for the
lease of premises, facilities and other administrative costs Rs. 198 million
(US$ 5 million) from ICICI Prudential Life Insurance Company compared to Rs. 84
million (US$ 2 million) in fiscal 2003, Rs. 6 million (US$ 138,249) from
Prudential ICICI Asset Management Company compared to Rs. 6 million (US$
138,249) in fiscal 2003, and Rs. 91 million (US$ 2 million) from ICICI Lombard
General Insurance Company as compared to Rs. 82 million (US$ 2 million) in
fiscal 2003.
Secondment of employees
In fiscal 2004, we received Rs. 0.6 million (US$ 13,825) from Prudential
ICICI Asset Management Company for seconded employees compared to Rs. 3 million
(US$ 69,124) in fiscal 2003 and Rs. 14 million (US$ 322,581) from ICICI Lombard
General Insurance Company compared to Rs. 10 million (US$ 230,415) in fiscal
2003.
Asset management services
In fiscal 2004, we provided asset management services to TCW and earned
fees of Rs. 14 million (US$ 322,581) as compared to Rs. 24 million (US$ 552,995)
in fiscal 2003.
Deposits and borrowings
In fiscal 2004, we paid interest on bonds/deposits/call borrowings to
affiliated companies amounting to Rs. 27 million (US$ 622,120) compared to Rs.
12 million (US$ 276,498) in fiscal 2003.
Interest and Dividend
In fiscal 2004, ICICI Bank received interest on car loans from affiliated
companies amounting to Rs. 0.27 million (US$ 6,221) compared to Rs. 0.33 million
(US$ 7,604) in fiscal 2003 and dividends of Rs. 172 million (US$ 4 million)
compared to Rs. Nil in fiscal 2003.
135
Employee loans
ICICI Bank has advanced housing, vehicle and general purpose loans to
employees, bearing interest ranging from 2.5% to 6%. The tenure of these loans
range from 5 years to 25 years. The loans are generally secured by the assets
acquired by the employees. Employee loan balances outstanding Rs. 3.8 billion
(US$ 87 million) at year-end fiscal 2004 and Rs. 2.3 billion (US$ 52 million) at
year-end fiscal 2003 are included in other assets.
Related party balances
The following balances payable to/receivable from related parties are
included in the balance sheet:
At March 31,
------------------------------
2003 2004
------------------------------
(in millions)
Loans........................................... Rs. 22 Rs. 20
Other assets.................................... 2,549 3,353
Deposits........................................ 440 700
Other liabilities............................... 3 50
Critical Accounting Policies
In order to understand our financial condition and results of operations,
it is important to understand our significant accounting policies and the extent
to which we use judgments and estimates in applying those policies. Our
accounting and reporting policies are in accordance with US GAAP and conform to
standard accounting practices relevant to our products and services and the
businesses in which we operate. US GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements and the reported income and expenses during the
reported period. Accordingly, we use a significant amount of judgment and
estimates based on assumptions for which the actual results are uncertain when
we make the estimation.
We have identified three critical accounting policies, based on the
judgments and estimates required in the application of these policies. These
include valuation of securities and accounting for derivative transactions and
hedging activities, allowance for loan losses and accounting for securitization
transactions. Additional information about these policies can be found in Note 1
to our consolidated financial statements. The statements below contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements".
Valuation of Securities and Accounting for Derivatives Transactions and Hedging
Activities
Our securities are classified into available for sale securities, trading
securities, venture capital investments and non-readily marketable securities.
The classification into available for sale and trading securities is based on
management's intention at the time of purchase. We no longer classify
investments in debt securities as held to maturity, due to sale of certain held
to maturity securities in fiscal 2002 by ICICI for reasons other than those
specified in SFAS No. 115. Further, we offer derivative products to our
customers to transfer, modify or reduce their foreign exchange and interest rate
risks and to manage our own interest rate and foreign exchange positions. The
derivatives market in India is evolving and our derivative volumes have
increased significantly since the amalgamation.
The fair values of quoted securities are determined based on market prices.
The fair value of securities for which quoted market prices are not available is
estimated as follows:
136
o The fair value of unquoted government of India securities is
estimated based on the yields to maturity of these securities
published by certain agencies approved by the Reserve Bank of India.
o The fair value of other unquoted securities and preference shares is
computed based on the mark-up, based on the credit rating of the
issuer by a credit rating agency, over the yields to maturity for
government of India securities, as published by certain agencies
approved by the Reserve Bank of India.
o The fair values of investments in unquoted mutual fund units are
estimated based on the latest repurchase price declared by the mutual
fund in respect of each particular scheme. If the repurchase price is
not available, the fair value is estimated based on the net asset
values of the respective mutual fund scheme.
o The fair values of certain derivative contracts are derived from
pricing models that consider market and contractual prices for the
underlying financial instruments, as well as the time value of money,
the yield curve and any other volatility factors underlying the
positions.
Changes in values of available-for-sale securities are recognized net of
taxes as a component of stockholders' equity, unless the value is impaired and
the impairment is not considered to be temporary. Impairment losses that are not
considered temporary are recognized in the income statement. We conduct regular
reviews to assess whether other-than-temporary impairment exists. Changes in the
fair values of trading account assets are recognized in the income statement.
Equity securities, forming part of our securities portfolio, are considered
as publicly traded if they have been traded on a securities exchange within six
months prior to the relevant fiscal year-end. The fair value of such securities
is the last quoted price. Non-readily marketable equity securities are recorded
at cost and a provision is made for other than temporary diminution. Equity
securities acquired by conversion of loans in a troubled debt restructuring are
stated at their fair values and accounted for in the same manner as equity
investments acquired for cash.
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 subsidiary. In
determining the fair value of these securities, consideration is given to the
financial conditions, operating results and prospects of the underlying
companies, and any other factors deemed relevant. Generally, these investments
are carried at cost during the first year, unless a significant event occurred
that affects the long-term value of the investment. Since the valuations are
inherently uncertain, these estimated values may differ significantly from the
values that would have been used had a ready market for the investments existed.
Changes in fair values of venture capital investments are recognized in the
income statement.
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.
We provide forward contracts to our customers for hedging their short-term
exchange rate risk on foreign currency denominated receivables and payables. We
generally provide this facility for a term of up to six months and occasionally
up to 12 months. We also offer interest rate and currency swaps to our customers
for hedging their medium and long-term risks due to interest rate and currency
exchange rate movements. We offer these swaps for a period ranging from three to
10 years. We also hedge our own exchange rate risk related to our foreign
currency trading portfolio with products from banking counterparties.
137
At the inception of a hedge transaction, we formally document the hedge
relationship and the risk management objective and strategy for undertaking the
hedge. This process includes identification of the hedging instrument, hedged
item, risk being hedged and the methodology for measuring effectiveness of the
hedge. In addition, we assess both at the inception of the hedge and on an
ongoing basis, whether the derivative used in the hedging transaction has been
highly effective in offsetting changes in fair value or cash flows of the hedged
item, and whether the derivative is expected to continue to be highly effective.
Derivatives that do not meet the criteria for designation as a hedge under SFAS
No. 133 at inception, or fail to meet the criteria thereafter, are accounted for
in other assets with changes in fair value recorded in the statement of income.
We discontinue hedge accounting prospectively when it is either 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 would occur; or management determines that
designation of the derivative as a hedging instrument is no longer appropriate.
Changes in the fixed income, equity, foreign exchange markets would impact
our 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
At year-end fiscal 2004, the allowance for loan losses was Rs. 66.8 billion
(US$ 1.5 billion) or 10.9% of net loans. The allowance for loan losses
represents management's estimate of probable losses inherent in the portfolio.
We have developed appropriate policies and procedures for assessing the adequacy
of the allowance for loan losses that reflect our careful evaluation of credit
risk considering all information available to us. In developing this assessment,
we must rely on estimates and exercise judgment regarding matters where the
ultimate outcome is unknown, such as economic factors, developments affecting
companies in specific industries and issues with respect to single borrowers.
Depending on changes in circumstances, future assessments of credit risk may
yield materially different results, which may require an increase or a decrease
in the allowance for loan losses.
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. Loans identified as trouble debt restructuring or other impaired
with a balance of Rs. 100 million and above are individually reviewed and an
allowance is determined based on the difference between the loan's carrying
value and the loan's fair value. Fair value is based on either the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the collateral, less
disposal costs, if the loan is collateral dependent. No other allowance is
provided on impaired loans that are individually reviewed.
Each portfolio of smaller-balance, homogenous loans, including consumer
loans and credit card receivables, is evaluated for impairment. The allowance
for loan losses attributed to these loans is established by a process that
includes an estimate of probable losses inherent in the portfolio. These include
historical delinquency and credit loss experience and current trends and
conditions.
These evaluation processes are subject to numerous estimates and judgments.
The use of different estimates or assumptions could produce different results.
We regularly monitor qualitative and quantitative trends in the loan portfolio,
including changes in the levels of restructured loans and other impaired loans.
The distribution of the allowance as described above does not diminish the fact
that
138
the entire allowance is available to absorb credit losses in the loan portfolio.
Our principal focus, therefore, is on the adequacy of the total allowance for
loan losses.
Securitization
We primarily securitize commercial loans through "pass-through"
securitizations. After the securitization, we generally continue to maintain
customer account relationships and service loans transferred to the
securitization trust. Transfers that do not meet the criteria for a sale under
SFAS No. 140, are required to be recorded as secured borrowings with a pledge of
collateral, and such secured borrowings are required to be reported as a
component of other borrowings. However, there have been no transfers which have
not met the criteria for a sale under SFAS No. 140, and consequent no recording
or reporting has been entailed. Recourse and servicing obligations and put
options written are recorded as proceeds of the sale.
Retained beneficial interests in the loans and servicing rights are
measured by allocating the carrying value of the loans between the assets sold
and the retained interest, based on the relative fair value at the date of the
securitization. The fair values are determined using financial models or quoted
market prices or sale value of similar assets.
Financial models and their underlying assumptions relating to delinquency,
prepayments, servicing costs and conversions from floating rate loans to fixed
rate loans, impact the amount and timing of gains and losses recognized and the
valuation of retained interests, and the use of different financial models or
assumptions could produce different financial results.
Recently Issued Accounting Standards
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities - an interpretation of Accounting Research Bulletin No. 51.
FIN No. 46 is applicable to all variable interest entities created after January
31, 2003. In respect of variable interest entities created before February 1,
2003, FIN No. 46 will be applicable from fiscal periods beginning after June 15,
2003. There are no variable interest entities that require disclosure under FIN
46. Further, in December 2003, the FASB issued a revision to FIN No. 46 to
clarify some of the provisions of FIN No. 46 and to exempt certain entities from
its requirements. We have transferred certain impaired loans to borrower
specific funds/trusts managed by an asset reconstruction company which are VIEs
within the definition contained in FIN 46/ FIN 46R. Accordingly, we have
consolidated these entities at year-end fiscal 2004.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Adoption of SFAS No. 149 did not have a material
impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equities. SFAS No. 150
requires issuers to classify as liabilities (or assets in some circumstance)
three classes of freestanding financial instruments that embody obligations for
the issuer. Generally, SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. Adoption of
SFAS No. 150 did not have a material impact on our consolidated financial
statements.
139
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132
revises financial statement disclosures for pension plans and other post
retirement benefit plans. SFAS No. 132 is applicable for fiscal periods
beginning after December 15, 2003. We have adopted the disclosure provisions of
SFAS No. 132.
140
MANAGEMENT
Directors and Executive Officers
Our board of directors, consisting of 17 members at September 20, 2004, is
responsible for the management of our business. Our organizational documents
provide for a minimum of three directors and a maximum of 21 directors,
excluding the government director and the debenture director (defined below),
if any. We may, subject to the provisions of our organizational documents and
the Indian Companies Act, change the minimum or maximum number of directors by
a resolution which is passed at a general meeting by a majority of the present
and voting shareholders. In addition, under the Indian Banking Regulation Act,
the Reserve Bank of India may require us to convene a meeting of our
shareholders for the purposes of appointing new directors to our board of
directors.
The Banking Regulation Act requires that at least 51% of the directors
should have special knowledge or practical experience in banking and areas
relevant to banking including accounting, finance, agriculture, and small scale
industry. Accordingly, all of our directors are professionals with special
knowledge of one or more of the above areas. Of the 17 directors, five are
directors who are in our wholetime employment, or wholetime directors. The
appointment of wholetime directors requires the approval of the Reserve Bank of
India and the shareholders. Under the terms of the loan and guarantee
facilities provided by the government of India to us, the government of India
is entitled to appoint and has appointed one representative to our board,
currently Mr. Vinod Rai. Of the remaining 11 independent directors, the
Chairman of our board, Mr. N. Vaghul, is the former chairman of ICICI, Mr. P.
C. Ghosh and Mr. S.B. Mathur are the Chairmen of General Insurance Corporation
of India and Life Insurance Corporation of India, respectively, which are among
ICICI Bank's large institutional shareholders, one director is a consultant,
one is a technocrat-entrepreneur, one is a practicing chartered accountant, one
is a professor of finance, one is a retired company executive, one is from a
financial holding company with investments in insurance and investment
management and two are from industrial companies. Of the 12 non-wholetime
directors, three have specialized knowledge in respect of agriculture and rural
economy or small-scale industry. The Reserve Bank of India has also prescribed
`fit and proper' criteria to be considered while appointing persons as
directors of banking companies. Our directors are required to make declarations
confirming their ongoing compliance of the above `fit and proper' criteria. Our
board of directors has reviewed the declarations received from the directors in
this regard and determined that all our directors satisfy the `fit and proper'
criteria.
Our organizational documents also provide that we may execute trust deeds
securing our debentures under which the trustee or trustees may appoint a
director, known as the debenture director. The debenture director is not
subject to retirement by rotation and may only be removed as provided in the
relevant trust deed. Currently, there is no debenture director on our board of
directors.
Pursuant to the provisions of the Indian Companies Act, at least
two-thirds of the total number of directors, excluding the government director
and the debenture director, are subject to retirement by rotation. One-third of
these directors must retire from office at each annual meeting of shareholders.
A retiring director is eligible for re-election. Pursuant to the provisions of
the Indian Banking Regulation Act, none of the directors other than wholetime
directors may hold office continuously for a period exceeding eight years. In
terms of the requirements of the Reserve Bank of India the maximum age limit
for directors is 70 years.
Our board of directors appointed Mr. S.B. Mathur, Chairman, Life Insurance
Corporation of India and Mr. V. Prem Watsa, Chairman & CEO of Fairfax Financial
Holdings Limited as non-wholetime directors effective January 29, 2004. The
shareholders have approved their appointments at the annual general meeting
held on September 20, 2004. Dr. Satish C. Jha, who had attained the age of 70
years did not seek reappointment at the annual general meeting and thus ceased
to be a director effective September 20, 2004. Mr. R. Seshasayee who was
appointed as a non-wholetime director effective May 3, 2002, resigned from our
board effective October 31, 2003.
141
Our board of directors had appointed Ms. Chanda Kochhar and Dr. Nachiket
Mor as Executive Directors effective April 1, 2001, Mr. K.V. Kamath and Ms.
Lalita D. Gupte, previously non-wholetime directors on our board, as Managing
Director & CEO and Joint Managing Director respectively, effective May 3, 2002
and Ms. Kalpana Morparia and Mr. S. Mukherji as Executive Directors, effective
May 3, 2002. Our board subsequently re-appointed Ms. Lalita D. Gupte, whose
tenure of appointment was until June 23, 2004, as Joint Managing Director till
October 31, 2006. The Reserve Bank of India and our shareholders have approved
these appointments. Our board also designated Ms. Kalpana Morparia as Deputy
Managing Director effective February 1, 2004. Mr. H. N. Sinor, who was
appointed Managing Director & CEO effective June 1, 1998 and re-designated as
Joint Managing Director effective May 3, 2002, retired effective June 1, 2003.
Mr.S. Mukherji, who was appointed as Executive Director effective May 3, 2002,
was appointed as Managing Director & CEO of ICICI Securities Limited, a
subsidiary of ICICI Bank, effective February 1, 2004 and ceased to be a
director of ICICI Bank effective that date.
The tenures of appointment of Mr. K. V. Kamath and Ms. Kalpana Morparia
are until April 30, 2006. The tenure of appointment of Ms. Lalita D. Gupte is
until October 31, 2006 and the tenures of each of Ms. Chanda D. Kochhar and Dr.
Nachiket Mor is until March 31, 2006. However, in order to comply with the
provisions of Indian Companies Act and ICICI Bank's organizational documents,
Ms. Lalita D. Gupte and Ms. Kalpana Morparia will be subject to retirement by
rotation if at any time the number of non-rotational directors exceeds
one-third of the total number of directors. If they are re-appointed as
directors immediately upon retirement by rotation, they will continue to hold
their offices as wholetime directors, and the retirement by rotation and
re-appointment shall not be deemed to constitute a break in their appointment.
Our other executive officers may hold office until they retire, unless they are
discharged earlier by us.
Our board of directors at September 20, 2004 had the following members:
--------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
--------------------------------------------------------------------------------------------------------------------------
Mr. Narayanan Vaghul 68 March 27, 2002 Chairman
Chairman Asset Reconstruction Company (India) Limited
GIVE Foundation
Chairman: Himatsingka Seide Limited
Agriculture & Small Enterprises Business ICICI Knowledge Park
Committee Mahindra Industrial Park Limited
Board Governance & Remuneration Committee Pratham India Education Initiative
Business Strategy Committee Director
Credit Committee Air India Limited
Risk Committee Air India Air Transport Services Limited
Air India Engineering Services Limited
Profession: Apollo Hospitals Enterprise Limited
Development Banker Azim Premji Foundation
Hemogenomics Private Limited
Ispat Caribbean
Ispat Europe Group S.A., Luxembourg
Ispat International N.V., Rotterdam, The
Netherlands
Ispat Mexicana, S.A. de C.V., Mexico
Mahindra & Mahindra Limited
Nicholas Piramal India Limited
Pratham Tamilnadu Education Initiative
Technology Network (India) Private Limited
Wipro Limited
--------------------------------------------------------------------------------------------------------------------------
Mr. Uday Madhav Chitale 54 August 21, 1997 Partner
M.P. Chitale & Company
Chairman: M.P. Chitale & Associates
Audit Committee Director
Fraud Monitoring Committee Crossdomain Solutions Private Limited
Share Transfer and Shareholders'/Investors' DFK Consulting Services (India) Private Limited
Grievance Committee DFK International (the Netherlands)
--------------------------------------------------------------------------------------------------------------------------
142
--------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
--------------------------------------------------------------------------------------------------------------------------
GMR Energy Limited
Profession: Indian Council for Dispute Resolution
Chartered Accountant
--------------------------------------------------------------------------------------------------------------------------
Mr. Prabhas Chandra Ghosh 59 January 31, 2003 Chairman
General Insurance Corporation of India
Profession: GIC Asset Management Company Limited
Company Executive GIC Housing Finance Limited
Loss Prevention Association of India Limited
India International Insurance Pte. Limited
Director
Deposit Insurance and Credit Guarantee
Corporation
Export Credit Guarantee Corporation of India
Indian Register of Shipping
Kenindia Assurance Company Limited
Life Insurance Corporation of India
Life Insurance Corporation (Mauritius) Offshore
Limited
Southern Petrochemical Industries Corporation
Limited
--------------------------------------------------------------------------------------------------------------------------
Mr. Sunil Behari Mathur 59 January 29, 2004 Chairman
Jeevan Bima Sahayog Asset Management Company
Profession: Limited
Company Executive Life Insurance Corporation of India
LIC HFL Care Homes Limited
LIC Housing Finance Limited
LIC (International) E.C. Bahrain
LIC (Lanka) Limited
LIC (Mauritius) Offshore Limited LIC (Nepal)
Limited
Director
General Insurance Corporation of India
Kenindia Assurance Company Limited, Nairobi,
Kenya
National Commodities and Derivatives Exchange
Limited
National Housing Bank
National Stock Exchange of India Limited
--------------------------------------------------------------------------------------------------------------------------
143
--------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
--------------------------------------------------------------------------------------------------------------------------
Mr. Lakshmi Niwas Mittal 54 May 3, 2002 Director
Artha Limited
Profession: Caribean Ispat Limited
Industrialist Galmatias Limited
Grupo Ispat International SA de CV
Irish Ispat Limited
Iscor Limited
Ispat (US) Holdings Inc
Ispat Annaba Spa
Ispat Europe Group SA
Ispat Inland Holdings Inc
Ispat Inland Inc
Ispat Inland LP
Ispat International Investments SL
Ispat International Limited
Ispat International NV
Ispat Karmet JSC
Ispat Mexicana SA de CV
Ispat Sidbec Inc
Ispat Sidex Holdings BV
Ispat Sidex SA
Ispat Tebessa Spa
LNM Capital Limited
LNM Holdings BV
LNM Holdings NV
LNM Internet Ventures Limited
Lucre Limited
Nestor Limited
Nuav Limited
Pratham UK Limited
PT Ispat Indo
Tommyfield Limited
Chairman - Supervisory Board
Ispat Nova Hut a.s.
President - Supervisory Board
Ispat Polska Stal S.A.
--------------------------------------------------------------------------------------------------------------------------
Mr. Anupam Pradip Puri 58 May 3, 2002 Director
Dr. Reddy's Laboratories Limited
Profession: Godrej Consumer Products Limited
Management Consultant Mahindra-British Telecom Limited
Mahindra & Mahindra Limited
Patni Computer Systems Limited
--------------------------------------------------------------------------------------------------------------------------
Mr. Vinod Rai 56 January 3, 2003 Director
Additional Secretary (Financial Sector) Bank of Baroda
IFCI Limited
Ministry of Finance, Government of India Infrastructure Development Finance Company
Limited
Profession: Small Industries Development Bank of India
Government Service
--------------------------------------------------------------------------------------------------------------------------
Mr. Somesh Ramchandra Sathe 59 January 29, 1998 Managing Director
Arbes Tools Private Limited
Profession: ESSP Meditek Private Limited
Technocrat Entrepreneur Sukeshan Equipments Private Limited
Partner
Tooltronics
--------------------------------------------------------------------------------------------------------------------------
144
--------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
--------------------------------------------------------------------------------------------------------------------------
Mr. Mahendra Kumar Sharma 57 January 31, 2003 Vice-Chairman
Hindustan Lever Limited
Profession: Chairman
Company Executive Vasishti Detergents Limited
Director
Hind Lever Chemicals Limited
Hind Lever Trust Limited
Indexport Limited
Lever India Exports Limited
Nepal Lever Limited
Toc Disinfectants Limited
--------------------------------------------------------------------------------------------------------------------------
Mr. Priya Mohan Sinha 64 January 22, 2002 Chairman
Profession: Professional Manager Bata India Limited
Director
Azim Premji Foundation
Indian Oil Corporation Limited
Lafarge India Limited
Quadra Advisory Private Limited
Wipro Limited
--------------------------------------------------------------------------------------------------------------------------
Prof. Marti Gurunath Subrahmanyam 58 May 3, 2002 Director
Profession: Professor Infosys Technologies Limited
Nexgen Financial Holdings Limited
Nexgen Re Limited
Nomura Asset Management (U.S.A.), Inc.
Supply Chainge Inc.
The Animi Offshore Fund Limited
The Animi Offshore Concentrated Risk Fund
Usha Communication Inc.
Director - Board of Governors
National Institute of Securities Markets
--------------------------------------------------------------------------------------------------------------------------
Mr. V. Prem Watsa 54 January 29, 2004 Chairman & CEO
Profession: Company Executive Crum & Foster Holdings Corp.
Fairfax Financial Holdings Limited
Chairman
4129768 Canada Inc.
Federated Insurance Company of Canada
Federated Life Insurance Company of Canada
Northbridge Financial Corporation
TIG Holdings, Inc.
President
1109519 Ontario Limited
810679 Ontario Limited
FFHL Share Option 1 Corp.
The Sixty Two Investment Company Limited
Vice-President
FFHL Group Limited
Vice-President & Secretary
Hamblin Watsa Investment Counsel Limited
Director
Commonwealth Insurance Company
Cunningham Lindsey U.S., Inc.
Hudson Insurance Company
Lindsey Morden Acquisitions
Lindsey Morden Group Inc.
Lombard General Insurance Company of Canada
Lombard Insurance Company
Markel Insurance Company of Canada
Odyssey Re Holdings Corp.
--------------------------------------------------------------------------------------------------------------------------
145
--------------------------------------------------------------------------------------------------------------------------
Name, Designation and Profession Age Date of Appointment Other appointments
--------------------------------------------------------------------------------------------------------------------------
The Sixty Four Foundation
The Sixty Three Foundation
Zenith Insurance Company
--------------------------------------------------------------------------------------------------------------------------
Mr. Kundapur Vaman Kamath 56 April 17, 1996 Chairman
Managing Director & CEO ICICI Bank Canada
(Managing Director ICICI Bank UK Limited
Chairman: & CEO effective ICICI Lombard General Insurance Company Limited
Committee of Directors May 3, 2002) ICICI Prudential Life Insurance Company Limited
ICICI Securities Limited
Profession: ICICI Venture Funds Management Company Limited
Company Executive Director
Indian Institute of Management, Ahmedabad
Director - Asia Pacific Regional Board
Visa International
Director - Board of Governors
Indian Institute of Information Technology
--------------------------------------------------------------------------------------------------------------------------
Ms. Lalita Dileep Gupte 55 September 12, 1994 Director
Joint Managing Director (Joint Managing ICICI Bank Canada
Director effective ICICI Bank UK Limited
Chairperson: May 3, 2002) ICICI Lombard General Insurance Company Limited
Asset Liability Management Committee ICICI Prudential Life Insurance Company Limited
ICICI Securities Limited
Profession: ICICI Venture Funds Management Company Limited
Company Executive
--------------------------------------------------------------------------------------------------------------------------
Ms. Kalpana Morparia 55 May 3, 2002 Chairperson
Deputy Managing Director ICICI Investment Management Company Limited
Director
Profession: ICICI Home Finance Company Limited
Company Executive ICICI Lombard General Insurance Company Limited
ICICI Prudential Life Insurance Company Limited
ICICI Securities Limited
ICICI Venture Funds Management Company Limited
--------------------------------------------------------------------------------------------------------------------------
Ms. Chanda Kochhar 42 April 1, 2001 Chairperson
Executive Director ICICI Home Finance Company Limited
ICICI Distribution Finance Private Limited
Profession: Director
Company Executive ICICI Prudential Life Insurance Company Limited
--------------------------------------------------------------------------------------------------------------------------
Dr. Nachiket Mor 40 April 1, 2001 Director
Executive Director ICICI Home Finance Company Limited
ICICI Securities Limited
Profession: ICICI Venture Funds Management Company Limited
Company Executive Pratham India Education Initiative
--------------------------------------------------------------------------------------------------------------------------
146
The executive officers of ICICI Bank at August 31, 2004 were as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Total
Total stock
Stock stock options
Total Share- options Stock options out-
Designation Years remuneration Bonus for holdings granted options granted standing
and of work in fiscal fiscal at August in fiscal granted in at August at August
Name Age Responsibilities experience 2004(1) 2004(2) 31, 2004(3) 2004(4) April 2004 31, 2004 31, 2004
-----------------------------------------------------------------------------------------------------------------------------------
Mr. K.V. 56 Managing 33 Rs. 12,316,116 Rs. 3,720,000 68,500 150,000 250,000 775,000 686,000
Kamath (5) Director & CEO
Ms. Lalita D. 55 Joint Managing 33 Rs. 10,554,771 Rs. 2,790,000 30,541 137,500 165,000 630,000 580,500
Gupte (5) Director
-International
Banking
Ms. Kalpana 55 Deputy 28 Rs. 6,641,935 Rs. 2,010,000 21,190 125,000 150,000 490,000 470,000
Morparia (5) Managing
Director
- Corporate
Centre and
Special Assets
Ms. Chanda D. 42 Executive 20 Rs. 5,106,383 Rs. 1,650,000 77,881 100,000 125,000 380,000 306,000
Kochhar(5) Director
- Retail
Banking
Dr. Nachiket 40 Executive 17 Rs. 5,122,568 Rs. 1,650,000 31,000 100,000 125,000 377,000 250,000
Mor(5) Director
- Wholesale
Banking and
Project Finance
Mr. Sanjiv 53 Senior General 28 Rs. 5,165,936 Rs. 2,016,000 4,289 - 37,500 185,500 185,500
Kerkar (5) Manager
Ms. Ramni 52 Senior General 28 Rs. 4,641,076 Rs. 1,812,480 9,566 75,000 37,500 244,500 217,500
Nirula(5) Manager
Mr. P. H. 52 Senior General 31 Rs. 3,405,534 Rs. 1,932,000 12,650 44,000 - 154,700 107,450
Ravikumar(5) Manager
(currently
seconded to
National
Commodities &
Derivatives
Exchange
Limited)
Mr. Balaji 39 Senior General 15 Rs. 4,696,576 Rs. 2,640,000 20,000 75,000 75,000 255,000 209.000
Swaminathan(5) Manager
Mr. Bhargav 38 Senior General 14 Rs. 3,853,917 Rs. 1,620,000 6,000 34,400 75,000 173,475 167,475
Dasgupta(5) Manager
Mr. M. N. 55 Senior General 36 Rs. 3,186,776 Rs. 1,296,000 21,550 37,500 37,500 170,250 137,100
Gopinath(5) Manager
Mr. N. S. 39 Chief 16 Rs. 3,773,608 Rs. 1,944,000 7,980 37,500 75,000 187,400 171,920
Kannan(5) Financial
Officer and
Treasurer
Ms. Madhabi 38 Senior General 16 Rs. 3,955,805 Rs. 1,944,000 30,811 37,500 75,000 204,900 147,450
Puri-Buch(5) Manager
Mr.V. 36 Senior General 14 Rs. 3,753,467 Rs. 1,944,000 9,500 37,500 75,000 184,900 157,450
Vaidyanathan(5) Manager
Mr. K. 43 Senior General 19 Rs. 3,488,878 Rs. 1,860,000 350 37,500 37,500 105,000 93,000
Ramkumar(5) Manager
Ms. Vishakha 35 Senior General 12 Rs. 2,991,275 Rs. 1,368,000 6,315 34,400 37,500 135,975 128,660
Mulye(5) Manager
Mr. Nagesh 45 Senior General 20 Rs. 3,932,916 Rs. 1,860,000 20,881 37,500 37,500 157,500 120,300
Pinge(5) Manager
(1) Including ICICI Bank's contribution to the superannuation fund and
provident fund as described under "-Compensation and Benefits to Directors
and Officers- Superannuation Fund and Provident Fund" and excluding bonus
payable for fiscal 2003 which was paid in fiscal 2004.
(2) Bonus for fiscal 2004 was paid in fiscal 2005.
(3) Executive officers and directors (wholetime and non-wholetime) as a group
held less than 0.5% of ICICI Bank's equity shares as of this date.
(4) Each stock option, once exercised, is equivalent to one equity share of
ICICI Bank. ICICI Bank granted these stock options to its executive
officers at no cost. See "-Compensation and Benefits to Directors and
Officers- Employee Stock Option Scheme" for a description of the other
terms of these stock options.
147
(5) In accordance with the Scheme of Amalgamation, directors and employees of
ICICI have received stock options in ICICI Bank equal to half the number
of the outstanding unexercised stock options they held in ICICI with the
exercise price of these options being equal to twice the exercise price
for the ICICI stock options exchanged. The stock options mentioned above
include ICICI stock options converted into ICICI Bank stock options on
this basis.
Mr. K.V. Kamath is a mechanical engineer and a post-graduate in business
management from the Indian Institute of Management, Ahmedabad. He joined ICICI
in 1971 and worked in the areas of 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 private sector
group in Indonesia as advisor to its chairman. Mr. Kamath joined the board of
directors of ICICI in October 1995. He was appointed Managing Director & CEO of
ICICI in May 1996 and was re-appointed in May 2001. Mr. Kamath was a
non-wholetime director on the board of ICICI Bank from April 1996. Effective
May 3, 2002 our board appointed Mr. Kamath as Managing Director & CEO.
Ms. Lalita D. Gupte has a Bachelor of Arts degree and also holds a Masters
degree in management science from the Jamnalal Bajaj Institute of Management
Studies, University of Mumbai. She joined ICICI in 1971, where she worked in
the areas of project finance, leasing, resources and treasury, and credit
operations. She joined the board of directors of ICICI in June 1994 as
Executive Director and was designated as 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.
Gupte was a non-wholetime director on the board of ICICI Bank from September
1994. Effective May 3, 2002, our board appointed Ms. Gupte as Joint Managing
Director. Our board and shareholders have approved her re-appointment as Joint
Managing Director until October 31, 2006 on the expiry of her tenure of
appointment on June 23, 2004. She is currently in charge of the international
operations.
Ms. Kalpana Morparia holds Bachelor's degrees in science and law. She
worked in the legal department of ICICI from 1975 to 1994. From 1996, when she
was designated as General Manager, she was in charge of the legal, planning,
treasury and corporate communications departments. In 1998, she was designated
a Senior General Manager of ICICI. She joined our board of directors of ICICI
in May 2001. Effective May 3, 2002 our board appointed Ms. Morparia as an
Executive Director. Further, effective February 1, 2004, our board designated
her as Deputy Managing Director. She is currently in charge of the Corporate
Centre which includes the strategy, risk management, legal, finance,
secretarial, human resources management, corporate communications and
facilities management and administration departments. She is also in charge of
the special assets management group.
Ms. Chanda D. Kochhar holds a management degree from the Jamnalal Bajaj
Institute of Management Studies, Mumbai and a degree in cost and works
accountancy from the Institute of Cost and Works Accountants of India. She
started her career in 1984 with ICICI in its project finance department and has
worked in the areas of corporate credit, infrastructure financing, e-commerce,
strategy and retail finance. Ms. Kochhar was designated a Senior General
Manager of ICICI in 2000 and was in charge of its retail business. She was
appointed to our board as an Executive Director in April 2001. She is currently
responsible for the retail banking operations.
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 worked in the areas of project finance, corporate
planning and treasury. Dr. Mor was designated a Senior General Manager of ICICI
in 2000 and was in charge of treasury. He was appointed to our board of
directors as an Executive Director in April 2001. He is currently responsible
for wholesale banking and project finance.
Mr. Sanjiv Kerkar is a chemical engineer and holds a management degree
from the Jamnalal Bajaj Institute of Management Studies, University of Mumbai.
He worked with ICICI from 1979 until 1993, when he joined Asian Finance and
Investment Company Limited, an affiliate of the Asian Development Bank. Mr.
Kerkar worked with Asian Finance and Investment Company from 1993 to
148
1996. In 1996, he re-joined ICICI as a General Manager and was in charge of the
risk management department in ICICI. In 1998 he was designated a Senior General
Manager of ICICI. Currently, Mr. Kerkar heads the Organizational Excellence
Group, which is responsible for our quality initiatives.
Ms. Ramni Nirula is a post-graduate in management studies from Delhi
University. She joined ICICI in 1975 and held various positions in the northern
regional office of ICICI. Ms. Nirula became General Manager in 1998 and was the
Zonal Manager of the Delhi zonal office for the period 1998 to 2000. She was
designated as Senior General Manager of ICICI in fiscal 2000. She was the
Managing Director & CEO of ICICI Securities from January 1, 2003 to January 31,
2004. She is currently responsible for the Government Banking Group and the
Rural and Micro-banking and Agri- business Group.
Mr. P.H. Ravikumar is a graduate from Osmania University and is a
Certified Associate of the Indian Institute of Bankers. Mr. Ravikumar started
his career with Bank of India in 1972. He joined ICICI Bank in 1994. He was
designated as Senior Executive Vice-President in 1998 and was in charge of
treasury, foreign exchange and credit. Mr. Ravikumar joined ICICI in April 2001
as a Senior General Manager. He is currently on secondment to the National
Commodity & Derivatives Exchange Limited as its Managing Director.
Mr. Balaji Swaminathan is a graduate in commerce from Calcutta University,
a chartered accountant and a cost and works accountant. Mr. Balaji Swaminathan
started his career with KPMG International in 1989. He worked in KPMG India as
Partner/Director from 1994 to 2001. He joined ICICI in August 2001 as its Chief
Financial Officer and was the Chief Financial Officer of ICICI up to March 31,
2002. He was the Chief Financial Officer of ICICI Bank from April 1, 2002 to
March 31, 2003. Currently, he is responsible for the Corporate Banking Group.
Mr. Bhargav Dasgupta is an engineer and has a post graduate degree in
management from Indian Institute of Management, Bangalore. He joined ICICI in
1992 in the project finance department. In 2003 he was designated a Senior
General Manager of ICICI Bank. Currently, he is responsible for the
International Banking Group.
Mr. M. N. Gopinath is a graduate in commerce and has a post-graduate
degree in business administration from Madras University. Mr. Gopinath started
his career with Bank of India in 1970. He worked in various positions at Bank
of India including as Vice-President in its New York Branch. He joined ICICI
Bank in 1995 as Senior Vice-President. In 2003 he was designated a Senior
General Manager of ICICI Bank. Currently, he is responsible for the Retail
Infrastructure Group and the Facilities Management and Administration Group.
Mr. N. S. Kannan is an engineer and a Chartered Financial Analyst from the
Institute of Chartered Financial Analysts of India and has a post-graduate
degree in management from the Indian Institute of Management, Bangalore. Mr.
Kannan joined ICICI in 1991 in the project finance department. In 2003 he was
designated a Senior General Manager of ICICI Bank. Currently, he is the Chief
Financial Officer and Treasurer of ICICI Bank. He is also responsible for the
Risk Management Group and the Corporate Communications Group.
Ms. Madhabi Puri-Buch is a graduate in mathematical economics and has a
post-graduate degree in management from the Indian Institute of Management,
Ahmedabad. She joined ICICI in 1989 in the project finance department. She left
ICICI in 1992 and worked in ANZ Grindlays Bank and ORG MARG Research before
re-joining ICICI again in January 1997 in the planning and treasury department.
In 2003 she was designated a Senior General Manager of ICICI Bank. Currently,
she is responsible for Retail Operations, the Retail Branch Banking & Call
Centre Group, the Product and Technology Group in the Wholesale Banking Group
and the Corporate Brand Group.
Mr. V. Vaidyanathan has Bachelor's and Master's degrees in business
administration from Birla Institute of Technology & Science, Ranchi. He worked
in Citibank N.A. before joining ICICI in 2000 in the personal financial
services division. In 2003 he was designated a Senior General Manager of ICICI
Bank. Currently, he is responsible for the Retail Products & Distribution Group
in the Retail Banking Group.
149
Mr. K. Ramkumar is a science graduate from Madras University with
post-graduate diploma in industrial relations and labor laws. He worked with
ICI India before joining ICICI in 2001 in the human resources department. In
2004, he was designated as Senior General Manager of ICICI Bank and he is
currently in charge of the Human Resources Management Group.
Ms. Vishakha Mulye is a commerce graduate from Mumbai University, and a
chartered accountant. Ms. Mulye joined ICICI in 1993 in the project finance
department. She was designated as Senior General Manager in 2004 and is
currently in charge of Structured Finance, Credit and Markets Group.
Mr. Nagesh Pinge is a commerce and law graduate from Mumbai University,
and a chartered accountant. He joined ICICI in 1983 in the leasing department.
He left ICICI in 1989 and worked in other financial services companies before
re-joining ICICI again in April 1998 in the risk management department. He was
designated as Senior General Manager in 2004 and is currently in charge of the
Compliance and Audit Group.
Corporate Governance
Our 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 our economic activities.
Our 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, generally comprising a
majority of independent directors and chaired by an independent director, to
oversee critical areas and functions of executive management.
Our 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.
Our board's role, functions, responsibility and accountability are clearly
defined. In addition to its primary role of monitoring corporate performance,
the functions of our 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 our board of directors to discharge these responsibilities
effectively, executive management gives detailed reports on our performance to
the board on a quarterly basis.
Our board functions either as a full board or through various committees
constituted to oversee specific operational areas. These board committees meet
regularly. The constitution and main functions of the various committees are
given below.
150
Agriculture & Small Enterprises Business Committee
The Agriculture & Small Enterprises Business Committee comprises four
independent Directors - Mr. N. Vaghul, Mr. Somesh R. Sathe, Mr. M.K. Sharma and
Mr. P.M. Sinha. The Committee is chaired by Mr. N. Vaghul.
The functions of the Agriculture & Small Enterprises Business Committee
include review of our business strategy in the agri-business and small
enterprises segments and review of the quality of the agricultural lending and
small enterprises finance credit portfolio.
Audit Committee
The Audit Committee comprises three independent directors - Mr. Uday M.
Chitale, who is a chartered accountant, Mr. M.K. Sharma and Mr. Somesh R.
Sathe. The committee is chaired by Mr. Uday M. Chitale. Mr. M.K. Sharma was
appointed as Alternate Chairman of the Committee effective July 22, 2004. Our
board of directors has determined that Mr. Uday M. Chitale qualifies as an
audit committee financial expert.
The Audit Committee provides direction to the audit and risk management
function and monitors the quality of the internal and statutory audit. The
responsibilities of the Audit Committee include overseeing of the financial
reporting process to ensure fairness, sufficiency and credibility of financial
statements, recommendation of appointment and removal of central and branch
statutory auditors and fixation of their remuneration, review of the annual
financial statements before submission to our board, review of the adequacy of
internal control systems and the internal audit function, review of compliance
with the inspection and audit reports of the Reserve Bank of India and reports
of statutory auditors, review of the findings of internal investigations,
discussion on the scope of audit with external auditors and examination of
reasons for substantial defaults, if any, in payment to stakeholders.
All audit and non-audit services to be provided by our principal
accountants are pre-approved by the Audit Committee before such services are
provided to us.
Board Governance & Remuneration Committee
The Board Governance & Remuneration Committee comprises three independent
directors - Mr. N. Vaghul, Mr. Anupam Puri, and Mr. P. M. Sinha. The Committee
is chaired by Mr. N. Vaghul.
The functions of the Board Governance & Remuneration Committee include
recommendation of appointments to our board, evaluation of the performance of
the Managing Director & CEO and other wholetime Directors on pre-determined
parameters, recommendation to our board of the remuneration (including
performance bonuses and perquisites) to wholetime directors, approving the
policy for and quantum of bonus payable to the members of the staff, framing
guidelines for the employees stock option scheme and recommendation of grant of
stock options to the staff and wholetime directors of ICICI Bank and its
subsidiary companies.
Business Strategy Committee
The Business Strategy Committee comprises five directors - Mr. N. Vaghul,
Mr. Anupam Puri, Mr. M. K. Sharma, Mr. P. M. Sinha and Mr. K. V. Kamath. The
majority of the members of this Committee are independent directors and it is
chaired by Mr. N. Vaghul.
The functions of the Business Strategy Committee are to approve the annual
income and expenditure and capital expenditure budgets for presentation to our
board for final approval and to review and recommend to our board our business
strategy.
151
Credit Committee
The Credit Committee comprises four directors - Mr. N. Vaghul, Mr. Somesh
R. Sathe, Mr. M. K. Sharma 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 review of developments in key
industrial sectors and approval of credit proposals in accordance with the
authorization approved by our board.
Fraud Monitoring Committee
The Fraud Monitoring Committee was constituted by our board effective May
1, 2004. The Committee comprises five Directors - Mr. Uday M. Chitale, Mr. M.K.
Sharma, Mr. K.V. Kamath, Ms. Kalpana Morparia and Ms. Chanda D. Kochhar. Mr.
Uday Chitale is the Chairman of the Committee.
The functions of the Fraud Monitoring Committee include monitoring and
review of all instances of frauds involving Rs.10.0 million (US$ 230,415) and
above.
Risk Committee
The Risk Committee comprises five directors - Mr. N. Vaghul, Mr. Uday M.
Chitale, Prof. Marti G. Subrahmanyam, Mr. V. Prem Watsa and Mr. K. V. Kamath.
The majority of the members of this committee are independent directors and it
is chaired by Mr. N. Vaghul.
This Committee reviews risk management policies in relation to various
risks (credit, portfolio, liquidity, interest rate, off-balance sheet and
operational risks), investment policies and strategy and regulatory and
compliance issues in relation thereto.
Share Transfer & Shareholders'/Investors' Grievance Committee
The Share Transfer & Shareholders'/Investors' Grievance Committee
comprises four directors - Mr. Uday M. Chitale, Mr. Somesh R. Sathe, Ms.
Kalpana Morparia and Ms. Chanda D. Kochhar. The Committee, is chaired by an
independent director, Mr. Uday M. Chitale.
The functions and powers of the Share Transfer & Shareholders'/Investors'
Grievance Committee include approval and rejection of transfer or transmission
of equity and preference shares, bonds, debentures and securities, issue of
duplicate certificates, allotment of shares and securities issued from time to
time, including those under stock options, review and redressal of
shareholders' and investors' complaints, delegation of authority for opening
and operation of bank accounts for payment of interest, dividend and redemption
of securities and the listing of securities on stock exchanges.
Committee of Directors
The Committee of Directors comprises all five wholetime directors and is
chaired by Mr. K.V. Kamath, Managing Director & CEO.
The powers of the Committee of Directors include review of performance
against targets for various business segments, credit approvals as per
authorization approved by our board, approvals in respect of borrowing and
treasury operations and premises and property related matters.
Asset-Liability Management Committee
The Asset Liability Management Committee comprises the Joint Managing
Director, Deputy Managing Director and two Executive Directors and is chaired
by Ms. Lalita D. Gupte, Joint Managing Director.
The functions of the Committee include management of ICICI Bank's balance
sheet, review of the asset-liability profile with a view to manage the interest
rate risk and deciding the deposit rates and prime lending rate of ICICI Bank.
152
Code of ethics
We have adopted a Code of Business Conduct and Ethics for our directors
and all our employees, which is filed as an exhibit to this report.
Principal Accountant Fees and Services
The total fees (excluding service tax and out of pocket expenses) paid to
our principal accountant relating to audit of consolidated financial statements
for fiscal 2004 and fiscal 2003 and the fees for other professional services
billed in fiscal 2004 and fiscal 2003 are as follows:
Convenience
translation into US$
Year ended March 31, Year ended March 31,
2003 2004 2004
-------- -------- --------------------
(in millions)
Audit
Audit of ICICI Bank Limited and its subsidiaries........... Rs. 19.9 Rs. 28.1 US$ 647,830
Audit-related services.....................................
Opinion on non-statutory accounts presented in Indian
Rupees................................................ - 0.2 4,839
Sub-total.................................................... 19.9 28.3 652,669
Non-audit services
Tax services...............................................
Tax compliance........................................... 1.7 0.7 16,838
Application for offshore banking license................. - 1.0 24,032
Other services............................................. 1.2 2.1 47,465
Sub-total.................................................... 3.0 3.8 88,336
------- ------- -----------
Total........................................................ 22.9 32.2 741,004
======= ======= ===========
Fees for "other services" are principally fees related to certification
services to one of our subsidiaries. The Audit Committee of ICICI Bank approved
the fees paid to our principal accountant relating to audit of consolidated
financial statements for fiscal 2004 and fees for other professional services
billed in fiscal 2004.
Summary Comparison of Corporate Governance Practices
The following is a summary comparison of significant differences between
our corporate governance practices and those required by the NYSE for U.S.
issuers.
Independent directors. A majority of our board are independent directors,
as defined under applicable Indian legal requirements. Under these
requirements, directors are not independent if they have any material pecuniary
relationship or transactions with us, our management or our subsidiaries. We
have not made a determination as to whether our directors would be considered
independent under the NYSE rules. Though the judgment on independence must be
made by our board, there is no requirement that our board affirmatively make
such determination, as required by the NYSE rules. Further, one of our
directors is a representative of the Indian government, as required by the
terms of the loan and guarantee facilities provided by the Indian government.
Non-management directors meetings. Though there is no such requirement
under applicable Indian legal requirements, our non-management directors meet
separately before each board meeting.
Board Governance and Remuneration Committee and the Audit Committee. The
members of our Board Governance and Remuneration Committee are independent, as
defined under applicable Indian legal requirements. All members of our Audit
Committee are independent under Rule 10A-3 under the Exchange Act. The
constitution and main functions of these committees as approved by our
board are described above and comply with the spirit of the NYSE requirements
for U.S. issuers.
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Compensation and Benefits to Directors and Officers
Remuneration
Under ICICI Bank's organizational documents, each non-wholetime director,
except the government director, is entitled to receive remuneration for
attending each meeting of our board or of a board committee. The amount of
remuneration payable to non-wholetime directors is set by our board from time
to time in accordance with limitations prescribed by the Indian Companies Act
or the government of India. The remuneration for attending each board or
committee meeting is currently fixed at Rs. 20,000 (US$ 461). In addition,
ICICI Bank reimburses directors for travel and related expenses in connection
with board and committee meetings and related matters. If a director is
required to perform services for ICICI Bank beyond attending meetings, ICICI
Bank may remunerate the director as determined by our board of directors and
this remuneration may be either in addition to or as substitution for the
remuneration discussed above. We have not paid any remuneration to
non-wholetime directors other than the remuneration for attending each meeting
of our board or of a board committee. Non-wholetime directors are not entitled
to the payment of any benefits at the end of their term of office.
At its meeting held on April 26, 2002, our board of directors appointed
Mr. K.V. Kamath as Managing Director & CEO, Ms. Lalita D. Gupte as Joint
Managing Director and Ms. Kalpana Morparia as Executive Director effective May
3, 2002. At its meeting held on January 29, 2004, our board re-appointed Ms.
Lalita D. Gupte as Joint Managing Director until October 31, 2006 on the expiry
of her tenure on June 23, 2004. The above appointments have been approved by
the Reserve Bank of India and our shareholders. Our board also designated Ms.
Kalpana Morparia as Deputy Managing Director effective February 1, 2004.
Till fiscal 2003, the remuneration structure of our wholetime directors as
approved by our board, our shareholders and the Reserve Bank of India consisted
of salary, perquisites and performance bonus up to 100% of the salary. In
fiscal 2004, the Reserve Bank of India issued guidelines stating that
performance bonus to wholetime directors of a private sector bank should not
exceed the average percentage of performance bonus paid to the bank's employees
and the board of directors may review the salary of the wholetime directors in
this context. Pursuant to these guidelines, our board of directors, at its
meeting held on April 30, 2004 increased the salary ranges payable to the
wholetime directors, based on the recommendations of the Board Governance &
Remuneration Committee, while the performance bonus paid to wholetime directors
cannot now exceed the average percentage of performance bonus paid to ICICI
Bank's employees. The increase in salary ranges was approved by our
shareholders at the annual general meeting on September 20, 2004. Our board or
any committee thereof may fix within the range stated below, the salary payable
to the wholetime directors.
Mr. K.V. Kamath, Managing Director & CEO.............Rs. 600,000 - Rs. 1,050,000 (US$ 13,825 to US$ 24,194) per month
Ms. Lalita D. Gupte, Joint Managing Director.........Rs. 400,000 - Rs. 900,000 (US$ 9,217 to US$ 20,737) per month
Ms. Kalpana Morparia, Deputy Managing Director.......Rs. 300,000 - Rs. 900,000 (US$ 6,912 to US$ 20,737) per month
Ms. Chanda D. Kochhar, Executive Director............Rs. 200,000 - Rs. 500,000 (US$ 4,608 to US$ 11,521) per month
Dr. Nachiket Mor, Executive Director ................Rs. 200,000 - Rs. 500,000 (US$ 4,608 to US$ 11,521) per month
We are required to obtain specific approval of the Reserve Bank of India
for the actual monthly salary and performance bonus paid each year to the
wholetime directors. The Reserve Bank of India has approved the payment of
performance bonus to our wholetime directors for fiscal 2004 and the monthly
salary payable for fiscal 2005.
The wholetime directors are entitled to perquisites (evaluated pursuant to
Indian Income-Tax Rules, wherever applicable, and otherwise at actual cost to
ICICI Bank), such as furnished accommodation, gas, electricity, water and
furnishings, club fees, personal insurance, use of car and telephone at
residence or reimbursement of expenses in lieu thereof, payment of income-tax
on perquisites by ICICI Bank to the extent permissible under the Indian
Income-tax Act, 1961 and the Rules framed thereunder, medical reimbursement,
leave and leave travel concession, education
154
benefits, provident fund, superannuation fund, gratuity and other retirement
benefits, in accordance with the scheme(s) and rule(s) applicable to employees
of ICICI Bank from time to time.
Where accommodation is not provided, each of the wholetime directors is
eligible for a house rent allowance of Rs. 50,000 (US$ 1,152) per month and
maintenance of accommodation including furniture, fixtures and furnishings, as
may be provided by ICICI Bank.
The total compensation paid by ICICI Bank to its wholetime directors and
executive officers, Mr. K.V. Kamath, Ms. Lalita D. Gupte, Ms. Kalpana Morparia,
Ms. Chanda D. Kochhar, Dr. Nachiket Mor, Mr. Sanjiv Kerkar, Ms. Ramni Nirula,
Mr. P.H. Ravikumar, Mr. Balaji Swaminathan, Mr. Bhargav Dasgupta, Mr. M. N.
Gopinath, Mr. N. S. Kannan, Ms. Madhabi Puri Buch and Mr. V. Vaidyanathan in
fiscal 2004 was Rs. 105 million (US$ 2 million) including bonus for fiscal 2004
to wholetime directors and other executive officers paid in fiscal 2005.
Bonus
Each year, our board of directors awards discretionary bonuses to
employees and wholetime directors on the basis of performance and seniority.
The performance of each employee is evaluated through a performance management
appraisal system. The aggregate amount paid by ICICI Bank for bonuses to all
eligible employees and wholetime directors for fiscal 2004 was Rs. 873 million
(US$ 20 million). This amount was paid in fiscal 2005.
Employee Stock Option Scheme
On January 24, 2000, our 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
our issued equity shares at March 31, 2000 could be allocated to employee stock
options. The employee stock option scheme as amended by the Scheme of
Amalgamation restricted the maximum number of options granted to any eligible
employee (as defined below) to 0.05% of our issued equity shares at the time of
the grant, and the aggregate of all such options to 5.0% of our issued equity
shares following the amalgamation. In April 2004, our board approved the
recommendation of the Board Governance & Remuneration Committee to modify the
limit of the aggregate number of options that could be granted under the
employee stock option scheme to 5% of our issued capital as on the date of
grant. The shareholders approved the modification at our annual general meeting
held on September 20, 2004.
Under the stock option scheme, eligible employees are entitled to apply
for equity shares. An eligible employee is a permanent employee or a director
of ICICI Bank or of its subsidiaries or its holding company. ICICI Bank has no
holding company.
The options granted for fiscal 2003 and earlier 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. Options granted for fiscal 2004 and beyond vest in a graded manner over
a four-year period with 20.0%, 20.0%, 30.0% and 30.0% of grants vesting each
year, commencing from the end of 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 for options granted prior to June 30, 2003 is equal to
the market price of our equity shares on the date of grant on the stock
exchange, which recorded the highest trading volume on the date of grant. On
June 30, 2003, the Securities and Exchange Board of India revised its
guidelines on employee stock options. While the revised guidelines provided
that companies were free to determine the exercise price of stock options
granted by them, they prescribed accounting rules and other disclosures,
including expensing of stock options in the income statement, which are
applicable to our Indian GAAP financial statements, in the event the exercise
price was not equal to the average of the high and low market price of the
equity shares in the two week period preceding the date of grant of the
options, on the stock exchange which recorded the highest trading volume during
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the two week period. Effective July 22, 2004, the Securities and Exchange Board
of India revised this basis of pricing to the latest available closing price,
prior to the date of the meeting of the board of directors in which options are
granted, on the stock exchange which recorded the highest trading volume on
that date. The price for options granted by ICICI Bank on or after June 30,
2003, but before July 22, 2004 is equal to the average of the high and low
market price of the equity shares in the two week period preceding the date of
grant of the options, on the stock exchange which recorded the highest trading
volume during the two week period in line with applicable guidelines of the
Securities and Exchange Board of India.
In February 2000, the Securities and Exchange Board of India directed the
National Securities Depository Limited to instruct companies to issue shares
which are pari passu in all respects. The National Securities Depository
Limited issued the instruction in March 3, 2000. Our board of directors, at its
meeting held on July 25, 2003, amended ICICI Bank's Employees Stock Option
Scheme to give effect to the requirements of the National Securities Depository
Limited.
The following table sets forth certain information regarding the stock
option grants ICICI Bank has made under its employee stock option scheme. ICICI
Bank granted all of these stock options at no cost to its employees. ICICI Bank
has not granted any stock options to its non-wholetime directors.
--------------------------------------------------------------------------------
Date of grant Number of options granted Exercise price(1)
--------------------------------------------------------------------------------
February 21, 2000........ 1,713,000 Rs. 171.90 US$ 3.96
April 26, 2001........... 1,580,200 170.00 3.92
March 27, 2002........... 3,155,000 120.35 2.77
April 25, 2003........... 7,338,300 132.05 3.04
July 25, 2003............ 147,500 157.03 3.62
October 31, 2003......... 6,000 222.40 5.12
April 30, 2004........... 7,539,500 300.10 6.91
---------
(1) The exercise price for options granted prior to June 30, 2003 is equal to
the market price of ICICI Bank's equity shares on the date of grant on the
stock exchange that recorded the highest trading volume on the date of
grant. The exercise price for options granted on or after June 30, 2003 is
equal to the average of the high and low market price of the equity shares
in the two week period preceding the date of grant of the options, on the
stock exchange which recorded the highest trading volume during the two
week period.
ICICI also had an employee stock option scheme for its directors and
employees and the directors and employees of its subsidiary companies, the
terms of which were substantially similar to the employee stock option scheme
of ICICI Bank. The following table sets forth certain information regarding the
stock option grants made by ICICI under its employee stock option scheme prior
to the amalgamation. ICICI granted all of these stock options at no cost to its
employees. ICICI had not granted any stock options to its non-wholetime
directors.
--------------------------------------------------------------------------------
Date of grant Number of options granted Exercise price(1)
--------------------------------------------------------------------------------
August 3, 1999........... 2,323,750 Rs. 85.55 US$ 1.97
April 28, 2000........... 2,902,500 133.40 3.07
November 14, 2000........ 20,000 82.90 1.91
May 3, 2001.............. 3,145,000 82.00 1.89
August 13, 2001.......... 60,000 52.50 1.21
March 27, 2002........... 6,473,700 60.25 1.39
---------
(1) The exercise price is equal to the market price of ICICI's equity shares
on the date of grant. However, the share options granted on August 3, 1999
were accounted as a variable plan resulting in a compensation cost of Rs.
97 million (US$ 2 million) which is being amortized over the vesting
period.
In accordance with the Scheme of Amalgamation, directors and employees of
ICICI and its subsidiary companies received stock options in ICICI Bank equal
to half the number of their outstanding unexercised stock options in ICICI. The
exercise price for these options is equal to twice the exercise price for the
ICICI stock options. All other terms and conditions of these options are
156
similar to those applicable to ICICI Bank's stock options pursuant to its
employee stock option scheme.
The following table sets forth certain information regarding the options
granted by ICICI Bank (including options granted by ICICI adjusted in
accordance with the Scheme of Amalgamation) at August 31, 2004.
--------------------------------------------------------------------------------
Particulars ICICI Bank
--------------------------------------------------------------------------------
Options granted............................................. 28,941,975
Options vested.............................................. 11,457,127
Options exercised........................................... 5,642,108
Options forfeited/lapsed.................................... 2,373,639
Extinguishment or modification of options................... -
Amount realized by sale of options.......................... Rs. 821,453,658
Total number of options in force............................ 20,926,228
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
1,148,000 options during fiscal 2004 at the fair value of the underlying shares
on the grant date of Rs. 45 (US$ 1) per equity share, 713,500 options during
fiscal 2003 at the fair value of the underlying shares on the grant date of Rs.
100 (US$ 2) per equity share, 2,044,800 stock options during fiscal 2002 at the
fair value of the underlying shares on the grant date of Rs. 68 (US$ 2) per
equity share and 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$ 1) per equity
share. The fair values for fiscal years 2001, 2002, 2003 and 2004 have been
determined by an external valuer. As the shares of ICICI Infotech are not
quoted on stock exchanges, the fair value, as determined by the valuer,
represents management's best estimates considering all known factors. Of the
stock options granted since fiscal 2001, 1,744,040 were forfeited by year-end
fiscal 2004. Of the stock options granted since fiscal 2001, 1,867,200 were
granted to our directors and executive officers.
In July 2000, ICICI Venture Funds Management Company approved an employee
stock option plan under which ICICI Venture Funds Management Company was
authorized to issue up to 125,000 equity shares to its employees and employees
of ICICI and ICICI group companies. Eligible employees were granted an option
to purchase shares subject to vesting conditions. The options vested over a
period of three years with 20.0%, 30.0% and 50.0% of the options vesting at the
end of each year. The options could have been exercised within 10 years from
the date of the grant. ICICI Venture Funds Management Company granted 81,400
stock options during fiscal 2001 at the fair value of the underlying shares on
the grant date of Rs. 835 (US$ 19) per equity share. As shares of ICICI Venture
Funds Management Company are not quoted on exchanges, the fair value
represented management's best estimates considering all known factors. Of the
above, 2,500 stock options were forfeited by year-end fiscal 2001. Of the stock
options granted, 20,425 were granted to ICICI Bank's directors and executive
officers. ICICI Venture Funds Management Company did not grant any stock
options in fiscal 2002. ICICI Venture Funds Management Company's employee stock
option plan was withdrawn in February 2002 and all outstanding stock options
under the plan were cancelled. The board of directors of ICICI Venture Funds
Management Company, at its meeting held on October 30, 2002, approved a Carry
Plan for its employees. The Carry Plan provides for ICICI Venture Funds
Management Company to directly pay carry from the performance fee earned by it
from the funds managed or advised on by it, to its employees through specific
carry trusts created for the purpose. Pursuant to the approval of the board of
directors of ICICI Venture Funds Management Company,
157
carry documents have been finalised and the Carry Plan is being implemented.
ICICI OneSource has two employee stock option plans. Under the first of
these plans, the Compensation Committee of ICICI OneSource is authorized to
issue stock options to eligible employees of ICICI OneSource and its
subsidiaries, up to 10.0% of the paid up share capital of ICICI OneSource.
Eligible employees are granted an option to purchase equity shares of ICICI
OneSource at predetermined exercise price, subject to vesting conditions. The
options vest in a graded manner over a four-year period with 25.0% of the
options vesting at the end of first year and thereafter, after every six
months, 12.5% of the options shall vest up to the end of four years from the
date of the grant. The options granted may be exercised within nine years from
the date of grant commencing on or after the expiry of twelve months from the
date of grant. The terms and conditions of the second plan are essentially
similar to the first plan, except the following:
o The aggregate number of shares to be allotted under the new employee
stock option plan, to all persons resident outside India shall not
exceed 5.0% of the fully diluted share capital of ICICI OneSource.
o The exercise period, within which the employees would exercise the
options, would be five years from the date of the grant.
The aggregate of stock options to be granted to the employees and
directors of ICICI OneSource under both the employee stock option plans shall
not exceed 10.0% of the fully diluted share capital of ICICI OneSource.
ICICI OneSource had granted 3,855,000 options during fiscal 2003 under the
first employee stock option plan, at the fair value of Rs. 11.25 per equity
share. ICICI OneSource granted 14,120,500 options and 825,000 options during
fiscal 2004 under the second employee stock option plan, at the fair value of
Rs. 12.89 per equity share and Rs. 18.53 per equity share respectively. ICICI
OneSource also granted 375,000 options during fiscal 2004, under the first
employee stock option plan, at the fair value of Rs. 12.83 per equity share.
The fair values for the fiscal years 2003 and 2004 have been determined either
by external valuers or based on the highest valuation of the ICICI OneSource
received from prospective investors who had indicated their willingness to
invest in ICICI OneSource at that valuation. As the shares of ICICI OneSource
are not quoted on stock exchanges, the fair value represents management's best
estimates considering all known factors.
Loans
ICICI Bank has internal rules and regulations to grant loans to employees
and wholetime directors to acquire certain assets such as property, vehicles
and other consumer durables. ICICI Bank's loans to employees have been made at
interest rates ranging from 2.5% to 6% per annum and are repayable over fixed
periods of time. The loans are generally secured by the assets acquired by the
employees. ICICI Bank had given loans to its employees for purchasing its
shares in the offering made by ICICI in June 1997 at the public offering price.
Bank of Madura had also given loans to employees for purchasing preferential
shares in the offering made by Bank of Madura in August 1995. Pursuant to the
Banking Regulation Act, ICICI Bank's non-wholetime directors are not eligible
for any loans. At year-end fiscal 2004, there were loans of Rs. 3.8 billion
(US$ 87 million) compared to loans of Rs. 2.3 billion (US$ 52 million) at
year-end fiscal 2003 outstanding to ICICI Bank employees. This amount included
loans of Rs. 27 million (US$ 622,120), compared to Rs. 25 million (US$ 576,037)
at year-end fiscal 2003, to certain of its directors and executive officers
(including employees who became executive officers during fiscal 2004), made
prior to the enactment of the Sarbanes-Oxley Act of 2002 or in case of
employees who became executive officers during fiscal 2004, loans made prior to
their becoming executive officers.
158
Gratuity
Under Indian law, ICICI Bank is required to pay a gratuity to employees
who retire or resign after at least five years of continuous service. ICICI
Bank makes contributions to three separate gratuity funds, for employees
inducted from ICICI, employees inducted from Bank of Madura and employees of
ICICI Bank other than employees inducted from ICICI and Bank of Madura.
The gratuity funds for employees inducted from ICICI and Bank of Madura
are separate gratuity funds managed by in-house trustees. Actuarial valuation
of the gratuity liability is determined by an independent actuary. The
investments of the funds are made according to rules prescribed by the
government of India. The accounts of the funds are audited by independent
auditors. The total corpus of these funds based on the latest unaudited
figures, at year-end fiscal 2004 was Rs. 418 million (US$ 10 million).
The gratuity fund for employees of ICICI Bank other than employees
inducted from ICICI and Bank of Madura, is administered by the Life Insurance
Corporation of India. In accordance with the gratuity fund's rules, actuarial
valuation of gratuity liability is calculated based on certain assumptions
regarding rate of interest, salary growth, mortality and staff turnover. The
total corpus of the funds at year-end fiscal 2004 was Rs. 89 million (US$ 2
million) compared to Rs. 53 million (US$ 1 million) at fiscal year-end 2003.
Superannuation Fund
ICICI Bank contributes 15.0% of the total annual salary of each employee
to a superannuation fund for ICICI Bank employees. The fund is administered by
the Life Insurance Corporation of India. ICICI Bank's employees get an option
on retirement or resignation to receive one-third of the total balance and a
monthly pension based on the remaining two-third balance. In the event of death
of an employee, his or her beneficiary receives the remaining accumulated
balance of 66.7%. ICICI Bank also gives a cash option to its employees,
allowing them to receive the amount contributed by ICICI Bank in their monthly
salary during their employment. The total corpus of the superannuation fund was
Rs. 683 million (US$ 16 million) at year-end fiscal 2004 compared to Rs. 640
million (US$ 15 million) at year-end fiscal 2003.
Provident Fund
ICICI Bank is statutorily required to maintain a provident fund as a part
of its retirement benefits to its employees. There are separate provident funds
for employees inducted from Bank of Madura (other than those employees who have
opted for pensions), and for other employees of ICICI Bank. These funds are
managed by in-house trustees. Each employee contributes 12.0% of his or her
basic salary (10% for clerks and sub-staff of Bank of Madura) and ICICI Bank
contributes an equal amount to the funds. The investments of the funds are made
according to rules prescribed by the government of India. The accounts of the
funds are audited by independent auditors. The total corpuses of the funds for
employees inducted from Bank of Madura, and other employees of ICICI Bank,
based on the latest audited figures, at year-end fiscal 2004 were Rs. 285
million (US$ 7 million), and Rs. 1.3 billion (US$ 30 million) respectively.
ICICI Bank made aggregate contributions of Rs. 236 million (US$ 5 million) to
these funds during fiscal 2004, compared to Rs. 162 million (US$ 4 million) in
fiscal 2003.
Pension Fund
Out of the employees inducted from Bank of Madura and employed with ICICI
Bank at end of fiscal 2004, 465 employees opted for pensions and 601 employees
opted for a provident fund. For employees who opted for a provident fund, ICICI
Bank's contribution of 12.0% of his or her basic salary (10% for clerks and
sub-staff of Bank of Madura) is credited to the provident fund every month. For
employees who opted for pensions, ICICI Bank's contribution of 12.0% of his or
her basic salary (10% for clerks and sub-staff of Bank of Madura) is credited
to the pension fund every month. These funds are managed by in-house trustees.
The investments of the funds are made according to
159
rules prescribed by the government of India. The accounts of the fund are
audited by independent auditors. The employees who opted for pensions are
entitled to a monthly pension from the day after their retirement. ICICI Bank
also gives a cash option to employees, allowing them to receive the present
value of one-third of their monthly pension in total satisfaction. Upon death
of an employee, family members are entitled to payment of a family pension
pursuant to the rules in this regard. The corpus of the fund at year-end fiscal
2004 was Rs. 961 million (US$ 22 million), compared to Rs. 963 million (US$ 22
million) at year-end fiscal 2003.
Interest of Management in Certain Transactions
Except as otherwise stated in this annual report, no amount or benefit has
been paid or given to any of our directors or executive officers.
160
OVERVIEW OF THE INDIAN FINANCIAL SECTOR
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the government of India and its various ministries and the Reserve Bank of
India, and has not been prepared or independently verified by us. This is the
latest available information to our knowledge at September 20, 2004.
Introduction
The Reserve Bank of India, the central banking and monetary authority of
India, is the central regulatory and supervisory authority for the Indian
financial system. A variety of financial intermediaries in the public and
private sectors participate in India's financial sector, including the
following:
o commercial banks;
o long-term lending institutions;
o non-bank finance companies, including housing finance companies;
o other specialized financial institutions, and state-level financial
institutions;
o insurance companies; and
o mutual funds.
Until the early 1990s, the Indian financial system was strictly
controlled. Interest rates were administered, formal and informal parameters
governed asset allocation, and strict controls limited entry into and expansion
within the financial sector. The government of India's economic reform program,
which began in 1991, encompassed the financial sector. The first phase of the
reform process began with the implementation of the recommendations of the
Committee on the Financial System, the Narasimham Committee I. The second phase
of the reform process began in 1999. See "--Banking Sector Reform--Committee on
Banking Sector Reform (Narasimham Committee II)".
This discussion presents an overview of the role and activities of the
Reserve Bank of India and of each of the major participants in the Indian
financial system, with a focus on the commercial banks and the long-term
lending institutions. This is followed by a brief summary of the banking reform
process along with the recommendations of various committees that have played a
key role in the reform process. A brief discussion on the impact of the
liberalization process on long-term lending institutions and commercial banks
is then presented. Finally, reforms in the non-banking financial sector are
briefly reviewed.
Reserve Bank of India
The Reserve Bank of India, established in 1935, is the central banking and
monetary authority in India. The Reserve Bank of India manages the country's
money supply and foreign exchange and also serves as a bank for the government
of India and for the country's commercial banks. In addition to these
traditional central banking roles, the Reserve Bank of India undertakes certain
developmental and promotional roles.
The Reserve Bank of India issues guidelines on exposure standards, income
recognition, asset classification, provisioning for non-performing and
restructured assets, investment valuation and capital adequacy 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 it on a regular basis. For further discussion
regarding the Reserve Bank of India's role as the regulatory and supervisory
authority of India's financial system and its impact on ICICI Bank, see
"Supervision and Regulation".
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Commercial Banks
Commercial banks in India have traditionally focused only on meeting the
short-term financial needs of industry, trade and agriculture. At year-end
fiscal 2004, there were 286 scheduled commercial banks in the country, with a
network of 66,970 branches serving approximately Rs. 15.17 trillion (US$ 349.5
billion) in deposit accounts. Scheduled commercial banks are banks that are
listed in the schedule to the Reserve Bank of India Act, 1934, and may further
be classified as public sector banks, private sector banks and foreign banks.
Scheduled commercial banks have a presence throughout India, with nearly 70.3%
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 seven associate banks, 19
nationalized banks and 196 regional rural banks. Excluding the regional rural
banks, the remaining public sector banks have 46,683 branches, and account for
69.9% of the outstanding gross bank credit and 73.8% of the aggregate deposits
of the scheduled commercial banks at year-end fiscal 2004. 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 2004, the State Bank of India and its seven associate banks had
13,593 branches. They accounted for 24.2% of aggregate deposits and 23.8% 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 2004 with 14,484 branches,
accounting for 3.7% of aggregate deposits and 2.9% of gross bank credit
outstanding of scheduled commercial banks.
Private Sector Banks
After the first phase of bank nationalization was completed in 1969,
public sector banks made up the largest portion of Indian banking. The focus on
public sector banks was maintained throughout the 1970s and 1980s. Furthermore,
existing private sector banks which showed signs of an eventual default were
merged with state-owned banks. In July 1993, as part of the banking reform
process and as a measure to induce competition in the banking sector, the
Reserve Bank of India permitted entry of the private sector into the banking
system. This resulted in the introduction of nine private sector banks,
including ICICI Bank. These banks are collectively known as the "new" private
sector banks. There were nine "new" private sector banks at year-end fiscal
2004, following the merger in February 2000 of Times Bank Limited, a new
private sector bank, into another new private sector bank, HDFC Bank Limited
and the conversion of Kotak Mahindra Finance Limited, a large non-bank finance
company into a bank in February 2003. In May 2004, the Reserve Bank of India
granted a banking license to another new private sector bank, YES Bank Limited.
In July 2004, the Reserve Bank of India announced the amalgamation of Global
Trust Bank, a new private sector bank, with Oriental Bank of Commerce, a public
sector bank. In addition, 21 private sector banks existing prior to July 1993
were operating at year-end fiscal 2004.
At year-end fiscal 2004, private sector banks accounted for approximately
17.7% of aggregate deposits and 20.2% of gross bank credit outstanding of the
scheduled commercial banks. Their network of 5,607 branches accounted for 8.4%
of the total branch network of scheduled commercial banks in the country. At
the end of the first quarter of fiscal 2005, ICICI Bank accounted for
approximately 4.2% of aggregate deposits and 7.8% of non-food credit
outstanding of the scheduled commercial banks.
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Foreign Banks
At year-end fiscal 2004, there were 33 foreign banks with 196 branches
operating in India. Foreign banks accounted for 4.8% of aggregate deposits and
6.9% of outstanding gross bank credit of scheduled commercial banks at year-end
fiscal 2004. As part of the liberalization process, the Reserve Bank of India
has permitted foreign banks to operate more freely, subject to requirements
largely similar to those imposed on domestic banks. Foreign banks operate in
India through branches of the parent bank. The Indian government has permitted
foreign banks to operate in India by setting up branches, incorporating
wholly-owned subsidiaries or acquiring up to 74.0% of the equity share capital
of an Indian private sector bank. In its recent draft "Comprehensive Policy
Framework for Ownership and Governance in Private Sector Banks", the Reserve
Bank of India proposed a limit of 5.0% on the shareholding of a foreign bank
with a presence in India in an Indian private sector bank. Subsequently, in a
circular dated July 6, 2004, the Reserve Bank of India stipulated that banks
should not acquire any fresh stake in a bank's equity shares, if by such
acquisition, the investing bank's holding exceeded 5.0% of the investee bank's
equity capital. This also applies to holdings of foreign banks with a presence
in India, in Indian banks. The primary activity of most foreign banks in India
has been in the corporate segment. However, some of the larger foreign banks
have made consumer financing a larger part of their portfolios. These banks
offer products such as automobile finance, home loans, credit cards and
household consumer finance.
Cooperative Banks
Cooperative banks cater to the financing needs of agriculture, small
industry and self-employed businessmen in urban and semi-urban areas of India.
The state land development banks and the primary land development banks provide
long-term credit for agriculture. In the light of liquidity and insolvency
problems experienced by some cooperative banks in fiscal 2001, the Reserve Bank
of India undertook several interim measures, pending formal legislative
changes, including measures related to lending against shares, borrowings in
the call market and term deposits placed with other urban cooperative banks.
Presently the Reserve Bank of India is responsible for supervision and
regulation of urban co-operative societies, and the National Bank for
Agriculture and Rural Development (NABARD) for State Co-operative Banks and
District Central Co-operative Banks. The Banking Regulation (Amendment) and
Miscellaneous Provisions Bill, 2003, which has been introduced in the Indian
Parliament, provides for the regulation of all co-operative banks by the
Reserve Bank of India. See also "-- Recent Structural Reforms - Proposed
Amendments to the Banking Regulation Act". In its Annual Policy Statement for
fiscal 2005, the Reserve Bank of India announced that it proposed to consider
issuance of fresh licenses to urban co-operative banks only after a
comprehensive policy on urban cooperative banks was in place, including an
appropriate legal and regulatory framework for the sector. The government of
India has proposed to appoint a task force to examine the reforms required in
the cooperative banking system.
Long-Term Lending Institutions
The long-term lending institutions were established to provide medium-term
and long-term financial assistance to various industries for setting up new
projects and for the expansion and modernization of existing facilities. These
institutions provide fund-based and non-fund-based assistance to industry in
the form of loans, underwriting, direct subscription to shares, debentures and
guarantees. The primary long-term lending institutions include Industrial
Development Bank of India, IFCI Limited and Industrial Investment Bank of India
and included ICICI prior to the amalgamation.
The long-term lending institutions were expected to play a critical role
in Indian industrial growth and, accordingly, had access to concessional
government funding. However, in recent years, the operating environment of the
long-term lending institutions has changed substantially. Although the initial
role of these institutions was largely limited to providing a channel for
government funding to industry, the reform process required them to expand the
scope of their business activities. Their new activities include:
o fee-based activities like investment banking and advisory services;
and
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o short-term lending activity including issuing corporate finance and
working capital loans.
Pursuant to the recommendations of the Narasimham Committee II and the
Khan Working Group, a working group created in 1999 to harmonize the role and
operations of long-term lending institutions and banks, the Reserve Bank of
India, in its mid-term review of monetary and credit policy for fiscal 2000,
announced that long-term lending institutions would have the option of
transforming themselves into banks subject to compliance with the prudential
norms as applicable to banks. In April 2001, the Reserve Bank of India issued
guidelines on several operational and regulatory issues which were required to
be addressed in evolving the path for transition of a long-term lending
institution into a universal bank. See "-- Recent Structural Reforms -
Universal Banking Guidelines". In April 2002, ICICI merged with ICICI Bank. The
Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
converted the Industrial Development Bank of India into a banking company to be
incorporated under the Companies Act, 1956, with exemptions from certain
statutory and regulatory norms applicable to banks, including an exemption for
a period of five years from the statutory liquidity ratio. The board of
directors of the Industrial Development Bank of India has approved its merger
with IDBI Bank Limited, a new private sector bank which is a subsidiary of the
Industrial Development Bank of India, subject to approval by the shareholders
and other regulatory approvals. The board of directors of IDBI Bank Limited has
also taken a decision to the same effect. A merger has also been proposed of
IFCI Limited with Punjab National Bank, a large public sector bank.
Non-Bank Finance Companies
There are over 10,000 non-bank finance companies in India, mostly in the
private sector. All non-bank finance companies are required to register with
the Reserve Bank of India. The non-bank finance companies may be categorized
into entities which take public deposits and those which do not. The companies
which accept public deposits are subject to strict supervision and capital
adequacy requirements of the Reserve Bank of India. ICICI Securities Limited,
ICICI Venture Funds Management Company Limited and ICICI Distribution Finance
Private Limited, which are our subsidiaries, are non-bank finance companies,
which do not accept public deposits. The scope and activities of non-bank
finance companies have grown significantly over the years. The primary
activities of the non-bank finance companies are consumer credit, including
automobile finance, home finance and consumer durable products finance,
wholesale finance products such as bill discounting for small and medium-sized
companies, and fee-based services such as investment banking and underwriting.
In 2003, Kotak Mahindra Finance Limited, a large non-bank finance company was
granted a banking license by the Reserve Bank of India and converted itself
into Kotak Mahindra Bank.
Over the past few years, certain non-bank finance companies have defaulted
to investors and depositors, and consequently actions (including bankruptcy
proceedings) have been initiated against them, many of which are currently
pending. See also "-- Reforms of the Non-Bank Finance Companies".
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. We are a major housing finance provider
and also have a housing finance subsidiary, ICICI Home Finance Company Limited.
The National Housing Bank and the Housing and Urban Development Corporation
Limited are the two government-controlled financial institutions created to
improve the availability of housing finance in India. The National Housing Bank
Act provides for securitization of housing loans, foreclosure of mortgages and
setting up of the Mortgage Credit Guarantee Scheme. The Reserve Bank of India
has directed commercial banks to lend at least 3.0% of their incremental
deposits in the form
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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, 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.
Insurance Companies
Currently, there are 27 insurance companies in India, of which 13 are life
insurance companies, 13 are general insurance companies and one is a
re-insurance company. Of the 13 life insurance companies, 12 are in the private
sector and one is in the public sector. Among the general insurance companies,
eight are in the private sector and five are in the public sector including the
Export Credit Guarantee Corporation of India Limited, which is a central
government enterprise providing insurance to exporters and counter-guarantees
to banks for credit given to exporters. The re-insurance company, General
Insurance Corporation of India, is in the public sector. Life Insurance
Corporation of India, General Insurance Corporation of India and public sector
general insurance companies also provide long-term financial assistance to the
industrial sector. We have joint ventures in each of the life insurance and the
general insurance sectors. Our life insurance joint venture, ICICI Prudential
Life Insurance Company Limited and our general insurance joint venture, ICICI
Lombard General Insurance Company Limited, are both major players in their
respective segments. During fiscal 2004, the total gross premiums underwritten
of all general insurance companies were Rs. 161.2 billion (US$ 3.7 billion) and
the total new premiums of all life insurance companies were Rs. 187.1 billion
(US$ 4.3 billion). From April to July 2004, the gross premiums underwritten by
all general insurance companies and the total new premiums of all life
insurance companies amounted to Rs. 63.7 billion (US$ 1.5 billion) and Rs. 55.3
billion (US$ 1.3 billion) respectively.
The insurance sector in India is regulated by the Insurance Regulatory and
Development Authority. In December 1999, the parliament passed the Insurance
Regulatory and Development Authority Act, 1999. This Act opened up the Indian
insurance sector for foreign and private investors. The Act allows foreign
equity participation in new insurance companies of up to 26.0%. The new company
should have a minimum paid up equity capital of Rs. 1.0 billion (US$ 23
million) to carry out the business of life insurance or general insurance or
Rs. 2.0 billion (US$ 46 million) to carry out exclusively the business of
reinsurance.
In the monetary and credit policy for fiscal 2001, the Reserve Bank of
India issued guidelines governing the entry of banks and financial institutions
into the insurance business. The guidelines
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permit banks and financial institutions to enter the business of insurance
underwriting through joint ventures provided they meet stipulated criteria
relating to their net worth, capital adequacy ratio, profitability track
record, level of impaired loans and the performance of their existing
subsidiary companies. The Indian government, while presenting its budget for
fiscal 2005, has proposed an increase in the limit on foreign equity
participation in private sector insurance companies from 26.0% to 49.0%.
However, this would require an amendment to the Insurance Regulatory and
Development Authority Act 1999 and has not been implemented as yet.
Mutual Funds
At the end of August 2004, there were 28 mutual funds in India with total
assets of Rs. 1,556.9 billion (US$ 35.9 billion). From 1963 to 1987, Unit Trust
of India was the only mutual fund operating in the country. It was set up in
1963 at the initiative of the government and the Reserve Bank of India. From
1987 onwards, several other public sector mutual funds entered this sector.
These mutual funds were established by public sector banks, the Life Insurance
Corporation of India and General Insurance Corporation of India. The mutual
funds industry was opened up to the private sector in 1993. In this year, the
SEBI (Mutual Fund) Regulation 1993 was issued by the Securities and Exchange
Board of India, under which all mutual funds except for the Unit Trust of
India, were to be registered and governed. The industry is now regulated by a
more comprehensive SEBI (Mutual Fund) Regulation, 1996 which replaced the SEBI
(Mutual Fund) Regulation 1993.
Unit Trust of India, with a high level of investment in equity securities,
started to face difficulties in meeting redemption and assured return
obligations due to a significant decline in the market value of its securities
portfolio. In response, the government of India implemented a package of reform
measures for Unit Trust of India, including guaranteeing redemption and assured
return obligations to the unit holders, subject to restrictions on the maximum
permissible redemption amount. As part of the reforms, Unit Trust of India was
divided into two mutual funds structured in accordance with the regulations of
the Securities and Exchange Board of India, one comprising assured return
schemes and the other comprising net asset value based schemes.
Impact of Liberalization on the Indian Financial Sector
Until 1991, the financial sector in India was heavily controlled and
commercial banks and long-term lending institutions, the two dominant financial
intermediaries, had mutually exclusive roles and objectives and operated in a
largely stable environment, with little or no competition. Long-term lending
institutions were focused on the achievement of the Indian government's various
socio-economic objectives, including balanced industrial growth and employment
creation, especially in areas requiring development. Long-term lending
institutions were extended access to long-term funds at subsidized rates
through loans and equity from the government of India and from funds guaranteed
by the government of India originating from commercial banks in India and
foreign currency resources originating from multilateral and bilateral
agencies.
The focus of the commercial banks was primarily to mobilize household
savings through demand and time deposits and to use these deposits to meet the
short-term financial needs of borrowers in industry, trade and agriculture. In
addition, the commercial banks provided a range of banking services to
individuals and business entities.
However, since 1991, there have been comprehensive changes in the Indian
financial system. Various financial sector reforms, implemented since 1991,
have transformed the operating environment of the banks and long-term lending
institutions. In particular, the deregulation of interest rates, emergence of a
liberalized domestic capital market, and entry of new private sector banks,
along with the broadening of long-term lending institutions' product
portfolios, have progressively intensified the competition between banks and
long-term lending institutions. The Reserve Bank of India has permitted the
transformation of long-term lending institutions into banks subject to
compliance with the prudential norms applicable to banks.
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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;
o similarly, the cash reserve ratio or the proportion of the bank's net
demand and time liabilities that were required to be deposited with
the Reserve Bank of India was reduced from 15.0% in the pre-reform
period to 4.5%. In a circular dated September 11, 2004, the Reserve
Bank of India has raised the cash reserve ratio to 4.75% with effect
from September 18, 2004 and 5.0% with effect from October 2, 2004;
o special tribunals were created to resolve bad debt problems;
o most of the restrictions on interest rates for deposits were removed.
Commercial banks were allowed to set their own level of interest
rates for all deposits except savings bank deposits;
o substantial capital infusion to several state-owned banks was
approved in order to bring their capital adequacy closer to
internationally accepted standards. By the end of fiscal 2002,
aggregate recapitalization amounted to Rs. 217.5 billion (US$ 5.0
billion). The stronger public sector banks were given permission to
issue equity to further increase capital; and
o banks were granted the freedom to open or close branches.
Committee on Banking Sector Reform (Narasimham Committee II)
The second Committee on Banking Sector Reform (Narasimham Committee II)
submitted its report in April 1998. The major recommendations of the committee
were in respect of capital adequacy requirements, asset classification and
provisioning, risk management and merger policies. The Reserve Bank of India
accepted and began implementing many of these recommendations in October 1998.
Recent Structural Reforms
Proposed Amendments to the Banking Regulation Act
Legislation seeking to amend the Banking Regulation Act has been
introduced in the Indian Parliament. As presently drafted, the main amendments
propose to:
o permit banking companies to issue non-redeemable and redeemable
preference shares;
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o make prior approval of the Reserve Bank of India mandatory for the
acquisition of more than 5.0% of a banking company's paid up capital
by any individual or firm or group;
o prohibit lending to relatives of directors and to non-subsidiary
companies that are under the same management as the banking company,
joint ventures, associates or the holding company of the banking
company. Lending to directors and to companies with directors common
to the banking company is already prohibited;
o remove the minimum statutory liquidity ratio requirement of 25.0%,
giving the Reserve Bank of India discretion to reduce the statutory
liquidity ratio to less than 25.0%. See also "Supervision and
Regulation - Legal Reserve Requirements - Statutory Liquidity Ratio";
o bring mergers of non-bank finance companies with banking companies
into the governance of the Indian Banking Regulation Act. Mergers of
non-bank finance companies with banking companies are currently
governed by the Indian Companies Act, 1956. The Banking Regulations
(Amendment) and Miscellaneous Provisions Bill, 2003 will, if passed,
require mergers of non-bank finance companies with banking companies
to be approved by the majority of the shareholders of both companies
and by the Reserve Bank of India. It also provides, if the merger is
approved, for dissenting shareholders at their option to be paid in
exchange for their shares the value of their shares as determined by
the Reserve Bank of India;
o bring all co-operative banks under the supervision of the Reserve
Bank of India; and
o remove the limit of 10.0% on the maximum voting power exercisable by
a shareholder in a banking company.
Legislative Framework for Recovery of Debts due to Banks
In fiscal 2003, the Indian Parliament passed the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002. This Act provides that a secured creditor may, in respect of loans
classified as non-performing in accordance with the Reserve Bank of India
guidelines, give notice in writing to the borrower requiring it to discharge
its liabilities within 60 days, failing which the secured creditor may take
possession of the assets constituting the security for the loan, and exercise
management rights in relation thereto, including the right to sell or otherwise
dispose of the assets. This Act also provides for the setting up of asset
reconstruction companies regulated by the Reserve Bank of India to acquire
assets from banks and financial institutions. The Reserve Bank of India has
issued guidelines for asset reconstruction companies in respect of their
establishment, registration and licensing by the Reserve Bank of India, and
operations. Asset Reconstruction Company (India) Limited, set up by us,
Industrial Development Bank of India, State Bank of India and certain other
banks and institutions, has received registration from the Reserve Bank of
India.
Several petitions challenging the constitutional validity of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 were filed before the Indian Supreme Court. The
Supreme Court, in April 2004, upheld the constitutionality of the Act, other
than the requirement originally included in the Act that the borrower deposit
75.0% of the dues with the debt recovery tribunal as a precondition for appeal
by the borrower against the enforcement measures. The government of India,
while announcing its budget for fiscal 2005, has proposed to amend the Act to
further strengthen the recovery process.
Earlier, following the recommendations of the Narasimham Committee, the
Recovery of Debts due to Banks and Financial Institutions Act, 1993 was
enacted. This legislation provides for the establishment of a tribunal for
speedy resolution of litigation and recovery of debts owed to banks or
financial institutions. The Act creates tribunals before which the banks or the
financial institutions can file a suit for recovery of the amounts due to them.
However, if a scheme of reconstruction is pending before the Board for
Industrial and Financial Reconstruction, under the Sick Industrial Companies
(Special Provision) Act, 1985, no proceeding for recovery can be initiated or
continued before the tribunals. This protection from creditor action ceases if
the secured creditor takes action under
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Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act. While presenting its budget for fiscal 2002, the
government of India announced measures for the setting up of more debt recovery
tribunals and the eventual repeal of the Sick Industrial Companies (Special
Provision) Act, 1985. To date, however, this Act has not been repealed.
Corporate Debt Restructuring Forum
To put in place an institutional mechanism for the restructuring of
corporate debt, the Reserve Bank of India has devised a corporate debt
restructuring system. The objective of this framework is to ensure a timely and
transparent mechanism for the restructuring of corporate debts of viable
entities facing problems, outside the purview of the Board of Industrial and
Financial Rehabilitation, debt recovery tribunals and other legal proceedings.
In particular, this framework aims to preserve viable corporates that are
affected by certain internal and external factors and minimize the losses to
the creditors and other stakeholders through an orderly and coordinated
restructuring program. The corporate debt restructuring system is a
non-statutory mechanism and a voluntary system based on debtor-creditor and
inter-creditor agreements.
Universal Banking Guidelines
Universal banking in the Indian context means the transformation of
long-term lending institutions into banks. Pursuant to the recommendations of
the Narasimham Committee II and the Khan Working Group, the Reserve Bank of
India, in its mid-term review of monetary and credit policy for fiscal 2000,
announced that long-term lending institutions would have the option of
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.
Pension Reforms
Currently, there are three categories of pension schemes in India: pension
schemes for government employees, pension schemes for employees in the
organized sector and voluntary pension schemes. In case of pension schemes
administered for government employees, the government pays its employees a
defined periodic benefit upon their retirement. Further, the contribution
towards the pension scheme is funded solely by the government and not matched
by a contribution from the employees. The Employees Provident Fund, established
in 1952, is a mandatory program for employees of certain establishments. It is
a contributory program that provides for periodic contributions of 10% to 12%
of the basic salary by both the employer and the employees. The contribution is
invested in prescribed securities and the accumulated balance in the fund
(including the accretion thereto) is paid to the employee as a lump sum on
retirement. Besides these, there are voluntary pension schemes administered by
the government (the Public Provident Fund to which contribution may be made up
to a maximum of Rs. 70,000 or US$ 1,613 per annum) or offered by insurance
companies, where the contribution may be made on a voluntary basis. Such
voluntary contributions are often driven by tax benefits offered under the
scheme.
In 1998, the government commissioned the Old Age Social and Income
Security (OASIS) project and nominated an expert committee to suggest changes
to the existing policy framework. The committee submitted its report in January
2000, recommending a system for private sector management of pension funds to
provide market-linked returns. It also recommended the establishment of a
separate pensions regulatory authority to regulate the pensions system.
Subsequently, in the budget for fiscal 2001, the government announced that a
high level committee would be formulated to design a contribution-based pension
scheme for new government recruits. The government also requested the Insurance
Regulatory and Development Authority to draw up a roadmap for implementing the
OASIS Report. The Insurance Regulatory and Development Authority
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submitted its report in October 2001. The report suggested that pension fund
managers should constitute a separate legal entity to conduct their pension
business. In August 2003, the government announced that it would be mandatory
for its new employees (excluding defense personnel) to join a new defined
contribution pension scheme where both the government and the employee would
make monthly contributions of 10% of the employee's salary. The government also
announced that a Pension Fund Development and Regulatory Authority would be set
up to regulate the pension industry. The government constituted the interim
Pension Fund Development and Regulatory Authority on October 11, 2003. In
December 2003, the government announced that the new pension scheme would be
applicable to all new recruits to Indian government service (excluding defense
personnel) from January 1, 2004.
Credit Policy Measures
As part of its effort to continue bank reform, the Reserve Bank of India
has announced a series of measures in its monetary and credit policy statements
aimed at deregulating and strengthening the financial system.
Credit Policy for Fiscal 2004
In the monetary and credit policy for fiscal 2004 announced in April 2003,
the Reserve Bank of India introduced the following key measures:
o The bank rate (the rate at which banks borrow from the Reserve Bank
of India) was reduced further by 0.25% from 6.25% to 6.0% and the
cash reserve ratio was also reduced by 0.25% to 4.5%. Earlier, the
Indian government's budget for fiscal 2004 had reduced the interest
rates on small savings schemes and public provident fund by 100 basis
points to 8.0% and at the same time the Reserve Bank of India reduced
the interest rate on savings bank accounts by 50 basis points to
3.5%; and
o The maturity period for non-resident external deposits was increased
from six months to one year.
Annual Policy Statement for Fiscal 2005
In its Annual Policy Statement for fiscal 2005 announced in May 2004, the
Reserve Bank of India kept the bank rate and repo rate (the annualized interest
earned by the lender in a repurchase transaction between two banks or between a
bank and the Reserve Bank of India) unchanged at 6.0% and 4.5% respectively and
introduced the following key measures:
o Banks are permitted to raise long-term bonds with a minimum maturity
of five years to the extent of their exposure of residual maturity of
more than five years to the infrastructure sector;
o The scope of definition of infrastructure lending is expanded to
include construction relating to projects involving agro-processing
and supply of inputs to agriculture, construction of preservation and
storage facilities for processed agro-products and construction of
educational institutions and hospitals;
o Measures were announced to facilitate the flow of credit to
agricultural and related sectors by including loans for storage
facilities and securitized agricultural loans as priority sector
advances;
o Resident individuals are permitted to remit freely up to US$ 25,000
per calendar year, for any current or capital account transaction or
a combination of these. Indian corporates and partnership firms are
allowed to invest up to 100.0% of their net worth overseas;
o Banks are permitted, under exceptional circumstances, with the
approval of their Boards, to consider enhancement of the exposure to
the borrower up to a maximum of 5.0% of capital funds, subject to the
borrower consenting to the bank making appropriate disclosures in its
annual report; and
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o Introduction of a graded higher provisioning requirement according to
the age of non-performing assets, which are included under `doubtful
for more than three years' category, with effect from March 31, 2005.
See "Supervision and Regulation".
Reforms of the Non-Bank Finance Companies
The standards relating to income recognition, provisioning and capital
adequacy were prescribed for non-bank finance companies in June 1994. The
registered non-bank finance companies were required to achieve a minimum
capital adequacy of 6.0% by year-end fiscal 1995 and 8.0% by year-end fiscal
1996 and to obtain a minimum credit rating. To encourage the companies
complying with the regulatory framework, the Reserve Bank of India announced in
July 1996 certain liberalization measures under which the non-bank finance
companies registered with it and complying with the prudential norms and credit
rating requirements were granted freedom from the ceiling on interest rates on
deposits and amount of deposits. Other measures introduced include requiring
non-bank finance companies to maintain a certain percentage of liquid assets
and to create a reserve fund. The percentage of liquid assets to be maintained
by non-bank finance companies has been revised uniformly upwards and since
April 1999, 15.0% of public deposits must be maintained.
Efforts have also been made to integrate non-bank finance companies into
the mainstream financial sector. The first phase of this integration covered
measures relating to registrations and standards. The focus of supervision has
now shifted to non-bank finance companies accepting public deposits. This is
because companies accepting public deposits are required to comply with all the
directions relating to public deposits, prudential norms and liquid assets. A
task force on non-bank finance companies set up by the government of India
submitted its report in October 1998, and recommended several steps to
rationalize the regulation of non-bank finance companies. Accepting these
recommendations, the Reserve Bank of India issued new guidelines for non-bank
finance companies, which were as follows:
o a minimum net owned fund of Rs. 2.5 million (US$ 57,604) is mandatory
before existing non-bank finance companies may accept public
deposits;
o a minimum investment grade rating is compulsory for loan and
investment companies accepting public deposits, even if they have the
minimum net owned funds;
o permission to accept public deposits was also linked to the level of
capital to risk assets ratio. Different capital to risk assets ratio
levels for non-bank finance companies with different ratings were
specified; and
o non-bank finance companies were advised to restrict their investments
in real estate to 10.0% of their net owned funds.
In the monetary and credit policy for fiscal 2000, the Reserve Bank of
India stipulated a minimum capital base of Rs. 20 million (US$ 460,829) 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.
During fiscal 2003, the Reserve Bank introduced a number of measures to
enhance the regulatory and supervisory standards of non-bank finance companies,
especially in order to bring them at par with commercial banks, in select
operations, over a period of time. Regulatory measures adopted during the year
included aligning interest rates in this sector with the rates prevalent in the
rest of the economy, tightening prudential norms, standardizing operating
procedures and harmonizing supervisory directions with the requirements of the
Indian Companies Act. The maximum rate of interest that non-bank finance
companies could pay on their public deposits was reduced from 12.5% per annum
to 11.0% per annum effective March 4, 2003.
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SUPERVISION AND REGULATION
The main legislation governing commercial banks in India is the Banking
Regulation Act. Other important laws include the Reserve Bank of India Act, the
Negotiable Instruments Act and the Banker's Books Evidence Act. Additionally,
the Reserve Bank of India, from time to time, issues guidelines to be followed
by the bank. Compliance with all regulatory requirements is evaluated with
respect to financial statements under Indian GAAP.
Reserve Bank of India Regulations
Commercial banks in India are required under the Banking Regulation Act to
obtain a license from the Reserve Bank of India to carry on banking business in
India. Before granting the license, the Reserve Bank of India must be satisfied
that certain conditions are complied with, including (i) that the bank has the
ability to pay its present and future depositors in full as their claims
accrue; (ii) that the affairs of the bank will not be or are not likely to be
conducted in a manner detrimental to the interests of present or future
depositors; (iii) that the bank has adequate capital and earnings prospects;
and (iv) that the public interest will be served if such license is granted to
the bank. The Reserve Bank of India can cancel the license if the bank fails to
meet the above conditions or if the bank ceases to carry on banking operations
in India.
ICICI Bank, being licensed as a banking company, is regulated and
supervised by the Reserve Bank of India. The Reserve Bank of India requires
ICICI Bank to furnish statements, information and certain details relating to
its business. It has issued guidelines for commercial banks on recognition of
income, classification of assets, valuation of investments, maintenance of
capital adequacy and provisioning for impaired assets. The Reserve Bank of
India has set up a Board for Financial Supervision, under the chairmanship of
the Governor of the Reserve Bank of India. The appointment of the auditors of
banks is subject to the approval of the Reserve Bank of India. The Reserve Bank
of India can direct a special audit in the interest of the depositors or in the
public interest.
Regulations relating to the Opening of Branches
Banks are required to obtain licenses from the Reserve Bank of India to
open new branches. Permission is granted based on factors such as the financial
condition and history of the company, its management, adequacy of capital
structure and earning prospects and the public interest. The Reserve Bank of
India may cancel the license for violations of the conditions under which it
was granted. Under the banking license granted to ICICI Bank by the Reserve
Bank of India, ICICI Bank is required to have at least 25.0% of its branches
located in rural and semi-urban areas. A rural area is defined as a center with
a population of less than 10,000. A semi-urban area is defined as a center with
a population of greater than 10,000 but less than 100,000. These population
figures relate to the 1991 census conducted by the government of India.
Capital Adequacy Requirements
ICICI Bank is subject to the capital adequacy requirements of the Reserve
Bank of India, which, based on the guidelines of the Basel Committee on Banking
Regulations and Supervisory Practices, 1998, require ICICI Bank to maintain a
minimum ratio of capital to risk adjusted assets and off-balance sheet items of
9.0%, at least half of which must be Tier 1 capital.
The total capital of a banking company is classified into Tier 1 and Tier
2 capital. Tier 1 capital, the core capital, provides the most permanent and
readily available support against unexpected losses. It comprises paid-up
capital and reserves consisting of any statutory reserves, free reserves and
capital reserve pursuant to the Indian Income-tax Act as reduced by equity
investments in subsidiaries, intangible assets and losses in the current period
and those brought forward from the previous period. In fiscal 2003, the Reserve
Bank of India issued a guideline requiring a bank's deferred tax asset to be
treated as an intangible asset and deducted from its Tier 1 capital.
Tier 2 capital consists of undisclosed reserves, revaluation reserves (at
a discount of 55.0%), general provisions and loss reserves (allowed up to a
maximum of 1.25% of risk weighted assets),
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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 positions in gold.
Effective March 31, 2001, banks and financial institutions were required
to assign a risk weight of 2.5% in respect of the entire investment portfolio
to cover market risk, over and above the existing risk weights for credit risk
in non-government and non-approved securities. In fiscal 2002, with a view to
the building up of adequate reserves to guard against any possible reversal of
the interest rate environment in the future due to unexpected developments, the
Reserve Bank of India 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, by fiscal 2006. This reserve has to be computed with respect to
investments in held for trading and available for sale categories. Investment
fluctuation reserve is included in Tier 2 capital. In June 2004, the Reserve
Bank of India issued guidelines on capital for market risk. The guidelines
prescribe the method of computation of risk-weighted assets in respect of
market risk. The aggregate risk weighted assets are required to be taken into
account for determining the capital adequacy ratio. Banks would be required to
maintain a capital charge for market risk in respect of their trading book
exposure (including derivatives) by year-end fiscal 2005 and securities
included under available for sale category by year-end fiscal 2006.
Loan Loss Provisions and Non-Performing 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 principal features of these Reserve Bank of India guidelines, which
have been implemented with respect to ICICI Bank's loans, debentures, lease
assets, hire purchases and bills are set forth below.
Asset Classification
Until year-end fiscal 2003, an impaired asset (also called non-performing
assets pursuant to the Reserve Bank of India guidelines) was an asset in
respect of which any amount of interest or principal was overdue for more than
two quarters. In particular, an advance was an impaired asset where:
o interest and/or installment of principal remained overdue for a
period of more than 180 days in respect of a term loan;
o the account remained "out-of-order" for a period of more than 180
days in respect of an overdraft or cash credit;
o the bill remained overdue for a period of more than 180 days in case
of bills purchased and discounted;
o interest and/or principal remained overdue for two harvest seasons
but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes; and
o any amount to be received remained overdue for a period of more than
180 days in respect of other accounts.
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Effective fiscal 2004, banks are now required to classify an asset as
impaired when principal or interest has remained overdue for more than 90 days.
Interest in respect of impaired assets is not recognized or credited to the
income account unless collected.
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 2004 for banks, non-performing assets are
classified as described below.
Sub-Standard Assets. Assets that are non-performing assets for a period
not exceeding 18 months (12 months effective year-end fiscal 2005). 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 (12 months effective year-end fiscal 2005). 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.
Loss Assets. Assets on which losses have been identified by the bank or
internal or external auditors or the Reserve Bank India inspection but the
amount has not been written off fully.
There are separate guidelines for projects under implementation which are
based on the achievement of financial closure and the date of approval of the
project financing.
The Reserve Bank of India also has separate guidelines for restructured
loans. A fully secured restructured standard asset can be restructured by
reschedulement of principal repayment and/or the interest element, but must be
separately disclosed as a restructured asset. 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. Similar
guidelines are applicable to sub-standard assets. The sub-standard accounts
which have been subjected to restructuring, whether in respect of principal
installment or interest amount, by whatever modality, are eligible to be
upgraded to the standard category only after the specified period, i.e., a
period of one year after the date when first payment of interest or of
principal, whichever is earlier, falls due, subject to satisfactory performance
during the period.
To put in place an institutional mechanism for the restructuring of
corporate debt, the Reserve Bank of India has devised a corporate debt
restructuring system. See "Overview of the Indian Financial Sector - Recent
Structural Reforms -- Corporate Debt Restructuring Forum".
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. Until year-end fiscal 2004, in
cases where there was a secured portion of the asset, depending upon
the period for which the asset remained doubtful, a 20.0% to 50.0%
provision was 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
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o More than three years: 50.0% provision
In July 2004, the Reserve Bank of India introduced additional provisioning
requirements for non-performing assets classified as `doubtful for more than
three years'. Effective year-end fiscal 2005, 100.0% provision will have to be
made for the secured portion of assets classified as doubtful for more than
three years on or after April 1, 2004. For the secured portion of assets
classified as doubtful for more than three years at March 31, 2004, a provision
of 60.0% will have to be made by year-end fiscal 2005, 75.0% by year-end fiscal
2006 and 100.0% by year-end fiscal 2007.
o Loss Assets. The entire asset is required to be written off or
provided for.
o Restructured Assets. A provision is made equal to the net
present value of the reduction in the rate of interest on the
loan over its maturity.
While the provisions indicated above are mandatory, a higher provision in
a loan amount is required if considered necessary by the management.
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 and financing of public sector
disinvestment.
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. Banks are required to declare a benchmark
prime lending rate based on various parameters including cost of
funds, operating expenses, capital charge and profit margin.
Each bank should also indicate the maximum spread over the prime
lending rate for all credit exposures other than retail loans.
The interest charged by banks on advances up to Rs. 200,000 (US$
4,608) to any one entity (other than certain permitted types of
loans including loans to individuals for acquiring residential
property, loans for purchase of consumer durables and other
non-priority sector personal 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.
o In terms of Section 20(1) of the Banking Regulation Act, a
banking company is prohibited from entering into any commitment
for granting any loans or advances to or on behalf of any of its
directors, or any firm in which any of its directors is
interested as partner, manager, employee or guarantor, or any
company (not being a subsidiary of the banking company or a
company registered under Section 25 of the Companies Act, 1956,
or a government company) of which, or the subsidiary or the
holding company of which any of the directors of the bank is a
director, managing agent, manager, employee or guarantor or in
which he holds substantial interest, or any individual in
respect of whom any of its directors is a partner or guarantor.
There are certain exemptions in this regard as the explanation
to the section provides that `loans or advances' shall not
include any transaction which Reserve Bank of India may specify
by general or special order as not being a loan or advance for
the purpose of such section. ICICI Bank is in compliance with
these requirements.
Legislation introduced in the Parliament to amend the Banking Regulation
Act has proposed to prohibit lending to relatives of directors and to
non-subsidiary companies that are under the same management as the banking
company, joint ventures, associates or the holding company of the banking
company. See also "The Indian Financial Sector--Recent Structural
Reforms--Proposed Amendments to the Banking Regulation Act".
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There are guidelines on loans against equity shares in respect of amount,
margin requirement and purpose.
Regulations relating to Sale of Assets to Asset Reconstruction Companies
The Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 provides for sale of financial assets by banks
and financial institutions to asset reconstruction companies. Reserve Bank of
India has issued guidelines to banks on the process to be followed for sales of
financial assets to asset reconstruction companies. These guidelines provide
that a bank may sell financial assets to an asset reconstruction company
provided the asset is a non-performing asset. A bank may sell a standard asset
only if the borrower has a consortium or multiple banking arrangement, at least
75.0% by value of the total loans to the borrower are classified as
non-performing and at least 75.0% by value of the banks and financial
institutions in the consortium or multiple banking arrangement agree to the
sale. The banks selling financial assets should ensure that there is no known
liability devolving on them and that they do not assume any operational, legal
or any other type of risks relating to the financial assets sold. Further,
banks may not sell financial assets at a contingent price with an agreement to
bear a part of the shortfall on ultimate realization. However, banks may sell
specific financial assets with an agreement to share in any surplus realized by
the asset reconstruction company in the future. While each bank is required to
make its own assessment of the value offered in the sale before accepting or
rejecting an offer for purchase of financial assets by an asset reconstruction
company, in consortium or multiple banking arrangements where more than 75.0%
by value of the banks or financial institutions accept the offer, the remaining
banks or financial institutions are obliged to accept the offer. Consideration
for the sale may be in the form of cash, bonds or debentures or security
receipts or pass through certificates issued by the asset reconstruction
company or trusts set up by it to acquire the financial assets.
Directed Lending
Priority Sector Lending
The Reserve Bank of India requires commercial banks to lend a certain
percentage of their net bank credit to specific sectors (the priority sectors),
such as agriculture, small-scale industry, small businesses and housing
finance. Total priority sector advances should be 40.0% of net bank credit with
agricultural advances required to be 18.0% of net bank credit and advances to
weaker sections required to be 10.0% of net bank credit, and 1.0% of the
previous year's net bank credit required to be lent under the Differential Rate
of Interest scheme. Any shortfall in the amount required to be lent to the
priority sectors may be required to be deposited with the National Bank for
Agriculture and the Rural Development. These deposits can be for a period of
one year or five years.
The Reserve Bank of India requires banks to lend up to 3.0% of their
incremental deposits in the previous fiscal year towards housing finance. This
can be in the form of home loans to individuals or subscription to the
debentures and bonds of the National Housing Bank and housing development
institutions recognized by the government of India.
Prior to the amalgamation, the advances of ICICI were not subject to the
requirement applicable to banks in respect of priority sector lending. Pursuant
to the terms of the Reserve Bank of India's approval of the amalgamation, ICICI
Bank is required to maintain a total of 50.0% of its net bank credit on the
residual portion of its advances (i.e., the portion of its total advances
excluding advances of ICICI at year-end fiscal 2002) in the form of priority
sector advances. This additional requirement of 10.0% by way of priority sector
advances will apply until such time as the aggregate priority sector advances
reach a level of 40.0% of the total net bank credit of ICICI Bank.
Export Credit
The Reserve Bank of India also requires commercial banks to make loans to
exporters at concessional rates of interest. This enables exporters to have
access to an internationally competitive financing option. Pursuant to existing
guidelines, 12.0% of a bank's net bank credit is required to be
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in the form of export credit. ICICI Bank provides export credit for
pre-shipment and post-shipment requirements of exporter borrowers in rupees and
foreign currencies.
Credit Exposure Limits
As a prudent measure aimed at better risk management and avoidance of
concentration of credit risk, the Reserve Bank of India has prescribed credit
exposure limits for banks and long-term lending institutions in respect of
their lending to individual borrowers and to all companies in a single group
(or sponsor group).
The limits currently set by the Reserve Bank of India are as follows:
1. Exposure ceiling for a single borrower is 15.0% of capital funds and
group exposure limit is 40.0% of capital funds. In case of financing
for infrastructure projects, the exposure limit to a single borrower
is extendable by another 5.0%, i.e., up to 20.0% of capital funds and
the group exposure limit is extendable by another 10.0%, i.e., up to
50.0% of capital funds. Banks may, in exceptional circumstances, with
the approval of their board of directors, consider enhancement of the
exposure to a borrower up to a maximum of further 5.0% of capital
funds, subject to the borrower consenting to the banks making
appropriate disclosures in their annual reports.
2. Capital funds is the total capital as defined under capital adequacy
norms (Tier 1 and Tier 2 capital).
3. Non-fund based exposures are calculated at 100.0% and in addition,
banks include forward contracts in foreign exchange and other
derivative products, like currency swaps and options, at their
replacement cost value in determining individual or group borrower
exposure ceilings, effective April 1, 2003.
At fiscal year-end fiscal 2004, ICICI Bank was in compliance with these
limits. ICICI Bank had received specific approval from the Reserve Bank of
India for exceeding the limit in the case of one borrower group exposure and
three single borrower exposures.
To ensure that exposures are evenly spread, the Reserve Bank of India
requires banks to fix internal limits of exposure to specific sectors. These
limits are subject to periodical review by the banks. ICICI Bank has fixed a
ceiling of 12.0% on its exposure to any one industry (other than retail loans)
and monitors its exposures accordingly.
Regulations relating to Investments and Capital Market Exposure Limits
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
total advances (including commercial paper) 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. 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 from the amalgamation. In addition,
the Reserve Bank of India has approved the exclusion of specific equity
investments acquired by conversion of debt under restructuring schemes approved
by the Corporate Debt Restructuring Forum.
In November 2003, Reserve Bank of India issued guidelines on investments
by banks in non-Statutory Liquidity Ratio securities issued by companies,
banks, financial institutions, central and state government sponsored
institutions and special purpose vehicles. These guidelines apply to primary
market subscriptions and secondary market purchases. Pursuant to these
guidelines, banks are prohibited from investing in non-Statutory Liquidity
Ratio securities with an original maturity of less than one year, other than
commercial paper and certificates of deposits. Banks are also prohibited from
investing in unrated securities. A bank's investment in unlisted non-Statutory
Liquidity Ratio
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securities may not exceed 10.0% of its total investment in non-Statutory
Liquidity Ratio securities as at the end of the preceding fiscal year. These
guidelines will not apply to investments in security receipts issued by
securitization or reconstruction companies registered with Reserve Bank of
India and asset backed securities and mortgage backed securities with a minimum
investment grade credit rating. These guidelines are effective April 1, 2004,
with provision for compliance in a phased manner by January 1, 2005.
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. In July 2004, the Reserve Bank of India imposed a
ceiling of 10.0% of capital funds (Tier 1 plus Tier 2 capital) on investments by
banks and financial institutions in equity shares, preference shares eligible
for capital status, subordinated debt instruments, hybrid debt capital
instruments and any other instrument approved as in the nature of capital,
issued by other banks and financial institutions. Investments in the
instruments which are not deducted from Tier I capital of the investing bank or
financial institution, will attract 100.0% risk weight for credit risk for
capital adequacy purposes. Further, banks and financial institutions cannot
acquire any fresh stake in a bank's equity shares, if by such acquisition, the
investing bank's or financial institution's holding exceeds 5.0% of the
investee bank's equity capital. Banks with investments in excess of the
prescribed limits were required to apply to the Reserve Bank of India with a
roadmap for reduction of the exposure. We have equity shareholding in excess of
the prescribed limits in two Indian private sector banks, Federal Bank Limited
and South Indian Bank Limited, and have submitted a roadmap for reduction of
our shareholding to the Reserve Bank of India.
Consolidated Supervision Guidelines
In fiscal 2003, the Reserve Bank of India issued guidelines for
consolidated accounting and consolidated supervision for banks. These
guidelines became effective April 1, 2003. The principal features of these
guidelines are:
Consolidated Financial Statements. Banks are required to prepare
consolidated financial statements intended for public disclosure.
Consolidated Prudential Returns. Banks are required to submit to the
Reserve Bank of India, consolidated prudential returns reporting their
compliance with various prudential norms on a consolidated basis, excluding
insurance subsidiaries. Compliance on a consolidated basis is required in
respect of the following main prudential norms:
o Single borrower exposure limit of 15.0% of capital funds (20.0% of
capital funds provided the additional exposure of up to 5.0% is for
the purpose of financing infrastructure projects);
o Borrower group exposure limit of 40.0% of capital funds (50.0% of
capital funds provided the additional exposure of up to 10.0% is for
the purpose of financing infrastructure projects);
o Deduction from Tier 1 capital of the bank, of any shortfall in
capital adequacy of a subsidiary for which capital adequacy norms are
specified; and
o Consolidated capital market exposure limit of 2.0% of consolidated
advances and 10.0% of consolidated net worth.
ICICI Bank is in compliance with these guidelines, except for the
consolidated capital market exposure limits. ICICI Bank has submitted to the
Reserve Bank of India that the limit of 2.0% of consolidated advances and 10.0%
of consolidated net worth effectively reduces the standalone capital market
exposure limit of 5.0% of advances and 20.0% of net worth. On a consolidated
basis, ICICI Bank has exceeded the exposure limits in respect of one borrower
group exposure and three single borrower exposures. The Reserve Bank of India
has granted approval for exceeding the norms in these cases on a standalone
basis. See also "-- Credit Exposure Limits".
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In June 2004, the Reserve Bank of India published the report of a working
group on monitoring of financial conglomerates, which proposed the following
framework:
o identification of financial conglomerates that would be subjected to
focused regulatory oversight;
o monitoring intra-group transactions and exposures and large exposures
of the group to outside counter parties;
o identifying a designated entity within each group that would collate
data in respect of all other group entities and furnish the same to
its regulator; and
o formalising a mechanism for inter-regulatory exchange of information.
The proposed framework covers entities under the jurisdiction of the
Reserve Bank of India, the Securities and Exchange Board of India, the
Insurance Regulatory and Development Authority and the National Housing Bank
and would in due course be extended to entities regulated by the proposed
Pension Fund Regulatory and Development Authority. The Reserve Bank of India
has identified ICICI Bank and its related entities as a financial conglomerate
with ICICI Bank as the designated entity responsible for reporting to the
Reserve Bank of India.
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.
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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.
In September 2004, the Reserve Bank of India announced that it would set
up an internal group to review the investment classification guidelines to
align them with international practices and the current state of risk
management practices in India, taking into account the unique requirement
applicable to banks in India of maintenance of a statutory liquidity ratio
equal to 25.0% of their demand and time liabilities. In the meanwhile, the
Reserve Bank of India has permitted banks to exceed the limit of 25.0% of
investments for the held to maturity category provided the excess comprises
only statutory liquidity ratio investments and the aggregate of such
investments in the held to maturity category do not exceed 25.0% of the demand
and time liabilities. The Reserve Bank of India has permitted banks to transfer
additional securities to the held to maturity category as a one time measure
during fiscal 2005, in addition to the transfer permitted under the earlier
guidelines. The transfer would be done at the lower of acquisition cost, book
value or market value on the date of transfer.
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.
Investments in security receipts or pass through certificates issued by
asset reconstruction companies or trusts set up by asset reconstruction
companies should be valued at the net asset value announced periodically by the
asset reconstruction company based on the valuation of the underlying assets.
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. The Reserve Bank of India has permitted banks to sell government of
India securities already contracted for purchase provided the purchase contract
is confirmed and the contract is guaranteed by Clearing Corporation of India
Limited or the security is contracted for purchase from the Reserve Bank of
India. Each security is deliverable or receivable on a net basis for a
particular settlement cycle.
Regulations relating to Deposits
The Reserve Bank of India has permitted banks to independently determine
rates of interest offered on term deposits. However, banks are not permitted to
pay interest on current account deposits. Further, banks may only pay interest
of up to 3.5% per annum on savings deposits. In respect of savings and time
deposits accepted from employees, ICICI Bank is permitted by the Reserve Bank
of India to pay an additional interest of 1.0% over the interest payable on
deposits from the public.
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Domestic time deposits have a minimum maturity of 15 days (seven days in
respect of deposits over Rs. 1.5 million (US$ 34,562) 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 (US$ 34,562) and above; and
o Interest on deposits is paid in accordance with the schedule of
interest rates disclosed in advance by the bank and not pursuant to
negotiation between the depositor and the bank.
ICICI Bank stipulates a minimum balance of Rs. 10,000 (US$ 230) for a
non-resident rupee savings deposit. Interest rates on non-resident rupee term
deposits of one to three years maturity are not permitted to exceed the
LIBOR/SWAP rates for US dollar of corresponding maturity. Interest rates on
non-resident rupee savings deposits are not permitted to exceed the LIBOR/SWAP
rate for six months maturity on US dollar deposits and are fixed quarterly on
the basis of the LIBOR/SWAP rate of US dollar on the last working day of the
preceding quarter.
Regulations relating to Knowing the Customer and Anti-Money Laundering
The Reserve Bank of India has issued several guidelines relating to
identification of depositors and has advised banks to put in place systems and
procedures to control financial frauds, identify money laundering and
suspicious activities, and monitor high value cash transactions. The Reserve
Bank of India has also issued guidelines from time to time advising banks to be
vigilant while opening accounts for new customers to prevent misuse of the
banking system for perpetration of frauds.
The Reserve Bank of India requires banks to open accounts only after
verifying the identity of customers as to their name, residence and other
details to ensure that the account is being opened by the customer in his own
name. To open an account, a prospective customer is required to be introduced
by an existing customer who has had his own account with the bank for at least
six months duration and has satisfactorily conducted that account, or a
well-known person in the local area where the prospective customer is residing.
If the prospective customer does not have an introducer, the prospective
customer is required to submit documents such as his identity card, passport or
details of bank accounts with other banks.
The Prevention of Money Laundering Act, 2002 has been passed by Indian
Parliament and has received the assent of the President of India on January 17,
2003. However the provisions of the Act shall come into force and effect only
on dates notified by the Indian government, which has not so far notified these
dates. The Act seeks to prevent money laundering and to provide for
confiscation of property derived from, or involved in, money laundering and for
incidental and connected matters.
Regulations on Asset Liability Management
At present, the Reserve Bank of India's regulations for asset liability
management require banks to draw up asset-liability gap statements separately
for rupee and for four major foreign currencies. These gap statements are
prepared by scheduling all assets and liabilities according to the stated and
anticipated re-pricing date, or maturity date. These statements have to be
submitted to the Reserve Bank of India on a quarterly basis. The Reserve Bank
of India has advised banks to actively monitor the difference in the amount of
assets and liabilities maturing or being re-priced in a particular period and
place internal prudential limits on the gaps in each time period, as a risk
control mechanism. Additionally, the Reserve Bank of India has asked banks to
manage their asset-liability structure such that the negative liquidity gap in
the 1-14 day and 15-28 day time periods does not exceed 20.0% of cash outflows
in these time periods. This 20.0% limit on negative gaps was made mandatory
with effect from April 1, 2000. In respect of other time periods, up to one
year, Reserve Bank of India has directed banks to lay down internal norms in
respect of negative liquidity gaps.
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Foreign Currency Dealership
The Reserve Bank of India has granted ICICI Bank a full-fledged authorized
dealers' license to deal in foreign exchange through its designated branches.
Under this license, ICICI Bank has been granted permission to:
o engage in foreign exchange transactions in all currencies;
o open and maintain foreign currency accounts abroad;
o raise foreign currency and rupee denominated deposits from non
resident Indians;
o grant foreign currency loans to on-shore and off-shore corporations;
o open documentary credits;
o grant import and export loans;
o handle collection of bills, funds transfer services;
o issue guarantees; and
o enter into derivative transactions and risk management activities
that are incidental to its normal functions authorized under its
organizational documents.
ICICI Bank's foreign exchange operations are subject to the guidelines
specified by the Reserve Bank of India in the exchange control manual. As an
authorized dealer, ICICI Bank is required to enroll as a member of the Foreign
Exchange Dealers Association of India, which prescribes the rules relating to
foreign exchange business in India.
Authorized dealers, like ICICI Bank, are required to determine their
limits on open positions and maturity gaps in accordance with the Reserve Bank
of India's guidelines and these limits are approved by the Reserve Bank of
India. Further, ICICI Bank is permitted to hedge foreign currency loan
exposures of Indian corporations in the form of interest rate swaps, currency
swaps and forward rate agreements, subject to certain conditions.
Ownership Restrictions
The government of India regulates foreign ownership in Indian banks. The
total foreign ownership in a private sector bank, like ICICI Bank, cannot
exceed 74.0% of the paid-up capital and shares held by foreign institutional
investors under portfolio investment schemes through stock exchanges cannot
exceed 49.0% of the paid-up capital.
The Reserve Bank of India's acknowledgement is required for the
acquisition or transfer of a bank's shares which will take the aggregate
holding (both direct and indirect, beneficial or otherwise) of an individual or
a group to equivalent of 5.0% or more of its total paid up capital. Reserve
Bank of India, while granting acknowledgement, may take into account all
matters that it considers relevant to the application, including ensuring that
shareholders whose aggregate holdings are above specified thresholds meet
fitness and propriety tests. In determining whether the acquirer or transferee
is fit and proper to be a shareholder, Reserve Bank of India may take into
account various factors including, but not limited to the acquirer or
transferee's integrity, reputation and track record in financial matters and
compliance with tax laws, proceedings of a serious disciplinary or criminal
nature against the acquirer or transferee and the source of funds for the
investment.
While granting acknowledgement for acquisition or transfer of shares that
takes the acquirer's shareholding to 10.0% or more and up to 30.0% of a private
sector bank's paid-up capital, Reserve Bank of India may consider additional
factors, including but not limited to:
o the source and stability of funds for the acquisition and ability to
access financial markets as a source of continuing financial support
for the bank,
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o the business record and experience of the applicant including any
experience of acquisition of companies,
o the extent to which the acquirer's corporate structure is in
consonance with effective supervision and regulation of its
operations; and
o in case the applicant is a financial entity, whether the applicant is
a widely held entity, publicly listed and a well established
regulated financial entity in good standing in the financial
community.
While granting acknowledgement for acquisition or transfer of shares that
takes the acquirer's shareholding to 30.0% or more of a private sector bank's
paid-up capital, Reserve Bank of India may consider additional factors,
including but not limited to whether or not the acquisition is in the public
interest and shareholder agreements and their impact on the control and
management of the bank's operations.
In July 2004, the Reserve Bank of India issued a draft policy on
ownership and governance in private sector banks. The key provisions of the
policy on ownership of banks, which are yet to be made effective, are:
o No single entity or group of related entities would be permitted to
directly or indirectly hold more than 10.0% of the equity capital of
a private sector bank and any higher level of acquisition would
require the Reserve Bank of India's prior approval;
o Banks with shareholders with holdings in excess of the prescribed
limit would have to indicate a plan for compliance;
o In respect of corporate shareholders, the objective would be to
ensure that no entity or group of related entities has a shareholding
in excess of 10.0% in the corporate shareholder. In case of
shareholders that are financial entities, the objective will be to
ensure that it is widely held, publicly listed and well regulated;
and
o Banks would be responsible for the "fit and proper" criteria for
shareholders on an ongoing basis.
Restrictions on Payment of Dividends
In April 2004, the Reserve Bank of India issued guidelines stating that a
bank would require the prior approval of the Reserve Bank of India for payment
of dividends if any of the following conditions are not satisfied:
o The bank had a capital adequacy ratio of at least 11.0% for the
preceding two completed years and the accounting year for which it
proposes to declare dividend;
o The bank had a net non-performing asset ratio of less than 3.0%;
o The dividend payout ratio (computed after excluding extraordinary
income and before considering dividend distribution tax) should not
exceed 33.33%;
o The proposed dividend should be payable out of the current year's
profit; and
o The financial statements should be free of any qualifications by the
statutory auditors, which have an adverse bearing on the profit
during that year. In case of any qualification to that effect, the
net profit should be suitably adjusted while computing the dividend
payout ratio.
Subsidiaries and Other Investments
ICICI Bank requires the prior permission of Reserve Bank of India to
incorporate a subsidiary. ICICI Bank is required to maintain an "arms' length"
relationship in respect of its subsidiaries and in
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respect of mutual funds sponsored by it in regard to business parameters such
as taking undue advantage in borrowing/lending funds, transferring/
selling/buying of securities at rates other than market rates, giving special
consideration for securities transactions, in supporting/financing the
subsidiary and financing its clients through them when it itself is not able or
not permitted to do so. ICICI Bank and its subsidiaries have to observe the
prudential norms stipulated by Reserve Bank of India, from time to time, in
respect of its underwriting commitments. Pursuant to such prudential norms,
ICICI Bank's underwriting or the underwriting commitment of its subsidiaries
under any single obligation shall not exceed 15% of an issue. ICICI Bank also
requires the prior specific approval of Reserve Bank of India to participate in
the equity of financial services ventures including stock exchanges and
depositories notwithstanding the fact that such investments may be within the
ceiling (lower of 30.0% of the paid up capital of the investee company and
30.0% of the investing bank's own paid up capital and reserves) prescribed
under Section 19(2) of the Banking Regulation Act. Further investment by ICICI
Bank in a subsidiary, financial services company, financial institution cannot
exceed 10.0% of its paid-up capital and reserves and its aggregate investments
in all such companies and financial institutions put together cannot exceed
20.0% of its paid-up capital and reserves.
Deposit Insurance
Demand and time deposits of up to Rs. 100,000 (US$ 2,304) 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.
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.
In November 2003, Reserve Bank of India issued guidelines which stated
that no financial intermediary, including banks, will be permitted to raise
external commercial borrowings or provide guarantees in favor of overseas
lenders for external commercial borrowings. Eligible borrowers may raise
external commercial borrowings in excess of US$ 50 million only to finance the
import of equipment and to meet foreign exchange needs of infrastructure
projects.
Legal Reserve Requirements
Cash Reserve Ratio
A banking company such as ICICI Bank is required to maintain a specified
percentage of its net 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. On September 11, 2004, the Reserve Bank of India announced an
increase in the cash reserve ratio from 4.5% to 4.75% effective September 18,
2004 and 5.0% effective October 2, 2004.
The following liabilities are excluded from the calculation of the demand
and time liabilities to determine 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.
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The Reserve Bank of India pays no interest on the cash reserves up to 3.0%
of the demand and time liabilities and effective September 18, 2004, pays
interest in the balance at 3.5% per annum. Prior to that date, the rate of
interest paid was the bank rate (currently 6.0%).
The cash reserve ratio has to be maintained on an average basis for a
fortnightly period and should not be below 70.0% of the required cash reserve
ratio on any day of the fortnight.
Statutory Liquidity Ratio
In addition to the cash reserve ratio, a banking company such as ICICI
Bank is required to maintain a specified percentage of its net demand and time
liabilities by way of liquid assets like cash, gold or approved unencumbered
securities. The percentage of this liquidity ratio is fixed by the Reserve Bank
of India from time to time, and it can be a minimum of 25.0% and a maximum of
40.0% pursuant to section 24 of the Banking Regulation Act. At present, the
Reserve Bank of India requires banking companies to maintain a liquidity ratio
of 25.0%. The Banking Regulation (Amendment) and Miscellaneous Provisions Bill,
2003 recently introduced in the Indian Parliament proposes to amend section 24
of the Banking Regulation Act to remove the minimum Statutory Liquidity Ratio
stipulation, thereby giving the Reserve Bank of India the freedom to fix the
Statutory Liquidity Ratio below this level. See also "Overview of the Indian
Financial Sector - Recent Structural Reforms - Proposed Amendments to the
Banking Regulation Act".
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.
Payment of Dividend
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, share selling commission, brokerage, amounts of losses
and any other item of expenditure not represented by tangible assets) have been
completely written off. The Indian government may exempt banks from this
provision by issuing a notification on the recommendation of the Reserve Bank
of India. We have been exempted from this provision in respect of expenses
relating to the Early Retirement Option offered by us in fiscal 2004. We have
obtained permission from the Reserve Bank of India to write off these expenses
over a five-year period in our Indian GAAP accounts.
Restriction on Share Capital and Voting Rights
Banks can issue only ordinary shares. The Banking Regulation Act specifies
that no shareholder in a banking company can exercise voting rights on poll in
excess of 10.0% of total voting rights of all the shareholders of the banking
company.
Only banks incorporated before January 15, 1937 can issue preferential
shares. Prior to the amalgamation, ICICI had preference share capital of Rs.
3.5 billion (US$ 81 million). The government of India, on the recommendation of
the Reserve Bank of India, has granted an exemption to ICICI Bank which allows
the inclusion of preference capital in the capital structure of ICICI Bank for
a period of five years, though ICICI Bank is a bank incorporated after January
15, 1937.
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Legislation recently introduced in the Indian Parliament proposes to amend
the Banking Regulation Act to remove the limit of 10.0% on the maximum voting
power exercisable by an shareholder in a banking company and allow banks to
issue redeemable and non-redeemable preference shares. See also "Overview of
the Indian Financial Sector - Recent Structural Reforms - Proposed Amendments
to the Banking Regulation Act".
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.
Regulatory Reporting and Examination Procedures
The Reserve Bank of India is empowered under the Banking Regulation Act to
inspect a bank. The Reserve Bank of India monitors prudential parameters at
quarterly intervals. To this end and to enable off-site monitoring and
surveillance by the Reserve Bank of India, banks are required to report to the
Reserve Bank of India on aspects such as:
o assets, liabilities and off-balance sheet exposures;
o the risk weighting of these exposures, the capital base and the
capital adequacy ratio;
o the unaudited operating results for each quarter;
o asset quality;
o concentration of exposures;
o connected and related lending and the profile of ownership, control
and management; and
o other prudential parameters.
The Reserve Bank of India also conducts periodical on-site inspections on
matters relating to the bank's portfolio, risk management systems, internal
controls, credit allocation and regulatory compliance, at intervals ranging
from one to three years. ICICI Bank has been and at present also, is, subject
to the on-site inspection by the Reserve Bank of India at yearly intervals. The
inspection report, along with the report on actions taken by ICICI Bank, has to
be placed before our board of directors. On approval by our board of directors,
we are 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 & CEO.
The Reserve Bank of India also conducts on-site supervision of selected
branches of ICICI Bank with respect to their general operations and foreign
exchange related transactions.
Appointment and Remuneration of the Chairman, Managing Director and Other
Directors
ICICI Bank is required to obtain prior approval of the Reserve Bank of
India before it appoints its chairman and managing director and any other
wholetime directors and fixes their remuneration. The Reserve Bank of India is
empowered to remove an appointee to the posts of chairman, managing director
and wholetime directors on the grounds of public interest, interest of
depositors or to ensure the proper management of ICICI Bank. Further, the
Reserve Bank of India may order meetings of our board of directors to discuss
any matter in relation to ICICI Bank, appoint observers to such meetings and in
general may make such changes to the management as it may deem necessary and
may also order the convening of a general meeting of the shareholders of ICICI
Bank to elect new directors. ICICI Bank cannot appoint as a director any person
who is a director of another banking company. In July 2004, the Reserve Bank of
India issued guidelines on `fit and proper' criteria for directors of banks.
Issue of Bonus Shares
ICICI Bank would require the prior permission of Reserve Bank of India and
its shareholders' approval to issue bonus shares.
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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.
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.
Restriction on Creation of Floating Charge
Prior approval of the Reserve Bank of India is required for creating
floating charge on ICICI Bank's undertaking or property. Currently, all ICICI
Bank's borrowings including bonds are unsecured.
Secrecy Obligations
ICICI Bank's obligations relating to maintaining secrecy arise out of
common law principles governing its relationship with its customers. ICICI Bank
cannot disclose any information to third parties except under clearly defined
circumstances. The following are the exceptions to this general rule:
o where disclosure is required to be made under any law;
o where there is an obligation to disclose to the public;
o where ICICI Bank needs to disclose information in its interest; and
o where disclosure is made with the express or implied consent of the
customer.
ICICI Bank is required to comply with the above in furnishing any
information to any parties. ICICI Bank is also required to disclose information
if ordered to do so by a court. The Reserve Bank of India may, in the public
interest, publish the information obtained from the bank. Under the provisions
of the Banker's Books Evidence Act, a copy of any entry in a bankers' book,
such as ledgers, day books, cash books and account books certified by an
officer of the bank may be treated as prima facie evidence of the transaction
in any legal proceedings.
Regulations governing Offshore Banking Units
The government and Reserve Bank of India have permitted banks to set up
Offshore Banking Units in Special Economic Zones, which are specially
delineated duty free enclaves deemed to be foreign territory for the purpose of
trade operations, duties and tariffs. ICICI Bank has an Offshore Banking Unit
located in the Santacruz Electronic Exports Promotion Zone, Mumbai. The key
regulations applicable to Offshore Bank Units include, but are not limited to,
the following:
o No separate assigned capital is required. However, the parent bank is
required to provide a minimum of US$10 million to its Offshore Banking
Unit.
o Offshore Banking Units are exempt from cash reserve ratio requirements.
o Reserve Bank of India may exempt a bank's Offshore Banking Unit from
statutory liquidity ratio requirements on specific application by the
bank.
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o An Offshore Banking Unit may not enter into any transactions in foreign
exchange with residents in India, unless such a person is eligible to
enter into or undertake such transactions under the Foreign Exchange
Management Act, 1999.
o All prudential norms applicable to overseas branches of Indian banks apply
to Offshore Banking Units.
o Offshore Banking Units are required to adopt liquidity and interest rate
risk management policies prescribed by Reserve Bank of India in respect of
overseas branches of Indian banks as well as within the overall risk
management and asset and liability management framework of the bank
subject to monitoring by the bank's board of directors at prescribed
intervals,
o Offshore Banking Units may raise funds in convertible foreign
currency as deposits and borrowings from non-residents including
non-resident Indians but excluding overseas corporate bodies.
o Offshore Banking Units may operate and maintain balance sheets only
in foreign currency.
o The loans and advances of Offshore Banking Units would not be
reckoned as net bank credit for computing priority sector lending
obligations.
o Offshore Banking Units must follow the Know Your Customer guidelines
and must be able to establish the identity and address of the
participants in a transaction, the legal capacity of the participants
and the identity of the beneficial owner of the funds.
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. ICICI Bank is subject to
Securities and Exchange Board of India regulations for its capital issuances,
as well as its underwriting, custodial, depositary participant, investment
banking, registrar and transfer agents, brokering and debenture trusteeship
activities. These regulations provide for its registration with the Securities
and Exchange Board of India for each of these activities, functions and
responsibilities. ICICI Bank is required to adhere to a code of conduct
applicable for these activities.
Public Financial Institution Status
ICICI was a public financial institution under the Indian Companies Act,
1956. The special status of public financial institutions is also recognized
under other statutes including the Indian Income-tax Act, 1961, Sick Industrial
Companies (Special Provisions) Act, 1985 and Recovery of Debts Due to Banks and
Financial Institutions Act, 1993. ICICI Bank is not a public financial
institution. As a public financial institution, ICICI was entitled to certain
benefits under various statutes. These benefits included the following:
o For income tax purposes, ICICI's deposits and bonds were prescribed
modes for investing and depositing surplus money by charitable and
religious trusts. Since ICICI Bank is a scheduled bank, its deposits
and bonds are also prescribed modes for investment by religious and
charitable trusts.
o The government of India had permitted non-government provident,
superannuation and gratuity funds to invest up to 40.0% of their
annual accretion of funds in bonds and securities issued by public
financial institutions. Further, the trustees of these funds could at
their discretion invest an additional 20.0% of such accretions in
these bonds and securities. These funds can invest up to only 10.0%
of their annual accretion in bonds and securities issued by private
sector banks, such as ICICI Bank.
o Indian law provides that a public financial institution cannot,
except as provided by law or practice, divulge any information
relating to, or to the affairs of, its customers. ICICI Bank
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has similar obligations relating to maintaining secrecy arising out of
common law principles governing its relationship with its customers.
o The Recovery of Debts Due to Banks and Financial Institutions Act,
1993 provides for establishment of debt recovery tribunals for
recovery of debts due to any bank or public financial institution or
to a consortium of banks and public financial institutions. Under
this Act, the procedures for recoveries of debt were simplified and
time frames were fixed for speedy disposal of cases. Upon
establishment of the debt recovery tribunal, no court or other
authority can exercise jurisdiction in relation to matters covered by
this Act, except the higher courts in India in certain circumstances.
This Act applies to banks as well as public financial institutions
and therefore applies to ICICI Bank.
ICICI's cessation as a public financial institution would have constituted
an event of default under certain of ICICI's loan agreements related to its
foreign currency borrowings. Prior to the amalgamation becoming effective, such
event of default was waived by the respective lenders pursuant to the terms of
such foreign currency borrowing agreements.
Special Status of Banks in India
The special status of banks is recognised under various statutes including
the Sick Industrial Companies Act, 1985, Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, and the Securitisation Act. As a bank, ICICI
Bank is entitled to certain benefits under various statutes including the
following:
o The Recovery of Debts Due to Banks and Financial Institutions Act,
1993 provides for establishment of Debt Recovery Tribunals for
expeditious adjudication and 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 have been simplified and time frames been 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.
o The Sick Industrial Companies Act, 1985, provides for reference of
sick industrial companies, to the Board for Industrial and Financial
Reconstruction. Under the Act, other than the Board of Directors of a
company, a scheduled bank (where it has an interest in the sick
industrial company by any financial assistance or obligation,
rendered by it or undertaken by it) may refer the company to the
BIFR.
o The Securitisation Act focuses on improving the rights of banks and
financial institutions and other specified secured creditors as well
as asset reconstruction companies by providing that such secured
creditors can take over management control of a borrower company upon
default and/or sell assets without the intervention of courts, in
accordance with the provisions of the Securitisation Act.
Income Tax Benefits
As a banking company, ICICI Bank is entitled to certain tax benefits under
the Indian Income-tax Act including the following:
o ICICI Bank is allowed a deduction of up to 40.0% of its taxable
business income derived from the business of long-term financing
(defined as loans and advances extended for a period of not less than
five years) which is transferred to a special reserve, provided that
the total amount of this reserve does not exceed two times the
paid-up share capital and general reserves. ICICI Bank is entitled to
this benefit because it is a financial corporation. Effective fiscal
1998, if a special reserve is created, it must be maintained and if
it is utilized, it is treated as taxable income in the year in which
it is utilized.
189
o ICICI Bank is entitled to a tax deduction on the provisioning towards
bad and doubtful debts equal to 7.5% of ICICI Bank's total business
income, computed before making any deductions permitted pursuant to
the Indian Income-tax Act, to the extent of 10.0% of the aggregate
average advances made by its rural branches computed in the manner
prescribed. ICICI Bank has the option of claiming a deduction in
respect of the provision made by it for any assets classified
pursuant to the Reserve Bank of India's guidelines as doubtful or
loss assets to the extent of 10.0% of the amount of such assets as on
the last day of the year.
o ICICI Bank is eligible to issue tax saving bonds approved in
accordance with the provisions of the Indian Income-tax Act. The
subscription to such bonds by certain categories of investors is a
prescribed mode of investing for the purposes of availing of a tax
rebate.
o For income tax purposes, ICICI Bank's deposits and bonds are
prescribed modes of investing and depositing surplus money by
charitable and religious trusts.
Regulations governing Insurance Companies
ICICI Prudential Life Insurance Company and ICICI Lombard General
Insurance Company, the subsidiaries of ICICI Bank offering life insurance and
non-life insurance respectively, are subject to the provisions of the Insurance
Act, 1938 and the various regulations prescribed by the Insurance Regulatory
and Development Authority. These regulations regulate and govern, among other
things, registration as an insurance company, investment, licensing of
insurance agents, advertising, sale and distribution of insurance products and
services and protection of policyholders' interests. In May 2002, the Indian
parliament approved the Insurance (Amendment) Act 2002, which facilitates the
appointment of corporate agents by insurance companies and prohibits
intermediaries and brokers from operating as surrogate insurance agents.
Regulations governing International Operations
Our international operations are governed by regulations in the countries
in which we have a presence.
Overseas Banking Subsidiaries
Our wholly-owned subsidiary in the United Kingdom, ICICI Bank UK Limited
is authorized by the Financial Services Authority, which granted our
application under Part IV of the Financial Services and Markets Act, 2000 on
August 8, 2003. Our wholly-owned subsidiary in Canada, ICICI Bank Canada, was
incorporated on September 12, 2003 as a Schedule II Bank in Canada. ICICI Bank
Canada has obtained the approval of the Canada Deposit Insurance Corporation
(CDIC) for deposit insurance and is regulated by the Office of the
Superintendent of Financial Institutions.
Offshore Branches
In Singapore, we have an offshore branch, regulated by the Monetary
Authority of Singapore. The Branch is allowed to accept deposits from Singapore
residents with a minimum size of US$ 100,000 or S$ 250,000. It is also subject
to minimum reserve requirements with respect to its Domestic Banking Unit book.
The Asian Currency Unit book is not subject to reserve requirements, but the
Branch is required to maintain minimum adjusted capital funds of S$ 10 million.
In Bahrain, we have an offshore branch, regulated by the Bahrain Monetary
Agency. The branch is permitted to transact banking business with approved
financial institutions within Bahrain and individuals or institutions outside
Bahrain. It is also permitted to offer banking services to non-resident Indians
in Bahrain.
Representative Offices
Our representative office in New York in the United States is licensed and
regulated by the State of New York Banking Department and the Federal Reserve
Board. Our representative office in Dubai in the United Arab Emirates is
regulated by the Central Bank of the United Arab Emirates. Our representative
office in Shanghai in China is regulated by the China Banking Regulatory
Commission. Our representative office in Bangladesh is regulated by the
Bangladesh Bank.
190
EXCHANGE CONTROLS
Restrictions on Conversion of Rupees
There are restrictions on the conversion of rupees into dollars. Before
February 29, 1992, the Reserve Bank of India determined the official value of
the rupee in relation to a weighted basket of currencies of India's major
trading partners. In the February 1992 budget, a new dual exchange rate
mechanism was introduced by allowing conversion of 60.0% of the foreign
exchange received on trade or current account at a market-determined rate and
the remaining 40.0% at the official rate. All importers were, however, required
to buy foreign exchange at the market rate except for certain specified
priority imports. In March 1993, the exchange rate was unified and allowed to
float. In February 1994 and again in August 1994, the Reserve Bank of India
announced relaxations in payment restrictions in case of a number of
transactions. Since August 1994, the government of India has substantially
complied with its obligations owed to the International Monetary Fund, under
which India is committed to refrain from using exchange restrictions on current
international transactions as an instrument in managing the balance of
payments. Effective July 1995, the process of current account convertibility
was advanced by relaxing restrictions on foreign exchange for various purposes,
such as foreign travel and medical treatment.
In December 1999, the Indian parliament passed the Foreign Exchange
Management Act, 1999, which became effective on June 1, 2000, replacing the
earlier Foreign Exchange Regulation Act, 1973. This legislation indicated 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 was 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. The Reserve Bank of India has also permitted authorized
dealers to freely allow remittances by individuals upto US$ 25,000 per calendar
year for any permissible current or capital account transactions or a
combination of both.
Restrictions on Sale of the Equity Shares underlying the ADSs and Repatriation
of Sale Proceeds
ADSs issued by Indian companies to non-residents have free transferability
outside India. However, under Indian regulations and practice, the approval of
the Reserve Bank of India is required for the sale of equity shares underlying
the ADSs by a non-resident of India to a resident of India as well as for
renunciation of rights to a resident of India. However, sale of such shares
under the portfolio investment scheme prescribed by the Reserve Bank of India,
does not require the approval of the Reserve Bank of India provided the sale 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 as per the 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
191
through a registered stock broker and a no objection/tax clearance certificate
from the income-tax authority has been produced.
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 was introduced,
subject to sectoral caps, wherever applicable.
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 have to 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 Depositary Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time. The sponsoring company
must also furnish full details of the issue in the prescribed forms to the
Reserve Bank of India within 30 days from the date of closure of the issue.
The Reserve Bank of India has issued a notification under the provisions
of the Foreign Exchange Management Act, 1999 permitting a registered broker in
India to purchase shares of any Indian company on behalf of a person resident
outside India, for the purpose of converting the shares so purchased into ADSs
provided that:
o the shares are purchased on a recognized stock exchange;
o the Indian company has issued ADSs;
o the shares are purchased with the permission of the custodian of the ADSs
of the concerned Indian company and are deposited with the custodian;
o the number of shares so purchased shall not exceed the number of ADSs
converted into underlying shares and shall be subject to sectoral caps as
applicable; and
o the non-resident investor, broker, custodian and the overseas depositary
comply with the provisions of the Scheme for Issue of Foreign Currency
Convertible Bonds and Ordinary Shares (through Depositary Receipt
Mechanism) Scheme, 1993 and the guidelines issued thereunder by the
government of India from time to time.
On November 23, 2002, the government of India's Ministry of Finance issued
Operative Guidelines for Disinvestment of Shares by the Indian Companies in the
Overseas Market through the Issue of ADSs. Under these guidelines, the
shareholders may divest their holdings in the overseas market through the
mechanism of a sponsored ADS issue by the Indian company. The holdings which
may be divested are holdings in Indian companies which are listed either in
India or on an overseas exchange.
The divestment process is initiated when the Indian company whose shares
are being offered for divestment in the overseas market sponsors an ADS issue
against the block of existing shares offered by the shareholders under these
guidelines. Such ADS issues against existing shares offered for divestment must
also comply with the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeover) Regulations, 1997, if the ADSs are
cancelled and the underlying shares are to be registered with the company. Such
divestment would result in foreign equity investment and would also need to
conform to the foreign direct investment sectoral policy. All mandatory
approvals including those under the Companies Act, 1956 and the approval of the
Foreign Investment Promotion Board for foreign equity induction through the
offer of existing shares would have to be obtained.
The Reserve Bank of India has permitted Indian companies to retain abroad for
any period, the funds raised through an issue of ADSs, in order to meet their
future foreign exchange requirement. Further, pending repatriation or
utilization, the Indian company may invest the foreign currency funds raised
in:
192
o deposits or certificates of deposit or other products offered by banks who
have been rated not less than AA(-) by Standard and Poor's Ratings
Service/Fitch IBCA or Aa3 by Moody's Investors Service;
o deposits with an overseas branch of an authorized dealer in India; and
o treasury bills and other monetary instruments of one-year maturity having
a minimum rating as indicated above.
The Reserve Bank of India has permitted resident shareholders of Indian
companies, who offer their shares for conversion to ADSs, to receive the sale
proceeds in foreign currency. However, the conversion to such ADSs should have
the approval of the Foreign Investment Promotion Board. Further, the sale
proceeds received by residents are also permitted to be credited to their
Exchange Earners' Foreign Currency/Resident Foreign Currency (Domestic)
accounts or to their rupee accounts in India at their option.
193
MARKET PRICE INFORMATION
Equity Shares
Our outstanding equity shares are currently listed and traded on the
Bombay Stock Exchange or the BSE and on the National Stock Exchange of India
Limited or the NSE.
Until recently, our outstanding equity shares were also traded on the
Chennai, Delhi, Kolkata and Vadodara Stock Exchanges. Pursuant to delisting
applications made by us, our equity shares have been delisted from The Delhi
Stock Exchange Association Limited effective February 11, 2004, the Madras
Stock Exchange Limited effective July 2, 2004 and The Calcutta Stock Exchange
Association Limited effective July 21, 2004 and our equity shares and bonds
have been delisted from the Vadodara Stock Exchange Limited effective July 22,
2004.
At August 31, 2004, 734 million equity shares were outstanding. The prices
for equity shares as quoted in the official list of each of the Indian stock
exchanges are in Indian rupees.
The following table shows:
o the reported high and low closing prices quoted in rupees for our
equity shares on the NSE; and
o the reported high and low closing prices for our equity shares,
translated into US dollars, based on the noon buying rate on the last
business day of each period presented.
Price per equity share(1)
----------------------------------------------
High Low High Low
----------------------------------------------
Annual prices:
Fiscal 2000................................... Rs. 275.00 Rs. 22.70 US$ 6.30 US$ 0.52
Fiscal 2001................................... 279.65 189.70 5.97 4.05
Fiscal 2002 .................................. 193.50 66.75 3.96 1.37
Fiscal 2003 .................................. 161.75 110.55 3.40 2.32
Fiscal 2004 .................................. 348.25 120.80 8.02 2.78
Quarterly prices:
Fiscal 2003:
First Quarter................................. 161.75 111.70 3.31 2.27
Second Quarter................................ 154.50 132.30 3.19 2.73
Third Quarter................................. 149.50 110.55 3.11 2.30
Fourth Quarter................................ 149.95 132.65 3.15 2.79
Fiscal 2004:
First Quarter................................. 150.15 120.80 3.24 2.60
Second Quarter................................ 204.50 145.10 4.47 3.17
Third Quarter................................. 302.20 204.40 6.63 4.49
Fourth Quarter................................ 348.25 267.75 8.02 6.17
Fiscal 2005:
First Quarter................................. 319.35 230.40 6.94 5.01
Second Quarter (through September 24, 2004)... 295.35 234.40 6.43 5.11
Monthly prices:
March 2004.................................... 304.30 269.55 7.01 6.21
April 2004.................................... 319.35 287.65 7.17 6.46
May 2004...................................... 314.80 230.40 6.93 5.07
June 2004..................................... 272.30 236.75 5.92 5.15
July 2004..................................... 267.50 234.40 5.77 5.05
August 2004 .................................. 279.10 265.00 6.02 5.72
September 2004 (through September 24, 2004)... 295.35 262.45 6.43 5.72
------------
(1) Data from the NSE. The prices quoted on the BSE and other stock exchanges
may be different.
194
At September 24, 2004 the closing price of equity shares on the NSE was
Rs. 292.25 equivalent to US$ 6.37 per equity share (US$ 12.73 per ADS on an
imputed basis) translated at the noon buying rate of Rs. 45.90 per US$ 1.00 on
September 24, 2004.
At August 27, 2004, there were approximately 536,589 holders of record of
equity shares, of which 111 had registered addresses in the United States and
held an aggregate of approximately 104,057 equity shares.
ADSs
Our ADSs, each representing two equity shares, were originally issued in
March 2000 in a public offering and are listed and trade on the New York Stock
Exchange under the symbol IBN. The equity shares underlying the ADSs are
currently listed on the BSE and the NSE.
At August 31, 2004, ICICI Bank had approximately 80 million ADSs,
equivalent to 160 million equity shares, outstanding. At this date, there were
65 record holders of ICICI Bank's ADSs, all of which have registered addresses
in the United States.
The following table sets forth, for the periods indicated, the reported
high and low closing prices on the New York Stock Exchange for our 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
Fiscal 2003...................................... 7.94 4.52
Fiscal 2004...................................... 18.33 5.27
Quarterly prices:
Fiscal 2003:
First Quarter.................................... 8.31 4.89
Second Quarter................................... 7.02 5.18
Third Quarter.................................... 6.68 4.52
Fourth Quarter................................... 6.81 5.78
Fiscal 2004:
First Quarter.................................... 7.27 5.27
Second Quarter................................... 10.56 7.23
Third Quarter.................................... 17.91 10.90
Fourth Quarter................................... 18.33 13.50
Fiscal 2005:
First Quarter.................................... 17.25 11.57
Second Quarter (through September 24, 2004)...... 13.91 11.25
Monthly prices:
March 2004....................................... 15.95 13.50
April 2004....................................... 17.25 15.50
May 2004......................................... 16.80 11.57
June 2004........................................ 13.20 11.75
July 2004........................................ 13.02 11.25
August 2004...................................... 13.55 11.99
September 2004 (through September 24, 2004)...... 13.91 12.20
195
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 Depositary Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time. The sponsoring company
must also furnish full details of the issue in the prescribed forms to the
Reserve Bank of India within 30 days from the date of closure of the issue.
On November 23, 2002, the government of India's Ministry of Finance issued
Operative Guidelines for Disinvestment of Shares by the Indian Companies in the
Overseas Market through the Issue of ADSs. Under these guidelines, the
shareholders may divest their holdings in the overseas market through the
mechanism of a sponsored ADS issue by the Indian company. The holdings which
may be divested are holdings in Indian companies which are listed either in
India or on an overseas exchange.
The divestment process is initiated when the Indian company whose shares
are being offered for divestment in the overseas market sponsors an ADS issue
against the block of existing shares offered by the shareholders under these
guidelines. Such ADS issues against existing shares offered for divestment must
also comply with the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeover) Regulations, 1997, if the ADSs are
cancelled and the underlying shares are to be registered with the company. Such
divestment would result in foreign equity investment and would also need to
conform to the foreign direct investment sectoral policy. All mandatory
approvals including those under the Companies Act, 1956 and the approval of the
Foreign Investment Promotion Board for foreign equity induction through the
offer of existing shares, would have to be obtained.
The Reserve Bank of India has issued a notification under the provisions
of the Foreign Exchange Management Act, 1999 permitting a registered broker in
India to purchase shares of any Indian company on behalf of a person resident
outside India, for the purpose of converting the shares so purchased into ADSs,
provided that:
o the shares are purchased on a recognized stock exchange;
o the Indian company has issued ADSs;
o the shares are purchased with the permission of the custodian of the
ADSs of the concerned Indian company and are deposited with the
custodian;
196
o the number of shares so purchased shall not exceed the number of ADSs
converted into underlying shares and shall be subject to sectoral
caps as applicable; and
o the non-resident investor, broker, custodian and the overseas
depositary comply with the provisions of the Scheme for Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through
Depositary Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time.
Under the foreign investment rules, the following are the restrictions on
foreign ownership applicable to us:
o Foreign investors may own up to 74.0 % of our equity shares subject
to conformity with guidelines issued by the Reserve Bank of India
from time to time. This limit includes foreign direct investment,
ADSs, Global Depositary Receipts and investment under the Portfolio
Investment Scheme by foreign institutional investors and non-resident
Indians, and includes shares acquired by subscription to private
placements and public offerings and acquisition of shares from
existing shareholders.
o Under the Issue of Foreign Currency Convertible Bonds and Equity
Shares (Through Depositary Receipt Mechanism) Scheme, 1993, foreign
investors may purchase ADSs or GDRs, subject to the receipt of all
necessary government approvals at the time the depositary receipt
program is set up.
o Under the portfolio investment scheme, (i) foreign institutional
investors, subject to registration with the Securities and Exchange
Board of India and the Reserve Bank of India, may hold in aggregate
up to 49.0% of our paid-up equity capital, provided that no single
foreign institutional investor may own more than 10.0% of our total
paid-up equity capital; and (ii) the shareholding of an individual
non-resident Indian or overseas corporate body is restricted to 5.0%
of our total paid-up equity capital.
o The Reserve Bank of India's guidelines relating to acquisition by
purchase or otherwise of shares of a private sector bank, if such
acquisition results in any person owning or controlling 5.0 % or more
of the paid up capital of the bank, are also applicable to foreign
investors investing in our shares. For more details on the Reserve
Bank of India guidelines relating to acquisition by purchase or
otherwise of shares of a private bank, see "Supervision and
Regulation - Reserve Bank of India Regulations - Ownership
Restrictions".
o Since we have joint ventures in the insurance sector, applications
for foreign direct investment in ICICI Bank have to be addressed to
the Reserve Bank of India for consideration in consultation with the
Insurance Regulatory and Development Authority in order to ensure
that the 26% limit of foreign shareholding applicable for the
insurance sector is not breached.
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.
We obtained the approval of the Foreign Investment Promotion Board for our
ADS offering in March 2000 which was a foreign direct investment. The
investments through the portfolio investment scheme in the secondary market in
India by foreign institutional investors, non-resident Indians and overseas
corporate bodies and investments through the foreign direct investment scheme
are distinct schemes that are available concurrently. As of August 27, 2004,
foreign investors owned approximately 70.1% of our equity in total, of which
21.8% 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, We obtained the approval of the government of India's Department of
Company Affairs and the relevant stock exchanges.
197
Equity shares which have been withdrawn from the depositary facility and
transferred on our register of shareholders to a person other than the
depositary or its nominee may be voted by that person 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 us exceeds 15.0% of our total equity under the Securities
and Exchange Board of India (Substantial Acquisition of Shares and Takeover)
Regulations, 1997.
ADSs issued by Indian companies to non-residents have free transferability
outside India. However, under Indian regulations and practice, the approval of
the Reserve Bank of India is required for the sale of equity shares underlying
the ADSs by a non-resident of India to a resident of India as well as for
renunciation of rights to a resident of India. However sale of such shares
under the portfolio investment scheme prescribed by the Reserve Bank of India,
does not require the approval of the Reserve Bank of India provided the same is
made on a recognized stock exchange and through a registered stock broker.
Any new issue of equity shares of a banking company, either through the
automatic route or with the specific approval of the Foreign Investment
Promotion Board, does not require further approval of the Reserve Bank of
India, but must comply with certain reporting requirements.
198
DIVIDENDS
Under Indian law, a company pays dividends upon a recommendation by its
board of directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each
fiscal year. The shareholders have the right to decrease but not increase the
dividend amount recommended by the board of directors. Dividends may be paid
out of the company's profits for the fiscal year in which the dividend is
declared or out of undistributed profits of prior fiscal years. ICICI Bank paid
dividends consistently every year from fiscal 1996, the second year of its
operations, to fiscal 2002. ICICI Bank paid the dividend for fiscal 2002 as an
interim dividend during fiscal 2002 itself and accordingly there was no
dividend outflow during fiscal 2003 in respect of dividends declared in fiscal
2002. For fiscal 2003, ICICI Bank declared a dividend, excluding dividend tax,
of Rs. 7.50 (US$ 0.17) per equity share aggregating to Rs. 4.6 billion (US$ 106
million). We paid the dividend in August 2003. For fiscal 2004, ICICI Bank
declared a dividend, excluding dividend tax, of Rs. 7.50 (US$ 0.17) per equity
share aggregating to Rs. 5.4 billion (US$ 124 million). The amount of Rs. 5.4
billion (US$ 124 million) excludes the impact of the issue of 6,992,187 equity
shares on May 24, 2004 through the exercise of the overallotment option.
The following table sets forth, for the periods indicated, the dividend
per equity share and the total amount of dividends paid out on the equity
shares during the fiscal year by ICICI Bank, each exclusive of dividend tax.
This may be different from the dividend declared for the year.
Dividend per Total amount of
equity share dividends paid
------------ ---------------
(in millions)
Dividend paid during the fiscal year
1999........................................... Rs. 1.20 Rs. 162
2000........................................... 1.20 198
2001 .......................................... 1.50 247
2002(1)........................................ 4.00(1) 881
2003........................................... - -
2004........................................... 7.50 4,598
------------
(1) Includes dividend of Rs. 2.00 per share declared for each of the fiscal
years 2001 and 2002.
Until May 1997, investors were required to pay tax on dividend income.
From June 1997, dividend income was made tax-exempt. However, ICICI Bank was
required to pay a 10.0% tax on distributed profits. From fiscal 1999, this tax
rate rose to 11.0% because of a 10.0% surcharge imposed on all taxes by the
government. For all distributions subsequent to May 2000, ICICI Bank was
required to pay a 22.6% tax on distributed profits which included a 20.0% tax
and a 13.0% surcharge on such tax. The tax rate was then reduced and ICICI Bank
was required to pay a 10.2% tax on distributed profits for all distributions
subsequent to May 2001, which included a 10.0% tax and a 2.0% surcharge on such
tax. The government of India's budget for fiscal 2003 abolished this tax on
distributed profits, but investors were required to pay tax on dividend income.
The government of India's budget for fiscal 2004 exempted dividend income from
being taxable in the hands of the investors. We are now required to pay a 13.1%
tax (including surcharge) on distributed profits.
Future dividends will depend upon our revenues, cash flow, financial
condition, the regulations of the Reserve Bank of India 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, we have equity shares
issued in India and equity shares represented by ADSs.
Pursuant to guidelines issued by the Securities and Exchange Board of
India in February 2000, with respect to equity shares issued by us during a
particular fiscal year, dividends declared and paid
199
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, ICICI Bank is required under the
Indian Banking Regulation Act to write off all capitalized expenses (including
preliminary expenses, organization expenses, share-selling commission,
brokerage, amounts of losses incurred or any other item of expenditure not
represented by tangible assets). Before declaring dividends, ICICI Bank is
required to transfer at least 20.0% of the balance of profits of each year
before payment of dividend to a reserve fund. The government of India may,
however, on the recommendation of the Reserve Bank of India, exempt ICICI Bank
from such a requirement. As per the revised guidelines issued by Reserve Bank
of India, only those banks, which comply with certain minimum prudential
requirements with respect to capital adequacy, net non-performing asset ratio
and other criteria, are eligible to declare dividends without prior approval of
Reserve Bank of India. Further, the guidelines prescribe a ceiling of 33.3% on
the dividend payout ratio, excluding dividend tax, for banks. Banks, which
comply with the prudential requirements of the above guidelines, but desire to
declare dividends higher than the specified ceiling must obtain prior approval
of Reserve Bank of India for declaration of such higher dividend. In case any
bank does not meet the criteria prescribed above, it has to obtain the prior
approval of Reserve Bank of India before declaring any dividend. For a
description of the revised guidelines issued by the Reserve Bank of India,
please see "Supervision and Regulation - Restrictions on Payment of Dividends".
Further, ICICI Bank requires prior approval from the Reserve Bank of India to
pay a dividend of more than 25.0% of the par value of its shares. ICICI Bank
also requires prior approval from the Reserve Bank of India to pay an interim
dividend.
For a description of the tax consequences of dividends paid to
shareholders, see "Taxation -- Indian Tax -- Taxation of Distributions".
The following table sets forth, for the periods indicated, the dividend
per equity share and the total amount of dividends paid out on the equity
shares during the year, each exclusive of dividend tax, for ICICI, prior to the
amalgamation. This may be different from the dividend declared for the year.
Dividend per Total amount of
equity share(1) dividends paid
----------------------------------
(in millions)
Dividend paid during the fiscal year
1999...................................... Rs. 11.00 Rs. 2,618
2000...................................... 11.00 2,641
2001...................................... 11.00 3,505
2002(2)................................... 22.00(2) 8,639
-----------------
(1) For fiscal 1999, 2000, 2001 and 2002, based on the exchange ratio of 1:2
in which shareholders of ICICI were issued shares of ICICI Bank, number of
shares have been adjusted by dividing by two. Hence, these numbers are
different from the numbers reported in the annual report on Form 20-F for
fiscal 2002
(2) Includes dividend of Rs. 11.00 per share declared for each of the fiscal
years 2001 and 2002, both of which were paid during fiscal 2002.
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TAXATION
Indian Tax
The following discussion of material Indian tax consequences to investors
in ADSs and equity shares who are not resident in India whether of Indian
origin or not (each a "non-resident") 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 described herein may
be amended or modified by future amendments to the Income-tax Act.
The summary is not intended to constitute a complete analysis of the tax
consequences under Indian law of the acquisition, ownership and sale of ADSs
and equity shares by non-resident investors. Potential investors should,
therefore, consult their own tax advisers regarding the tax consequences of
such acquisition, ownership and sale, including the tax consequences under
Indian law, the law of the jurisdiction of their residence, any tax treaty
between India and their country of residence, and in particular the application
of the regulations implementing the Section 115AC regime.
Residence
For the purpose of the Income-tax Act, an individual is a resident of
India during any fiscal year, if he (i) is in India in that year for 182 days
or more or (ii) having been in India for a period or periods aggregating 365
days or more during the four years preceding that fiscal year, is in India for
a period or periods aggregating 60 days or more in that fiscal 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 fiscal year or an Indian citizen who leaves India for the
purposes of his employment during the fiscal year. A company is resident in
India in any fiscal year if it is registered in India or the control and
management of its affairs is situated wholly in India in that year. A firm or
other association of persons is resident in India except where the control and
the management of its affairs are situated wholly outside India.
Taxation of Distributions
Dividends paid are not subject to any Indian withholding or other tax.
However, we are required to pay tax at the rate of 13.06875% on the dividends
distributed by us. The dividend so paid is not taxable under section 115AC in
the hands of the ADS holders.
Taxation on Redemption of ADSs
The acquisition of equity shares upon redemption of ADSs by a non-resident
investor will not give rise to a taxable event for Indian tax purposes.
Taxation on Sale of ADSs or Equity Shares
Any transfer of ADSs outside India by a non-resident investor to another
non-resident investor will not give rise to Indian capital gains tax in the
hands of the transferor.
Subject to any relief under any relevant double taxation treaty, gain
arising from 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 advice of redemption of the ADS
by the Depositary as specified below), the rate of tax is 10.2% (including
education cess) where the total income does
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not exceed Rs. 850,000 (US$ 19,585) or 11.22% (including applicable surcharges
and an additional surcharge by way of education cess) where the total income
exceeds Rs. 850,000 (US$ 19,585). 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 41.82% (including applicable
surcharges and education cess) 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. The Finance (No. 2) Act, 2004, introduced the
securities transaction tax effective October 1, 2004 which shall be levied on
transactions of purchase /sale of equity shares entered into on a recognized
stock exchange in India at the specified rates in accordance with the
provisions of Chapter VII there under. The transaction of sale of equity shares
entered into a recognised stock exchange in India settled by actual delivery or
transfer will be subject to securities transaction tax at the rate of 0.075%,
on the value of the transaction, payable by the seller. In cases where
securities transaction tax is payable, the resulting long-term capital gains
would be exempt from tax and short-term capital gains would be taxable at a
lower tax rate of 10.2%(including education cess) where the total income does
not exceed Rs. 850,000 (US$ 19,585) or 11.22% (including applicable surcharges
and an additional surcharge by way of education cess) where the total income
exceeds Rs. 850,000 (US$ 19,585). For transactions that are not subject to
securities transaction tax, the normal capital gains tax regime will apply.
During the period the underlying equity shares are held by non-resident
investors on a transfer from the Depositary upon redemption, the provisions of
the double taxation treaty entered into by the government of India with the
country of residence of the non-resident investors will apply in determining
the taxation of any capital gains 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 Stock Exchange, Mumbai or the National Stock Exchange 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 on the date of advice of
redemption by the Depositary.
Rights
Distributions to non-resident investors 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 Indian tax in the hands of the non-resident
investor.
It is unclear as to whether capital gains derived from the sale of rights
outside India by a non-resident investor that is not entitled to exemption
under a tax treaty to another non-resident investor will be subject to Indian
capital gains tax. If the rights are deemed by the Indian tax authorities to be
situated within India, as our situs is in India,then the capital gains realized
on the sale of rights will be subject to customary Indian capital gains
taxation as discussed above.
Stamp Duty
Upon the issuance of the equity shares underlying the ADSs, we are
required to pay a stamp duty of 0.1% per share of the issue price. A transfer
of ADSs is not subject to Indian stamp duty. Normally, upon the receipt of
equity shares in physical form from the depositary in exchange for ADSs
representing such equity shares, a non-resident investor would be liable for
Indian stamp duty applicable on re-issuance in physical form, which is the same
as stamp duty payable on the original issuance in physical form subject to a
maximum of Rs. 20 per share certificate. Similarly, a sale of equity shares in
physical form by a non-resident investor would also be subject to Indian stamp
duty at the rate of 0.25% of the market value of the equity shares on the trade
date, although customarily such tax is borne by the transferee, that is, the
purchaser. However, our equity shares are compulsorily delivered in
non-physical form except for trades up to 500 shares only, which may be
delivered in
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physical form. Under Indian stamp law, no stamp duty is payable on the
acquisition or transfer of equity shares in non-physical form. As per the
Finance Act, 2004, all delivery based sales on a recognized stock exchange in
India of inter-alia all equity shares shall attract transaction tax at the
rates of 0.075% of the value of the securities transacted.
Other Taxes
At present, there are no taxes on wealth, gifts or inheritance which apply
to the ADSs or underlying equity shares.
Service Tax
Brokerage fees paid to stockbrokers in connection with the sale or
purchase of shares which are listed on any recognized stock exchange in India
are subject to a service tax at a rate of 10.2% (including applicable education
cess). 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 or equity shares
that are generally applicable to US investors. For these purposes, you are an
US investor if, for US federal income tax purposes, you are:
1. a citizen or resident of the United States;
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. certain financial institutions;
5. persons who own the ADSs or equity shares as part of an integrated
investment (including a straddle, hedging or conversion transaction)
comprised of the ADS or equity shares, and one or more other
positions for US federal income tax purposes;
6. persons whose functional currency is not the US dollar; or
7. persons who own, actually or constructively, 10.0% or more of ICICI
Bank's voting stock.
This discussion is based on the tax laws of the United States currently in
effect (including the Internal Revenue Code of 1986, as amended, referred to as
the "Code"), Treasury Regulations, Revenue Rulings and judicial decisions.
These laws may change, possibly with retroactive effect.
This discussion is also based in part on representations by the depositary
and assumes that each obligation under the deposit agreement and any related
agreement will be performed in accordance with its terms. Furthermore, the US
Treasury has expressed concerns that parties to whom ADSs are pre-released may
be taking actions that are inconsistent with the claiming of foreign tax
credits for US
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investors of ADSs. Such actions would also be inconsistent with the claiming of
the reduced rate of tax, described below, applicable to dividends received by
certain non-corporate US investors. Accordingly, the analysis of the
creditability of Indian taxes and the availability of the reduced tax rate for
dividends received by certain non-corporate US investors, each described below,
could be affected by actions taken by parties to whom ADSs are pre-released.
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 adviser 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.
This discussion assumes that ICICI Bank is not, and will not become, a
passive foreign investment company (as discussed below).
Taxation of Dividends
Dividends you receive on the ADSs or equity shares, other than certain pro
rata distributions of ADSs or equity shares or rights to acquire ADSs or equity
shares, 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 Rs., 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 on the date of
receipt. If you realize gain or loss on a sale or other disposition of rupees,
it will be US source ordinary income or loss. If you are a corporate US
investor, you will not be entitled to claim a dividends-received deduction for
dividends paid by ICICI Bank. Subject to applicable limitations, if you are a
non-corporate US investor, dividends paid to you in taxable years beginning
before January 1, 2009 will be taxable at a maximum rate of 15.0%. If you are a
non-corporate US investor, you should consult your own tax adviser to determine
whether you are subject to any special rules that limit your ability to be
taxed at this favorable rate.
Taxation of Capital Gains
You will recognize capital gain or loss for US federal income tax purposes
on the sale or exchange of ADSs or equity shares in the same manner as you
would on the sale or exchange of any other shares held as capital assets. The
gain or loss will generally be US source income or loss. You should consult
your own tax advisers about the treatment of capital gains, which may be taxed
at lower rates than ordinary income for non-corporate taxpayers, and capital
losses, the deductibility of which may be limited.
Under certain circumstances as described under "Taxation - Indian Taxation
- Taxation on Sale of ADSs or Equity Shares", you may be subject to Indian tax
upon the disposition of equity shares. You should consult your own tax adviser
with respect to your ability to credit this Indian tax against your US federal
income tax liability.
Passive Foreign Investment Company Rules
Based upon certain proposed Treasury regulations, which are proposed to be
effective for taxable years beginning after December 31, 1994, and upon certain
management estimates, ICICI Bank does not expect to be a passive foreign
investment company (a "PFIC") for its taxable year ended March 31, 2004 or in
the foreseeable future. In general, a foreign corporation is a PFIC 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. Since there can be no
assurance that the proposed regulations will be finalized in their current
form, the manner of the application of the proposed regulations is not entirely
clear, and the composition of ICICI Bank's income and assets will
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vary over time, there can be no assurance that ICICI Bank will not be
considered a PFIC for any taxable year.
If ICICI Bank were treated as a PFIC 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 US 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 ADSs or equity shares,
including, under certain circumstances, a disposition pursuant to an otherwise
tax-free reorganization, gain recognized by you would be allocated ratably over
your holding period for the ADSs or equity shares. The amounts allocated to the
taxable year of the disposition and to any year before ICICI Bank became a
passive foreign investment company would be taxed as ordinary income. The
amount allocated to each other taxable year would be subject to tax at the
highest rate in effect for individuals or 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
125.0% of the average of the annual distributions on ADSs or equity shares
received by you during the preceding three years or your holding period,
whichever is shorter, would be subject to taxation as described above.
If the ADSs or equity shares are "regularly traded" on a "qualified
exchange", you may make a mark-to-market election. The ADSs or equity shares
will be treated as "regularly traded" in any calendar year in which more than a
de minims quantity of the ADSs or equity shares, as the case may be, are traded
on a qualified exchange on at least 15 days during each calendar quarter. 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 as ordinary income
the excess, if any, of the fair market value of the ADSs or equity shares at
the end of each 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 or equity shares 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 or equity shares will be adjusted to reflect any such income or
loss amounts. Any gain recognized on the sale or other disposition of ADSs or
equity shares will be treated as ordinary income.
If you own ADSs or equity shares during any year in which ICICI Bank is a
PFIC, you must file Internal Revenue Service Form 8621.
In addition, if we were to be treated as a PFIC in a taxable year in which
we pay a dividend or the prior taxable year, the 15.0% dividend rate discussed
above with respect to payment of dividends to certain non-corporate U.S.
investors would not apply.
Information reporting and backup withholding
Payment of dividends and sales proceeds that are made within the United
States or through certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless (i) you are a
corporation or other exempt recipient or (ii) in the case of backup
withholding, you provide a correct taxpayer identification number and certify
that no loss of exemption from backup withholding has occurred.
The amount of any backup withholding from a payment to you will be allowed
as a credit against your U.S. federal income tax liability and may entitle you
to a refund, provided that the required information is furnished to the
Internal Revenue Service.
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PRESENTATION OF FINANCIAL INFORMATION
ICICI Bank and ICICI prepared their historical financial statements in
accordance with Indian generally accepted accounting principles. Starting in
fiscal 2000, ICICI Bank published in its annual shareholders' report its
financial statements in US GAAP as well as in Indian GAAP. Starting in fiscal
1999, ICICI published in its annual shareholders' report its financial
statements in US GAAP as well as in Indian GAAP.
The financial information in this annual report has been prepared in
accordance with US GAAP, unless indicated otherwise. Our fiscal year, like
ICICI Bank's and ICICI's fiscal year prior to the amalgamation, ends on March
31 of each year so all references to a particular fiscal year are to the year
ended March 31 of that year. Our financial statements, including the notes to
these financial statements, audited by KPMG LLP, UK, independent accountants,
are set forth at the end of this annual report.
The Statement on Financial Accounting Standard No. 141 on "Business
Combinations", issued by the Financial Accounting Standards Board, requires
that business combinations be accounted for in the period in which the
combination is consummated. The effective date of the amalgamation for
accounting purposes under US GAAP was April 1, 2002. Accordingly, under US
GAAP, the amalgamation has been reflected in the financial statements contained
in this annual report for fiscal 2003, as it was consummated in April 2002.
Under US GAAP, the amalgamation was accounted for as a reverse acquisition.
This means that ICICI was recognized as the accounting acquirer in the
amalgamation, although ICICI Bank was the legal acquirer. Accordingly, the
financial statements and other financial information contained in this annual
report for fiscal 2002 and prior years, except where specifically stated
otherwise, present the assets, liabilities and results of operations of ICICI.
Under Indian GAAP, the amalgamation was accounted for on March 30, 2002,
the Appointed Date specified in the Scheme of Amalgamation, with ICICI Bank
being recognized as the accounting acquirer.
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 year ended March 31, 2000. As a result, the financial statements
for fiscal 2002 and 2001 are not strictly comparable with those for fiscal
2000.
The consolidation of ICICI's majority ownership interest in two insurance
companies, ICICI Prudential Life Insurance Company Limited and ICICI Lombard
General Insurance Company Limited, in each of fiscal 2001 and 2002 was deemed
inappropriate because of substantive participative rights retained by the
minority shareholders. Accordingly, such investees have not been consolidated
from fiscal 2003 but have been accounted for by the equity method. Prior period
financial statements have been restated and as a result, the financial
statements for fiscal 2002, fiscal 2001 and fiscal 2000 contained in this
annual report are not the same as those contained in our annual report for
fiscal 2002, fiscal 2001 and fiscal 2000. There is no resultant impact on net
income or stockholders' equity for fiscal 2002.
Although we have translated in this annual report certain rupee amounts
into dollars for convenience, this does not mean that the rupee amounts
referred to could have been, or could be, 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
206
on the noon buying rate in the City of New York for cable transfers in rupees
at March 31, 2004. 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
31, 2004 was Rs. 43.40 per US$1.00.
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ADDITIONAL INFORMATION
Memorandum and Articles of Association
Objects and Purposes
Pursuant to Clause III. A. 1 of ICICI Bank's Memorandum of Association,
ICICI Bank's main objective is to carry on the business of banking in any part
of India or outside India.
Directors' Powers
ICICI Bank's directors' powers include the following:
o Article 140 of the Articles of Association provides that no director
of ICICI Bank shall, as a director, take any part in the discussion
of or vote on any contract or arrangement if such director is
directly or indirectly concerned or interested.
o Directors have no powers to vote in absence of a quorum.
o Article 83 of the Articles of Association provides that the directors
may raise and secure the payment of amounts in a manner and upon such
terms and conditions in all respects as they think fit and in
particular by the issue of bonds, debenture stock, or any mortgage or
charge or other security on the undertaking or the whole or any part
of the property of ICICI Bank (both present and future) including its
uncalled capital.
Amendment to Rights of Holders of Equity Shares
Any change to the existing rights of the equity holders can be made only
by amending the Articles of Association which would require a special
resolution of the shareholders, which must be passed by not less than three
times the number of votes cast against the resolution.
Change in Control Provisions
Article 59 of the Articles of Association provides that the board of
directors may at their discretion decline to register or acknowledge any
transfer of shares in respect of shares upon which we have a lien. Moreover,
the board of directors may refuse to register the transfer of any shares if the
total nominal value of the shares or other securities intended to be
transferred by any person would, together with the total nominal value of any
shares held in ICICI Bank, exceed 1% of the paid up equity share capital of the
merged entity or if the board of directors is satisfied that as a result of
such transfer, it would result in the change in the board of directors or
change in the controlling interest of ICICI Bank and that such change would be
prejudicial to the interests of ICICI Bank. However, under the Indian Companies
Act, the enforceability of such transfer restrictions is unclear.
Material Contracts
Scheme of Amalgamation of ICICI, ICICI Personal Financial Services and
ICICI Capital Services with ICICI Bank
Pursuant to the Scheme of Amalgamation among ICICI, ICICI Personal
Financial Services, ICICI Capital Services and ICICI Bank, sanctioned by the
High Court of Gujarat at Ahmedabad on March 7, 2002 and by the High Court of
Judicature at Bombay on April 11, 2002 and approved by the Reserve Bank of
India on April 26, 2002, ICICI, ICICI Personal Financial Services and ICICI
Capital Services were merged with ICICI Bank in an all-stock merger. ICICI Bank
is the surviving legal entity in the amalgamation. ICICI Bank issued 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
208
of ICICI. For more information about the amalgamation, see "Business-History".
This Scheme of Amalgamation is attached as an exhibit to this annual report.
Documents on Display
The documents concerning us which are referred to herein may be inspected
at the Securities and Exchange Commission ("SEC"). You may read and copy any
document filed or furnished by us at the SEC's public reference rooms in
Washington D.C., New York and Chicago, Illinois or obtain them by mail upon
payment of prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information. The SEC also maintains a website at www.sec.gov, which contains,
in electronic form, each of the reports and other information that we have
filed electronically with the SEC. Information about ICICI Bank is also
available on the web at www.icicibank.com.
Incorporation by Reference
We incorporate by reference the information disclosed under "Description
of Equity Shares" and "Description of the American Depositary Shares" in ICICI
Bank's Registration Statement on Form F-1 (File No. 333-30132).
209
Index to Consolidated Financial Statements
Contents Page
Report of independent registered public accounting firm..............F-2
Consolidated balance sheets..........................................F-3
Consolidated statements of operations................................F-4
Consolidated statements of stockholders' equity and other
comprehensive income...............................................F-6
Consolidated statements of cash flows................................F-7
Notes to the consolidated financial statements.......................F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
ICICI Bank Limited
We have audited the accompanying consolidated balance sheets of ICICI Bank
Limited and subsidiaries ('the Company') as of March 31, 2003 and 2004, and the
related consolidated statements of operations, stockholders' equity and other
comprehensive income, and cash flows for each of the years in the three-year
period ended March 31, 2004. 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 the standards of the Public
Company Accounting Oversight Board (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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ICICI Bank
Limited and subsidiaries as of March 31, 2003 and 2004, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
April 1, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets and SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. As discussed in Note 1
to the consolidated financial statements, effective October 1, 2002, the
Company adopted the provisions of SFAS No. 147, Acquisitions of Certain
Financial Institutions, retroactive to April 1, 2001, the adoption date of SFAS
No. 142.
The United States dollar amounts are presented in the accompanying
consolidated financial statements solely for the convenience of the readers and
have been translated into United States dollar on the basis described in Note 1
to the consolidated financial statements.
London, United Kingdom KPMG LLP
May 22, 2004
F-2
ICICI Bank Limited and subsidiaries
Consolidated balance sheets
In millions, except share data
Convenience
translation
into US$,
As of March 31, As of March 31,
------------------------------ ---------------
2003 2004 2004
------------- ------------- ---------------
Assets
Cash and cash equivalents................................... Rs. 72,453 Rs. 98,985 US$ 2,281
Trading assets.............................................. 39,634 75,155 1,732
Securities:
Available for sale........................................ 267,499 296,605 6,834
Non-readily marketable equity securities.................. 9,418 8,621 199
Venture capital investments............................... 3,704 5,142 118
Investments in affiliates................................... 2,615 3,619 83
Loans, net of allowance for loan losses,
security deposits and unearned income..................... 630,421 728,520 16,786
Customers' liability on acceptances......................... 43,252 65,142 1,501
Property and equipment, net................................. 21,215 23,183 534
Assets held for sale........................................ 2,306 4,829 111
Goodwill.................................................... 4,787 5,403 124
Intangible assets, net...................................... 5,118 4,513 104
Deferred tax assets......................................... 6,423 7,937 183
Interest and fees receivable................................ 12,472 6,529 151
Other assets................................................ 58,946 74,948 1,727
------------- ------------- ----------
Total assets................................................ Rs. 1,180,263 Rs. 1,409,131 US$ 32,468
============= ============= ==========
Liabilities
Interest bearing deposits................................... Rs. 456,051 Rs. 611,178 US$ 14,081
Non-interest bearing deposits............................... 35,239 73,777 1,700
Trading liabilities......................................... 26,086 26,079 601
Short-term borrowings....................................... 42,095 57,364 1,322
Bank acceptances outstanding................................ 43,252 65,142 1,501
Long-term debt.............................................. 400,812 373,449 8,605
Redeemable preferred stock.................................. 853 944 22
Taxes and dividends payable................................. 16,880 20,180 465
Deferred tax liabilities.................................... 460 614 14
Other liabilities........................................... 66,198 84,829 1,955
------------- ------------- ----------
Total liabilities........................................... Rs. 1,087,926 Rs. 1,313,556 US$ 30,266
============= ============= ==========
Commitments and contingencies (Note 29)
Minority interest........................................... 124 1,050 24
Stockholders' equity:
Common stock at Rs. 10 par value: 800,000,000 and
1,550,000,000 shares authorized as of March 31, 2003 and
2004; Issued and outstanding 613,034,404 and 616,391,905
shares as of March 31, 2003 and 2004, respectively........ 6,127 6,164 142
Additional paid-in capital.................................. 64,863 65,341 1,506
Retained earnings........................................... 18,246 18,279 421
Accumulated other comprehensive income...................... 2,977 4,741 109
------------- ------------- ----------
Total stockholders' equity.................................. 92,213 94,525 2,178
------------- ------------- ----------
Total liabilities and stockholders' equity.................. Rs. 1,180,263 Rs. 1,409,131 US$ 32,468
============= ============= ==========
See accompanying notes to the consolidated financial statements.
F-3
ICICI Bank Limited and subsidiaries
Consolidated statements of operations
In millions, except share data
Convenience
translation into US$
Year ended March 31, Year ended March 31,
-------------------------------------- --------------------
2002(1) 2003 2004 2004
---------- ---------- ---------- --------------------
Interest and dividend income
Interest and fees on loans.................................. Rs. 75,237 Rs. 75,080 Rs. 69,221 US$ 1,596
Interest and dividends on securities ....................... 1,447 17,022 15,695 362
Interest and dividends on trading assets ................... 1,715 2,754 3,232 74
Interest on balances and deposits with banks................ 368 1,151 1,148 26
Other interest income....................................... 100 2,096 1,823 42
---------- ----------- ---------- ---------
Total interest and dividend income.......................... 78,867 98,103 91,119 2,100
---------- ----------- ---------- ---------
Interest expense............................................
Interest on deposits........................................ 744 26,033 30,680 707
Interest on long-term debt.................................. 59,798 48,163 38,412 885
Interest on short-term borrowings........................... 7,717 3,829 1,374 32
Interest on trading liabilities............................. 911 3,114 1,815 42
Other interest expense ..................................... 350 2,069 94 2
---------- ----------- ---------- ---------
Total interest expense...................................... 69,520 83,208 72,375 1,668
---------- ----------- ---------- ---------
Net interest income......................................... 9,347 14,895 18,744 432
Provision for loan losses................................... 9,743 19,649 20,055 462
---------- ----------- ---------- ---------
Net interest income/ (loss) after provision for
loan losses.............................................. (396) (4,754) (1,311) (30)
Non-interest income.........................................
Fees, commission and brokerage.............................. 4,703 5,397 8,988 207
Net gain on trading activities.............................. 2,442 3,075 4,433 102
Net gain/(loss) on venture capital investments.............. (316) (1,278) 357 8
Net gain/(loss) on other securities......................... (3,256) 956 12,443 287
Net gain on sale of loans and credit substitutes............ 1,979 3,120 4,687 108
Foreign exchange income/(loss).............................. 78 92 2,061 47
Software development and services........................... 1493 1,062 903 21
Gain on sale of stock of subsidiaries/affiliates............ 165 - - -
Gain/(loss) on sale of property and equipment............... 29 16 345 8
Rent........................................................ 310 117 131 3
Transaction processing services............................. - 696 1,756 40
Other non-interest income................................... 521 - 574 13
---------- ----------- ---------- ---------
Total non-interest income................................... 8,148 13,253 36,678 844
---------- ----------- ---------- ---------
Non-interest expense........................................
Salaries and employee benefits.............................. 2,980 5,383 9,976 230
General and administrative expenses......................... 4,616 12,581 16,440 378
Amortization of intangible assets........................... - 645 685 16
---------- ----------- ---------- ---------
Total non-interest expense.................................. 7,596 18,609 27,101 624
---------- ----------- ---------- ---------
Income/(loss) before equity in earning/(loss) of affiliates,
minority interest, income taxes and cumulative effect of
accounting changes ....................................... 156 (10,110) 8,266 190
Equity in earning/(loss) of affiliates...................... 294 (958) (1,437) (33)
Minority interest........................................... 83 24 28 1
---------- ----------- ---------- ---------
Income/(loss) before income taxes and cumulative effect of
accounting changes........................................ 533 (11,044) 6,857 158
Income tax (expense)/benefit................................ (251) 3,061 (1,638) (38)
---------- ----------- ---------- ---------
Income/(loss) before cumulative effect of accounting changes
282 (7,983) 5,219 120
Cumulative effect of accounting changes, net of tax......... 1,265 - - -
---------- ----------- ---------- ---------
Net income/(loss)........................................... Rs. 1,547 Rs. (7,983) Rs. 5,219 US$ 120
========== =========== ========== =========
F-4
ICICI Bank Limited and subsidiaries
Consolidated statements of operations
In millions, except share data
Convenience
translation into US$
Year ended March 31, Year ended March 31,
------------------------------------ --------------------
2002(1) 2003 2004 2004
--------- ----------- --------- --------
Earnings per equity share: Basic (Rs.)
Net income/ (loss) before cumulative effect of accounting
changes................................................... Rs. 0.72 Rs. (14.18) Rs. 8.50 US$ 0.20
Cumulative effect of accounting changes..................... 3.22 - - -
--------- ---------- --------- --------
Net income/ (loss).......................................... 3.94 (14.18) 8.50 0.20
Earnings per equity share: Diluted (Rs.)
Net income/ (loss) before cumulative effect of accounting
changes................................................... Rs. 0.72 Rs. (14.18) Rs. 8.43 US$ 0.20
Cumulative effect of accounting changes..................... 3.22 - - -
--------- ---------- --------- --------
Net income/(loss)........................................... 3.94 (14.18) 8.43 0.20
Weighted average number of equity shares used in computing
earnings per equity share (millions)
Basic....................................................... 393 563 614
Diluted..................................................... 393 563 619
See accompanying notes to the consolidated financial statements.
1) Restated for reverse acquisition and adoption of SFAS No. 147.
F-5
ICICI Bank Limited and subsidiaries
Consolidated statements of stockholders' equity and other comprehensive income
In millions, except share data
--------------------------------------------------------------------------------------------------------
Common stock Treasury stock
------------ --------------
No. of
shares(1) Amount No. of shares Amount
--------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001....................... 392,672,024 Rs. 3,922 - -
--------------------------------------------------------------------------------------------------------
Common stock issued on exercise of stock options... 700 - - -
Amortization of compensation....................... - - - -
Comprehensive income
Net income....................................... - - - -
Net unrealized gain/(loss) on securities, net of - - - -
realization (net of tax).......................
Translation adjustments (net of tax)............. - - - -
Comprehensive income/(loss)........................
Cash dividends declared (Rs. 11 per common share).. - - - -
--------------------------------------------------------------------------------------------------------
Balance as of March 31, 2002(2).................... 392,672,724 Rs. 3,922 - -
--------------------------------------------------------------------------------------------------------
Common stock issued on reverse acquisition......... 118,962,731 1,190 - -
Fair value of stock options assumed on reverse
acquisition...................................... - -
Treasury stock arising due to reverse acquisition.. 101,395,949 (101,395,949) (8,204)
Sale of treasury stock............................ - 1,015 101,395,949 8,204
Common stock issued on exercise of stock options... 3,000 - - -
Increase in carrying value on direct issuance of
stock by subsidiary.............................. - - - -
Amortization of compensation....................... - - - -
Comprehensive income
Net income/(loss)................................ - - - -
Net unrealized gain/(loss) on securities, net of - - - -
realization (net of tax).......................
Translation adjustments (net of tax)............. - - - -
Comprehensive income/(loss)........................ - - -
--------------------------------------------------------------------------------------------------------
Balance as of March 31, 2003....................... 613,034,404 Rs. 6,127 Rs. - Rs. -
--------------------------------------------------------------------------------------------------------
Common stock issued on exercise of stock options... 3,370,604 34 - -
Receipt of calls in arrears........................ 3 - -
Forfeiture of shares............................... 13,103 - - -
Amortization of compensation....................... - - - -
Comprehensive income
Net income/(loss)................................ - - - -
Net unrealized gain/(loss) on securities, net of - - - -
realization (net of tax)......................
Translation adjustments (net of tax)............. - - - -
Comprehensive income/(loss)........................ - - - -
Cash dividends declared (Rs.7.5 per common share).. - - - -
--------------------------------------------------------------------------------------------------------
Balance as of March 31, 2004....................... 616,391,905 6,164 Rs. - Rs. -
--------------------------------------------------------------------------------------------------------
Balance as of March 31, 2004 (US$)................. 142
--------------------------------------------------------------------------------------------------------
F-6
[Table -- continued]
Consolidated statements of stockholders' equity and other comprehensive income
In millions, except share data
-------------------------------------------------------------------------------------------------------------------------------
Additional Accumulated other Total
paid-in Retained Deferred comprehensive stockholder's
capital earnings compensation Income, net of tax equity
-------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001....................... Rs. 42,036 Rs. 34,196 Rs. (33) Rs. (4,199) Rs. 75,922
-------------------------------------------------------------------------------------------------------------------------------
Common stock issued on exercise of stock options... - - - - -
Amortization of compensation....................... - - 26 - 26
Comprehensive income
Net income....................................... - 1,547 - - 1547
Net unrealized gain/(loss) on securities, net of - - - 3,283 3,283
realization (net of tax).......................
Translation adjustments (net of tax)............. - - - 84 84
------------
Comprehensive income/(loss)........................ 4,914
------------
Cash dividends declared (Rs. 11 per common share).. - (9,514) - - (9,514)
-------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2002(2).................... Rs. 42,036 Rs. 26,229 Rs. (7) Rs. (832) Rs. 71,348
-------------------------------------------------------------------------------------------------------------------------------
Common stock issued on reverse acquisition......... 10,838 - - - 12,028
Fair value of stock options assumed on reverse
acquisition...................................... 409 - - - 409
Treasury stock arising due to reverse acquisition.. 8,204 - - - -
Sale of treasury stock............................ 3,336 - - - 12,555
Common stock issued on exercise of stock options... - - - - -
Increase in carrying value on direct issuance of
stock by subsidiary.............................. 40 - - - 40
Amortization of compensation....................... - - 7 - 7
Comprehensive income
Net income/(loss)................................ - (7,983) - - (7,983)
Net unrealized gain/(loss) on securities, net of - - - 3,731 3,731
realization (net of tax).......................
Translation adjustments (net of tax)............. - - - 78 78
------------
Comprehensive income/(loss)........................ - - - - (4,174)
============
-------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2003....................... Rs. 64,863 Rs. 18,246 Rs. - Rs. 2,977 Rs. 92,213
-------------------------------------------------------------------------------------------------------------------------------
Common stock issued on exercise of stock options... 478 - - - 512
Receipt of calls in arrears........................ - - - 3
Forfeiture of shares .............................. - - - - -
Amortization of compensation....................... - - - - -
Comprehensive income
Net income/(loss)................................ - 5,219 - - 5,219
Net unrealized gain/(loss) on securities, net of - - - 1,858 1,858
realization (net of tax)......................
Translation adjustments (net of tax)............. - - - (94) (94)
------------
Comprehensive income/(loss)........................ - - - - 6,983
------------
Cash dividends declared (Rs.7.5 per common share).. - (5,186) - - (5,186)
-------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2004....................... Rs. 65,341 Rs. 18,279 Rs. - Rs. 4,741 Rs. 94,525
-------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2004 (US$)................. 1,506 421 109 2,178
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
1) Restated for reverse acquisition.
2) Restated for adoption of SFAS No. 147.
F-6
ICICI Bank Limited and subsidiaries
Consolidated statements of cash flows
In millions, except share data
Convenience
translation into US$
Year ended March 31, Year ended March 31,
--------------------------------- --------------------
2002(1) 2003 2004 2004
--------- --------- --------- --------------------
Operating activities
Net income/(loss) .................................... Rs. 1,547 Rs.(7,983) Rs. 5,219 US$ 120
Adjustments to reconcile net income to net cash (used
in)/provided by operating activities:
Provision for loan and other credit losses ......... 10,532 19,649 20,055 462
Depreciation ....................................... 786 2,438 2,791 64
Amortization ....................................... 1,193 5,815 (1,902) (44)
Amortization of discounts and expenses on borrowings 1,307 607 856 20
Deferred income tax ................................ (3,245) (4,348) (2,046) (47)
Unrealized loss/(gain) on trading securities ....... (80) (117) 15 -
Unrealized loss/(gain) on venture capital
Investments ..................................... 300 1,278 (499) (11)
Other than temporary decline in value of other
securities ...................................... 3,480 2,098 944 22
Unrealized gain on derivative transactions ......... 190 (1,009) (850) (20)
Undistributed equity in (earning)/loss of affiliates (9) 958 1,631 38
Minority interest .................................. (83) (24) (28) (1)
(Gain)/loss on sale of property and equipment, net . (29) (16) (345) (8)
(Gain)/loss on sale of securities available for sale (349) (956) (12,443) (287)
Gain on sale of subsidiary's stock ................. (165) - - -
Gain on sale of loans .............................. (1979) (2,795) (4,687) (108)
Cumulative effect of accounting changes, net of tax (1,265) - - -
Change in assets and liabilities
Trading account assets .......................... (23,421) 29,944 (34,686) (799)
Interest and fees receivable .................... 3,583 (2,990) 5,943 137
Other assets .................................... (12,783) (34,295) (18,535) (427)
Trading account liabilities ..................... 4,352 (13,656) (7) -
Taxes payable ................................... 552 5,830 3,300 76
Other liabilities ............................... 14,422 4,663 18,750 432
-------- -------- -------- -------
Net cash (used in)/provided by operating activities .. (1,164) 5,091 (16,524) (381)
-------- -------- -------- -------
Investing activities
Purchase of available for sale securities ........... (68,043) (717,765) (270,405) (6,231)
Purchase of venture capital investments .............. (504) (1,268) (3,097) (72)
Purchase of non-readily marketable equity securities . (2,015) (1,150) (561) (13)
Proceeds from sale of held to maturity securities .... 640 - - -
Proceeds from sale of available for sale securities .. 28,512 684,769 255,316 5,883
Proceeds from sale of venture capital investments .... 53 207 2,157 50
Proceeds from sale of non-readily marketable equity
securities ......................................... 183 - 1,358 31
Proceeds from sale of subsidiary's stock ............. 302 - - -
Origination of loans, net ............................ 28,624 (108,023) (237,709) (5,477)
Proceeds from sale of loans .......................... 40,815 51,780 128,269 2,956
Purchase of property and equipment ................... (1,701) (6,943) (5,740) (132)
Proceeds from sale of property and equipment ......... 128 504 1,305 30
Investments in affiliates ............................ (1,159) (1,691) (2,635) (61)
Payment for business acquisition, net of cash acquired (143) 98,487 (1,322) (30)
-------- -------- -------- -------
Net cash (used in)/provided by investing activities .. 25,692 (1,093) (133,064) (3,066)
-------- -------- -------- -------
F-7
ICICI Bank Limited and subsidiaries
Consolidated statements of cash flows
In millions, except share data
Convenience
translation into US$
Year ended March 31, Year ended March 31,
------------------------------------- --------------------
2002(1) 2003 2004 2004
--------- ----------- ----------- --------------------
Financing activities
Increase in deposits, net ............................ Rs. 1,308 Rs. 158,290 Rs. 193,741 US$ 4,464
Proceeds/ repayment from short-term borrowings, net .. (28,852) (30,118) 15,269 352
Proceeds from other borrowings ....................... 5,787 - - -
Proceeds from issuances of long-term debt ............ 158,905 10,631 114,712 2,643
Repayment of long-term debt .......................... (142,019) (124,979) (142,931) (3,293)
Proceeds from issuance of common stock ............... - 13,155 515 12
Proceeds from issuance of common stock by subsidiary . 390 - - -
Cash dividends paid .................................. (9,514) - (5,186) (119)
--------- ----------- ----------- ---------
Net cash provided by/(used in) financing activities .. (13,995) 26,979 176,120 4,059
--------- ----------- ----------- ---------
Effect of exchange rate on cash and cash equivalents . (14) - - -
--------- ----------- ----------- ---------
Net increase/(decrease) in cash and cash equivalents . 10,519 30,977 26,532 612
Cash and cash equivalents at the beginning of the
year................................................ 30,957 41,476 72,453 1,669
--------- ----------- ----------- ---------
Cash and cash equivalents at the end of the year ..... Rs.41,476 Rs. 72,453 Rs. 98,985 US$ 2,281
========= =========== =========== =========
Supplementary information:
Cash paid for:
Taxes .............................................. 4,505 1,027 3,313 US$ 76
Non-cash items:
Foreclosed assets .................................. 1,188 673 1,087 25
Conversion of loan to equity shares ................ 1,586 4,495 1,162 27
Transfer of securities from held to maturity
category to available for sale category ......... 866 - - -
Change in unrealized gain/(loss) on securities
available for sale, net ......................... 3,283 5,205 2,507 58
Acquisitions
Fair value of net assets acquired, excluding cash
and cash equivalents ............................ (37,948) 642 15
Shares issued ...................................... 118,965,731 3,370,604 -
Treasury stock ..................................... 8,204 - -
See accompanying notes to the consolidated financial statements.
1) Restated for reverse acquisition and adoption of SFAS No. 147.
F-8
ICICI Bank Limited and subsidiaries
Notes to the consolidated financial statements
1. Significant accounting policies
Overview
ICICI Bank Limited (ICICI Bank) together with its subsidiaries and
affiliates (collectively, the Company) is a diversified financial services
group providing a variety of banking and financial services including project
and corporate finance, working capital finance, venture capital finance,
investment banking, treasury products and services, retail banking, broking and
insurance. Further, the Company also has interests in the software development,
software services and business process outsourcing businesses. The Company is
headquartered in Mumbai, India.
Effective April 1, 2002, ICICI Bank (which for periods prior to April 1,
2002 is referred to as the `acquiree') and ICICI Limited (ICICI) consummated a
transaction whereby shareholders of ICICI were issued shares of the acquiree in
the ratio of 1:2. The transaction has been treated as a reverse acquisition for
financial reporting purposes with ICICI (the `acquirer') as the accounting
acquirer and is further discussed in Note 3.
The consolidated statements of operations, cash flows and stockholders'
equity and other comprehensive income for the year ended 2002, presented
herein, are those of the acquirer, even though the acquiree is the surviving
legal entity subsequent to the reverse acquisition. As such, they include the
acquirer's less than majority ownership interest in the acquiree accounted for
by the equity method.
Principles of consolidation
The consolidated financial statements include the accounts of ICICI Bank
and all of its subsidiaries. The Company consolidates subsidiaries in which it
holds, directly or indirectly, more than 50% of the voting rights or where it
exercises control. Entities where the Company holds 20% to 50% of the voting
rights and/or has the ability to exercise significant influence, other than
investments of designated venture capital subsidiaries, are accounted for under
the equity method, and the pro rata share of their income (loss) is included in
other income. Income from investments in less than 20%-owned companies is
recognized when dividends are received. The Company consolidates entities
deemed to be Variable Interest Entities (VIEs) where the Company is determined
to be the prime beneficiary under FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). All significant inter company accounts
and transactions are eliminated on consolidation.
In December 2003, the FASB issued Financial Interpretation No. 46R,
'Consolidation of Variable Interest Entities' (FIN 46R), which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R revises and replaces FIN 46, issued by
the FASB in January 2003. FIN 46R applies to the accounting for certain
entities, the investors in which are identified as not possessing the normal
characteristics of a controlled financial interest, or which lack sufficient
equity to finance its activities without additional support from other parties.
Such entities are referred to in FIN 46R as Variable Interest Entities. FIN46R
refers to parties with equity, certain contractual or other financial interest
as variable interest holders. FIN 46R establishes a framework for defining a
prime beneficiary and requires consolidation of VIEs in which the Company is
the prime beneficiary. FIN 46R also requires specific disclosures about VIEs in
which the Company is the prime beneficiary or in which it holds a significant
variable interest. Accounting requirements of FIN 46 were immediately
applicable to any VIE created after January 31, 2003 and this provision was
unchanged by FIN 46R. For all other VIEs with which the Company holds a
variable interest, the Company is required to evaluate each entity's structure
to determine whether it is reasonably likely that the Company would be required
to consolidate or disclose information about each VIE's nature,
F-9
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
purpose, size and activities, together with the Company's maximum exposure to
loss. For those VIEs created prior to February 1, 2003, the Company will be
required to adopt the accounting provisions of FIN 46 commencing April 1, 2004
although earlier adoption is allowed.
The Company is involved with special purpose entities through which it
conducts various loan securitizations. Existing securitization structures with
which the Company is involved are excluded from the scope of FIN 46R and as
such are considered to be qualifying special purpose entities (QSPEs) as set
forth in SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. The Company is not involved with any
unconsolidated special purpose entities which are not considered to be QSPEs,
however the Company has venture capital investments in entities that are not
subject to consolidation under provisions of FIN 46R but are instead reported
at fair value pursuant to specialized accounting requirements applicable to
investment companies. The Company further provides project finance or other
credit products which may result in credit exposure or fee interest with the
counterparty that meet the definition of a variable interest in a variable
interest entity. At March 31, 2004 the volume of such credits outstanding was
Rs. 426,616 million. In addition, credits committed but not yet disbursed
amounted to Rs. 73,903 million. The Company does not presently anticipate that
this involvement would be sufficient to result in the Company being the prime
beneficiary in a Variable Interest Entity as defined in FIN 46R. Accordingly,
adoption of the provisions of FIN 46R is not anticipated to have a material
impact on the Company's operating results or financial position.
The consolidation of the Company's majority ownership interest in two
insurance companies acquired in each of fiscal 2001 and 2002 was deemed
inappropriate because of substantive participative rights retained by the
minority shareholders. Accordingly, such interests are no longer consolidated
from fiscal 2003, but are accounted for by the equity method. Prior period
financial statements have been restated with no resultant impact on net income
or shareholders' equity.
Basis of preparation
The accounting and reporting policies of the Company used in the
preparation of these consolidated financial statements reflect general industry
practices and conform to generally accepted accounting principles in the United
States (US GAAP).
The preparation of consolidated financial statements in conformity with US
GAAP requires that management makes estimates and assumptions that affect the
reported amount of assets and liabilities and disclosures of contingent assets
and liabilities as of the date of the consolidated financial statements and the
reported income and expense for the reporting period. The Company makes
estimates for valuation of derivatives and securities, where no ready market
exists, determining the level of allowance for loan losses and assessing
recoverability of goodwill, intangible assets and deferred tax assets.
Management believes that the estimates used in the preparation of the
consolidated financial statements are prudent and reasonable. The actual
results could differ from these estimates.
Foreign currencies
The consolidated financial statements are reported in Indian rupees (Rs.),
the national currency of India. The functional currency of each entity within
the Company is its respective local currency.
The assets and liabilities of the Company's foreign operations are
translated into Indian rupees at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Resulting
translation adjustments are reflected as a component of accumulated other
comprehensive income.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions
F-10
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
denominated in a currency other than the functional currency are included in
the results of operations as incurred.
Solely for the convenience of the readers, the financial statements as of
and for the year ended March 31, 2004, have been translated into United States
dollar at the noon buying rate in New York City on March 31, 2004, for cable
transfers in Indian rupees, as certified for customs purposes by the Federal
Reserve of New York of US$ 1 = Rs.43.40. 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,
2004, or at any other certain date.
Revenue recognition
Interest income is accounted on an accrual basis except in respect of
impaired loans, where it is recognized on a cash basis. Income from leasing and
hire purchase operations is accrued in a manner to provide a fixed rate of
return on outstanding investments.
Fees from activities such as investment banking, loan syndication and
financial advisory services are accrued based on milestones specified in the
customer contracts. Fees for guarantees and letters of credit are amortized
over the contracted period of the commitment.
Revenues from software development, software services and business process
outsourcing comprise income from time-and-material and fixed-price contracts.
Revenue with respect to time-and-material contracts is recognized as related
services are performed. Revenue with respect to fixed-price contracts is
recognized in accordance with the percentage of completion method of
accounting. Provisions for estimated losses on contracts-in-progress are
recorded in the period in which such losses become probable based on the
current contract estimates.
Cash equivalents
The Company considers all highly liquid investments, which are readily
convertible into cash and have contractual maturities of three months or less
from the date of purchase, to be cash equivalents. The carrying value of cash
equivalents approximates fair value.
Securities and trading activities
The Company classifies investments in debt and readily marketable equity
securities, other than investments held by certain venture capital
subsidiaries, into two categories based upon management's intention at the time
of purchase: trading securities and securities available for sale. Realized
gains and losses on the sale of securities are recorded at the time of sale.
For computing realized gains and losses on securities, other than equity
shares, the cost is ascertained using the first-in-first-out method. The
realized gains and losses on equity shares are computed using the weighted
average method.
As more fully explained in Note 6, the Company no longer classifies
investments in debt securities as held to maturity, due to sale of certain held
to maturity securities during the year ended March 31, 2002.
Trading assets, primarily debt securities and foreign exchange products,
are recorded at fair value with realized and unrealized gains and losses
included in non-interest income. Interest on trading securities is recorded in
interest income. The fair value of trading assets is based upon quoted market
prices or, if quoted market prices are not available, estimates using similar
securities or pricing models.
Securities not classified as trading securities are classified as
available for sale. These include securities used as part of the Company's
asset liability management strategy, which may be sold in response to changes
in interest rates, prepayment risk, liquidity needs and similar
F-11
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
factors. Securities available for sale are recorded at fair value with
unrealized gains and losses recorded, net of tax, as a component of accumulated
other comprehensive income.
Equity securities, which are traded on a securities exchange within six
months of the balance sheet date are considered as publicly traded. The last
quoted price of such securities is taken as their fair value. Non-readily
marketable equity securities for which there is no readily determinable fair
value are recorded at cost.
Securities on which there is an unrealized loss that is deemed to be other
than temporary are written down to fair value with the loss recorded in
non-interest income as a loss on other securities. Other than temporary decline
is identified by management based on an evaluation of all significant factors
including the length of time and the extent to which the fair value has been
less than the cost, the financial condition and prospects of the issuer and the
extent and ability of the Company to retain the investment for a period of time
sufficient to allow for any probable recovery in fair value.
Securities acquired through conversion of loans in a troubled debt
restructuring are recorded at the fair value on the date of conversion and
subsequently accounted for as if acquired for cash.
The Company's venture capital subsidiaries carry their investments at fair
value, with changes in fair value recognized in gain/loss on venture capital
investments. The fair values of publicly traded venture capital investments are
generally based upon quoted market prices. In certain situations, including
thinly traded securities, large-block holdings, restricted shares or other
special situations, the quoted market price is adjusted to produce an estimate
of the attainable fair value for the securities. For securities that are not
publicly traded, fair value is determined in good faith pursuant to procedures
established by the venture capital subsidiaries. In determining the fair value
of these securities, consideration is given to the financial conditions,
operating results and prospects of the underlying companies, and any other
factors deemed relevant. Generally, these investments are carried at cost
during the first year, unless a significant event occurs that affects the
long-term value of the investment. Because of the inherent uncertainty of the
valuations, those estimated values may differ significantly from the values
that would have been used had a ready market for the investments existed.
Trading liabilities represent borrowings from banks in the inter-bank call
money market, borrowings from banks and corporates in the course of trading
operations and balances arising from repurchase transactions.
Loans
Loans are reported at the principal amount outstanding, inclusive of
interest accrued and due per the contractual terms, except for certain
non-readily marketable privately placed debt instruments, which are considered
credit substitutes and are, therefore classified as loans but accounted for as
debt securities. Loan origination fees (net of loan origination costs) are
deferred and recognized as an adjustment to yield over the life of the loan.
Interest is accrued on the unpaid principal balance and is included in interest
income.
Loans include aggregate rentals on lease financing transactions and
residual values, net of security deposits and unearned income. Lease financing
transactions substantially represent direct financing leases. Loans also
include the aggregate value of purchased securitized receivables, net of
unearned income.
The Company identifies a commercial loan as impaired and places it on
non-accrual status when it is probable that it will be unable to collect the
scheduled payments of principal and interest due under the contractual terms of
the loan agreement. A commercial loan is also considered to be impaired and
placed on a non-accrual basis if interest or principal is greater than 90 days
overdue. Delays or shortfalls in loan payments are evaluated along with other
F-12
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
factors to determine if a loan should be classified as impaired. The decision
to classify a loan as impaired is also based on an evaluation of the borrower's
financial condition, collateral, liquidation value and other factors that
affect the borrower's ability to pay.
The Company classifies a loan as a restructured loan where it has made
concessionary modifications, that it would not otherwise consider, to the
contractual terms of a loan to a borrower experiencing financial difficulties.
Such loans are placed on non-accrual status. Generally, at the time a loan is
placed on non-accrual status, interest accrued and uncollected on the loan in
the current fiscal year is reversed from income, and interest accrued and
uncollected from the prior year is charged off against the allowance for loan
losses. Thereafter, interest on non-accrual loans is recognized as interest
income only to the extent that cash is received. When borrowers demonstrate
over an extended period the ability to repay a loan in accordance with the
contractual terms of a loan, which the Company classified as non-accrual, the
loan is returned to accrual status. With respect to restructured loans,
performance prior to the restructuring or significant events that coincide with
the restructuring are evaluated in assessing whether the borrower can meet the
rescheduled terms and may result in the loan being returned to accrual status
after a performance period.
Consumer loans are generally identified as impaired not later than a
predetermined number of days overdue on a contractual basis. The number of days
is set at an appropriate level by loan product. The policy for suspending
accruals of interest and impairment on consumer loans varies depending on the
terms, security and loan loss experience characteristics of each product.
Allowance for loan losses
The allowance for loan losses represents management's estimate of probable
losses inherent in the portfolio. Larger balance, non-homogenous exposures
representing significant individual credit exposures are evaluated based upon
the borrower's overall financial condition, resources and payment record and
the realizable value of any collateral. Within the allowance of loan losses, a
valuation allowance is maintained for larger-balance, non-homogenous loans that
have been individually determined to be impaired. This estimate considers all
available evidence including the present value of the expected future cash
flows discounted at the loan's contractual effective rate and the fair value of
collateral. Provisions recognized by the Company on account of reductions of
future interest rates as a part of troubled debt restructurings are accreted as
a credit to the provision for loan losses over the tenor of the restructured
loan.
Each portfolio of smaller-balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, is
individually evaluated for impairment. The allowance for loan losses attributed
to these loans is established via a process that includes an estimate of
probable losses inherent in the portfolio, based upon various statistical
analysis. These include migration analysis, in which historical delinquency and
credit loss experience is applied to the current aging of the portfolio,
together with an analysis that reflects current trends and conditions.
While determining the adequacy of the allowance for loan losses,
management also considers overall portfolio indicators including historical
credit losses, delinquent and non-performing loans, and trends in volumes and
terms of loans; an evaluation of overall credit quality and the credit process,
including lending policies and procedures; consideration of economic,
geographical, product, and other environmental factors.
The Company also includes in the allowances provision for credit losses on
its performing portfolio based on the estimated probable losses inherent in the
portfolio. The allowances on the performing portfolio are established after
considering historical and projected default rates and loss severities,
internal risk rating and geographic, industry and other environmental factors;
and model imprecision.
The Company evaluates its impaired loan portfolio at the end of every
period and loan
F-13
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
balances which are deemed irrecoverable are charged off against related
allowances for credit losses.
Transfers and servicing of financial assets
The Company transfers commercial and consumer loans through securitization
transactions. The transferred loans are de-recognized and gains/losses are
recorded only if the transfer qualifies as a sale under SFAS No. 140.
Recourse and servicing obligations and put options written are recorded as
proceeds of the sale. For a transfer of financial assets to be considered a
sale, financial assets transferred by the Company must have been isolated from
the seller, even in bankruptcy or other receivership; the purchaser must have
the right to sell the assets transferred or the purchaser must be a qualifying
special purpose entity meeting certain significant restrictions on its
activities, whose investors have the right to sell their ownership interests in
the entity; and the seller must not continue to control the assets transferred
through an agreement to repurchase them or have a right to cause the assets to
be returned (known as a call option).
Retained beneficial interests in the loans and servicing rights are
measured by allocating the carrying value of the loans between the assets sold
and the retained interest, based on the relative fair value at the date of the
securitization. The fair values are determined using either financial models,
quoted market prices or sales of similar assets.
Loans held-for-sale
Loans originated for sale are classified as loans held-for-sale and are
accounted for at the lower of cost or fair value. Such loans are reported as
other assets. Market value of such loans are determined at rates applicable to
similar loans.
Derivatives instruments and hedging activities
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
Statement of Financial Accounting Standard No.133 "Accounting for Derivative
Instruments and Hedging Activities" (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
F-14
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
inception of the hedge and on an ongoing quarterly basis, whether the
derivative used in the hedging transaction has been highly effective in
offsetting changes in fair value or cash flows of the hedged item, and whether
the derivative is expected to continue to be highly effective.
The Company discontinues hedge accounting prospectively when either it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item; the derivative
expires or is sold, terminated or exercised; the derivative is de-designated
because it is unlikely that a forecasted transaction will occur; or management
determines that designation of the derivative as a hedging instrument is no
longer appropriate.
When a fair value hedge is discontinued, the hedged asset or liability is
no longer adjusted for changes in fair value and the existing basis adjustment
is amortized or accreted over the remaining life of the asset or liability.
When a cash flow hedge is discontinued but the hedged cash flow or forecasted
transaction is still expected to occur, gains and losses that were accumulated
in other comprehensive income are amortized or accreted into the statement of
income. Gains and losses are recognized in the statement of income immediately
if the cash flow hedge was discontinued because a forecasted transaction did
not occur.
The Company may occasionally enter into a contract (host contract) that
contains a derivative that is embedded in the financial instrument. If
applicable, an embedded derivative is separated from the host contract and can
be designated as a hedge; otherwise, the derivative is recorded as a
freestanding derivative.
The Company adopted SFAS No. 133 and SFAS No.138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, on a prospective basis
effective April 1, 2001.
Prior to the adoption of SFAS No. 133, derivatives used for interest rate
risk management were not recorded at fair value. Rather, the net interest
settlement on designated derivatives that either effectively altered the
interest rate characteristics of assets and liabilities or hedged exposures to
risk was treated as an adjustment to the interest income or interest expense of
the related assets or liabilities. The effect of adopting SFAS No. 133 and SFAS
No. 138 did not result in any material impact on the statement of operations.
Guarantees and indemnifications
In November 2002, the FASB issued Financial Interpretation No. 45,
`Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others' (FIN 45), which requires that,
for guarantees within the scope of FIN 45 issued or amended after December 31,
2002, a liability for the fair value of the obligation undertaken in issuing
the guarantee be recognized. FIN 45 also requires additional disclosures in
financial statements for periods ending after December 15, 2002. Accordingly,
the required disclosures are included in Note 30 to the consolidated financial
statements of the Company. The recognition and measurement provisions of FIN 45
were adopted effective January 1, 2003 and did not have a material impact on
the consolidated financial statements of the Company.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
The cost of additions, capital improvements and interest during the
construction period are capitalized, while maintenance and repairs are charged
to expense when incurred. Property and equipment held to be disposed off are
reported as assets held for sale at the lower of carrying amount or fair value,
less cost to sell.
Depreciation is provided over the estimated useful lives of the assets or
lease term whichever is shorter.
Property under construction and advances paid towards acquisition of
property and
F-15
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
equipment are disclosed as capital work in progress. The interest costs
incurred for funding an asset during its construction period are capitalized
based on the average outstanding investment in the asset and the average cost
of funds. The capitalized interest cost is included in the cost of the relevant
asset and is depreciated over the estimated useful life of the asset.
Capitalized costs of computer software obtained for internal use represent
costs incurred to purchase computer software from third parties and direct
costs of materials and services incurred on internally developed software. The
capitalized costs are amortized on a straight-line basis over the estimated
useful life of the software.
Impairment of long-lived assets
Long-lived assets and certain intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
Business combinations
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also specifies the
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocated to an assembled workforce may not be
accounted separately.
As of April 1, 2001, the Company had an unamortized deferred credit of Rs.
1,265 million related to an excess of the fair value of assets acquired over
the cost of an acquisition. As required by SFAS No. 141, in conjunction with
the early adoption of SFAS No. 142, the unamortized deferred credit as of April
1, 2001, has been written-off and recognized as the effect of a change in
accounting principle.
Goodwill and intangible assets
On April 1, 2001, the Company early-adopted SFAS No. 142, Goodwill and
Other Intangible Assets. As required by SFAS No. 142, the Company reclassified
existing goodwill and intangible assets to conform with the new criteria in
SFAS No. 141 for recognition apart from goodwill. This resulted in
reclassification of previously recorded intangible assets of Rs. 115 million as
goodwill and a reclassification of previously recorded goodwill of Rs. 373
million as a separate unidentifiable intangible asset and related deferred tax
liability.
As required by SFAS No. 142, the Company identified its reporting units
and assigned assets and liabilities, including goodwill to the reporting units
on the date of adoption. Subsequently, the Company compared the fair value of
each reporting unit to its carrying value, to determine whether goodwill is
impaired at the date of adoption. This transitional impairment evaluation did
not indicate an impairment loss.
Subsequent to the adoption of SFAS No. 142, the Company does not amortize
goodwill but instead tests goodwill for impairment at least annually. The
annual impairment test under SFAS No. 142 did not indicate an impairment loss.
Intangible assets are amortized over their estimated useful lives in
proportion to the economic benefits consumed in each period.
F-16
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
The useful life of other intangible assets is as follow:
No. of years
Customer-related intangibles.................................. 3-10
Other intangibles............................................. 5
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. SFAS No. 147 requires that business combinations
involving financial institutions within its scope, be accounted for under SFAS
No. 141. Previously, generally accepted accounting principles for acquisitions
of financial institutions provided for recognition of the excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. Under SFAS
No. 147, such excess is accounted for as goodwill. Adoption of SFAS No. 147
resulted in a reclassification of previously recorded unidentifiable intangible
asset of Rs. 581 million and deferred tax liability of Rs. 208 million to
goodwill with effect from April 1, 2001. Further, as required by SFAS No. 147,
the Company reversed the amortization expense of Rs. 290 million and the
related income tax benefit of Rs. 103 million, by restating the results for the
year ended March 31, 2002.
Liabilities and Equity
On July 1, 2003, the Company adopted SFAS No 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No.150 establishes standards for how an issuer measures certain financial
instruments with characteristics of both liabilities and equity and classifies
them in its statements of financial position. It requires that an issuer
classify a financial instrument that is within scope as a liability (or an
asset in some circumstances) when that financial instrument embodies an
obligation of the issuer. SFAS 150 is effective for financial instruments
entered into or modified after May 31,2003, and otherwise effective July 1,
2003, and did not have any impact on the Company's 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 amount for financial reporting and tax basis of assets
and liabilities, using enacted tax rates expected to apply to taxable income in
the years the temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the statement of income in the period of enactment. Deferred tax
assets are recognized subject to a valuation allowance based upon management's
judgment as to whether realization is considered more likely than not.
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.
F-17
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Trading assets and liabilities
Trading assets and liabilities include securities and derivatives and are
recorded either at market value or, where market prices are not readily
available, fair value, which is determined under an alternative approach. The
determination of market or fair value considers various factors including stock
exchange quotations, time value and volatility factors underlying derivatives,
counterparty credit quality and derivative transaction cash maintenance during
that period. Trading derivatives in a net receivable position are reported as
trading assets. Similarly trading derivatives in a net payable position are
reported as trading liabilities.
Employee benefit plans
The Company provides a variety of benefit plans to eligible employees.
Contributions to defined contribution plans are charged to income in the period
in which they accrue. Current service costs for defined benefit plans are
accrued in the period to which they relate. Prior service costs, if any,
resulting from amendments to the plans are recognized and amortized over the
remaining period of service of the employees.
Stock-based compensation
The Company uses the intrinsic value based method of Accounting Principle
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to
account for its employee stock-based compensation plans. Compensation cost for
fixed and variable stock based awards is measured by the excess, if any, of the
fair market price of the underlying stock over the exercise price. Compensation
cost for fixed awards is measured at the grant date, while compensation cost
for variable awards is estimated until the number of shares an individual is
entitled to receive and the exercise price are known (measurement date).
In December 2002, FASB issued SFAS No. 148 Accounting for Stock Based
Compensation-transition and disclosures, an amendment of FASB No. 123. SFAS No.
148 amends SFAS No. 123, Accounting for Stock Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock based employee compensation and the effect of
the method used on reported results. The disclosure provisions of SFAS No. 148
are applicable for fiscal periods beginning after December 15, 2002
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,
-----------------------------------
2002(1) 2003 2004
--------- ---------- ---------
Net income/(loss) (in millions)
As reported........................................................ Rs. 1,547 Rs. (7,983) Rs. 5,219
Add: Stock based employee compensation expense included in
reported net income, net of tax effects.................... 26 7 -
Less : Stock based employee compensation expense determined under
fair value based method, net of tax effects................. (58) (358) (309)
--------- --------- ---------
Pro forma net income/ (loss)....................................... 1,515 (8,334) 4,910
--------- --------- ---------
Earnings/ (loss) per share: Basic (in Rs.)
As reported........................................................ 3.94 (14.18) 8.50
Pro forma.......................................................... 3.86 (14.80) 8.00
Earnings/ loss) per share: Diluted (in Rs.)
As reported........................................................ 3.94 (14.18) 8.43
Pro forma.......................................................... 3.86 (14.80) 7.93
1) Restated for reverse acquisition and adoption of SFAS No. 147.
F-18
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
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:
Year ended March 31,
---------------------------------
2002 2003 2004
-------- -------- -----------
Dividend yield.............................. 5.5% 1.7% 4.1%
Expected life............................... 10 years 10 years 10 years
Risk free interest rate..................... 7.4% 8.9% 5.1% - 5.9%
Volatility.................................. 55% 54% 40%
Dividends
Dividends on common stock and the related dividend tax are recognized on
approval by the Board of Directors.
Earnings/ (Loss) per share
Basic earnings/ (loss) per share is computed by dividing net income/
(loss) by the weighted average number of common stock outstanding during the
period. Diluted earnings/ (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue equity shares were
exercised or converted.
Reclassifications
Certain other reclassifications have been made in the financial statements
of prior years to conform to classifications used in the current year. These
changes had no impact on previously reported results of operations or
stockholders' equity.
2. Dilution of ownership interest in the acquiree
During the year ended March 31, 2002, the Company reduced its ownership
interest in acquiree from 46.4% to 46%. This resulted in a gain of Rs. 57
million, which is included in the statement of income.
3. Acquisitions
Reverse acquisition
Effective April 1, 2002, the acquiree and ICICI consummated a transaction
whereby shareholders of the ICICI were issued shares of the acquiree in the
ratio of 1:2. The transaction has been treated as a reverse acquisition, with
the acquiree as the surviving legal entity but ICICI as the accounting
acquirer.
On the acquisition date, ICICI held a 46% ownership interest in the
acquiree. Accordingly, the acquisition of the balance 54% ownership interest
has been accounted for as a step-acquisition. The operations of the acquiree
have been consolidated in these financial statements effective April 1, 2002.
As a result of the acquisition, ICICI Bank became a universal banking
company offering the entire spectrum of financial services. The acquisition was
expected to reduce the cost of funds for the Company through access to the
extensive branch network and deposit base of the acquiree. Further, the
acquisition was expected to benefit the Company through greater opportunities
to generate fee-based income, participation in the payment networks and ability
to provide transaction banking services. Subsequent to the acquisition, the
operations of the acquirer are being governed by the Banking Regulation Act,
1949.
F-19
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
The components of the purchase price and allocation are as follows:
(in millions)
Fair value of common stock issued on reverse acquisition........... Rs. 12,028
Direct acquisition costs........................................... 1,627
Fair value of stock options assumed on reverse acquisition......... 409
----------
Total.............................................................. Rs. 14,064
----------
The fair value of common stock issued on reverse acquisition was based on
the average prices of the equity shares for the two trading days before and
after October 25, 2002, the date, the terms of the acquisition were agreed to
and announced.
The total purchase price has been allocated to the acquired assets and
assumed liabilities as of the date of acquisition based on management's
estimates and independent appraisals as follows:
(in millions)
Assets
Cash and cash equivalents......................................... Rs. 53,183
Investments....................................................... 113,725
Loans............................................................. 39,102
Property and equipment............................................ 2,609
Intangible assets................................................. 5,470
Other assets...................................................... 11,093
-----------
Total assets acquired............................................. Rs. 225,182
Liabilities
Deposits.......................................................... Rs. 176,018
Borrowings........................................................ 16,174
Other liabilities................................................. 19,745
-----------
Total liabilities assumed........................................ Rs. 211,937
------------
Net tangible and intangible assets................................ Rs. 13,245
Goodwill.......................................................... 819
------------
Total............................................................. Rs 14,064
------------
The goodwill recognized above is not deductible for tax purposes.
The intangible assets relate to customer and deposit relationships and
would be amortized over a period of 10 years.
Consequent to the acquisition, the 46% ownership interest held by the
Company in the acquiree was recorded as treasury stock at its historical
carrying value. In September 2002, the treasury stock was sold to institutional
investors for Rs. 13,154 million. The difference between the sale proceeds and
the carrying value, net of related tax effects of Rs. 599 million, was
recognized in the statement of stockholders equity as a capital transaction.
Other acquisitions
During the year ended March 31, 2004, the Company recorded goodwill of
Rs. 616 million in relation to acquisitions of certain finance and service
companies for an aggregate cash consideration of Rs. 757 million. The revenues
and total assets of the acquired companies are immaterial to the consolidated
results of operations and financial position of the Company.
During the year ended March 31, 2003, the Company acquired certain
software development and services companies in India and the United States for
an aggregate cash consideration of Rs. 959 million. The transactions were
accounted for under the purchase method of accounting and resulted in goodwill
of Rs. 617 million.
F-20
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Pro forma information
Pro forma results of the operations for the years ended March 31, 2003 and
2004 as if the acquisitions had been made at the beginning of the periods is
given below. The pro forma results include estimates and assumptions which
management believes are reasonable. However, these do not reflect any benefits
from economies or synergies, which might be achieved from combining the
operations. The pro forma consolidated results of operations include
adjustments to give effect to amortization of acquired intangible assets other
than goodwill. The pro forma information is not necessarily indicative of the
operating results that would have occurred had the purchase been made at the
beginning of the periods presented.
Year ended March 31,
-------------------------
2003 2004
----------- -----------
Revenues (in millions)............................. Rs. 112,337 Rs. 128,508
Net income/(loss) (in millions).................... (8,153) 5,292
EPS (Basic and Diluted) (in Rs.)................... (14.48) 8.62
4. Cash and cash equivalents
Cash and cash equivalents as of March 31, 2004, includes deposits with the
Reserve Bank of India of Rs.49,633 million (2003: Rs. 45,506 million) including
Rs. 46,016 million (2003: Rs. 39,805 million) in accordance with the guidelines
governing minimum cash reserve requirements and interest-bearing deposits with
other banks of Rs. 28,404 million (2003: Rs. 6,919 million). The balances
maintained with the Reserve Bank of India towards cash reserve requirements are
subject to withdrawal and usage restrictions.
5. Trading assets
A listing of the trading assets is set out below.
As of March 31
----------------------
2003 2004
----------- ---------
(in millions)
Government of India securities......................... Rs. 26,658 Rs.30,374
Securities purchased under agreements to resell........ 5,399 34,974
Corporate debt securities.............................. 6,704 6,403
Equity securities...................................... 187 1,018
Fair value of derivative and foreign exchange contracts. 686 2,386
----------- ---------
Total................................................... Rs. 3 9,634 Rs.75,155
=========== =========
As of March 31, 2004, trading assets include Government of India (GOI)
securities amounting to Rs. 768 million (2003: Rs. 8,050 million), which are
held as and towards repurchase transactions undertaken and telegraphic transfer
drawing arrangements.
F-21
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
6. Securities
The portfolio of securities is set out below.
As of March 31, 2003 As of March 31, 2004
--------------------------------------------------- ---------------------------------------------------
Amortized Gross Gross Fair Amortized Gross Gross Fair
cost unrealized unrealized value cost unrealized unrealized value
gain loss gain loss
(in millions)
Available for sale
Corporate debt securities Rs. 10,636 Rs. 389 Rs. (79) Rs. 10,946 Rs. 18,791 Rs. 183 Rs. (154) Rs. 18,820
GOI securities........... 240,187 4,403 (459) 244,131 256,284 4,488 (192) 260,580
----------- --------- ---------- ----------- ----------- ----------- --------- ----------
Total debt securities.... 250,823 4,792 (538) 255,077 275,075 4,671 (346) 279,400
Equity securities........ 13,609 745 (1,932) 12,422 15,475 2,072 (342) 17,205
----------- --------- ---------- ----------- ----------- ----------- --------- ----------
Total securities
available for sale..... Rs. 264,432 Rs. 5,537 Rs. (2,470) Rs. 267,499 Rs. 290,550 Rs. 6,743 Rs. (688) Rs.296,605
=========== ========= ========== =========== =========== =========== ========= ==========
Non-readily
marketable equity
securities (1)......... Rs. 9,418 Rs. 8,621
Venture capital
investments (2)........ Rs. 3,704 Rs. 5,142
1) Primarily represents securities acquired as a part of project financing
activities or conversion of loans in debt restructurings.
2) Represents venture capital investments held by venture capital
subsidiaries of the Company.
During the year ended March 31, 2004, as part of its ongoing evaluation of
its securities portfolio, the Company recorded an impairment charge of Rs. 944
million (2003: Rs. 2,098 million, 2002: Rs. 3,480 million) for 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, 2003 As of March 31, 2004
----------------------------------------------- ----------------------------------------------
Amortized Gross Gross Fair Amortized Gross Gross Fair
cost unrealized unrealized value cost unrealized unrealized value
gain loss gain loss
(in millions)
Available for sale.. Rs. 61,295 Rs. 2,539 Rs. (1,118) Rs. 62,716 Rs. 49,103 Rs. 1,330 Rs. (364) Rs. 50,069
During the year ended March 31, 2002, the Company sold debt securities
classified as held to maturity. The debt securities were sold for Rs. 640
million resulting in a realized gain of Rs. 102 million. As the securities were
sold for reasons other than those specified in Statement of Financial
Accounting Standard No. 115, `Accounting for Certain Investments in Debt and
Equity Securities' (SFAS 115), all remaining held to maturity securities were
reclassified as available for sale. Subsequent to the sale, the Company no
longer classifies debt securities as held to maturity.
Other than temporary impairment
The Company has determined that the unrealized losses on the Company's
investments in equity and debt securities are temporary in nature. The Company
conducts a review each year to identify and evaluate investments that have
indications of possible impairment. An investment in an equity or debt security
is impaired if its fair value falls below its cost and the decline is
considered other than temporary. Factors considered in determining whether a
loss is temporary include length of time and extent to which fair value has
been below cost; the financial
F-22
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
condition and near term prospects of the issuer, and the Company's ability and
intent to hold the investment for a period sufficient to allow for any
anticipated recovery. The Company's review of impairment generally entails:
o identification and evaluation of investments that have indications of
possible impairment;
o analysis of individual investments that have fair values less than 75% of
amortized cost, including consideration of the length of time the
investment has been in an unrealized loss position;
o discussion of evidential matter, including an evaluation of factors or
triggers that would or could cause individual investments to qualify as
having other-than temporary impairment and those that would not support
other-than temporary impairment;
o documentation of the results of these analyses, as required under business
policies.
The fair value of the investment in equity and debt securities in an
unrealized loss position as of March 31, 2004 is set out below.
Less than 12 months 12 months or longer Total
Description of Securities Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
-------------------------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions)
Corporate debt securities Rs. 6,985 Rs. 145 Rs. 249 Rs. 8 Rs. 7,234 Rs. 154
GOI Securities.......... 21,999 192 - - 21,999 192
Credit substitutes...... 2,414 309 134 55 2,548 364
Equity Securities....... 1,041 342 - - 1,041 342
---------- -------- ------- ------ ---------- ---------
Total .................. Rs. 32,439 Rs. 988 Rs. 383 Rs. 63 Rs. 32,822 Rs. 1,052
========== ======== ======= ====== ========== =========
Income from securities available for sale
A listing of income from securities available for sale is set out below.
Year ended March 31,
-----------------------------------
2002 2003 2004
--------- ---------- ----------
(in millions)
Interest........................................................ Rs. 1,027 Rs. 16,633 Rs. 15,264
Dividends....................................................... 267 389 431
--------- ---------- ----------
Total........................................................... Rs. 1,294 Rs. 17,022 Rs. 15,695
========= ========== ==========
Gross realized gain............................................. Rs. 1,238 Rs. 6,845 Rs. 16,211
Gross realized loss............................................. (7) (5,022) (2,467)
--------- ---------- ----------
Total........................................................... Rs. 1,231 Rs. 1,823 Rs. 13,744
========= ========== ==========
F-23
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
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,
---------------------
2003 2004
--------- ---------
(in millions)
Interest..................................... Rs. 8,406 Rs. 6,003
Dividends ................................... 381 45
--------- ---------
Total........................................ Rs. 8,787 Rs. 6,048
========= =========
Gross realized gain.......................... Rs. 1,200 Rs. 733
Gross realized loss.......................... (75) (108)
--------- ---------
Total........................................ Rs. 1,125 Rs. 625
========= =========
Maturity profile of debt securities
A listing of each category of available for sale debt securities as of
March 31, 2004, by maturity is set out below.
Available for sale
-------------------------------
Amortized Cost Fair value
-------------- -----------
(in millions)
Corporate debt securities
Less than one year....................... Rs. 2,206 Rs. 2,204
One to five years........................ 4,600 4,696
Five to ten years........................ 9,370 9,357
Greater than ten years................... 2,615 2,563
----------- -----------
Total Corporate debt securities.......... Rs. 18,791 Rs. 18,820
----------- -----------
GOI securities
Less than one year....................... Rs. 41,641 Rs. 43,456
One to five years........................ 18,819 18,956
Five to ten years........................ 112,774 112,704
Greater than ten years................... 83,050 85,464
----------- -----------
Total GOI securities..................... Rs. 256,284 Rs. 260,580
----------- -----------
Total debt securities.................... Rs. 275,075 Rs. 279,400
=========== ===========
Credit substitutes
Less than one year....................... Rs. 13,121 Rs. 13,114
One to five years........................ 15,643 15,859
Five to ten years........................ 13,261 14,047
Greater than ten years................... 7,078 7,049
----------- -----------
Total credit substitutes................. Rs. 49,103 Rs. 50,069
=========== ===========
7. Repurchase transactions
The Company has undertaken repurchase and reverse repurchase transactions
in GOI securities. The average level of repurchase transactions outstanding
during the year ended March 31, 2004, was Rs. 7,551 million (2003: Rs. 7,002
million). The average level of reverse repurchase transactions outstanding
during the year ended March 31, 2004, was Rs.1,010 million (2003: Rs. 4,483
million). As of March 31, 2004, outstanding repurchase and reverse repurchase
transactions were Rs. Nil (2003: Rs. 3,000 million) and Rs. 34,974 million
(2003: Rs. 5,399 million) respectively.
F-24
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
8. Investments in affiliates
The acquiree
For the year ended March 31, 2002, the Company accounted for its 46%
interest in the acquiree using the equity method. The carrying value of the
investment in the acquiree as of March 31, 2002, was Rs. 8,204 million. The
Company's equity in the income of the acquiree for the year ended March 31,
2002 was Rs. 929 million. During the year ended March 31, 2002, the Company
received dividends of Rs. 403 million (2001: Rs. 184 million) from the
acquiree.
The summarized statement of income of the acquiree is set out below.
Statement of income Year ended March 31, 2002
-------------------------
(in millions)
Interest income................................... Rs. 20,837
Interest expense.................................. (15,116)
----------
Net interest income............................... Rs. 5,721
Provision for loan losses......................... (1,722)
Non-interest income............................... 5,213
Non-interest expense.............................. (6,260)
Income taxes...................................... (931)
Cumulative effect of accounting change............ 16
----------
Net income........................................ Rs. 2,037
==========
Insurance companies
The Company accounts for its 74% ownership interest in ICICI Prudential
Life Insurance Limited (`ICICI Prulife') and ICICI Lombard General Insurance
Company Limited (`ICICI Lombard') by the equity method of accounting because of
substantive participative rights held by the minority shareholders.
The carrying value of the investment in these companies as of March 31,
2004, was Rs. 3,165 million (2003: Rs. 2,230 million). The Company's equity in
the loss of these affiliates for the year ended March 31, 2004 was Rs. 1,561
million (2003: Rs. 971 million, 2002: Rs. 681 million).
The summarized balance-sheets and statements of operations of these
entities as of and for the year ended March 31, 2004 is set out below.
Balance sheet As of March 31, 2004
------------------------
ICICI ICICI
Prulife Lombard
---------- --------
(in millions)
Cash and cash equivalents ........................ Rs. 318 Rs. 629
Securities........................................ 8,186 3,366
Assets held to cover linked liabilities .......... 8,650 -
Other assets...................................... 2,597 1,639
---------- ---------
Total assets...................................... Rs. 19,751 Rs. 5,634
========== =========
Provision for linked liabilities ................. Rs. 8,650 -
Other liabilities................................. 8,827 Rs. 3,516
Stockholders' equity.............................. 2,274 2,118
---------- ---------
Total liabilities and stockholders' equity........ Rs. 19,751 Rs. 5,634
========== =========
F-25
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Statement of income Year ended March 31, 2004
-------------------------
ICICI ICICI
Prulife Lombard
----------- --------
(in millions)
Interest income.................................. Rs. 630 Rs. 184
Interest expense................................. - -
---------- --------
Net interest income.............................. Rs. 630 Rs. 184
Non-interest income.............................. 4,007 1,544
Non-interest expense............................. (6,764) (1,622)
Income tax (expense)/ benefit.................... (97) (9)
---------- --------
Net income/(loss)................................ Rs. (2,224) Rs. 97
========== ========
Others
The other affiliates of the Company are Prudential ICICI Asset Management
Company Limited (Pru-ICICI), Prudential ICICI Trust Limited (Pru-Trust),
TCW/ICICI Investment Partners LLC (TCW) and Semantik Solutions Gmbh, Germany.
The carrying value of the investment in such affiliates as of March 31, 2004,
was Rs. 454 million (2003: Rs. 385 million). The Company's equity in the income
of such affiliates for the year ended March 31, 2004, was Rs. 123 million
(2003: Rs. 13 million, 2002: Rs. 46 million).
9. Loans
A listing of loans by category is set out below.
As of March 31,
---------------------------
2003 2004
------------- -----------
(in millions)
Project and corporate finance (1) (2) ................................. Rs. 387,870 Rs. 319,646
Working capital finance (including working capital term loans)........... 74,422 80,505
Lease financing.......................................................... 26,927 26,165
Consumer loans and credit card receivables............................... 188,286 309,006
Other.................................................................... 18,959 70,059
------------- -----------
Gross loans.............................................................. Rs. 696,464 Rs. 805,381
Unearned income.......................................................... (8,902) (7,482)
Security deposits........................................................ (2,922) (2,612)
------------- -----------
Loans, net of unearned income and security deposits...................... Rs. 684,640 Rs. 795,287
Allowances for loan losses............................................... (54,219) (66,767)
------------- -----------
Loans, net............................................................... Rs. 630,421 Rs. 728,520
============= ===========
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. 50,069 million (2003: Rs. 62,716 million) of credit
substitutes classified as loans.
Project and corporate finance loans are generally secured by property,
plant and equipment and other tangible assets. Generally, the working capital
loans are secured by a first lien on current assets, principally comprising
inventory and receivables. Additionally, in certain cases the Company may
obtain additional security for working capital loans through a first or second
lien on property and equipment, pledge of financial assets like marketable
securities and corporate/personal guarantees.
F-26
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Lease financing
Contractual maturities of the Company's investment in lease financing and
its components, which are included in loans are set out below.
As of March 31,
2004
---------------
(in millions)
Gross finance receivables for the year ending March 31,
2005........................................................... Rs. 3,375
2006........................................................... 3,350
2007........................................................... 5,197
2008........................................................... 2,953
2009........................................................... 2,871
Thereafter..................................................... 8,419
------------
Rs. 26,165
Unearned income................................................ (7,538)
Security deposits.............................................. (2,612)
------------
Investment in lease financing.................................. Rs. 16,015
============
Maturity profile of loans
A maturity profile of gross loans, other than investment in lease
financing is set out below.
As of March 31,
------------------------
2003 2004
----------- -----------
(in millions)
Less than one year.................................. Rs. 147,707 Rs. 186,326
One to five years................................... 328,692 365,924
Greater than five years............................. 193,138 226,966
----------- -----------
Total............................................... Rs. 669,537 Rs. 779,216
=========== ===========
Interest and fees on loans
A listing of interest and fees on loans (net of unearned income) is set
out below.
As of March 31,
----------------------------------
2002 2003 2004
---------- ---------- ----------
(in millions)
Project and corporate finance ........................... Rs. 56,032 Rs. 45,307 Rs. 31,242
Working capital finance (including working capital
term loans)............................................ 6,418 8,241 6,760
Lease financing.......................................... 4,977 2,484 1,438
Consumer loans and credit card receivables............... 6,593 15,372 26,097
Other.................................................... 1,217 3,676 3,684
---------- ---------- ----------
Total.................................................... Rs. 75,237 Rs. 75,080 Rs. 69,221
========== ========== ==========
Restructured loans
The Company classifies a loan as a restructured loan where it has made
concessionary modifications, that it would not otherwise consider, to the
contractual terms of a loan to a borrower experiencing financial difficulties.
As of March 31, 2004, the Company had committed to lend Rs. 13,684 million
(2003: Rs. 2,822 million), to borrowers who are parties to troubled debt
restructurings.
F-27
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Impaired loans, including restructured loans
A listing of restructured loans is set out below.
As of March 31,
--------------------------
2003 2004
------------ -----------
(in millions)
Project and corporate finance....................... Rs. 135,421 Rs. 149,724
Working capital finance (including working capital
term loans)....................................... 11,084 11,525
Other............................................... 886 1,149
------------ -----------
Restructured loans.................................. Rs. 147,391 Rs. 162,398
Allowance for loan losses........................... (24,732) (40,981)
------------ -----------
Restructured loans, net............................. Rs. 122,659 Rs. 121,417
============ ===========
Restructured loans:
With a valuation allowance......................... Rs. 147,391 Rs. 162,398
Without a valuation allowance...................... - -
------------ -----------
Restructured loans.................................. Rs. 147,391 Rs. 162,398
============ ===========
A listing of other impaired loans is set out below.
As of March 31,
--------------------------
2003 2004
------------ -----------
(in millions)
Project and corporate finance...................... Rs. 67,906 Rs. 42,842
Working capital finance (including working capital
term loans)....................................... 11,907 2,978
Lease financing..................................... 1,550 746
Consumer loans and credit card receivables.......... 1,752 3,672
Other............................................... 41 -
------------ -----------
Other impaired loans................................ Rs. 83,156 Rs. 50,238
Allowance for loan losses .......................... (27,837) (21,474)
------------ -----------
Other impaired loans, net........................... Rs. 55,319 Rs. 28,764
------------ -----------
Other impaired loans:
With a valuation allowance......................... Rs. 83,087 Rs. 50,238
Without a valuation allowance...................... 69 -
------------ -----------
Other impaired loans................................ Rs. 83,156 Rs. 50,238
============ ===========
During the year ended March 31, 2004, interest income of Rs. 9,072 million
(2003: Rs. 2,358 million, 2002: Rs. 3,257 million) was recognized on impaired
loans on a cash basis. Gross impaired loans (including restructured loans)
averaged Rs. 221,592 million during the year ended March 31, 2004 (2003: Rs.
188,195 million).
Concentration of credit risk
Concentration of credit risk exists when changes in economic, industry or
geographic factors similarly affect groups of counterparties whose aggregate
credit exposure is material in relation to Company's total credit exposure. The
Company's portfolio of financial instruments is broadly diversified along
industry, product and geographic lines within India.
F-28
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
The Company's 20 largest borrowers, based on gross outstanding balances,
totaled approximately Rs. 149,620 million as of March 31, 2004 (2003: Rs.
145,299 million), which represented 18.6% (2003: 21.2%) of the gross loans
outstanding. The single largest borrower as of March 31, 2004 was Rs. 17,448
million (2003: Rs. 15,314 million) which represented 2.2% (2003: 2.2%) of the
gross loans outstanding. The largest group of companies under the same
management control accounted for approximately 4.5% (2003: 4.9%) of our total
gross loans outstanding.
10. 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,
----------------------------------
2002 2003 2004
---------- ---------- ----------
(in millions)
Allowance for loan losses at the beginning of the year............ Rs. 33,035 Rs. 36,647 Rs. 54,219
Effect of reverse acquisition on allowance for loan losses........ - 1,297 -
Provisions for loan losses, net of releases of provisions as a
result of cash collections........................................ 9,743 19,649 20,055
---------- ---------- ----------
Rs. 42,778 Rs. 57,593 Rs. 74,274
Loans charged-off................................................. (6,131) (3,374) (7,507)
---------- ---------- ----------
Allowance for loan losses at the end of the year.................. Rs. 36,647 Rs. 54,219 Rs. 66,767
========== ========== ==========
11. Securitization activity
The Company primarily securitizes commercial loans through `pass-through'
securitizations. After the securitization, the Company generally continues to
maintain customer account relationships and services loans transferred to the
securitization trust. The securitizations are either with or without recourse.
In a few cases, the Company may enter into derivative transactions such as
written put options and interest rate swaps with the transferees.
During the year ended March 31, 2004, the Company securitized loans and
credit substitutes with a carrying value of Rs. 128,269 million (2003: Rs.
51,780 million), which resulted in gains of Rs. 4,248 million (2003: Rs. 2,070
million, 2002: Rs. 1,079 million). The gains are reported as a component of
gain on sale of loans and credit substitutes.
Transfers that do not meet the criteria for a sale under SFAS No. 140, are
required to be recorded as secured borrowings with a pledge of collateral, and
such secured borrowings are required to be reported as a component of other
borrowings. However, there have been no transfers which have not met the
criteria for a sale under SFAS No. 140, and consequent no recording or
reporting has been entailed.
As discussed above, the Company has written put options, which require the
Company to purchase, upon request of the holders, securities issued in certain
securitization transactions. The put options seek to provide liquidity to
holders of such instruments. If exercised, the Company will be obligated to
purchase the securities at the predetermined exercise price.
As of March 31, 2004, the Company sold loans and credit substitutes with
an aggregate put option exercise price of Rs. 38,267 million (2003: Rs. 24,404
million). Subsequent to their initial issuance, such options are recorded at
fair values with changes reported in the statement of operations.
F-29
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
The following table summarizes certain cash flows received from and paid
to securitization trusts during the year ended March 31, 2004:
Auto Personal Two wheeler Mortgage Corporate
Loans Loans loans Loans Loans Others
---------- --------- ----------- ---------- ---------- -----------
(in millions)
Principal Securitized. Rs. 24,279 Rs. 9,675 Rs. 3,659 Rs. 45,403 Rs. 42,453 Rs. 2,800
Pre-Tax Gains......... 879 605 172 617 1,786 189
Proceeds from
securitization........ 25,688 11,115 4,018 39,234 45,975 3,721
Servicing fees received 5 13 - - - -
Cash flows received on
retained interests and
other cash flows...... 312 394 - - - -
Closing balance of
retained interest on
March 31, 2004........ 1,401 943 388 1,266 - -
Auto loans, personal loans, two wheeler loans and mortgage loans form part of
consumer loans.
Key assumptions during the year ended March 31, 2004 in measuring the fair
value if retained interests at the date of sale or securitization
Two wheeler
Auto Loans Personal Loans loans Mortgage loans
------------- -------------- ----------- --------------
Discount Rate.......................... 10.88%-12.44% 23.01%-24.07% 20.77% 8.61%
Constant prepayment rate (per annum)... 8.00%-12.00% 27.00% 12.00% 6.00%
Anticipated net credit losses (per annum) 0.75%-0.90% 3.25% 3.00% 0.25%
At March 31, 2004, the sensitivity of the fair value to adverse changes of
10% and 20% in each of the key assumptions were as follows:
(in millions)
Carrying value of retained interests Rs. 3,998
Discount Rate
10%.............................................................. (404)
20%.............................................................. (761)
Constant prepayment rate (per annum)
10%.............................................................. (128)
20%.............................................................. (255)
Anticipated net credit losses (per annum)
10%.............................................................. (69)
20%.............................................................. (140)
F-30
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
12. Variable Interest Entities
During the year, the Company transferred certain impaired loans to
borrower specific funds/trusts managed by an asset reconstruction company. The
trusts/funds (which are separate legal entities) issued Security Receipts
(`SRs') to the Company and other transferors as consideration for the
transaction. The trusts/funds have been set up by the asset reconstruction
company under a recently enacted debt recovery legislation in India and aim to
improve the recoveries of banks from impaired assets by aggregating lender
interests and speeding up enforcement of security interest by lenders. Certain
transfers involving 33 loans amounting to Rs. 7.13 billion, did not qualify for
sale accounting under SFAS No. 140 and continue to be reflected as loans on the
balance sheet of the Company. Other transfers qualified for sale accounting but
were impacted by FIN 46/FIN 46R.
The funds/trusts to which these loans have been transferred are VIEs
within the definition contained in FIN 46. The Company is the `Prime
Beneficiary' of nine trusts/funds and accordingly has consolidated these
entities at March 31, 2004. These trusts relate to the transfers of nine loans
amounting to Rs. 3.90 billion and the total assets of these trusts amount to
Rs. 4.89 billion.
10 trusts/funds with total assets of Rs. 2.93 billion are VIEs but the
Company is not deemed to be the Prime Beneficiary. The Company has transferred
loan amounting to Rs. 0.81 billion to these entities. Accordingly, the Company
has not consolidated these VIEs at March 31, 2004. The Company accounts for the
SRs relating to this category of transfers as AFS securities but classifies
them as loans.
The Company's venture capital business is involved with entities that may
be deemed VIEs. The FASB permitted non-registered investment companies to defer
consolidation of VIEs with which they are involved until the proposed Statement
of Position on the clarification of the scope of the Investment Company Audit
Guide is finalized, which is expected in mid-2004. Following issuance of the
Statement of Position, the FASB will consider further modification to FIN 46R
to provide an exception for companies that qualify to apply the revised Audit
Guide. The Company applied this deferral provision and did not consolidate Rs.
961 million of additional assets in potential VIEs with which the Company is
involved as of March 31, 2004. Following issuance of the revised Audit Guide
and further modification, if any, to FIN 46R, the Company will assess the
effect of such guidance on its venture capital business.
13. Derivative instruments and hedging activities
The Company manages its exposures to market rate movements by modifying
its mix of assets and liabilities, either directly or through the use of
derivative financial products including interest rate swaps, cross currency
swaps, foreign currency options, equity index futures, equity index options and
forward exchange contracts.
All such freestanding derivatives, whether held for trading or non-trading
purposes, are carried at their fair value as either assets or liabilities and
related gains and losses are included in other non-interest income. The Company
has not identified any significant derivative features embedded in other
contracts that are not clearly and closely related to the host contract and
meet the definition of a derivative.
Fair values for derivatives are based on quoted market prices, which take
into account current market and contractual prices of the underlying instrument
as well as time value underlying the positions.
All the designated hedges entered into by the Company qualify as fair
value hedges under SFAS No. 133. There are no cash flow hedges or hedges of net
investments in foreign operations. For fair value hedges, changes in the fair
value of the hedged asset or liability due to
F-31
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
the risk being hedged are recognized in the statement of operations along with
changes in the fair value of the derivative. The Company assesses the
effectiveness of the hedge instrument at inception and continually on a
quarterly basis. The ineffectiveness, to the extent to which offsetting gains
or loss are not achieved, is recorded through the statement of operations.
The table below summarizes certain information relating to the Company's
hedging activities:
As of March 31,
---------------------
2003 2004
--------- ---------
(in millions)
Fair value of fair value hedges......................... Rs. 1,836 Rs. 1,084
Hedge ineffectiveness recognized in earnings............ 128 248
14. Property and equipment
A listing of property and equipment by asset category is set out below.
As of March 31,
-----------------------
2003 2004
---------- ----------
(in millions)
Land........................................... Rs. 1,535 Rs. 1,526
Buildings...................................... 11,194 12,313
Equipment and furniture........................ 4,068 7,081
Capital work-in-progress....................... 1,077 988
Others......................................... 8,593 9,318
---------- ----------
Gross value of property and equipment.......... 26,467 31,226
Accumulated depreciation....................... (5,252) (8,043)
---------- ----------
Property and equipment, net.................... Rs. 21,215 Rs. 23,183
========== ==========
As of March 31, 2004, land and buildings include certain assets of Rs. 570
million (2003: Rs. 622 million), which have not yet been registered in the
Company's name pending regulatory transfer approvals.
15. Assets held for sale
As of March 31, 2004, assets held for sale represent certain assets of Rs.
4,829 million (2003: Rs. 2,306 million) acquired through foreclosure of loans.
F-32
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
16. Goodwill and intangible assets, net
A listing of goodwill and intangible assets by category is set out below.
As of March 31,
-----------------------
2003 2004
---------- ----------
(in millions)
Goodwill.................................... Rs. 4,841 Rs. 5,457
Accumulated amortization.................... (54) (54)
---------- ----------
Goodwill, net............................... Rs. 4,787 Rs. 5,403
Customer-related intangibles................ Rs. 5,635 Rs. 5,701
Accumulated amortization.................... (590) 1,245)
---------- ----------
Customer related intangibles, net........... Rs. 5,045 Rs. 4,456
Other intangibles........................... Rs. 76 Rs. 76
Accumulated amortization.................... (3) (19)
---------- ----------
Other intangibles, net...................... Rs. 73 Rs. 57
---------- ----------
Goodwill and intangible assets, net......... Rs. 9,905 Rs. 9,916
========== ==========
The following table presents the changes in goodwill during the year ended
March 31, 2004.
(in millions)
Balance as of March 31, 2003....................................... Rs. 4,787
Goodwill relating to acquisitions consummated during the period.... 616
-----------
Balance as of March 31, 2004....................................... Rs. 5,403
===========
No goodwill impairment loss has been recorded during the years ended March
31, 2003 and March 31, 2004.
Goodwill as of March 31, 2004 has been allocated to the following
segments:
Segment (in millions)
Commercial Banking................................................. Rs. 2,275
ICICI Infotech..................................................... 1,895
ICICI OneSource.................................................... 1,233
-----------
Total.............................................................. Rs. 5,403
===========
Amortization of intangible assets
The estimated amortization schedule for intangible assets, on a straight
line basis, for the next five years is set out below.
Year ended March 31 (in millions)
-------------------
2005............................................................... Rs. 625
2006............................................................... 582
2007............................................................... 570
2008............................................................... 570
2009............................................................... 555
-----------
Total Rs. 2,902
===========
F-33
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
17. Other assets
Other assets consist of the following:
As of March 31,
--------------------------
2003 2004
----------- ----------
(in millions)
Debtors...................................... Rs. 4,748 Rs. 13,263
Staff advances............................... 2,273 3,766
Advance taxes................................ 28,273 33,512
Security deposits............................ 2,789 8,485
Advance for purchases of securities.......... 15,415 8,191
Prepaid expenses............................. 522 596
Others(1).................................... 4,926 7,135
----------- ----------
Total........................................ Rs. 58,946 Rs. 74,948
=========== ==========
1) Others include loans held for sale of Rs. 2,260 million (2003: Rs. 1,387
million).
18. Deposits
Deposits include demand deposits, which are non-interest-bearing, and
savings and time deposits, which are interest bearing. A listing of deposits is
set out below.
As of March 31,
----------------------------
2003 2004
----------- ------------
(in millions)
Interest bearing
Savings deposits............................. Rs. 37,932 Rs. 86,403
Time deposits................................ 418,119 524,775
----------- ------------
Total interest-bearing deposits.............. Rs. 456,051 Rs. 611,178
=========== ============
Non-interest bearing.........................
Demand deposits.............................. Rs. 35,239 Rs. 73,777
----------- ------------
Total........................................ Rs. 491,290 Rs. 684,955
=========== ============
Contractual maturities of time deposits as of March 31, 2004 are set out
below.
(in millions)
Deposits maturing during the year ending March 31,
2005......................................................... Rs. 421,435
2006......................................................... 41,710
2007......................................................... 30,371
2008......................................................... 14,348
2009......................................................... 6,963
Thereafter................................................... 9,948
-------------
Total deposits............................................... Rs. 524,775
=============
As of March 31, 2004, the aggregate of time deposits with individual
balances greater than Rs. 5 million was Rs. 359,770 million (2003: Rs. 267,297
million).
19. Short term borrowings
Short term borrowings represent non-trading borrowings with an original
maturity of one year or less.
F-34
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
20. Long-term debt and redeemable preferred stock
Long-term debt
Long-term debt represents debt with an original maturity of greater than
one year. Maturity distribution is based on contractual maturities or earlier
dates at which the debt is callable at the option of the holder. A significant
portion of the long-term debt bears a fixed rate of interest. Interest rates on
floating-rate debt are generally linked to the London Inter-Bank Offer Rate or
similar money market rates. The segregation between fixed-rate and
floating-rate obligations is based on the contractual terms.
A listing of long-term debt as of March 31, 2004, by maturity and interest
rate profile is set out below.
Fixed-rate Floating-rate
Obligations obligations Total
----------- ------------- ------------
(in millions)
Long-term debt maturing during the year ending March 31,
2005.................................................... Rs. 73,101 Rs. 5,225 Rs. 78,326
2006.................................................... 79,324 6,272 85,596
2007.................................................... 53,098 5,285 58,383
2008.................................................... 23,691 2,306 25,997
2009.................................................... 41,385 2,147 43,532
Thereafter.............................................. 70,593 11,959 82,552
----------- ----------- ------------
Total................................................... Rs. 341,192 Rs. 33,194 Rs. 374,386
Less: Unamortized debt issue cost...................... (937)
------------
Total................................................... Rs. 373,449
============
All long-term debt is unsecured. Debt aggregating Rs. 32,209 million
(2003: Rs. 35,151 million) is guaranteed by the Government of India (GOI).
Long-term debt is denominated in various currencies. As of March 31, 2004,
long-term debt comprises Indian rupee debt of Rs. 314,825 million (2003: Rs.
350,633 million) and foreign currency debt of Rs. 58,624 million (2003: Rs.
50,179 million).
Indian rupee debt
A listing of major category of Indian rupee debt is set out below.
As of March 31,
--------------------------------------------------------------------------------------------------
2003 2004
---------------------------------------------- -------------------------------------------------
Category Weighted Weighted
average Average average Average
interest Residual interest residual
Amount rate Range maturity Amount rate Range maturity
----------- -------- --------- ---------- ----------- -------- ---------- -----------
(In millions)
Bonds issued to
institutional
/individual investors(1).. Rs. 309,488 11.71% 7-16.40% 3.26 years Rs. 246,463 10.35% 3.57-16.4% 3.20
Bonds eligible for
statutory reserve
requirements(2)......... 14,815 11.87% 11.50-12% 7.22 years 14,815 11.60% 11.5-12.00% 6.21
Borrowings from GOI(3)... 6,137 10.13% 11-13% 4.44 years 5,338 9.88% 11-13.00% 2.92
Refinance from
financial institutions... 20,193 7.35% 6.5-17% 3.64 years 48,209 6.69% 5.5-17.00% 2.42
----------- -----------
Total.................... Rs. 350,633 11.28% 3.46 years Rs. 314,825 9.95% 3.3years
=========== ===========
1) Includes application money received on bonds outstanding at the end of the
year.
2) Banks in India are required to mandatorily maintain a specified percentage
of certain liabilities as cash or in approved securities. These bonds
issued by the Company are approved securities under the rules.
3) Includes interest-free borrowing from the GOI aggregating Rs. 343 million
(2003: Rs. 296 million). The borrowing was initially recorded at its fair
value of Rs. 100 million based on the prevailing interest rate of 16% for
borrowings of a similar term and risk. Interest is being imputed for each
reporting period using this rate.
F-35
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Foreign currency debt
A listing of major category of foreign currency debt is set out below.
As of March 31,
--------------------------------------------------------------------------------------------------
2003 2004
---------------------------------------------- -------------------------------------------------
Category Weighted Weighted
average Average average Average
interest Residual interest residual
Amount rate Range maturity Amount rate Ramge maturity
----------- -------- --------- ---------- ----------- -------- ---------- -----------
(In millions)
Borrowings from
international
development agencies
(1)(2)(3)............... Rs. 25,417 4.14% 0-8.5% 9.50 years Rs. 27,249 3.00% 0.0-8.50% 9.63
Other borrowings from
international markets... 24,762 3.37% 0-9.15% 2.52 years 31,375 3.90% 0.0-7.55% 3.23
----------- ----------
Total.................... Rs. 50,179 3.69% 6.05 years Rs. 58,624 3.50% 7.08 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, 2004, under these lines of credit, the Company has an
unutilized option to borrow Rs. 4,718 million (2003: Rs. 6,265 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
GOI.
Redeemable preferred stock
The Company issued preferred stock with a face value of Rs. 3,500 million
during the year ended March 31, 1998 under the scheme of business combination
with ITC Classic Finance Limited. This preferred stock bears a dividend yield
of 0.001% and is redeemable at face value after 20 years. The preferred stock
was initially recorded at its fair value of Rs. 466 million. Subsequently,
interest is being imputed for each reporting period. The imputed interest rate
of 10.6% was determined based on the then prevailing interest rate for
securities of similar maturity. The carrying amount of this redeemable
preferred stock as of March 31, 2004 is Rs. 944 million (2003: Rs. 853
million).
Banks in India are generally not allowed to issue preferred stock.
However, the Company has been currently exempted from this restriction.
21. Other liabilities
Interest accrued
Other liabilities as of March 31, 2004, include Rs. 13,561 million (2003:
Rs. 16,276 million) of interest accrued but not due on interest bearing
liabilities.
Borrowings from Kreditanstalt fur Wiederaufbau
The Company has borrowings from Kreditanstalt fur Wiederaufbau (KfW), an
international development agency, under specific lines of credit. The terms of
the borrowings provide for limitations on usage, whereby funds can be used only
for specified purposes. The borrowings are guaranteed by the GOI.
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
F-36
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
of the borrowing agreement provide that a portion of the interest payable on
the borrowings shall be retained by the Company and used to be advanced as
loans/contributions for specified purposes.
The Company periodically advances loans/contributions for specified
purposes out of these funds and reports such utilizations to the GOI/KfW.
However, no time schedule has been specified for the usage of the funds. In the
event that the funds are not utilized for specified purposes, the GOI/KfW have
the right to require repayment of the grant/retained interest. Additionally,
KfW can modify the scope of the specified purposes. The Company retains the
income derived from the loans made out of the funds. Similarly, it bears the
risks of default on the loans.
The interest repaid by the GOI in the form of grants and the interest
retained under the agreement with KfW do not represent contributions as they
specify donor-imposed conditions, the breach of which, would enable the donor
to demand repayment of the grants/retained interest. Accordingly, the
grants/retained interest have been reported as liabilities.
Other liabilities as of March 31, 2004, also include grants of Rs. 2,800
million (2003: Rs. 2,052 million) and retained interest of Rs. 678 million
(2003: Rs. 496 million).
22. Common stock
The Company presently has only one class of common stock. In the event of
liquidation of the affairs of the Company, all preferential amounts, if any,
shall be discharged by the Company. The remaining assets of the Company, after
such discharge, shall be distributed to the holders of common stock in
proportion to the common stock held by shareholders.
The Company has issued American Depository Shares (ADS) representing
underlying common stock. The common stock represented by the ADS is similar to
other common stock, except for voting rights. While every holder of common
stock, as reflected in the records of the Company, has one vote in respect of
each share held, the ADS holders have no voting rights due to a condition
contained in the approval of the offering from the Ministry of Finance of
India. Under the depository agreement, the depository of the ADS will vote as
directed by the Board of Directors of the Company.
As discussed in Note 3, the Company consummated the reverse acquisition
with the acquiree effective April 1, 2002, whereby shareholders of the Company
were issued common shares of the acquiree in the ratio of 1:2. The effect of
the reverse acquisition on the capital structure (including outstanding stock
options) of the Company has been retroactively adjusted in the financial
statements. On consummation of the reverse acquisition, adjustments were made
to the value of the common stock and the additional paid in capital.
The Board of Directors, pursuant to a resolution dated February 10, 2004,
authorized an equity issue amounting to Rs. 30,500 million through a book built
issue with a green shoe option of Rs. 4,500 million subject to the approval of
shareholders under the Companies Act, 1956 of India, at the extraordinary
general meeting to be held on March 12, 2004. The shareholders pursuant to a
resolution dated March 12, 2004 authorized the issue and the green shoe option.
23. Retained earnings and dividends
Retained earnings at March 31, 2004 computed as per generally accepted
accounting principles of India amounting to Rs. 73,942 million (2003: Rs. 63,207
million) include reserves aggregating to:
F-37
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
o Rs. 9,607 million (2003: Rs. 5,514 million) which are not distributable as
dividends under the Banking Regulation Act, 1949. These relate to
requirements regarding earmarking a part of the profits under banking laws
in India. Utilization of these balances is subject to approval of the
Board of Directors and needs to be reported to Reserve Bank of India.
Statutes governing the operations of the Company mandate that dividends be
declared out of distributable profits only after the transfer of at least
25% of net income each year, computed in accordance with current banking
regulations, to a statutory reserve. Additionally, the remittance of
dividends outside India is governed by Indian statutes on foreign exchange
transactions.
o Rs. 20,476 million (2003: Rs. 11,295 million) which are not distributable
as dividends under the Indian company law.
o Rs. 11,690 million (2003: Rs. 11,440 million) earmarked under Indian tax
laws to avail tax benefits and which are not distributable as dividends.
Any transfer of balances from such earmarked reserves would result in
withdrawal of the tax exemption on the transferred amounts.
24. Earnings per share
A computation of the earnings per share is set out below.
Year ended March 31,
--------------------------------------------------------------------------
2002 2003 2004
--------------------- ------------------------ ----------------------
(in millions, except earnings per share data)
Fully Fully Fully
Basic diluted Basic diluted Basic Diluted
---------- --------- ---------- ---------- --------- ---------
Earnings
Net income before extraordinary items and
cumulative effect of accounting change
(before dilutive impact)..................... Rs. 282 Rs. 282 Rs. (7,983) Rs. (7,983) Rs. 5,219 Rs. 5,219
Contingent issuances of
subsidiaries/affiliates...................... Rs. - Rs. - Rs. - Rs. - Rs. - Rs. -
---------- --------- ---------- ---------- --------- ---------
Net income before cumulative effect of
accounting change (adjusted for full
dilution).................................... Rs. 282 Rs. 282 Rs. (7,983) Rs. (7,983) Rs. 5,219 Rs. 5,219
Cumulative effect of accounting change, net
of tax....................................... Rs. 1,265 Rs. 1,265 Rs. - Rs. - Rs. - Rs. -
---------- --------- ---------- ---------- --------- ---------
Net income available to common stockholders
(adjusted for full dilution)................. Rs. 1,547 Rs. 1,547 Rs. (7,983) Rs. (7,983) Rs. 5,219 Rs. 5,219
Common stock
Weighted-average common stock outstanding...... Rs. 393 Rs. 393 Rs. 563 Rs. 563 Rs. 614 Rs. 614
Dilutive effect of convertible debt instruments - - - - - -
Dilutive effect of employee stock options...... - - - - - 5
---------- --------- ---------- ---------- --------- ---------
Total.......................................... Rs. 393 Rs. 393 Rs. 563 Rs. 563 Rs. 614 Rs. 619
Earnings per share
Net income before extraordinary items and
cumulative effect of accounting change...... Rs. 0.72 Rs. 0.72 Rs. (14.18) Rs. (14.18) Rs. 8.50 Rs. 8.43
Cumulative effect of accounting change........ 3.22 3.22 - - - -
---------- --------- ---------- ---------- --------- ---------
Net income.................................... Rs. 3.94 Rs. 3.94 Rs. (14.18) Rs. (14.18) Rs. 8.50 Rs. 8.43
========== ========= ========== ========== ========= =========
Options to purchase 12,610,275 equity shares and 1,098,225 equity shares
granted to employees at a weighted average exercise price of Rs. 154.70 and Rs.
266.56 were outstanding during the year ended March 31, 2003 and 2004,
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.
25. Segmental disclosures and related information
Segmental disclosures
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for the reporting of information about
operating segments. Operating
F-38
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
segments are defined as components of an enterprise for which separate
financial information is available that is regularly evaluated by the Chief
Operating Decision Maker (CODM) in deciding how to allocate resources and in
assessing performance. As discussed in Note 3, the Company consummated the
reverse acquisition with the acquiree effective April 1, 2002. Subsequent to
the reverse acquisition, the Company changed the structure of its internal
organization, which changed the composition of its operating segments. The
Company's operations have been classified into the following segments:
Commercial Banking segment, Investment Banking segment and Others. Segment data
for previous periods have been reclassified on a comparable basis.
The Commercial Banking segment provides medium-term and long-term project
and infrastructure financing, securitization, factoring, lease financing,
working capital finance and foreign exchange services to clients. Further, it
provides deposit and loan products to retail customers. The Investment Banking
segment deals in the debt, equity and money markets and provides corporate
advisory products such as mergers and acquisition advice, loan syndication
advice and issue management services.
Others consist of various operating segments that do not meet the
requirements to be reported as on individual reportable segment as defined in
SFAS No. 131.
The CODM evaluates the Company's performance and allocates resources based
on performance indicators (components of profit and loss) of each of the
segments. Further, the CODM specifically reviews assets of the consumer loans
division, which is a part of commercial banking segment.
The profit and loss of reportable segments is set out below.
Commercial Banking Investment Banking
--------------------------------------- --------------------------------------
Year ended March 31, Year ended March 31,
--------------------------------------- --------------------------------------
2002 2003 2004 2002 2003 2004
----------- ----------- ----------- ---------- ----------- -----------
(in millions) (in millions)
Income from external customers
Interest income ................. Rs. 91,445 Rs. 76,498 Rs. 71,143 Rs. 8,239 Rs. 21,595 Rs. 19,954
Non - interest income............ 9,747 4,771 16,023 1,826 6,792 17,167
Income from other operating
segments.......................
Interest income.................. 3,796 8,533 8,881 11,007 189 174
Non - interest income............ 1,040 384 351 219 251 254
----------- ----------- ----------- ---------- ----------- -----------
Total income..................... Rs. 106,028 Rs. 90,186 Rs. 96,398 Rs. 21,291 Rs. 28,827 Rs. 37,549
Interest expense................. Rs. 81,867 Rs. 69,462 Rs. 62,327 17,454 Rs. 23,916 Rs. 18,904
Depreciation..................... 1,244 2,008 2,108 89 231 739
Provision for loan losses........ 11,458 19,645 20,040 8 4 15
Other expenses................... 10,321 10,343 17,358 1,781 2,921 3,991
----------- ----------- ----------- ---------- ----------- -----------
Income/ (loss) before taxes...... Rs. 1,138 Rs. (11,272) Rs. (5,435) Rs. 1,959 Rs. 1,755 Rs. 13,900
Income tax (expense)/ benefit.... (728) 3,420 1,077 (659) (529) (2,749)
Cumulative effect of accounting
changes, net of tax............ 1,281 - - - -
----------- ----------- ----------- ---------- ----------- -----------
Net income/ (loss)............... Rs. 1,691 Rs. (7,852) Rs. (4,358) Rs. 1,300 Rs. 1,226 Rs. 11,151
=========== =========== =========== ========== =========== ===========
A listing of certain assets of reportable segments is set out below.
Commercial Banking Investment Banking Others Total
------------------ ------------------ ------ -----
As of March 31, 2003 2004 2003 2004 2003 2004 2003 2004
---- ---- ---- ---- ---- ---- ---- ----
(in millions)
Property and
equipment........... Rs. 16,048 Rs. 18,133 Rs. 2,754 Rs. 2,303 Rs. 2,413 Rs. 2,747 Rs. 21,215 Rs. 23,183
Investment in
equity affiliates... - - 252 47 2,363 3,572 2,615 3,619
F-39
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Inter segment transactions are generally based on transfer pricing
measures as determined by management. Income, expenses, assets and liabilities
are either specifically identifiable with individual segments or have been
allocated to segments on a systematic basis. Corporate overheads and assets
have also been allocated to segments on a systematic basis.
A reconciliation between the segment income and consolidated totals of the
Company is set out below.
Income/(loss) before taxes and
Total income accounting changes Met income/(loss)
------------------------------------- ------------------------------------ ------------------------------------
Year ended March 31, Year ended March 31, Year ended March 31,
------------------------------------- ------------------------------------ -----------------------------------
2002 2003 2004 2002 2003 2004 2002 2003 2004
----------- ---------- ---------- --------- ----------- ---------- --------- ---------- ----------
(in millions)
Commercial
banking... Rs. 106,028 Rs. 90,186 Rs. 96,398 Rs. 1,138 Rs. (11,272) Rs. (5,435) Rs. 1,691 Rs. (7,852) Rs. (4,358)
Investment
banking... 21,291 28,827 37,549 1,959 1,755 13,900 1,300 1,226 11,151
Others...... 2,789 2,874 4,334 (549) (1,527) (1,608) (343) (1,357) (1,574)
----------- ---------- ---------- --------- ----------- ---------- --------- ---------- ----------
Eliminations
of the
acquiree.. (29,308) - - (2,015) - - (1,101) - -
Other
reconciling
adjustments (13,785) (10,531) (10,484) - - - - - -
----------- ---------- ---------- --------- ----------- ---------- --------- ---------- ----------
Consolidated
Total..... Rs. 87,015 Rs.111,681 Rs.127,797 Rs. 533 Rs. (11,044) Rs. 6,857 Rs. 1,547 Rs. (7,983) Rs. 5,219
=========== ========== ========== ========= =========== ========== ========= ========== ==========
A reconciliation between the segments and consolidated total assets of the
Company is set out below.
As of March 31
----------------------------
2003 2004
------------- -------------
(in millions)
Commercial Banking(1)........................ Rs. 767,343 Rs. 902,442
Investment Banking........................... 398,574 484,439
Others....................................... 9,850 12,232
------------- -------------
Total segment assets......................... Rs. 1,175,767 Rs. 1,399,113
Unallocable assets........................... Rs. 16,826 Rs. 20,718
Eliminations................................. (12,330) (10,700)
------------- -------------
Consolidated total assets.................... Rs. 1,180,263 Rs. 1,409,131
============= =============
1) Commercial banking includes assets of consumer loans division of Rs.
297,517 million (March 2003: Rs. 172,208 million), which are reviewed
separately by the CODM.
Geographic distribution
The business operations of the Company are largely concentrated in India.
Activities outside India include resource mobilization in the international
markets and operations of certain software development and services
subsidiaries in the United States.
Major customers
The Company provides banking and financial services to a wide base of
customers. There is no major customer, which contributes more than 10% of total
income.
F-40
26. Employee benefits
Gratuity
In accordance with Indian regulations, the Company provides for gratuity,
a defined benefit retirement plan covering all employees. The plan provides a
lump sum payment to vested employees at retirement or termination of employment
based on the respective employee's salary and the years of employment with the
Company. The gratuity benefit provided by the Company to its employees is equal
to or greater than the statutory minimum.
In respect of the parent company, the gratuity benefit is provided to the
employee either through a fund administered by a Board of Trustees and managed
by Life Insurance Corporation of India (LIC) or through a fund administered and
managed by a Board of Trustees. The Company is responsible for settling the
gratuity obligation through contributions to the fund. The plan is fully
funded.
In respect of the remaining entities within the group, the gratuity
benefit is provided through annual contributions to a fund administered and
managed by the LIC. Under this scheme, the settlement obligation remains with
the Company, although the LIC administers the scheme and determines the
contribution premium required to be paid by the Company.
The following table sets forth the funded status of the plans and the
amounts recognized in the financial statements:
As of March 31,
------------------
2003 2004
------- --------
(in millions)
Change in benefit obligations
Projected benefit obligations at beginning of the year... Rs. 263 Rs. 893
Divestitures.............................................
Obligations assumed on acquisition....................... 393 -
Service cost............................................. 69 106
Interest cost............................................ 64 99
Benefits paid............................................ (18) (470)
Actuarial (gain)/loss on obligations..................... 63 176
Unrecognized prior service cost.......................... 59 -
------- --------
Projected benefit obligations at the end of the year..... Rs. 893 Rs. 804
------- --------
Change in plan assets
Fair value of plan assets at beginning of the year....... Rs. 248 Rs. 873
Fair value of plan assets acquired on acquisition........ 402 -
Actual return on plan assets............................. 70 64
Employer contributions................................... 163 47
Benefits paid............................................ (32) (470)
Actuarial (gain)/loss.................................... 22 -
------- --------
Plan assets at the end of the year....................... Rs. 873 Rs. 514
------- --------
Funded status............................................ Rs. (20) Rs. (290)
Unrecognized actuarial loss.............................. 136 290
Unrecognized transitional obligation..................... (17) (16)
Unrecognized prior service cost.......................... - 61
------- --------
Net prepaid gratuity cost................................ Rs. 99 Rs. 45
======= ========
Accumulated benefit obligation at year end.............. Rs. 480 Rs. 336
F-41
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
The components of the net gratuity cost are set out below.
Year ended March 31,
-------------------------
2002 2003 2004
------- ------- -------
(in millions)
Service cost.................................... Rs. 29 Rs. 69 Rs. 106
Interest cost................................... 25 64 99
Expected return on assets....................... (29) (70) (68)
Amortization of transition asset/liability...... (1) (1) (1)
Amortization of prior service cost.............. 1 1 6
Actuarial (gain)/loss........................... 2 2 2
Curtailment (gain)/ loss........................ - - 25
------- ------- -------
Net gratuity cost............................... Rs. 27 Rs. 65 Rs. 169
======= ======= =======
Weighted average assumptions used to determine net periodic benefit cost
for the period:
As of March 31,
-------------------------
2002 2003 2004
------- ------- -------
Discount rate................................... 10% 8% 7%
Rate of increase in the compensation levels..... 9% 7% 7%
Rate of return on plan assets................... 9.5% 7.5% 7.5%
Weighted average assumptions used to determine benefit obligations:
As of March 31,
----------------
2003 2004
------- -------
Discount rate................................... 8.0% 7.0%
Rate of increase in the compensation levels..... 7.0% 7.0%
As of March 31, 2004, of the total plan assets Rs. 113 million (2003: Rs.
46 million) has been invested in debt securities of the Company.
Plan Assets
The Company determines its assumptions for the expected rate of return on
plan assets based on the expected average long term rate of return over the
next 15 to 20 years.
The Company's asset allocation for the gratuity at the end of the year
ended March 31, 2004 and March 31, 2003 and the target allocation for year
ending March 31, 2005 by asset category based on fair values is as follows:
Asset Category Target asset Post-retirement Post-retirement
allocation asset at Mar 31, asset at Mar 31,
2005 2004 2003
------------ ---------------- ----------------
Debt Securities ............... 0% 0% 0%
Other investments.............. 100% 100% 100%
--- --- ---
Total.......................... 100% 100% 100%
=== === ===
The plan assets are either maintained by LIC or through a fund
administrated and managed by a Board of Trustees.
The investment strategy is to invest in a prudent manner for providing
benefits to the participants of the scheme. The strategies are targeted to
produce a return that, when combined with the Company's contribution to the
funds will maintain the fund's ability to meet all required benefit
obligations.
F-42
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
The benefit expected be paid in each of the next five fiscal year and in
the five fiscal years thereafter is as follows:
(in millions)
Expected company contributions to the fund during the year 2004 - 2005... Rs. 180
Expected benefit payments from the fund during:
2004 - 2005.............................................................. 18
2005 - 2006.............................................................. 27
2006 - 2007.............................................................. 54
2007 - 2008.............................................................. 35
2008 - 2009.............................................................. 57
2009 - 2010 to 2013 - 2014............................................... 475
Pension
The Company provides for pension, a deferred retirement plan covering
certain employees. The plan provides for a pension payment on a monthly basis
to these employees on their retirement based on the respective employee's
salary and years of employment with the Company. Employees covered by the
pension plan are not eligible for benefits under the provident fund plan, a
defined contribution plan. The pension plan pertained to the acquiree which was
acquired with effect from April 2003
The pension plan is funded through periodic contributions to a fund set-up
by the Company and administrated by a Board of Trustees. Such contributions are
actuarially determined.
The following table sets forth the funded status of the plan and the
amounts recognized in the financial statements.
As of March 31,
---------------------
2003 2004
--------- ---------
(in millions)
Change in benefit obligations
Projected benefit obligations at beginning of the year... Rs. 913 Rs. 853
Service cost............................................. 22 24
Interest cost............................................ 89 74
Benefits paid............................................ (42) (165)
Actuarial (gain)/loss on obligations.................... (129) 248
--------- ---------
Projected benefit obligations at the end of the year..... Rs. 853 Rs. 1,034
--------- ---------
Change in plan assets
Fair value of plan assets at beginning of the year....... Rs. 914 Rs. 1,156
Actual return on plan assets............................. 86 46
Employer contributions................................... 16 10
Gain/(loss) on plan assets............................... 166 -
Benefits paid............................................ (26) (165)
--------- ---------
Plan assets at the end of the year....................... Rs. 1,156 Rs. 1,047
--------- ---------
Funded status............................................ Rs. 303 Rs. 13
Unrecognized actuarial loss/(gain)....................... (304) (18)
Unrecognized transitional obligation..................... - -
Unrecognized prior service cost.......................... - -
--------- ---------
Net Amount Recognized.................................... Rs. (1) Rs. (5)
======== =========
Accumulated benefit obligation at year end............... Rs. 658 Rs. 961
======== =========
F-43
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
The components of the net pension cost are set out below.
Year ended March 31,
--------------------
2003 2004
-------- --------
(in millions)
Service cost............................................ Rs. 22 Rs. 24
Interest cost........................................... 89 74
Expected return on assets............................... (86) (84)
Actuarial (gain)/loss................................... - -
-------- --------
Net pension cost........................................ Rs. 25 Rs. 14
======== ========
Weighted average assumptions used to determine net periodic benefit cost
for the period:
As of March 31,
--------------------
2003 2004
-------- --------
Discount rate........................................... 8% 7%
Rate of increase in the compensation levels............. 7% 7%
Rate of return on plan assets........................... 7.5% 7.5%
Pension increases....................................... 3% 3%
Weighted average assumptions used to determine benefit obligations:
As of March 31,
--------------------
2003 2004
-------- --------
Discount rate........................................... 8% 7%
Rate of increase in the compensation levels............. 7% 7%
Pension increases....................................... 3% 3%
Plan Assets
The Company determines its assumptions for the expected rate of return on
plan assets based on the expected average long-term rate of return over the
next 15 to 20 years.
The Company's asset allocation for the pension at the end of the year
ended March 31, 2004 and March 31, 2003 and the target allocation for year
ending March 31, 2005 by asset category based on fair values are as follows:
Asset Category Target asset Pension assets Pension assets
allocation at Mar 31 at Mar 31
2005 2004 2003
------------ -------------- --------------
Debt Securities............. 100% 100% 100%
Other investments........... 0% 0% 0%
---- ---- ----
Total....................... 100% 100% 100%
=== === ===
The plan assets are maintained through a fund administered and managed by
a Board of Trustees.
The investment strategy of the Company is to invest in a prudent manner
for providing benefits to the participants of the scheme. The strategies are
targeted to produce a return that, when combined with the Company's
contribution to the funds will maintain the fund's ability to meet all required
benefit obligations. Risk is reduced by investment in GOI Securities or
relatively low risk securities.
F-44
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Superannuation
The permanent employees of the Company are entitled to receive retirement
benefits under the superannuation scheme operated by the Company.
Superannuation is a defined contribution plan under which the Company
contributes annually a sum equivalent to 15% of the employee's eligible annual
salary to LIC, the manager of the fund, which undertakes to pay the lump sum
and annuity payments pursuant to the scheme. The Company contributed Rs. 50
million, Rs. 97 million and Rs. 103 million to the employees superannuation
plan for the years ended March 31, 2002, 2003 and 2004 respectively.
Provident fund
In accordance with Indian regulations, employees of the Company (excluding
those covered under the pension scheme) are entitled to receive benefits under
the provident fund, a defined contribution plan, in which, both the employee
and the Company contribute monthly at a determined rate. These contributions
are made to a fund set up by the Company and administered by a Board of
Trustees. The contribution to the employees provident fund amounted to Rs. 89
million, Rs. 106 million and Rs. 236 million for the years ended March 31,
2002, 2003 and 2004 respectively.
27. Early Retirement Option (ERO)
The Bank has implemented Early Retirement Option Scheme 2003 to its
employees in July 2003. All employees who had completed 40 years of age and
seven years of service with the Bank (including period of service with entities
amalgamated with the Bank) were eligible for the ERO.
For a period of one month commencing on July 1, 2003 the Company offered
its employees special benefits in connection with their early retirement option
of employment. The early retirement option was offered to employees who have
completed a minimum service period of seven years and have completed minimum 40
years of age. The employees opting for the plan were paid a lump-sum
consideration.
An aggregate of 1,495 employees opted for this plan. The termination
benefits in respect of the plan aggregated Rs. 1,910 million, which has been
reflected in the income statement under the salaries and employee benefits.
28. Employee Stock Option Plan
In August 1999, the Company approved an Employee Stock Option Plan (ICICI
Plan). Under the ICICI Plan, the Company is authorized to issue up to 31
million equity shares to eligible employees. Eligible employees are granted an
option to purchase shares subject to vesting. The options vest in a graded
manner over 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. Compensation expense under the ICICI Plan for the year ended March 31,
2004 is Rs. Nil (2003: Rs.7 million, 2002: Rs. 26 million).
As a result of the reverse acquisition, all outstanding options of the
Company were exchanged for options of the acquiree in the ratio of 1:2 with an
adjustment to the exercise price in the same ratio. This transaction is similar
to an equity restructuring. In accordance with FIN 44, Accounting for Certain
Transactions involving Stock Compensation, the above transaction had no
accounting consequence.
Under the terms of the reverse acquisition, the Company assumed the
employee options outstanding under the acquiree's option plan. As the intrinsic
value of all the assumed options
F-45
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
was negative on the date of consummation, no amount has been allocated to
deferred compensation under FIN 44.
Stock option activity
Stock option activity under the above stock option plans is set out below.
Year ended March 31, 2002
----------------------------------------------------------------------------
ICICI Bank Limited
----------------------------------------------------------------------------
Range of exercise Weighted average
Option shares prices and grant Weighted average remaining contractual
outstanding date fair values exercise price life (months)
------------- ----------------- ---------------- ---------------------
Outstanding at the beginning of the year. 2,546,675 Rs. 171.0 - 266.8 Rs. 226.0 109
Granted during the year.................. 4,887,500 105.0 - 164.0 134.4 116
Forfeited during the year................ (417,675) 164.0 - 266.8 218.4 -
Exercised during the year................ (700) 171.0 171.0 -
---------
Outstanding at the end of the year ...... 7,015,800 Rs. 105.0 - 266.8 Rs. 162.6 114
========= ----------------- --------- ---
Exercisable at the end of the year....... 74,300 Rs. 171.0 - 266.8 Rs. 205.6 -
Year ended March 31, 2003
----------------------------------------------------------------------------
ICICI Bank Limited
----------------------------------------------------------------------------
Range of exercise Weighted average
Option shares prices and grant Weighted average remaining contractual
outstanding date fair values exercise price life (months)
------------- ----------------- ---------------- ---------------------
Outstanding at the beginning of the year. 7,015,800 Rs. 105.0 - 266.8 Rs. 162.6 114
Acquisitions............................. 6,327,825 120.4 - 171.9 146.0 110
Forfeited during the year................ (730,350) 120.4 - 266.8 154.6 -
Exercised during the year................ (3,000) 105.0 105.0 -
---------
Outstanding at the end of the year....... 12,610,275 Rs. 105.0 - 266.8 Rs. 154.7 98
=========
Exercisable at the end of the year....... 5,222,317 Rs. 52.5 - 266.8 Rs. 169.9 -
Year ended March 31, 2004
----------------------------------------------------------------------------
ICICI Bank Limited
----------------------------------------------------------------------------
Range of exercise Weighted average
Option shares prices and grant Weighted average remaining contractual
outstanding date fair values exercise price life (months)
------------- ----------------- ---------------- ---------------------
Outstanding at the beginning of the year. 12,610,275 Rs. 105.0 - 266.8 Rs. 154.7 98
Acquisitions............................. 7,491,800 132.1 - 222.4 132.6 109
Forfeited during the year................ (766,489) 120.4 - 266.8 129.4 -
Exercised during the year................ (3,370,604) 105.0 - 266.8 151.7 -
----------
Outstanding at the end of the year....... 15,964,982 Rs. 105.0 - 266.8 Rs. 146.2 96
==========
Exercisable at the end of the year....... 6,080,121 Rs. 105.0 - 266.8 Rs. 167.3 -
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 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 the year ended March 31, 2002, 2003 and 2004, the Company has not
recorded any
F-46
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
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, 2002
----------------------------------------------------------------------------
ICICI Infotech
----------------------------------------------------------------------------
Range of exercise Weighted average
Option shares prices and grant Weighted average remaining contractual
outstanding date fair values exercise price life (months)
------------- ----------------- ---------------- ---------------------
Outstanding at the beginning of the year. 2,241,400 Rs. 37.5 Rs. 37.5 108
Granted during the year.................. 1,974,800 68.0 68.0 99
Forfeited during the year................ (342,960) 37.5 - 68.0 42.0 -
Exercised during the year................ (10,220) 37.5 37.5 -
---------
Outstanding at the end of the year....... 3,863,020 Rs. 37.5 - 68.0 Rs. 52.7 104
=========
Exercisable at the end of the year....... 369,448 Rs. 37.5 Rs. 37.5 -
Year ended March 31, 2003
----------------------------------------------------------------------------
ICICI Infotech
----------------------------------------------------------------------------
Range of exercise Weighted average
Option shares prices and grant Weighted average remaining contractual
outstanding date fair values exercise price life (months)
------------- ----------------- ---------------- ---------------------
Outstanding at the beginning of the year. 3,863,020 Rs. 37.5 - 68.0 Rs. 52.7 104
Granted during the year.................. 783,500 68.0 - 100.0 97.1 108
Forfeited during the year................ (435,360) 37.5 - 100.0 59.1 -
Exercised during the year................ (10,200) 37.5 - 68.0 55.7 -
---------
Outstanding at the end of the year....... 4,200,960 Rs. 37.5 - 100.0 Rs. 60.3 75
=========
Exercisable at the end of the year....... 1,235,070 Rs. 37.5 - 100.0 Rs. 46.2 87
Year ended March 31, 2004
----------------------------------------------------------------------------
ICICI Infotech
----------------------------------------------------------------------------
Range of exercise Weighted average
Option shares prices and grant Weighted average remaining contractual
outstanding date fair values exercise price life (months)
------------- ----------------- ---------------- ---------------------
Outstanding at the beginning of the year. 4,200,960 Rs. 37.5 - 100.0 Rs. 60.3 75
Granted during the year.................. 1,148,000 37.5 - 100 45.0 -
Forfeited during the year................ (859,320) 37.5 - 100 37.5 -
Exercised during the year................ (2,660) 37.5 - 100 54.4 -
---------
Outstanding at the end of the year....... 4,486,980 Rs. 37.5 - 100 Rs. 57.5 -
=========
Exercisable at the end of the year....... 2,044,704 Rs. 37.5 - 100 Rs. 50.5 88
ICICI Venture
In July 2000, ICICI Venture, a consolidated subsidiary, approved an
Employee Stock Option Plan (Venture Plan). As of March 31, 2001, 78,900 options
with an exercise price of Rs. 835 per share were outstanding. The Company did
not record compensation cost, as the exercise price was equal to the fair value
of the underlying equity shares on the grant date. During the year ended March
31, 2002, the Venture Plan was discontinued and all the options outstanding
were voluntarily forfeited by the employees. The Company does not intend to
replace such cancelled options.
F-47
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
ICICI OneSource Limited
In September 2002, ICICI OneSource, a consolidated subsidiary, approved an
Employee Stock Options Plan (OneSource Plan). Under the OneSource Plan, ICICI
OneSource is authorized to issue equity shares up to 10% of the share capital
to the employees. Eligible employees are granted an option to purchase shares
subject to vesting conditions. The options vest in a graded manner over four
years with 25% at the end of the first year and 12.5% of the options vesting at
the end of each subsequent six month period. The options can be exercised
within 10 years from the date of the grant.
Stock option activity under the above stock option plan is set out below.
Year ended March 31, 2003
----------------------------------------------------------------------------
ICICI One Source Limited
----------------------------------------------------------------------------
Range of exercise Weighted average
Option shares prices and grant Weighted average remaining contractual
outstanding date fair values exercise price life (months)
------------- ----------------- ---------------- ---------------------
Outstanding at the beginning of the year. - - - -
Granted during the year.................. 4,250,000 Rs. 11.3 Rs. 11.3 113
Forfeited during the year................ (395,000) 11.3 11.3 -
Exercised during the year................ - - - -
---------
Outstanding at the end of the year....... 3,855,000 Rs. 11.3 Rs. 11.3 113
=========
Exercisable at the end of the year....... - - - -
Year ended March 31, 2004
----------------------------------------------------------------------------
ICICI One Source Limited
----------------------------------------------------------------------------
Range of exercise Weighted average
Option shares prices and grant Weighted average remaining contractual
outstanding date fair values exercise price life (months)
------------- ----------------- ---------------- ---------------------
Outstanding at the beginning of the year. 3,855,000 Rs. 11.3 Rs. 11.3 113
Granted during the year.................. 15,320,500 12.83 - 18.53 13.2 73
Forfeited during the year................ (1,207,500) 11.25 - 18.53 11.3 -
Exercised during the year................ - - - -
----------
Outstanding at the end of the year....... 17,968,000 Rs. 11.25 - 18.53 Rs. 12.9- 81
==========
Exercisable at the end of the year....... - - - -
The Company has not recorded any compensation cost, as the exercise price
was equal to the fair value of the underlying equity shares on the grant date.
As shares of ICICI OneSource Limited are not quoted on exchanges, the fair
value represents management's best estimates considering all available factors.
F-48
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
29. Income taxes
Components of deferred tax balances
The tax effects of temporary differences are reflected through a deferred
tax asset/liability, which is included in the balance sheet of the Company.
The components of the deferred tax balances are set out below.
As of March 31,
-----------------------------
2003 2004
------------ -----------
(in millions)
Deferred tax assets
Allowance for loan losses................. Rs. 16,228 Rs. 17,902
Available for sale securities............. 1,044 -
Investments in trading securities......... 62 67
Unearned income........................... 693 -
Capital loss carry forward................ 23 1,566
Business loss carry forward............... 219 286
Deposits.................................. 94 34
Undistributed losses of affiliates........ 235 642
Other..................................... 339 232
------------ -----------
Rs. 18,937 Rs. 20,729
Valuation allowance....................... (524) (893)
------------ -----------
Total deferred tax asset.................. Rs. 18,413 Rs. 19,836
============ ===========
Deferred tax liabilities
Property and equipment.................... Rs. (9,216) Rs. (8,329)
Undistributed earnings of subsidiary...... (294) (450)
Intangibles............................... (1,857) (1,625)
Unearned income........................... - (896)
Investment in trading securities.......... (39) (63)
Long term debt............................ (666) (336)
Available for sale securities............. (20) (202)
Others.................................... (358) (612)
------------ -----------
Total deferred tax liability.............. Rs. (12,450) Rs. (12,513)
------------ -----------
Net deferred tax asset.................... Rs. 5,963 Rs. 7,323
============ ===========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of the
deferred tax asset is dependent on the generation of future taxable income
during the periods in which the temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, the
projected future taxable income, and tax planning strategies in making this
assessment. Based on the level of historical taxable income and projections for
future taxable incomes over the periods in which the deferred tax assets are
deductible, management believes that it is more likely than not that the
Company will realize the benefits of those deductible differences. The amount
of deferred tax assets considered realizable, however could be reduced in the
near term if estimates of future taxable income are reduced.
The Company would require taxable income of Rs. 27,497 million in the
future periods to be able to fully realize the benefit of net deferred asset
recognized in these consolidated financial statements.
The Company had a valuation allowance of Rs. 97 million as at April 1,
2001. The net change in the total valuation allowance for the years ended March
31, 2002, March 31, 2003 and
F-49
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
March 31, 2004 was an increase of Rs. 129 million, Rs. 298 million and Rs. 369
million respectively. The majority of the valuation allowance as of March 31,
2004 related to business loss carried forward and capital loss carried forward.
As of March 31, 2004, included in the above, the Company has recorded a
valuation allowance of Rs. 642 million pertaining to an excess of the tax basis
over the financial reporting basis of investments in equity affiliates.
As at March 31, 2004, the Company has business loss carry forward of Rs.
757 million, with expiration dates as follows: March 31, 2010 - Rs. 173
million. Further, business loss carry forward pertaining to the Company's US
subsidiary was Rs. 500 million which expires in 2023 and Australian subsidiary
was Rs. 84 million which has no expiration date.
The Company has capital loss carry forward of Rs. 4,294 million, with
expiration dates as follows: March 31, 2006 - Rs. 98 million and March 31, 2012
- Rs. 4,196 million.
Reconciliation of tax rates
The Indian statutory tax rate is 35% plus a surcharge. During each of the
years presented, legislation was enacted in the first few months of the fiscal
year that changed the amount of the surcharge for that fiscal year and future
years. The surcharge was changed to 2%, 5% and 2.5% during the years ended
March 31, 2002, 2003 and 2004, respectively, and resulted in a total statutory
tax rate of 35.70%, 36.75% and 35.875% for the years ended March 31, 2002, 2003
and 2004, respectively.
The following is the reconciliation of expected income taxes at statutory
income tax rate to income tax expense /benefit as reported:
Year ended March 31,
----------------------------------------
2002 2003 2004
----------- ----------- ------------
(in millions)
Income/(loss) before income taxes ............................ Rs. 533 Rs. (11,044) Rs. 6,857
Statutory tax rate............................................ 35.70% 36.75% 35.875%
Income tax expense/(benefit) at the statutory tax rate........ 190 (4,059) 2,460
Increases/(reductions) in taxes on account of:
Special tax deductions available to financial institutions.... (333) (38) (32)
Exempt interest and dividend income........................... (800) (558) (906)
Income charged at rates other than statutory tax rate......... 280 (741)
916
Changes in the statutory tax rate............................. 360 (109) 137
Expenses disallowed for tax purposes.......................... 109 486 270
Tax on undistributed earnings of subsidiary................... 234 62 134
Change in valuation allowance................................. 129 298 371
Tax adjustments in respect of prior year tax assessments...... 175 (31) (9)
Tax adjustment on account of change in tax status of subsidiary - (97) -
Other......................................................... (93) 69 (46)
----------- ----------- ------------
Income tax expense/(benefit) reported......................... Rs. 251 Rs. (3,061) Rs. 1,638
=========== =========== ===========
F-50
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
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,
-----------------------------------------
2002 2003 2004
----------- ------------ ------------
(in millions)
Current............................ Rs. 3,474 Rs. 1,287 Rs. 3,684
Deferred........................... (3,223) (4,348) (2,046)
----------- ------------ -------------
Income tax expense/(benefit)
reported......................... Rs. 251 Rs. (3,061) Rs. 1,638
=========== ============ ============
Only an insignificant amount of the Company's income/(loss) before income
taxes and income tax expense/(benefit) was from outside India.
Allocation of income taxes
The total income tax expense/(benefit) was recorded as follows:
Year ended March 31,
-----------------------------------------
2002 2003 2004
----------- ------------ ------------
(in millions)
Income/(loss) from continuing
operations....................... Rs. 251 Rs. (3,061) Rs. 1,638
Unrealized gain/(loss) on
securities available for sale.... 890 1,461 655
Additional paid in capital......... - 599 -
----------- ------------ -------------
Income tax expense/(benefit)
reported......................... Rs. 1,141 Rs. (1,001) Rs. 2,293
=========== ============ ============
30. Commitments and contingencies
Loan commitments
The Company has outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs. 73,903 million as
of March 31, 2004 (2003: Rs. 48,759 million). The interest rate on these
commitments is dependent on the lending rates on the date of the loan
disbursement. Further, the commitments have fixed expiration dates and are
contingent upon the borrower's ability to maintain specific credit standards.
Guarantees
As a part of its project financing and commercial banking activities, the
Company has issued guarantees to enhance the credit standing of its customers.
These generally represent irrevocable assurances that the Company will make
payments in the event that the customer fails to fulfill its financial or
performance obligations. Financial guarantees are obligations to pay a third
party beneficiary where a customer fails to make payment towards a specified
financial obligation. Performance guarantees are obligations to pay a third
party beneficiary where a customer fails to perform a non-financial contractual
obligation. The guarantees are generally for a period not exceeding 10 years.
The credit risk associated with these products, as well as the operating
risks, are similar to those relating to other types of financial instruments.
The current carrying amount of the liability for the Company's obligations
under the guarantee amounted to Rs. 1,229 million (2003: Rs. 1,096 million)
F-51
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Details of guarantees outstanding are set out below.
Nature of guarantee Maximum potential amount of future payments under guarantee
Less than 1 1-3 3-5
year year year Over 5 year Total
----------- ----------- ----------- ----------- -----------
(in millions)
Financial guarantees....... Rs. 24,792 Rs. 11,128 Rs. 10,326 Rs. 11,098 Rs. 57,344
Performance guarantees..... 26,544 23,070 9,565 5,821 65,000
----------- ----------- ----------- ----------- -----------
Total...................... Rs. 51,336 Rs. 34,198 Rs. 19,891 Rs. 16,919 Rs. 122,344
=========== =========== =========== =========== ===========
The Company has collateral available to reimburse potential losses on its
guarantees. Margins available to the Company to reimburse losses realized under
guarantees amounted to Rs. 2,055 million (2003: Rs. 2,503 million). Other
property may also be available to the Company to cover these losses under
guarantees.
Capital commitments
The Company is obligated under a number of capital contracts. Capital
contracts are job orders of a capital nature which have been committed. As of
the balance sheet date, work had not been completed to this extent. Estimated
amounts of contracts remaining to be executed on capital account aggregated Rs.
294 million as of March 31, 2004 (2003: Rs. 264 million).
Tax contingencies
Various tax-related legal proceedings are pending against the Company at
various levels of appeal either with the tax authorities or in the courts.
Potential liabilities, if any, have been adequately provided for, and the
Company does not estimate any incremental liability in respect of these
proceedings.
As of March 31, 2004, the Company has been assessed an aggregate of
Rs. 25,017 million in excess of the provision made in the financial statements
in income tax, interest tax, wealth tax and sales tax demands by the
Government of India's tax authorities for past years. The Company has appealed
each of these tax demands. The Company believes that the tax authorities are
not likely to be able to substantiate their income tax , interest tax, wealth
tax and sales tax assessments and accordingly has not provided for these tax
demands as of March 31, 2004.
Litigation
Various litigation and claims against the Company and its subsidiaries are
in process and pending. Based upon a review of open matters with legal counsel,
management believes that the outcome of such matters will not have a material
effect upon the Company's consolidated financial position, results of
operations or cashflows.
Operating lease commitments
The Company has commitments under long-term operating leases principally
for premises and automated teller machines. The following is a summary of
future minimum lease rental commitments as of March 31, 2004, for
non-cancelable leases:
F-52
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
(in millions)
Lease rental commitments for the year ending March 31,
2005......................................................... Rs. 231
2006......................................................... 223
2007......................................................... 208
2008......................................................... 174
2009......................................................... 170
Thereafter................................................... 150
---------
Total minimum lease commitments.............................. Rs. 1,156
=========
31. Related party transactions
The Company has transactions with its affiliates and directors/employees.
The following represent the significant transactions between the Company and
such related parties:
Insurance services
During the year ended March 31, 2004 the Company paid insurance premium to
ICICI Lombard amounting to Rs. 219 million (2003: Rs. 224 million, 2002: Rs.26
million).
Lease of premises and facilities
During the year ended March 31, 2004, the Company received for lease of
premises, facilities and other administrative costs from ICICI Prulife, Rs. 198
million (2003: Rs. 84 million. 2002: Rs. 54 million), from Pru-ICICI, Rs. 6
million (2003: Rs. 6 million, 2002: Rs. 5 million) and from ICICI Lombard, Rs.
91 million (2003: Rs. 82 million, 2002: Rs. 50 million).
Secondment of employees
During the year ended March 31, 2004, the Company received from ICICI
Prulife for seconded employees, Rs. 0.6 million (2003: Rs. 3 million, 2002:
Nil) and from ICICI Lombard, Rs. 14 million (2003: Rs. 10 million, 2002: Rs. 5
million).
Asset management services
During the year ended March 31, 2004, the Company provided asset
management services to TCW and earned fees of Rs. 14 million (2003: Rs. 24
million, 2002: Rs. 21 million).
Deposits and borrowings
During the year ended March 31, 2004, the Company paid interest on
bonds/deposits/call borrowings to its affiliated companies, Rs. 27 million
(2003: Rs. 12 million, 2002: Rs. 268 million).
Interest and Dividend
During the year ended March 31, 2004, the Company received interest on car
loans from its affiliated companies, Rs. 0.27 million (2003: Rs.0.33 million)
and dividend Rs. 172.00 million (2003: Nil).
F-53
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Employee loans
The Company has advanced housing, vehicle and general purpose loans to
employees, bearing interest ranging from 2.5% to 6%. The tenure of these loans
range from 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, 2004, of Rs.3,766 million (2003: Rs. 2,273 million) are included in
other assets.
Related party balances
The following balances payable to/receivable from related parties are
included in the balance sheet:
As of March 31,
-------------------------
2003 2004
---------- -----------
(in millions)
Loans...................................... Rs. 22 Rs. 20
Other assets............................... 2,549 3,353
Deposits................................... 440 700
Other liabilities.......................... 3 50
32. Estimated fair value of financial instruments
The Company's financial instruments include financial assets and
liabilities recorded on the balance sheet, as well as off-balance sheet
instruments such as foreign exchange and derivative contracts.
Fair value estimates are generally subjective in nature, and are made as
of a specific point in time based on the characteristics of the financial
instruments and relevant market information. Where available, quoted market
prices are used. In other cases, fair values are based on estimates using
present value or other valuation techniques. These techniques involve
uncertainties and are significantly affected by the assumptions used and
judgments made regarding risk characteristics of various financial instruments,
discount rates, estimates of future cash flows, future expected loss experience
and other factors. Changes in assumptions could significantly affect these
estimates and the resulting fair values. Derived fair value estimates cannot
necessarily be substantiated by comparison to independent markets and, in many
cases, could not be realized in an immediate sale of the instruments.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments.
Disclosure of fair values is not required for certain items such as investment
accounted for under the equity method of accounting, obligations for pension
and other post-retirement benefits, income tax assets and liabilities, property
and equipment, prepaid expenses, core deposit intangibles and the value of
customer relationships associated with certain types of consumer loans,
particularly the credit card portfolio, and other intangible assets.
Accordingly, the aggregate fair value amount presented do not purport to
represent, and should not be considered representative of, the underlying
market or franchise value of the Company. In addition, because of differences
in methodologies and assumptions used to estimate fair values, the Company's
fair values should not be compared to those of other financial institutions.
F-54
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments.
Cash and cash equivalents
The carrying amounts reported in the balance sheet approximate fair values
because maturities are less than three months.
Trading assets and liabilities
Trading account assets and liabilities are carried at fair value in the
balance sheet. Values for trading securities are generally based on quoted, or
other independent, market prices. Values for interest rate and foreign exchange
products are based on quoted, or other independent, market prices, or are
estimated using pricing models or discounted cash flows.
Securities
Fair values are based primarily on quoted, or other independent, market
prices. For certain debt and equity investments that do not trade on
established exchanges, and for which markets do not exist, estimates of fair
value are based upon management's review of the investee's financial results,
condition and prospects.
Loans
The fair values of certain commercial and consumer loans are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
The carrying value of certain other loans approximates fair value due to the
short-term and/or repricing characteristics of these loans. For impaired loans,
the impairment is considered when arriving at the fair value.
Deposits
The carrying amount of deposits with no stated maturity is considered to
be equal to their fair value. Fair value of fixed-rate time deposits is
estimated by discounting contractual cash flows using interest rates currently
offered on the deposit products. Fair value for variable-rate time deposits
approximates their carrying value. Fair value estimates for deposits do not
include the benefit that results from the low-cost funding provided by the
deposit liabilities compared to the cost of alternative forms of funding (core
deposit intangibles).
Long-term debt, short-term borrowings and redeemable preferred stock
The fair value of the Company's debt, including short-term borrowings, is
estimated based on quoted market prices for the issues for which there is a
market, or by discounting cash flows based on current rate available to the
Company for similar types of borrowing arrangements.
F-55
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
A listing of the fair values by category of financial assets and financial
liabilities is set out below.
As of March 31, 2003 As of March 31, 2004
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------- ------------- ------------- -------------
(in millions)
Financial assets
Trading account assets........................ Rs. 39,634 Rs. 39,634 Rs. 75,155 Rs. 75,155
Securities (Note 1)........................... 280,621 280,621 310,368 310,368
Loans (Note 2)................................ 630,421 641,048 728,520 740,786
Other financial assets (Note 3)............... 115,705 115,705 164,127 164,127
------------- ------------- ------------- -------------
Total......................................... Rs. 1,066,381 Rs. 1,077,008 Rs. 1,278,170 Rs. 1,290,436
============= ============= ============= =============
Financial liabilities
Interest-bearing deposits..................... Rs. 456,051 Rs. 454,251 Rs. 611,178 Rs. 612,225
Non-interest-bearing deposits................. 35,239 35,239 73,777 73,777
Trading account liabilities................... 26,086 26,086 26,079 26,079
Short-term borrowings......................... 42,095 42,017 57,364 57,364
Long-term debt................................ 400,812 426,928 373,449 397,649
Redeemable preferred stock.................... 853 1,035 944 1056
Other financial liabilities (Note 4).......... 43,252 43,252 65,142 65,142
------------- ------------- ------------- -------------
Total......................................... Rs. 1,004,388 Rs. 1,028,808 Rs. 1,207,933 Rs. 1,233,292
============= ============= ============= =============
1) Includes non-readily marketable equity securities of Rs. 8,621 million
(2003: Rs. 9,418 million) for which there are no readily determinable fair
values.
2) The carrying value of loans is net of the allowance for loan losses,
security deposits and unearned income.
3) Includes cash and cash equivalents and customers acceptance liability for
which the carrying value is a reasonable estimate of fair value.
4) Represents acceptances outstanding, for which the carrying value is a
reasonable estimate of fair value.
33. Regulatory matters
Subsequent to the reverse acquisition of the acquiree, the Company is a
banking company within the meaning of the Indian Banking Regulation Act, 1949,
registered with and subject to examination by the Reserve Bank of India.
Statutory liquidity requirements
In accordance with the Banking Regulation Act, 1949, the Company is
required to maintain a specified percentage of its net demand and time
liabilities by way of liquid unencumbered assets like cash, gold and approved
securities. The amount of securities required to be maintained at March 31,
2004 was Rs.303,432 million (2003: Rs. 230,644 million).
F-56
ICICI Bank Limited and Subsidiaries
Notes to the consolidated financial statements (continued)
Capital adequacy requirements
The Company is subject to the capital adequacy requirements set by the
Reserve Bank of India, which stipulate a minimum ratio of capital to risk
adjusted assets and off-balance sheet items of 9% to be maintained. The capital
adequacy ratio of the Company calculated in accordance with the Reserve Bank of
India guidelines at March 31, 2004, was 10.36%.
For and on behalf of the Board
K.V. KAMATH
Managing Director &
Chief Executive Officer
KALPANA MORPARIA
Deputy Managing Director
JYOTIN MEHTA N. S. KANNAN G.VENKATAKRISHNAN
General Manager & Chief Financial Officer General Manager
Company Secretary & Treasurer Accounting & Taxation Group
F-57
EXHIBIT INDEX
Exhibit No. Description of Document
----------- -----------------------
1.1 ICICI Bank Memorandum of Association, as amended.
1.2 ICICI Bank Articles of Association, as amended (incorporated by
reference to ICICI Bank's Annual Report on Form 20-F for the
year ended March 31, 2003 filed on September 30, 2003).
2.1 Deposit Agreement among ICICI Bank, Deutsche Bank and the
holders from time to time of American Depositary Receipts issued
thereunder (including as an exhibit, the form of American
Depositary Receipt) (incorporated herein by reference to ICICI
Bank's Registration Statement on Form F-1 (File No. 333-30132)).
2.2 Letter Agreements dated February 19, 2002 and April 1, 2002
amending and supplementing the Deposit Agreement (incorporated
herein by reference to ICICI Bank's Annual Report on Form 20-F
for the year ended March 31, 2002 filed on September 30, 2002).
2.3 ICICI Bank's Specimen Certificate for Equity Shares
(incorporated herein by reference to ICICI Bank's Registration
Statement on Form F-1 (File No. 333-30132)).
4.1 ICICI Bank's Employee Stock Option Plan, as amended.
4.2 ICICI Infotech Employee Stock Option Plan (incorporated herein
by reference to Exhibit 4.2 to ICICI Bank's Annual Report on Form
20-F for the year ended March 31, 2002 filed on September 30,
2002).
4.3 ICICI Bank's Early Retirement Option Plan (incorporated herein
by reference to Exhibit 4.4 to ICICI Bank's Annual Report on
Form 20-F for the year ended March 31, 2003 filed on September
30, 2003).
4.4 Scheme of Amalgamation of ICICI, ICICI Personal Financial
Services, ICICI Capital Services with ICICI Bank (incorporated
herein by reference to Exhibit 4.5 to ICICI Bank's Annual Report
on Form 20-F for the year ended March 31, 2002 filed on September
30, 2002).
4.5 Letter from the Reserve Bank of India to ICICI Bank dated April
26, 2002 approving the Scheme of Amalgamation of ICICI, ICICI
Personal Financial Services, ICICI Capital Services with ICICI
Bank (incorporated herein by reference to Exhibit 4.3 to ICICI
Bank's Annual Report on Form 20-F for the year ended March 31,
2001 filed on September 28, 2001).
210
8.1 List of Subsidiaries (included under "Business-Subsidiaries and
Affiliates" herein).
11.1 Code of Business Conduct and Ethics.
12.1 Certification of the principal executive officer of the Company
required by Rule 13a-14(a) of the Securities and Exchange Act of
1934, as amended.
12.2 Certification of the principal financial officer of the Company
required by Rule 13a-14(a) of the Securities and Exchange Act of
1934, as amended.
13 Certification required by Rule 13a-14(b) of the Securities and
Exchange Act of 1934, as amended and Section 1350 of Chapter 63
of Title 18 of the United States Code.
211
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
For ICICI BANK LIMITED
By: /s/ Jyotin Mehta
-----------------------------
Name: Mr. Jyotin Mehta
Title: General Manager and Company
Secretary.
Place: Mumbai
Date: September 29, 2004