Dissertation Final

A DISSERTATION
ON
A Study of Credit Risk Assessment of ICICI

Bank Ltd.
Submitted in partial fulfillment for the award of Master of
Business Administration 2016-18
Submitted to: Submitted by:

Prof. Ashish Bajpai Nimisha Maurya
Professor MBA (IB) 2nd Sem
IM BHU Roll No. – 1642BIB021
Enrolment No. 335401
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DECLARATION
I the undersigned solemnly declare that the report of the dissertation work for the course
entitled “A Study of Credit Risk Assessment of ICICI Bank Ltd.” is based on my own work
carried out during the course of MBA (IB) 4th under the supervision of Professor Ashish Bajpai.
I assert that the statements made and the conclusions drawn are an outcome of the project work.
I further declare to the best of my knowledge and belief that the project report does not contain
any part of any work which has been submitted for the award of any other
degree/diploma/certificate in this University or any other University.
(Signature of student)
Nimisha Muarya
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CERTIFICATE BY GUIDE/SUPERVISOR
This is to certify that the dissertation work done on “A Study of Credit Risk Assessment of
ICICI Bank Ltd” is a bona fide work carried out by Nimisha Maurya under my supervision and
guidance. The project report is submitted towards the project of course of Dissertation for
fulfillment of the two year, full time Master of Business Administration (International
Business) Programme. This work has not been submitted anywhere else for any other
degree/diploma.
Prof. Ashish Bajpai

Institute of Management Studies,
Banaras Hindu University
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ACKNOWLEDGEMENT
I would like to acknowledge IM BHU for giving me this opportunity to get an insight into the
real world issues and cases by means of this project. I would like to extend my heartfelt
gratitude towards mentor for his guidance, right from the initiation to the completion of the
project, for inspiring us to learn new ways to use MS-Excel which will help in analysis of data
and making charts. The valuable inputs and technical details helped us to get the core of the
course.
Thanking you.
Nimisha Maurya
MBA-IB
2016-2018
IMS BHU
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CONTENT-
1. Introduction………………………………………………………....….6
2. Objective and Significance………………………………………...…..7
3. Indian Banking Industry……………………………………………….8
4. Company profile……………………………………………….……..19
5. Literature review……………………………………………..………21
6. Theoretical background of credit risk management………………….23
7. Risk management in ICICI Bank………………………………….…29
8. Research Methodology……………………………………………….42
9. Data Analysis & interpretation………………………………………43
10.Findings & Recommendation ……………………………………….50
11.Conclusion………………………………………………………..….51
12.References …………………………………………………………..52
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INTRODUCTION
Risk is the fundamental element that drives financial behavior. Financial institutions, should
manage the risk efficiently to survive in the highly uncertain world. The future of banking will
undoubtedly rest on risk management dynamics. Only those banks that have efficient risk
management system will survive in the market in the long run. Credit risk is the oldest and
biggest risk that a bank, by virtue of its very nature of business, inherits. This has, however,
acquired a greater significance in the recent past for various reasons. Foremost among them is
the economic liberalization across the globe. India is on exception to this swing towards
market-driven economy. Better credit portfolio diversification enhances the prospects of the
reduced concentration credit risk profile and non-performing assets of banks.
For banks and financial institutions, credit risk had been an essential factor that needed to be
managed well. Credit risk was the possibility that a borrower of counter party would fail to
meet its obligations in accordance with agreed terms. Credit risk; therefore arise from the
bank’s dealings with or lending to corporate, individuals, and other banks or financial
institutions.
Credit risk had been the oldest and biggest risk that bank, by virtue of its very nature of
business, inherited. Currently in India there were many banks in operation. I selected ICICI
bank to examine the impact level of credit risk management towards the profitability of bank.
To examine its impact level, there is multiple regression models by taking 10 years return on
asset (ROA), non-performing asset (NPA) and capital adequacy ratio (CAR). Data has been
collected from RBI annual report and ICICI annual report for regression purpose.
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OBJECTIVE AND SIGNIFICANCE
STATEMENT OF THE PROBLEM-
A major part of the work was to ascertain as to what extent bank could manage their credit
risks, what tools or techniques were at their disposal and to what extent their performance could
be augmented by proper credit risk management policies and strategies.
OBJECTIVE-
1. To understand the Credit Risk Management of ICICI Bank

2. To analyze the relationship between credit risk management and bank efficiency.
3. To study influence of credit risk management on the bank performance in terms of bank
profitability.
SIGNIFICANCE OF STUDY-
On making the review of the previously conducted studies, it is identified that credit risk
management should be at the centre of banks’ operations in order to maintain financial
sustainability and reaching more clients. It is revealed from the literature that majority of the
studies on the area focused on developing the conceptual framework of credit risk management.
However some of the researches have also been conducted on identifying the influence of credit
risk management on banks but very few researches focused on exploring the relationship
between credit risk management and efficiency in banks. Moreover most of these studies have
been conducted in other parts of the globe. This creates a gap and opportunity to explore this
untapped area of research. Thus the present study aims at addressing this gap and understanding
the impact of credit risk management on efficiency of banks. The proposed paper will assess
the intricacies of credit risk management in banking sector in general and its relation to the
bank performance.
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INDIAN BANKING INDUSTRY
History:
Banking in India has its origin as carry as the Vedic period. It is believed that the transition
from money lending to banking must have occurred even before Manu, the great Hindu jurist,
who has devoted a section of his work to deposits and advances and laid down rules relating to
the interest. During the mogul period, the indigenous bankers played a very important role in
lending money and financing foreign trade and commerce. During the days of East India
Company, it was to turn of the agency house stop carry on the banking business. The general
bank of India was the first joint stock bank to be established in the year 1786.The others which
followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported
to have continued till1906, while the other two failed in the meantime. In the first half of the
19th Century the East India Company established three banks; The Bank of Bengal in 1809,
The Bank of Bombay in 1840 and The Bank of Madras in 1843.These three banks also known
as presidency banks and were independent units and functioned well. These three banks were
amalgamated in 1920 and The Imperial Bank of India was established on the 27thJan 1921,
with the passing of the SBI Act in 1955, the undertaking of The Imperial Bank of India was
taken over by the newly constituted SBI. The Reserve Bank which is the Central Bank was
created in 1935 by passing of RBI Act 1934, in the wake of swadeshi movement, a number of
banks with Indian Management were established in the country namely Punjab National Bank
Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, The Bank of Baroda Ltd, The
Central Bank of India Ltd .On July 19th 1969, 14 Major Banks of the country were nationalized
and in 15th April 1980 six more commercial private sector banks were also taken over by the
government. The Indian Banking industry, which is governed by the Banking Regulation Act
of India 1949, can be broadly classified into two major categories, non-scheduled banks and
scheduled banks. Scheduled Banks comprise commercial banks and the co-operative banks.
The first phase of financial reforms resulted in the nationalization of 14 major banks in1969
and resulted in a shift from class banking to mass banking. This in turn resulted in the
significant growth in the geographical coverage of banks. Every bank had to earmark a min
percentage of their loan portfolio to sectors identified as “priority sectors” the manufacturing
sector also grew during the 1970’s in protected environments and the banking sector was a
critical source. The next wave of reforms saw the nationalization of6 more commercial banks
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in 1980 since then the number of scheduled commercial banks increased four- fold and the
number of bank branches increased to eight fold. After the second phase of financial sector
reforms and liberalization of the sector in the early nineties. The PSB’s found it extremely
difficult to complete with the new private sector banks and the foreign banks. The new private
sector first made their appearance after the guidelines permitting them were issued in January
1993.
The Indian Banking System: Banking in our country is already witnessing the sea changes as
the banking sector seeks new technology and its applications. The best port is that the benefits
are beginning to reach the masses. Earlier this domain was the preserve of very few
organizations. Foreign banks with heavy investments in technology started giving some “Out
of the world “customer services. But, such services were available only to selected few- the
very large account holders. Then came the liberalization and with it a multitude of private
banks, a large segment of the urban population now requires minimal time and space for its
banking needs.
Automated teller machines or popularly known as ATM are the three alphabets that have
changed the concept of banking like nothing before. Instead of tellers handling your own cash,
today there are efficient machines that don’t talk but just dispense cash. Under the Reserve
Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled banks. The
scheduled banks are those, which are entered in the Second Schedule of RBI Act, 1934. Such
banks are those, which have paid- up capital and reserves of an aggregate value of not less than
Rs.5 lacs and which satisfy RBI that their affairs are carried out in the interest of their
depositors. All commercial banks Indian and Foreign, regional rural banks and state co-
operative banks are Scheduled banks. Nonscheduled banks are those, which have not been
included in the Second Schedule of the RBI Act, 1934.The organized banking system in India
can be broadly classified into three categories: (I) Commercial Banks (ii) Regional Rural Banks
and (iii) Co-operative banks. The Reserve Bank of India is the supreme monetary and banking
authority in the country and has the responsibility to control the banking system in the country.
It keeps the reserves of all commercial banks and hence is known as the “Reserve Bank”.
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STRUCTURE
The Reserve Bank of India, the nation’s central bank, began operations on April 01, 1935. It
was established with the objective of ensuring monetary stability and operating the currency
and credit system of the country to its advantage.
In India, the banks are being segregated in different groups. Each group has their own benefits,
own dedicated target markets, limitations in operating in India. The commercial banking
structure in India consists of Scheduled Commercial Banks and Unscheduled Banks. Scheduled
commercial Banks constitute those banks which have been included in the Second Schedule of
Reserve Bank of India (RBI) Act, 1934. For the purpose of assessment of performance of
banks, the Reserve Bank of India categorise them as public sector banks, old private sector
banks, new private sector banks and foreign banks.
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IMPORTANCE OF BANKING SECTOR IN A GROWING ECONOMY
In the recent times when the service industry is attaining greater importance compared to
manufacturing industry, banking has evolved as a prime sector providing financial services to
growing needs of the economy.
Banking industry has undergone a paradigm shift from providing ordinary banking services in
the past to providing such complicated and crucial services like, merchant banking, housing
finance, bill discounting etc. This sector has become more active with the entry of new players
like private and foreign banks. It has also evolved as a prime builder of the economy by
understanding the needs of the same and encouraging the development by way of giving loans,
providing infrastructure facilities and financing activities for the promotion of entrepreneurs
and other business establishments.
For a fast developing economy like ours, presence of a sound financial system to mobilize and
allocate savings of the public towards productive activities is necessary. Commercial banks
play a crucial role in this regard.
The Banking sector in recent years has incorporated new products in their businesses, which
are helpful for growth. The banks have started to provide fee-based services like, treasury
operations, managing derivatives, options and futures, acting as bankers to the industry during
the public offering, providing consultancy services, acting as an intermediary between two-
business entities etc. At the same time, the banks are reaching out to other end of customer
requirements like, insurance premium payment, tax payment etc. It has changed itself from
transaction type of banking into relationship banking, where you find friendly and quick service
suited to your needs. This is possible with understanding the customer needs their value to the
bank, etc. This is possible with the help of well-organized staff, computer based network for
speedy transactions, products like credit card, debit card, health card, ATM etc. These are the
present trend of services. The customers at present ask for convenience of banking transactions,
like 24 hours banking, where they want to utilize the services whenever there is a need. The
relationship banking plays a major and important role in growth, because the customers now
have enough number of opportunities, and they choose according to their satisfaction of
responses and recognition they get. So the banks have to play cautiously, else they may lose
out the place in the market due to competition, where slightest of opportunities are captured
fast.
Another major role played by banks is in transnational business, transactions and networking.
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Many leading Indian banks have spread out their network to other countries, which help in
currency transfer and earn exchange over it.
These banks play a major role in commercial import and export business, between parties of
two countries. This foreign presence also helps in bringing in the international standards of
operations and ideas. The liberalization policy of 1991 has allowed many foreign banks to enter
the Indian market and establish their business. This has helped large amount of foreign capital
inflow & increase our Foreign exchange reserve.
Another emerging change happening all over the banking industry is consolidation through
mergers and acquisitions. This helps the banks in strengthening their empire and expanding
their network of business in terms of volume and effectiveness.
EMERGING CHALLENGES IN INDIAN BANKING SECTOR
In the early 1990s the Indian economy, which was hitherto protected, saw the forces of
liberalisation, privatisation and globalisation being unleashed in the business environment.
Earlier, till the nineties, the insulated economy provided comforts to public sector banks in
areas of liquidity management while in an administered interest regime the discretion of
management being limited, the risk parameters in these spheres were hazy and not quantifiable.
Unfortunately the public sector banks, which had a useful role to play earlier on, faced
deteriorating performance during that period. In fact, the nationalised sector had outlived its
utility. The public sector banks became burdened with unwelcome legacies; customer service
faced casualty; need for computerisation along with networking among the vast branch network
was urgently felt. At the backdrop of all these, the first Narasimham Committee on Financial
Sector Reforms put forward its recommendations. These recommendations have given public
sector banks a new lease of life.
Contemporary to all these developments, the Indian Banking sector saw the advent of a new
generation of banks – the private sector banks. The private banking in that context was viewed
as a brand new approach as these banks were able to bypass the structural and other
shortcomings of the public sector. A few of the new ones that were promoted by the institutions
such as the IDBI and ICICI did establish themselves (although their size and scale of business
operations varied) and survived the market upheavals of the 1990. Apart from other factors, the
professional approach of some of the new generation private sector banks helped them stay
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clear of the pitfalls associated with public sector banks.
However, in less than a decade after the advent of these new generation banks and with the
initiation of financial sector reforms, commercial banks (even successful ones) are being forced
to change organizationally. These changes are deemed necessary in the light of the increased
competition in the sector – not 105 only among domestic commercial banks and non-banking
financial companies but also from the foreign counterparts having operational presence in
India.
Moreover, in view of increased competition, the structure of Indian banking system is expected
to undergo a transformation and the main drivers of which will be consolidation, convergence,
and technology (Kamath, Kohli, Shenoy, Kumar, Nayak & Kuppuswamy, 2003). The changes
in structure would also have its impact on the banking strategy and the focus of the banks would
be to reduce overcapacity in the Indian banking system through consolidation. Apart from
consolidation in the banking sector, banks are expected to grow out of their narrow focus on
banking services to become financial service providers – offering a variety of services under
‘one-roof’. Thus, the one-stop-shop approach would enable them to provide, besides banking
services, a host of other financial products, both to the retail as well as corporate customers.
CURRENT SCENERIO OF BANKING SECTOR
As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and
well-regulated. The financial and economic conditions in the country are far superior to any
other country in the world. Credit, market and liquidity risk studies suggest that Indian banks
are generally resilient and have withstood the global downturn well.
Indian banking industry has recently witnessed the roll out of innovative banking models like
payments and small finance banks. RBI’s new measures may go a long way in helping the
restructuring of the domestic banking industry.
The digital payments system in India has evolved the most among 25 countries with India’s
Immediate Payment Service (IMPS) being the only system at level 5 in the Faster Payments
Innovation Index (FPII).*
In August 2017, Global rating agency Moody's announced that its outlook for the Indian
banking system was stable. In November 2017, Global rating agency Moody's upgraded four
Indian banks from Baa3 to Baa2.
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Market Size
 The Indian banking system consists of 27 public sector banks, 26 private sector banks,
46 foreign banks, 56 regional rural banks, 1,574 urban cooperative banks and 93,913
rural cooperative banks, in addition to cooperative credit institutions. Public-sector
banks control more than 70 per cent of the banking system assets, thereby leaving a
comparatively smaller share for its private peers. Banks are also encouraging their
customers to manage their finances using mobile phones.
 As the Reserve Bank of India (RBI) allows more features such as unlimited fund
transfers between wallets and bank accounts, mobile wallets are expected to become
strong players in the financial ecosystem.
 The unorganised retail sector in India has huge untapped potential for adopting digital
mode of payments, as 63 per cent of the retailers are interested in using digital payments
like mobile and card payments, as per a report by Centre for Digital Financial Inclusion
(CDFI).
ICRA estimates that credit growth in India’s banking sector would be at 7-8 per cent in FY
2017-18.
Investments/developments
Key investments and developments in India’s banking industry include:
 The bank recapitalisation plan by Government of India is expected to push credit
growth in the country to 15 per cent and as a result help the GDP grow by 7 per cent in
FY19. ^
 Public sector banks are lining up to raise funds via qualified institutional placements
(QIP), backed by better investor sentiment after the Government of India's bank
recapitalisation plan and an upgrade in India's sovereign rating by Moody's Investor
Service.
 The RBI amends statutes thereby allowing lenders to invest in real estate investment
trusts (REITs) and infrastructure investment trusts (InvITs) not exceeding 10 per cent
of the unit capital of such instruments.
Government Initiatives
 The Government of India is planning to introduce a two percentage point discount in
the Goods and Services Tax (GST) on business-to-consumer (B2C) transactions made
via digital payments.
 A new portal named 'Udyami Mitra' has been launched by the Small Industries
Development Bank of India (SIDBI) with the aim of improving credit availability to
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Micro, Small and Medium Enterprises' (MSMEs) in the country.
 Mr Arun Jaitley, Minister of Finance, Government of India, introduced 'The Banking
Regulation (Amendment) Bill,2017', which will replace the Banking Regulation
(Amendment) Ordinance, 2017, to allow the Reserve Bank of India (RBI) to guide
banks for resolving the problems of stressed assets.
 Under the Union Budget 2018-19, the government has allocated Rs 3 trillion
(US$ 46.34 billion) towards the Mudra Scheme and Rs 3,794 crore (US$ 586.04
million) towards credit support, capital and interest subsidy to MSMEs.
The government and the regulator have undertaken several measures to strengthen the Indian
banking sector.
 A two-year plan to strengthen the public sector banks through reforms and capital
infusion of Rs 2.11 lakh crore (US$ 32.5 billion), has been unveiled by the Government
of India that will enable these banks to play a much larger role in the financial system
and give a boost to the MSME sector. In this regard, the Lok Sabha has approved
recapitalisation bonds worth Rs 80,000 crore (US$ 12.62 billion) for public sector
banks, which will be accompanied by a series of reforms, according to Mr Arun Jaitley,
Minister of Finance, Government of India.
 The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill has been
passed by Rajya Sabha and is expected to strengthen the banking sector.
INDIAN BANKING- THE FUTURE AHEAD
India is well positioned to become the fourth-largest economy in the world by 2025 with a GDP
growth rate of 7 - 8 % a year1. This robust economic growth would be possible if the banking
sector is able to adequately and efficiently meet the needs of a growing economy. Moreover,
the Indian Economic Environment has witnessed path breaking reform measures initiated by
the Government (Murty, 2001) since early 1990s. As the socio economic development of a
country depends on how strong the banking sector is and vice versa, reforms measures were
also targeted towards the financial sector. In fact, the banking sector – the dominating segment
of any Financial System – affects the economic performance of a country and there exist a
causal link between the banking sector and the real sector (Yuncu, Akdeniz & Aydogan, 2008).
The causal link is, however, quite significant. Thus, the Indian banking system too, has been
acting as an important agent of economic growth and intermingles with different segment of
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the financial sector. Therefore, it can be anticipated that in the light of the present economic
situation and its increased industrial financing requirements, the Indian banking system will
further grow in size and complexity while acting as a change agent (Samal, 2001). However,
as banks grow in size and complexity, they now have to function increasingly under
competitive pressures.
Furthermore, with economic reform initiatives undertaken by the Government since early
1990s and subsequent implementation of wide range of financial sector reforms, Indian
banking has also undergone complete metamorphosis. All these have brought in a sea-change
in the operating environment of the banks (Singh, 2001). Moreover, increasing emphasis on
globalisation of the Indian economy has opened up new avenues and challenges for Indian
banks but at the same time profit margin is reduced. In view of these developments, Indian
banks are subjected to tremendous pressures for enhancing profitability to sustain competition
in the market. These pressures may emanate from within the banking system as well as from
non-banking institutions because the product boundaries have blurred, the number of players
in the sector has increased and more importantly there has been increasing participation of
shareholders even in case of public sector banks. Thus, all these factors are mounting pressures
on the performance of banks and in their quest to remain competitive, Indian banks are now
more concerned for enhanced profitability and they have become even more accountable to
their stakeholders.
INDIAN BANKS AND FOCUS AREA
Financial sector reforms and liberalisation of prudential regulations have thrown in a lot of
opportunities for Indian bank to grow and diversify their areas of business operations. There is
no doubt that deregulation has opened up new vistas for banks to augment revenues but it has
entailed greater competition and consequently greater risks and a chain of challenges. These
challenges emerged as a result of emergence of new banks, new financial institutions, new
instruments and new opportunities in the environment. Moreover, globalisation has ushered in
restructuring of the banking and financial sector through a series of mergers and amalgamations
and eventually brought in convergence of 107 different activities and businesses in the banking
sector (Deshpandey, 2001). With globalisation, newer technologies and techniques in areas like
fund management and security creation has been introduced. Also innovative products which
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are tailor-made to meet the varied requirements of customers are introduced in the market to
cater the needs of the customers in a better way. Thus, today, banks are subjected to cut-throat
competition and in order to survive, Indian banks need to be proactive in meeting these
emerging challenges. Moreover, competition has resulted in extending the frontiers of banking
activities, which calls for understanding and upgradation of skills in various areas and more
importantly in the area of risk management. Although the Indian banking industry is one of the
best in Asia in terms of efficiency (Shen, Liao & Weyman-Jones, 2009), the industry has to go
a long to compete with other nonAsian banks. Therefore, the following are the areas on which
banks need to focus for their sustenance –
1. Capital Adequacy Norms
2. Product Innovation
3. Application of Information Technology in Service Delivery Process
4. Risk Management
5. Risk-based Business Segmentation and Use of Technology
6. Development of Knowledge and Skills of its Human Resources
7. Enhancing Corporate Governance
8. Customer Relationship Management
9. Increasing Profit and Customer Orientation
10. Need for Branch Rationalisation
11. Need for Greater Prudence
12. Asset Liability Management
13. Brand Building and Management
14. Transparency
15. Enhancing Shareholders’ Value
16. Financial Inclusion
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COMPANY PROFILE
ICICI BANK
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution,
and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46%
through a public offering of shares in India in fiscal 1998, an equity offering in the form of
ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited
in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to
institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative
of the World Bank, the Government of India and representatives of Indian industry. The
principal objective was to create a development financial institution for providing medium-
term and long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial institution offering
only project finance to a diversified financial services group offering a wide variety of products
and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank.
In 1999, ICICI become the first Indian company and the first bank or financial institution from
non-Japan Asia to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of the emerging
competitive scenario in the Indian banking industry, and the move towards universal banking,
the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with
ICICI Bank would be the optimal strategic alternative for both entities, and would create the
optimal legal structure for the ICICI group's universal banking strategy. The merger would
enhance value for ICICI shareholders through the merged entity's access to low-cost deposits,
greater opportunities for earning fee-based income and the ability to participate in the payments
system and provide transaction-banking services. The merger would enhance value for ICICI
Bank shareholders through a large capital base and scale of operations, seamless access to
ICICI's strong corporate relationships built up over five decades, entry into new business
segments, higher market share in various business segments, particularly fee-based services,
and access to the vast talent pool of ICICI and its subsidiaries.
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In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of
ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial
Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was
approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of
Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the
Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing
and banking operations, both wholesale and retail, have been integrated in a single entity.
ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and
employees.
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LITRATURE REVIEW
Within the last few years, a number of studies had provided the discipline into the practice of
credit risk management within banking sector. An insight of related studies could be as follows:
Private sector banks were more serious to implement effective credit risk management practice
than state owned banks. A study conducted by Kuo and Enders (2004) of credit risk
management policies for state banks in China and found that mushrooming of the financial
market; the state owned commercial banks in China were faced with the unprecedented
challenges and tough for them to compete with foreign bank unless they could make some
thoughtful change. In this thoughtful change, the reform of credit risk management was a major
step that determined whether the state owned commercial banks in China would survive the
challenges or not.
Felix and Claudine (2008) investigated the relationship between bank performance and credit
risk management. It could be inferred from their findings that return on equity (ROE) and return
on assets (ROA) both measuring profitability were inversely related to the ratio of non-
performing loan to total loan of financial institutions thereby leading to a decline in
profitability.
Ahmad and Ariff (2007) examined the key determinants of credit risk of commercial banks on
emerging economy banking systems compared with the developed economies. The study found
that regulation was important for banking systems that offered multi-products and services;
management quality is critical in the cases of loan-dominant banks in emerging economies. An
increase in loan loss provision was also considered to be a significant determinant of potential
credit risk.
Ghosh and Das (2005) focused on whether, and to what extent, governments should impose
capital adequacy requirements on banks, or alternately, whether market forces could also
ensure the stability of banking systems. The study contributed to this debate by showing how
market forces might motivate banks to select high capital adequacy ratios as a means of
lowering their borrowing costs. Empirical tests for the Indian public sector banks during the
1990s demonstrate that better capitalized banks experienced lower borrowing costs. These
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findings suggested that ongoing reform efforts at the international level should primarily focus
on increasing transparency and strengthening competition among the banks.
Thiagarajan et al. (2011) analyzed the role of market discipline on the behavior of commercial
banks with respect to their capital adequacy. The study showed that the Capital Adequacy Ratio
(CAR) in the Indian commercial banking sector showed that the commercial banks were well
capitalized and the ratio was well over the regulatory minimum requirement. The private sector
banks showed a higher percentage of tier-I capital over the public sector banks. However the
public sector banks showed a higher level of tier-II capital. Although the full implementation
of Basel II accord by the regulatory authority (RBI) might have influenced the level of capital
adequacy in the banking sector. The study indicated that market forces influence the bank’s
behavior to keep their capital adequacy well above the regulatory norms. The NonPerforming
Assets significantly influenced the cost of deposits for both public and private sector banks.
The return on equity had a significant positive influence on the cost of deposits for private
sector banks. The public sector banks could reduce the cost of deposits by increasing their tier-
I capital. Based upon literature review, this research paper analyzed the performance of private
sector and public sector banks undertaken for the study.
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THEORETICAL BACKGROUND OF CREDIT
RISK MANAGEMENT
CONCEPT OF CREDIT RISK MANAGEMENT:

Credit Risk Management is very important area for the banking sector and there are wide
prospects of growth. Banks and other financial institutions are often faced with risks that are
mostly of financial in nature. Management of risk has been very important component of
business plan for the banks and an undercurrent of risk mitigation and planning has always
been part of the banking business.
Risk management plays a vital role in a bank‟s credit management. Banking professionals have
to maintain the balance between the risks and the returns. For a large customer base banks need
to have a variety of loan products that are reasonable enough. If the interest rates in loan
products are too low, the bank will suffer from losses.
There have been conscious efforts in minimizing the risk without affecting the business
opportunities since the early days of banking. With the increasing volume of business and
complexity in financial transactions, the risk management also has increased. Risk management
is relatively easy in stable environments and under predictable circumstances of interest rates.
However, with increasing volatility in the markets has made risk management more
complex.23 Giving loans is risky affair for bank sometimes; Banks are constantly faced with
risks. There are certain risks in the process of granting loans to certain clients. There can be
more risk involved if the loan is extended to unworthy debtors. Certain risks may also come
when banks offer securities and other forms of investments. Effective Credit Risk Management
is vital for success of any bank, as banks are operating with a low margin compared to other
business. They should strike a 106 proper balance between profitability and liquidity and
should always be careful about default profitability and credit value at risk.
CREDIT RISK RATING:
Credit risk rating is a rating assigned to borrowers, based on an analysis of their ability and
willingness to repay the loan. Under the IRB (Internal Rating Base) approach, banks will be
allowed to use their internal credit risk rating system for setting capital charges. The IRB
approach provides similar treatment for corporate bank and a separate frame-work for retail
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and project finance.
IRB approach is one of the most innovative aspects to calculate credit risk under the new
accord. According to Basel-II norms, credit risk is computed in two ways under IRB approach,
one is the Foundation approach while the other is the Advance approach.
The foundation approach is relatively a fundamental approach. In this, the banks are allowed
to develop their own model for estimating the probability of default for individual client or
group of clients. The advanced approach allows the banks to develop their own model to
quantity required capital for credit risk.
BASEL–II (Accord):
Basel-I was very simple as Basel-II is complex. Basel-II Accord to be adopted widely and
quickly. The Basel-I Accord is considered as “One Size Fits All”, which needed to be upgraded
as each bank has its own way in measuring, managing and mitigating risk.
Basel-I norms deal only with credit risk. So, it did not discriminate between different levels of
risk. As a result a loan to an established corporate was deemed as risky as a loan to a new
business. The Basel-II accord proposes getting rid of the old risk weighted categories that
treated all corporate borrowers the same replacing categories into which borrowers would be
assigned on that credit system.
This accord is based on three mutually reinforcing pillars, which together contribute to the
safety of the financial system.
First Pillar : Minimum Capital Requirement
Second Pillar : Supervisory Review Process
Third Pillar : Market Discipline
The new Basel accord is a set of recommendation especially in terms of risk management. This
will help in better pricing of loans in alignment with their actual risk. The customer with high
credit worthiness will be benefited and will get loans at cheaper interest rates. Higher risk
sensitivity of the norms provides no incentive to lend to borrower with waning credit quality.
It guides and show the way of credit management to the banking system.
Its implementation will lead to more efficient loan pricing which will reflect the risks and the
costs involved. So, there would be a shift towards higher quality borrowers over a period of
time and the risk of the overall portfolio should decrease.
It is obvious that Indian banks have enjoyed the benefit of implementing Basel-I norms in the
last period. Basel-II norms will also work for the strengthening of Indian banks in the fight
with risk management in the coming years.
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AN NPA CONCEPT:
The banking system has always played an important role in the growth and development of the
economy and therefore countries with a sound banking system are said to be economically
stronger. The failure of the banking sectors adversely affects other sectors in the economy. Non-
Performing Assets (NPA) is one of the major concerns for any bank. NPA is the parameter to
judge bank’s performance.
NPAs adversely affect lending activity of banks as non-recovery of loan installments as also
interest on the loan portfolio. The efficient management of loan accounts is the major concern
for any bank. If proper evaluation is done at 108 the time of advancing loans then the NPAs
can be reduced. NPAs also hurt the profitability of bank.
An asset, including a leased asset, becomes nonperforming when it ceases to generate income
for the bank. A non – performing asset (NPA) is a loan or an advance where;
1. Interest and/ or installment of principal remain overdue for a period of more
than 90 days in respect of a term loan,
2. The account remains „out of order‟, in respect of an Overdraft/Cash Credit
(OD/CC),
3. The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
4. The installment of principal or interest there on remains overdue for two crop
seasons for short duration crops,
5. The installment of principal or interest there on remains overdue for one crop
season for long duration crops,
6. The amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitization transaction undertaken in terms of guidelines on
securitization dated February 1, 2006.
7. In respect of derivative transactions, the overdue receivables representing
positive mark-to-market value of a derivative contract, if these remain unpaid
for a period of 90 days from the specified due date for payment.
Banks should, classify an account as NPA only if the interest due and charged during any
quarter is not serviced fully within 90 days from the end of the quarter.
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ROA CONCEPT
Return on Assets (ROA) is an indicator of how profitable a company is relative to its total
assets. ROA gives an idea as to how efficient management is at using its assets to generate
earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is
displayed as a percentage. Sometimes this is referred to as "Return on Investment". (ROI)
The formula for return on assets is:
ROA tells you what earnings were generated from invested capital (assets). ROA for public
companies can vary substantially and will be highly dependent on the industry. This is why
when using ROA as a comparative measure, it is best to compare it against a company's
previous ROA numbers or the ROA of a similar company. The assets of the company are
comprised of both debt and equity. Both of these types of financing are used to fund the
operations of the company. The ROA figure gives investors an idea of how effectively the
company is converting the money it has to invest into net income. The higher the ROA number,
the better, because the company is earning more money on less investment.
CAPITAL ADEQUACY RATIO CONCEPT

Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted
assets and current liabilities. It is decided by central banks and bank regulators to prevent
commercial banks from taking excess leverage and becoming insolvent in the process.
The risk weighted assets take into account credit risk, market risk and operational risk.
The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI
norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian
public sector banks are emphasized to maintain a CAR of 12%.
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EPS
EPS is the portion of a company’s profit that is allocated to every individual share of the stock.
It is a term that is of much importance to investors and people who trade in the stock market.
The higher the earnings per share of a company, the better is its profitability. While calculating
the EPS, it is advisable to use the weighted ratio, as the number of shares outstanding can
change over time.
THE RBI DIRECTIVES ON ADVANCES:
1. General: The banks should charge interest on loans or advances granted by them as per
the directives issued by RBI from time to time. The interest at the specified rates shall
109 be charged at monthly rests from April 1, 2002. Interest rates shall be rounded off
to the nearest rupee.
2. 2. Benchmark Prime Lending Rate (BPLR) And Spreads: Banks are free to determine
of interest subject to BPLR and Spread guidelines on the loans above Rs.2 lakhs. This
is for operational flexibilities for the bank.
3. 3. Freedom To Fix Lending Rates: Banks are free to set their lending rates in some
categories.
4. 4. Fixed Interest Rates For Loans: Banks are free to offer all categories of loans on fixed
or floating rates, subject to conformity to Asset Liability Management (ALM)
guidelines.
5. 5. Withdrawals Against Uncleared Effects: In the nature of unsecured advances, the
banks should charge interest on such drawls as per the directive. This instruction will
not apply to the facility afforded to depositors for immediate credit.
6. 6. Loans Under Consortium Arrangement: The banks need not charge uniform rate of
interest even under a consortium arrangement.
7. 7. Zero Percent Interest Finance Schemes For Consumer Durables: These types of loan
schemes lack transparency in operation and disort pricing mechanism of loan products.
So, banks should refrain from offering these types of schemes. These products do not
give a clear picture to the customer regarding the interest rates. Banks should also not
promote such schemes by advertisement in different media.
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RBI‟S GUIDELINES ON LENDING PRACTICES BY THE BANKS:
 Application cum-acknowledgment form of banks should be comprehensive to include

rate of interest, manner of charging interest, process fees and other charges, panel
interest rates, pre-payment options, and any other matter which effects the interest of
the borrower, so that a meaningful comparison with that of other banks can be made
and informed decision can be taken by the borrower.
 Loan application form should be disposed within a reasonable period of time and state
specific time period from the date of acknowledgement, within which the decision on
loan request will be conveyed to the borrower.
 In case of rejection, specific reasons should be conveyed in writing.
 Credit limits which may be sanctioned may be mutually settled.
 Terms and conditions governing credit facilities such as margin, security should be
based on due diligence and creditworthiness of borrower.
 Lender should ensure timely disbursement of loans sanctioned.
 Lender should give notice of any change in the terms and conditions including interest
rates and service charges.
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RISK MANAGEMENT AT ICICI
As a financial intermediary, ICICI Bank is exposed to risks that are particular to its lending and
trading businesses and the environment within which it operates. ICICI Bank’s goal in risk
management is to ensure that it understands, measures and monitors the various risks that arise
and that the organization adheres strictly to the policies and procedures which are established
to address these risks.
As a financial intermediary, ICICI Bank is primarily exposed to credit risk, market risk,
liquidity risk, operational risk and legal risk. ICICI Bank has a central Risk, Compliance and
Audit Group with a mandate to identify, assess, monitor and manage all of ICICI Bank’s
principal risks in accordance with well-defined policies and procedures. The Head of the Risk,
Compliance and Audit Group reports to the Executive Director responsible for the Corporate
Center, which does not include any business groups, and is thus independent from ICICI
Bank’s business units. The Risk, Compliance and Audit Group coordinates with representatives
of the business units to implement ICICI Bank’s risk methodologies.
Committees of the board of directors have been constituted to oversee the various risk
management activities. The Audit Committee of ICICI Bank’s board of directors provides
direction to and also monitors the quality of the internal audit function. The Risk Committee
of ICICI Bank’s board of directors reviews risk management policies in relation to various
risks including portfolio, liquidity, interest rate, off-balance sheet and operational risks,
investment policies and strategy, and regulatory and compliance issues in relation thereto. The
Credit Committee of ICICI Bank’s board of directors reviews developments in key industrial
sectors and ICICI Bank’s exposure to these sectors. The Asset Liability Management
Committee of ICICI Bank’s board of directors is responsible for managing the balance sheet
and reviewing the asset-liability position to manage ICICI Bank’s market risk exposure. The
Agriculture & Small Enterprises Business Committee of ICICI Bank’s board of directors,
which was constituted in June 2003 but has not held any meetings to date, will, in addition to
reviewing ICICI Bank’s strategy for small enterprises and agri-business, also review the quality
of the agricultural lending and small enterprises finance credit portfolio. For a discussion of
these and other committees, see ''Management''.
As shown in the following chart, the Risk, Compliance and Audit Group is organized into six
subgroups: Credit Risk Management, Market Risk Management, Analytics, Internal Audit,
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Retail Risk Management and Credit Policies and Reserve Bank of India Inspection. The
Analytics Unit develops proprietary quantitative techniques and models for risk measurement.
MD & CEO and Audit Risk Credit

Agriculture & small business enterprises
Committee
Executive Director & Head, Risk, Compliance

Corporate Centre and Audit Group
Internal Audit
Credit Risk Market Risk Reatail Risk Credit Policy &
Analytics (Including
Managemen Management Management RBI Inspection
subsdisries)
The Risk, Compliance and Audit Group is also responsible for assessing the risks pertaining to
international business, including review of credit policies and setting sovereign and
counterparty limits.
Credit Risk
In our lending operations, we are principally exposed to credit risk. Credit risk is the risk of
loss that may occur from the failure of any party to abide by the terms and conditions of any
financial contract with us, principally the failure to make required payments on loans due to
us. We currently measure, monitor and manage credit risk for each borrower and also at the
portfolio level. We have a structured and standardized credit approval process, which includes
a well-established procedure of comprehensive credit appraisal.
Credit Risk Assessment Procedures for Corporate Loans
In order to assess the credit risk associated with any financing proposal, ICICI Bank assesses
a variety of risks relating to the borrower and the relevant industry. Borrower risk is evaluated
by considering:
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 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;
 The borrower's relative market position and operating efficiency; and
 The quality of management by analyzing their track record, payment record and
financial conservatism.
Industry risk is evaluated by considering:
 certain industry characteristics, such as the importance of the industry to the economy,
its growth outlook, cyclicality and government policies relating to the industry;
 the competitiveness of the industry; and
 Certain industry financials, including return on capital employed, operating margins
and earnings stability.
After conducting an analysis of a specific borrower's risk, the Credit Risk Management Group
assigns a credit rating to the borrower. ICICI Bank has a scale of 10 ratings ranging from AAA
to B and an additional default rating of D. Credit rating is a critical input for the credit approval
process. ICICI Bank determines the desired credit risk spread over its cost of funds by
considering the borrower's credit rating and the default pattern corresponding to the credit
rating. Every proposal for a financing facility is prepared by the relevant business unit and
reviewed by the appropriate industry specialists in the Credit Risk Management Group before
being submitted for approval to the appropriate approval authority. The approval process for
non-fund facilities is similar to that for fund based facilities. The credit rating for every
borrower is reviewed at least annually and is typically reviewed on a more frequent basis for
higher risk credits and large exposures. ICICI Bank also reviews the ratings of all borrowers in
a particular industry upon the occurrence of any significant event impacting that industry.
Working capital loans are generally approved for a period of 12 months. At the end of 12
months, ICICI Bank reviews the loan arrangement and the credit rating of the borrower and
takes a decision on continuation of the arrangement and changes in the loan covenants as may
be necessary.
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Credit Approval Procedures for Corporate Loans
Project Finance Procedures
ICICI Bank has a strong framework for the appraisal and execution of project finance
transactions. ICICI Bank believes that this framework creates optimal risk identification,
allocation and mitigation, and helps minimize residual risk.
The project finance approval process begins with a detailed evaluation of technical,
commercial, financial, marketing and management factors and the sponsor's financial strength
and experience.
Once this review is completed, an appraisal memorandum is prepared for credit approval
purposes. As part of the appraisal process, a risk matrix is generated, which identifies each of
the project risks, mitigating factors and residual risks associated with the project. The appraisal
memorandum analyzes the risk matrix and establishes the viability of the project. Typical key
risk mitigating factors include the commitment of stand-by funds from the sponsors to meet
any cost overruns and a conservative collateral position. After credit approval, a letter of intent
is issued to the borrower, which outlines the principal financial terms of the proposed facility,
sponsor obligations, conditions precedent to disbursement, undertakings from and covenants
on the borrower. After completion of all formalities by the borrower, a loan agreement is
entered into with the borrower.
In addition to the above, in the case of structured project finance in areas such as infrastructure
and oil, gas and petrochemicals, as a part of the due diligence process, ICICI Bank appoints
consultants, wherever considered necessary, to advise the lenders, including technical advisors,
business analysts, legal counsel and insurance consultants. These consultants are typically
internationally recognized and experienced in their respective fields. Risk mitigating factors in
these financings generally also include creation of debt service reserves and channeling project
revenues through a trust and retention account.
ICICI Bank’s project finance credits are generally fully secured and have full recourse to the
borrower. In most cases, ICICI Bank has a security interest and first lien on all the fixed assets
and a second lien on all the current assets of the borrower. Security interests typically include
property, plant and equipment as well as other tangible assets of the borrower, both present and
future.
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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
financings.
ICICI Bank has a set of distinct approval procedures to evaluate and mitigate the risks
associated with such products. These procedures include:
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• 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;
• conducting due diligence on the underlying business systems, including a detailed evaluation
of the servicing and collection procedures and the underlying contractual arrangements; and
• paying particular attention to the legal, accounting and tax issues that may impact any
structure.
ICICI Bank’s analysis enables it to identify risks in these transactions. To mitigate risks, ICICI
Bank uses various credit enhancement techniques, such as over-collateralization, cash
collateralization, creation of escrow accounts and debt service reserves and performance
guarantees. The residual risk is typically managed by complete or partial recourse to the
borrowing company whose credit risk is evaluated as described above. ICICI Bank also has a
monitoring framework to enable continuous review of the performance of such transactions.
Working Capital Finance Procedures
ICICI Bank carries out a detailed analysis of its borrowers' working capital requirements.
Credit limits are approved in accordance with the approval authorization approved by ICICI
Bank’s board of directors. Once credit limits are approved, ICICI Bank calculates the amounts
that can be lent on the basis of monthly statements provided by the borrower and the margins
stipulated. Quarterly information statements are also obtained from borrowers to monitor the
performance on a regular basis. Monthly cash flow statements are obtained where considered
necessary. Any irregularity in the conduct of the account is reported to the appropriate authority
on a monthly basis. Credit limits are reviewed on an annual basis.
Working capital facilities are primarily secured by inventories and receivables. Additionally,
in certain cases, these credit facilities are secured by personal guarantees of directors, or
subordinated security interests in the tangible assets of the borrower including plant and
machinery.
Credit Approval Authority for Corporate Loans
ICICI Bank has established four levels of credit approval authorities for its corporate banking
activities, the Credit Committee of the board of directors, the Committee of Directors, the
Committee of Executives (Credit) and the Regional Committee (Credit). The Credit Committee
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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.
Committee Members Approval Authority

Credit Committee of the Chaired by an • All approvals to companies with
board of directors independent director and rating below BB and all new (non
consisting of a majority agriculture) companies rated BB,
of independent directors pursuant to ICICI Bank’s internal
credit rating policy.
• All approvals (in practice,
generally above the prescribed
authority of the Committee of
Directors).
• 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
Director and Chief authority of the Committee of
Executive Officer and Executives (Credit) subject to the
consisting of all whole following total exposure limits:
time directors. • Up to 10.0% of ICICI Bank's
capital funds(1) to a single entity;
and
• Up to 30.0% of ICICI Bank's
capital funds (1) to a single group of
companies.
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Committee of Executives Consisting of heads of Approvals linked to the rating,
(Credit) client relationship tenure and security of the exposure,
groups, which are above the authority of the
retail assets, treasury, Regional Committee (Credit)
international banking, subject to the following indicative
structured products and exposure limits:
portfolio management, • From up to Rs. 5.0 billion (US$
project finance with the 105 million) for a one year
Chief Financial Officer secured exposure to up to Rs. 0.38
and billion (US$ 8 million) for a
the Head-Risk, secured exposure greater than ten
Compliance years for each company with
and Audit Group as an internal credit rating of AA- and
permanent invitees. above;
• From up to Rs. 5.0 billion (US$
105 million) for a one year
unsecured exposure to up to Rs. 0.27
billion (US$ 6 million) for
an unsecured exposure greater than
ten years for each company
with an internal credit rating of AA-
and above
• From up to Rs. 1.6 billion (US$ 34
million) for a one year
secured exposure to up to Rs. 0.13
billion (US$ 3 million) for a
ten year secured exposure for each
company with an internal
credit rating of A+ and below;
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a ten year unsecured exposure for
each company with an
internal credit rating of A+ and
below;
Regional Committee Consisting of regional • From up to Rs. 5.0 billion (US$

(Credit) representatives of 105 million) for a one year
various secured exposure to up to Rs. 0.15
client relationship groups billion (US$ 3 million) for a
and a representative of ten year secured exposure for each
Structured Finance and company with an internal
Portfolio Management credit rating of AA- and above;
Group, with a • From up to Rs. 5.0 billion (US$
representative 105 million) for a one year
of Risk, Compliance and unsecured exposure to up to Rs. 0.11
Audit Group as a billion (US$ 2 million) for
permanent invitee. a ten year unsecured exposure for
internal credit rating of AA- and
above;
secured exposure to up to Rs. 0.06
billion (US$ 1 million) for a
ten year secured exposure for each
company with an internal
credit rating of A+ and below;
• From up to Rs. 0.64 billion (US$
13 million) for a one year
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a ten year unsecured exposure for
internal credit rating of A+ and
below
All new loans must be approved by the above committees in accordance with their respective
powers. Certain designated executives are authorized to approve:
• Ad-hoc/ additional working capital facilities not exceeding the lower of 10.0% of existing
approved facilities and Rs. 20 million (US$ 420,610);
• Temporary accommodation not exceeding the lower of 20.0% of existing approved facilities
and Rs. 20 million (US$ 420,610); and
• Facilities fully secured by deposits, cash margin, and letters of credit of approved banks or
approved sovereign debt instruments.
In addition to the above loan products, ICICI Bank’s Rural Micro Banking Group provides
loans to self-help groups, rural agencies, as well as certain categories of agricultural loans and
loans under government-sponsored schemes. These loans are typically of small amounts. The
credit approval authorization approved by the board of directors of ICICI Bank requires that
all such loans above Rs.1.5 million (US$ 31,546) be approved by the Committee of Directors
comprising all the whole time directors, while the authority to approve loans up to Rs.1.5
million (US$ 31,546) has been delegated to designated executives.
Credit Monitoring Procedures for Corporate Loans
The Credit Middle Office Group monitors compliance with the terms and conditions for credit
facilities prior to disbursement. It also reviews the completeness of documentation, creation of
security and insurance policies for assets financed. All borrower accounts are reviewed at least
once a year. Larger exposures and lower rated-borrowers are reviewed more frequently.
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Retail Loan Procedures
Our customers for retail loans are typically middle and high-income, salaried or self-employed
individuals, and, in some cases, partnerships and corporations. Except for personal loans and
credit cards, we require a contribution from the borrower and our loans are secured by the asset
financed.
Our retail credit product operations are sub-divided into various product lines. Each product
line is further sub-divided into separate sales and marketing and credit groups. The Risk,
Compliance and Audit Group, which is independent of the business groups, approves all new
retail products and product policies and credit approval authorizations. All products and
policies require the approval of the Committee of Directors comprising all the wholetime
directors. All credit approval authorizations require the approval of ICICI Bank’s board of
directors.
We have an established process for evaluating and selecting our dealers and franchisees and
there is a clear segregation between the group responsible for originating loans and the group
that approves the loans. A centralized set of risk assessment criteria has been created for retail
lending operations after approval by the Risk, Compliance and Audit Group. These criteria
vary across product segments but typically include factors such as the borrower's income, the
loan-to-value ratio and certain stability factors. The loan approval authority is delegated to
credit officers, subject to loan amount limits, which vary across different loan products. We
use Direct Marketing Agents (DMAs) for the marketing and sale of retail credit products.
Credit approval authority lies only with our credit officers.
Credit officers approve loans in compliance with the risk assessment criteria. External agencies
are used to facilitate a comprehensive due diligence process including visits to office or home
in the case of loans to individual borrowers. Before disbursements are made, the credit officer
conducts a centralized check and review of the borrower's profile.
In order to limit the scope of individual discretion in the loan assessment and approval process,
ICICI Bank has implemented a credit-scoring program for credit cards. ICICI Bank has also
implemented a credit-scoring program for certain variants within the consumer durables loan
product. The credit-scoring program is an automated credit approval system for evaluating loan
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applications by assigning a credit score to each applicant based on certain demographic
attributes like earnings stability, educational background and age. The credit score then forms
the basis of loan evaluation. Though a formal credit bureau does not as yet operate in India, we
avail the services of certain private agencies operating in India to check applications before
disbursement.
ICICI Bank has a separate retail credit team, which undertakes review and audit of credit
quality across each credit approval team. ICICI Bank has established centralized operations to
manage operating risk in the various back office processes of its retail loan business except for
a few operations which are decentralized to improve turnaround time for our customers. The
Risk, Compliance and Audit Group conducts an independent audit of processes and documents
at periodic intervals. As with our other retail credit products, ICICI Bank emphasizes
conservative credit standards, including credit scoring and strict monitoring of repayment
patterns, to optimize risks associated with credit cards.
ICICI Bank has a collections unit structured along various product lines and geographical
locations, to manage delinquency levels. The collections unit operates under the guidelines of
a standardized recovery process. ICICI Bank also makes use of external collection agents to
aid ICICI Bank in its collection efforts, including collateral repossession in accounts that are
overdue for more than 90 days. A fraud control department has been set up to manage levels
of fraud, primarily through fraud prevention in the form of forensic audits and also through
recovery of fraud losses. The fraud control department is aided by specialized agencies.
External agencies for collections are strictly governed by standardized process guidelines.
External agencies are also used to facilitate a comprehensive due diligence process including
property valuation prior to the approval of home loans and visits to home or office in the case
of loans to individual borrowers.
Small Enterprises Loan Procedures
The Small Enterprises Group finances dealers and vendors of companies by implementing
structures to enhance the base credit quality of the vendor / dealer, that involve an analysis of
the base credit quality of the vendor / dealer pool and an analysis of the linkages that exist
between the vendor / dealer and the company.
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The group is also involved in financing based on a cluster community based approach that is,
financing of small enterprises that have a homogeneous profile such as apparel manufacturers
and manufacturers of pharmaceuticals. The risk assessment of such communities involves
identification of appropriate credit norms for target market, use of scoring models for
enterprises that satisfy these norms and applying pre-determined exposure limits to enterprises
that are awarded a minimum required score in the scoring model. The assessment also involves
setting up of portfolio control norms, individual borrower approval norms and stringent exit
triggers to be followed while financing such clusters or communities.
40 | P a g e
RESEARCH METHODOLOGY:
Data Collection Source:
The study is based on secondary data. The secondary information is collected from Annual
reports of ICICI bank and RBI and different published materials vis. Books, Journals &
websites.
Hypotheses
On the basis of the objectives considered for the study, the following hypotheses are developed:
 Hypothesis 1: There is no significant relationship between Capital adequacy ratio and
net profit.
 Hypothesis 2: There is no significant relationship between NPA and net profit.
 Hypothesis 3: There is no significant relationship NPA and EPS.
EPS.
ROA. 3
 Hypothesis 6: There is no significant relationship between NPA and ROA.
Data Analysis Tool:
1. Correlation
2. Linear regression
41 | P a g e
DATA ANALYSIS AND INTERPRETATION
The study is empirical in nature based on secondary data. ICICI Bank has been selected for the
study as it is the pioneering private sector bank in India. The study was conducted for a period
of ten years from 2007-08 to 2016-17. The data of the selected bank has been taken from the
annual reports, financial statements and Basel III disclosures. For the purpose of the study the
various variables that have been taken are capital adequacy ratio, net non-performing assets
and net NPA ratio (i.e. percentage of net NPA to net advances) for studying credit risk
management. Also the variables that have been taken to study bank performance are profit
figures, earning per share (EPS) and average return on assets (ROA). For analyzing the data
Correlation has been applied to test the hypotheseS,
(In cr)
YEAR CAR (%) ROA (%) NET NPA NET PROFIT EPS (Rs)
(%) (Rs)
2008 13.97 1.03 0.88 4157.73 32.19
2009 15.53 0.99 1.04 3758.13 33.76
2010 19.41 1.1 0.9 4024.98 36.14
2011 19.54 1.26 0.11 5151.38 45.27
2012 18.52 1.36 0.73 6465.26 56.11
2013 18.74 1.7 0.77 8325.47 72.2
2014 17.7 1.78 0.97 9810.48 84.99
2015 17.02 1.86 1.61 1175.35 19.32
2016 16.64 1.49 2.67 9726.29 16.75
2017 17.39 1.1 4.89 9801.08 16.84
Table .1
The data analysis begins with the presentation of the correlation between the various elements
used in the study. The hypotheses formulated were then tested using the regression analysis.
The regression equations used for the testing the hypothesis were in the form of Y1= a + β1X1
42 | P a g e
Correlation between the elements of credit risk management and bank efficiency
Pearson’s product moment correlation was used to determine the strength of the relationship
the elements of credit risk management have with each other and with elements of the
efficiency. The results of the correlation analysis are presented in Table
NET
CAR ROA NET NPA PROFIT EPS
CAR 1
ROA 0.268869 1
NET NPA -0.1898 -0.11705 1
NET PROFIT 0.172992 0.167065 0.454693 1
EPS 0.382816 0.405124 -0.5645 0.320914 1
Table .2
It is seen from the Table 2 that the correlation between CAR and elements of bank efficiency
(i.e. profit, EPS, ROA) is positive. And the correlation between NPA and elements of efficiency
(i.e.EPS & ROA) is negative. Based on the correlation results one would expect to find positive
regression coefficients when conducting regression analysis with elements of credit risk
management as predictor variable and elements of efficiency as dependent variable.
Hypothesis Testing
Regression Test for Hypothesis H1

 Ho 1: There is no significant relationship between Capital adequacy ratio and net profit.
Ho1 hypothesizes that capital adequacy ratio does not have significant impact on net profit.
This hypothesis was tested with the help of simple regression analysis.
Regression Statistics
Multiple R 0.172992
R Square 0.029926
Adjusted R Square -0.09133
Standard Error 3195.719
ANOVA
43 | P a g e
df SS MS F Significance F
Regression 1 2520423 2520423 0.246795 0.632703
Residual 8 81700953 10212619
Total 9 84221376
Coefficients Standard Error t Stat P-value
Intercept 979.2381 10636.96 0.09206 0.928914
CAR 301.5234 606.9499 0.496785 0.632703
The R square value of 0.299 reveals that CAR explains 2.99% of variance in net profit, which
is not reasonably enough. The null hypothesis is thus accepted.

 Ho 2: There is no significant relationship between NPA and net profit.
Ho2 hypothesizes that NPA ratio does not have significant impact on net profit. This hypothesis
was tested with the help of simple regression analysis.
Multiple R 0.454692943
R Square 0.206745672
Adjusted R Square 0.107588881
ANOVA
Regression 1 17412405 17412405 2.085038 0.186744
Residual 8 66808971 8351121
Total 9 84221376
44 | P a g e
Intercept 4771.486 1367.063 3.49032 0.008195
NET NPA 1007.639 697.8271 1.443966 0.186744
From table, the R square value of 0.2067 reveals that NPA ratio explains 20% of variance in
net profit, which is a significant variance. Thus null hypothesis is rejected.

Ho 3: There is no significant relationship NPA and EPS.
Ho4 hypothesizes that NPA ratio does not have significant impact on EPS. This hypothesis was
tested with the help of simple regression analysis
Multiple R 0.564495
R Square 0.318655
ANOVA
Regression 1 1577.111 1577.111 3.741483 0.089128
Residual 8 3372.163 421.5204
Total 9 4949.274
Intercept 55.32924 9.712372 5.69678 0.000456
45 | P a g e
NET NPA -9.58973 4.957751 -1.93429 0.089128
The R square value of 0.31 reveals that NPA ratio explains 31% of variance in EPS, which is
significantly enough. The null hypothesis is thus rejected

 Ho 4: There is no significant relationship between Capital adequacy ratio and EPS.
Ho5 hypothesizes that CAR ratio does not have significant impact on EPS. This hypothesis
Multiple R 0.382816
R Square 0.146548
Observations 10
ANOVA
Regression 1 725.3084 725.3084 1.373701 0.274896
Residual 8 4223.966 527.9957
Total 9 4949.274
Intercept -47.8793 76.48288 -0.62601 0.548746
CAR 5.115 4.364148 1.17205 0.274896
The R square value of .1465 reveals that CAR explains 14.65% of variance in EPS. The null
hypothesis is thus rejected.
46 | P a g e
 Ho 5: There is no significant relationship between Capital adequacy ratio and ROA.
Ho8 hypothesizes that CAR does not have significant impact on ROA. This hypothesis was
tested with the help of simple regression analysis
Multiple R 0.268869
R Square 0.072291
Observations 10
ANOVA
Regression 1 2.004075 2.004075 0.623391 0.452554
Residual 8 25.71836 3.214796
Total 9 27.72244
Intercept 15.45991 2.578574 5.995527 0.000325
ROA 1.452881 1.840135 0.789551 0.452554
The R square value of .0.0722 reveals that CAR explains 7.22 of variance in ROA. The null
hypothesis is thus rejected.

Ho 6: NPA ratio does not significantly influence ROA
Ho9 hypothesizes that NPA ratio does not have significant impact on ROA. This hypothesis
47 | P a g e
Multiple R 0.117046
R Square 0.0137
Observations 10
ANOVA
Regression 1 0.234944 0.234944 0.111121 0.74744

Residual 8 16.91447 2.114308
Total 9 17.14941
Intercept 2.137023 2.091159 1.021932 0.336719
ROA -0.49746 1.492304 -0.33335 0.74744
The R square value of 0.0137 reveals that NPA ratio explains 1.37% of variance in ROA. The
null hypothesis is thus accepted.
48 | P a g e
FINDINGS:
1. CAR does not significantly influence net profit.

2. NPA influence Net Profit.
3. NPA significantly influence EPS.
4. CAR influence EPS
5. CAR influence ROA.
6. NPA influence ROA but not significantly.
RECOMMENDATION
Based on the findings the researcher would recommend that the banks could establish a credit
risk management team that should be responsible for the following actions that would help in
minimizing credit risk;
 Bank should initiate efforts on adopting the new technologies in order to improve
their customer service levels and provide new delivery platforms to them. The success
of these initiatives would have a bearing on their banks market position.
 Bank should participate in portfolio planning and management.
 Bank should provide training for the employee to enhance their capacity and
reviewing the adequacy of credit training across.
49 | P a g e
CONCLUSION-
This study shows that there was a significant relationship between bank performance (in
terms of return on asset) and credit risk management (in terms of nonperforming asset).
Better credit risk management results in better bank performance. Thus, it was of crucial
importance that banks practiced prudent credit risk management and safeguarding the assets
of the banks and protected the investors’ interests. The study also revealed banks with higher
profit potentials could better absorb credit losses whenever they cropped up and therefore
recorded better performances. Furthermore, the study showed that there was a direct but
inverse relationship between return on asset (ROA) and the ratio of non-performing asset
(NPA). This had led us to reject our hypothesis and conclusion that banks with higher interest
income had lower non-performing assets, hence good credit risk management strategies.
50 | P a g e
REFERENCES-
https://rbi.org.in/Scripts/AnnualReportMainDisplay.aspx
https://www.icicibank.com/aboutus/annual.page
https://books.google.co.in/books/about/Business_Statistics.html
Rajgopal S. Bank Risk Management, SBI monthly review
Basel Principles for the management of credit risk Consultive Paper issued by Basel
Committee on supervision
51 | P a g e

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A DISSERTATION

A Study of Credit Risk Assessment of ICICI

Submitted to: Submitted by:

Prof. Ashish Bajpai

STATEMENT OF THE PROBLEM-

1. To understand the Credit Risk Management of ICICI Bank

EMERGING CHALLENGES IN INDIAN BANKING SECTOR

CURRENT SCENERIO OF BANKING SECTOR

INDIAN BANKING- THE FUTURE AHEAD

INDIAN BANKS AND FOCUS AREA

CONCEPT OF CREDIT RISK MANAGEMENT:

CREDIT RISK RATING:

CAPITAL ADEQUACY RATIO CONCEPT

THE RBI DIRECTIVES ON ADVANCES:

 Application cum-acknowledgment form of banks should be comprehensive to include

MD & CEO and Audit Risk Credit

Executive Director & Head, Risk, Compliance

Corporate Finance Procedures

Working Capital Finance Procedures

Credit Approval Authority for Corporate Loans

Committee Members Approval Authority

Regional Committee Consisting of regional • From up to Rs. 5.0 billion (US$

Credit Monitoring Procedures for Corporate Loans

Small Enterprises Loan Procedures

Data Collection Source:

Data Analysis Tool:

Regression Test for Hypothesis H1

Regression 1 2520423 2520423 0.246795 0.632703

Residual 8 81700953 10212619

Coefficients Standard Error t Stat P-value

Intercept 979.2381 10636.96 0.09206 0.928914

CAR 301.5234 606.9499 0.496785 0.632703

Regression Test for Hypothesis H2

Intercept 4771.486 1367.063 3.49032 0.008195

NET NPA 1007.639 697.8271 1.443966 0.186744

Regression Test for Hypothesis H3

Regression 1 1577.111 1577.111 3.741483 0.089128

Residual 8 3372.163 421.5204

Coefficients Standard Error t Stat P-value

Intercept 55.32924 9.712372 5.69678 0.000456

Regression Test for Hypothesis H4

Regression 1 725.3084 725.3084 1.373701 0.274896

Residual 8 4223.966 527.9957

Coefficients Standard Error t Stat P-value

Intercept -47.8793 76.48288 -0.62601 0.548746

CAR 5.115 4.364148 1.17205 0.274896

Regression 1 2.004075 2.004075 0.623391 0.452554

Residual 8 25.71836 3.214796

Coefficients Standard Error t Stat P-value

Intercept 15.45991 2.578574 5.995527 0.000325

ROA 1.452881 1.840135 0.789551 0.452554

Regression Test for Hypothesis H6

Regression 1 0.234944 0.234944 0.111121 0.74744

Coefficients Standard Error t Stat P-value

Intercept 2.137023 2.091159 1.021932 0.336719

ROA -0.49746 1.492304 -0.33335 0.74744

1. CAR does not significantly influence net profit.

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