Study of NPAs at ICICI Bank

A RESEARCH PROJECT REPORT
ON
“A STUDY OF NON PERFORMING ASSETS WITH
SPECIAL REFERENCE TO ICICI BANK”
A report submitted to Mahamaya Technical
University for the partial
Fulfillment of MBA
Degree 2010-12
Submitted to: - Submitted by:-
Dr.H.P.Maheshwari ASHISH KUMAR
Director- MBA MBA – 2nd
year
Greater Noida Institute of Technology Roll.No.-1027270021
Greater Noida Institute of Technology(Management Institute) Code: 272
7, Knowledge Park-II, Greater Noida (U.P)

CERTIFICATE
This is to certify that the Research Project Report entitled “A STUDY OF NON
PERFORMING ASSETS WITH SPECIAL REFERENCE TO ICICI BANK ”, Being
submitted by ASHISH KUMAR fulfillment of the requirement of Mahamaya Technical
University is a record of an independent work done by his under my guidance and
supervision.
Dr. H.P.Maheshwari Mr.Ashish Kumar Dixit
Director-MBA Assistant Professor
Greater Noida Institute of Technology GNIT, Greater Noida
(Management Institute)-Code: 272
GREATER NOIDA INSTITUTE OF TECHNOLOGY (MBA INSTITUTE) Pg.2

DECLARATION
I ASHISH KUMAR to declare that the Research project report entitled “A
STUDY OF NON PERFORMING ASSETS WITH SPECIAL REFERENCE
TO ICICI BANK”Being submitted to the MAHAMAYA TECHNICAL
UNIVERSITY for the partial fulfillment of the requirement for the degree of
Master of Business Administration is my own endeavors and it has not been
submitted earlier to any institution/university for any degree.
Place: Greater Noida
Date: (ASHISH KUMAR)

ACKNOWLEDGEMENT
With profound veneration, first of all we recline ourselves before ALMIGHTY without
whose blessings ourselves is cipher.
It is my pleasure to be indebted to various people, who directly or indirectly contributed in
the development of this work and who influenced my thinking, behavior, and acts during the
course of study.
As a student specializing in finance, I came to know about the ground realities in topics like
Non Performing Assets with special reference to ICICI BANK. For this I am indebted to
Mr.Ashish Kumar Dixit my research project guidance & my faculty members who took
personal interest in my project and bore the associated headaches.
It would be unfair if I do not mention the name of Dr.H.P Maheshwari, Director, GNIT
(MBA INSTITUTE) who gave me valuable tips to complete this project.
Lastly, I would like to thank the almighty and my parents for their moral support and my
colleagues with whom I shared my day-to-day experience and received lots off suggestions
that improved my work quality.
ASHISH KUMAR
GNIT (MBA INSTITUTE)
ROLL. NO.1027270021

ABSTRACT
A strong banking sector is important for flourishing economy. The failure of the banking
sector may have an adverse impact on other sectors. Non-performing assets are one of the
major concerns for banks in India.
NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a
large number of credit defaults that affect the profitability and net-worth of banks and also
erodes the value of the asset. The NPA growth involves the necessity of provisions, which
reduces the over all profits and shareholders value.
The issue of Non Performing Assets has been discussed at length for financial system all over
the world. The problem of NPAs is not only affecting the banks but also the whole economy.
In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of
the industry and trade.
This report deals with understanding the concept of NPAs, its magnitude and major causes
for an account becoming non-performing, projection with special reference to ICICI bank.

CONTENTS
CHAPTER
NO.
TOPICS PAGE NO.
ACKNOWLEDGEMENT 4
ABSTRACT 5
TABLE OF CONTENT 6
1. INTRODUCTION 7
2. OBJECTIVES 9
3. NEEDS OF THE STUDY 10
5. BACKGROUND 11
6. LITERATURE REVIEW 12
7. INDUSTRY PROFILE 36
 HISTORY OF BANKING 37
 TRANSFORMATION IN
BANKING
42
 CHALLENGES IN BANKING 44
8. COMPANY PROFILE 46
 INTRODUCTION 49
 HISTORY 51
 IMPACT OF FINANCIAL
CRISIS
56
9. RESEARCH METHODOLOGY 58
10.
DATA ANALYSIS AND
INTERPRETATION
63
11. SUGGESTIONS AND CONCLUSION 81
12. LIMITATIONS 91
13. REFERENCES 92

INTRODUCTION
The crucial role of bank economists in transforming the banking system in India. Economists
have to be more ‘mainstreamed’ within the operational structure of commercial banks. Apart
from the traditional functioning of macro-scanning, the inter linkages between treasuries,
dealing rooms and trading rooms of banks need to be viewed not only with the day-to-day
needs of operational necessity, but also with analytical content and policy foresight.
Banking sector reforms in India has progressed promptly on aspects like interest rate
deregulation, reduction in statutory reserve requirements, prudential norms for interest rates,
asset classification, income recognition and provisioning. But it could not match the pace
with which it was expected to do. The accomplishment of these norms at the execution stages
without restructuring the banking sector as such is creating havoc.
During pre-nationalization period and after independence, the banking sector remained in
private hands Large industries who had their control in the management of the banks were
utilizing major portion of financial resources of the banking system and as a result low
priority was accorded to priority sectors. Government of India nationalized the banks to make
them as an instrument of economic and social change and the mandate given to the banks was
to expand their networks in rural areas and to give loans to priority sectors such as small scale
industries, self-employed groups, agriculture and schemes involving women.
To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled
the banking system to expand its network in a planned way and make available banking
series to the large number of population and touch every strata of society by extending credit
to their productive endeavours. This is evident from the fact that population per office of
commercial bank has come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly,
share of advances of public sector banks to priority sector increased form 14.6% in 1969 to
44% of the net bank credit. The number of deposit accounts of the banking system increased
from over 3 crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to
over 2.68 crores.

Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. It is no longer confined to only metropolitans
or cosmopolitans in India. In fact, Indian banking system has reached even to the remote
corners of the country. This is one of the main reasons of India's growth process.
Financial sector reform in India has progressed rapidly on aspects like interest rate
deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-
based supervision. But progress on the structural-institutional aspects has been much slower
and is a cause for concern. The sheltering of weak institutions while liberalizing operational
rules of the game is making implementation of operational changes difficult and ineffective.
Changes required to tackle the NPA problem would have to span the entire gamut of
judiciary, polity and the bureaucracy to be truly effective.
In liberalizing economy banking and financial sector get high priority. Indian banking sector
of having a serious problem due non performing. The financial reforms have helped largely
to clean NPA was around Rs. 52,000 crores in the year 2004. The earning capacity and
profitability of the bank are highly affected due to this
Non Performing Asset means an asset or account of borrower, which has been classified by a
bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by The Reserve Bank of India.
The level of NPA act as an indicator showing the bankers credit risks and efficiency of
allocation of resource.

OBJECTIVE OF THE STUDY
Following are the objectives of the study:
 What types of challenges banking industry is facing with special reference to NPA.
 How ICICI bank cope with NPA and its impact in recent economic crisis.
 To find the factors that would effect level of NPAs.
 To analyze the significance of each variable that might effect the NPA level.
 To understand what is Non Performing Assets and what are the underlying reasons for
the emergence of the NPAs.
 To understand the impacts of NPAs on the operations of the banks.
 To know what steps are being taken by the Indian banking sector to reduce the NPAs?
 To evaluate the comparative ratio of the banks with concerned to the NPAs.

NEEDS OF THE STUDY
The banks not only accept the deposits of the people but also provide them credit
facilities for their development. Indian banking sector has the nation in developing the
business and service sectors. But recently the banks are facing the problem of credit risk. It is
found that many general people and business people borrow from the banks but due to some
genuine or other reasons are not able to repay back the amount drawn to the banks. The
amount which is not given back to the banks is known as the non performing assets. Many
banks are facing the problem of NPAs which hampers the business of the banks. Due to
NPAs the income of the banks is reduced and the banks have to make the large number of
the provisions that would curtail the profit of the banks and due to that the financial
performance of the banks would not show good results.
The main aim behind making this report is to know how public sector banks are
operating their business and how NPAs play its role to the operations of the public sector
banks. The report NPAs are classified according to the sector, industry, and state wise. The
present study also focuses on the existing system in India to solve the problem of NPAs and
comparative analysis to understand which bank is playing what role with concerned to NPAs.
Thus, the study would help the decision makers to understand the financial performance and
growth of public sector banks as compared to the NPAs.
This report explores an empirical approach to the analysis of Non-Performing Assets
(NPAs) with special reference of ICICI bank in India. The level of NPAs is one of the drivers
of financial stability and growth of the banking sector. This report aims to find the
fundamental factors which impact NPAs of banks. A model consisting of two types of
factors, viz., macroeconomic factors and bank-specific parameters, is developed and the
behavior of NPAs of the three categories of banks is observed. The empirical analysis
assesses how macroeconomic factors and bank-specific parameters affect NPAs of a
particular category of banks. The macroeconomic factors of the model included are GDP
growth rate and excise duty, and the bank-specific parameters are Credit Deposit Ratio
(CDR), loan exposure to priority sector, Capital Adequacy Ratio (CAR), and liquidity risk.
The results show that movement in NPAs over the years can be explained well by the factors
considered in the model for the public and private sector banks. The other important results
derived from the analysis include the finding that banks' exposure to priority sector lending
reduces NPAs.

BACKGROUND
Granting of credit for economic activities is the prime duty of banking. Apart from
raising resources through fresh deposits, borrowings and recycling of funds received back
from borrowers constitute a major part of funding credit dispensation activity. Lending is
generally encouraged because it has the effect of funds being transferred from the system to
productive purposes, which results into economic growth. However lending also carries a risk
called credit risk, which arises from the failure of borrower. Non-recovery of loans along
with interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect
the banks profitability on a large scale. Though complete elimination of such losses is not
possible, but banks can always aim to keep the losses at .
at a low level. Non-performing Asset (NPA) has emerged since over a decade as an alarming
threat to the banking industry in our country sending distressing signals on the sustainability
and endurability of the affected banks. The positive results of the chain of measures affected
under banking reforms by the Government of India and RBI in terms of the two Narasimhan
Committee Reports in this contemporary period have been neutralized by the ill effects of this
surging threat. Despite various correctional steps administered to solve and end this problem,
concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on
banking and financial institutions.
main aim of any person is the utilization of money in the best manner since the India
is country where more than half of the population has problem of running the family in the
most efficient manner. However Indian people faced large number of problem till the
development of the full fledged banking sector. The Indian banking sector came into the
developing nature mostly after the 1991 government policy. The banking sector has really
helped the Indian people to utilize the single money in the best manner as they want. People
now have started investing their money in the banks and banks also provide goods returns on
the deposited amount. The people now have at the most understood that banks provide them
good security to their deposits and so excess amounts are invested in the banks. Thus, banks
have helped the people to achieve their socio economic objectives.

LITERATURE REVIEW
NON PERFORMING ASSETS (NPA)
Action for enforcement of security interest can be initiated only if the secured asset is
classified as Nonperforming asset. Non performing asset means an asset or account of
borrower, which has been classified by bank or financial institution as sub –standard ,
doubtful or loss asset, in accordance with the direction or guidelines relating to assets
classification issued by RBI . An amount due under any credit facility is treated as “past due
“when it is not been paid within 30 days from the due date. Due to the improvement in the
payment and settlement system, recovery climate, up gradation of technology in the banking
system etc, it was decided to dispense with “past due “concept, with effect from March 31,
2001. Accordingly as from that date, a Non performing asset shell be an advance where
i. Interest and/or instalment of principal remain overdue for a period of more than 180 days in
respect of a term loan,
ii. The account remains ‘out of order ‘for a period of more than 180 days, in respect of an
overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 180 days in case of bill purchased or
discounted.
iv. Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt ’90 days overdue ‘norms for identification of NPA
s, from the year ending March 31, 2004, a non performing asset shell be a loan or an advance
where;
i. Interest and/or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
ii. The account remains ‘out of order ‘for a period of more than 90 days ,in respect of an
overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 90 days in case of bill purchased or
discounted.

iv. Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts
Out of order
An account should be treated as out of order if the outstanding balance remains continuously
in excess of sanctioned limit /drawing power. in case where the out standing balance in the
principal operating account is less than the sanctioned amount /drawing power, but there are
no credits continuously for six months as on the date of balance sheet or credit are not enough
to cover the interest debited during the same period ,these account should be treated as ‘out of
order’.
Overdue
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on due date
fixed by the bank.

FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs. But the problem
of NPAs is more in public sector banks when compared to private sector banks and foreign
banks. A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. The Indian banking system,
which was operating in a closed economy, now faces the challenges of an open economy. On
one hand a protected environment ensured that banks never needed to develop sophisticated
treasury operations and Asset Liability Management skills. On the other hand a combination
of directed lending and social banking relegated profitability and competitiveness to the
background. The net result was unsustainable NPAs and consequently a higher effective cost
of banking services.
The problem India Faces is not lack of strict prudential norms but
i. The legal impediments and time consuming nature of asset disposal proposal.
ii. Postponement of problem in order to show higher earnings.
iii. Manipulation of debtors using political influence.
Macro Perspective Behind NPAs
A lot of practical problems have been found in Indian banks, especially in public sector
banks. For Example, the government of India had given a massive wavier of Rs. 15,000 Crs.
under the Prime Minister ship of Mr. V.P. Singh, for rural debt during 1989-90. This was not
a unique incident in India and left a negative impression on the payer of the loan.
Poverty elevation programs like IRDP, RREP, SUME, SEPUP, JRY, PMRY etc., failed on
various grounds in meeting their objectives. The huge amounts of loan granted under these
schemes were totally unrecoverable by banks due to political manipulation, misuse of funds
and non-reliability of target audience of these sections. Loans given by banks are their assets
and as the repayments of several of the loans were poor, the qualities of these assets were
steadily deteriorating. Credit allocation became 'Lon Melas', loan proposal evaluations were
slack and as a result repayments were very poor. There are several
reasons for an account becoming NPA.
* Internal factors
* External factors

EXTERNAL FACTORS
 Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non-recover, their by reducing their profitability and liquidity.
 Willful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order to
get back the money extended to them as advances and loans.
 Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit.
Mainly ours framers depends on rain fall for cropping. Due to irregularities of rain fall the
framers are not to achieve the production level thus they are not repaying the loans.
 Industrial sickness
Improper project handling , ineffective management , lack of adequate resources , lack of
advance technology , day to day changing govt. Policies give birth to industrial sickness.
Hence the banks that finance those industries ultimately end up with a low recovery of their
loans reducing their profit and liquidity.
 Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they borrow
to operate these activities. The banks recover the amount by selling of their assets, which
covers a minimum label. Thus the banks record the non recovered part as NPAs and has to
make provision for it.
 Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thus it has to cope
with the changing principles and policies for the regulation of the rising of NPAs.
The fallout of handloom sector is continuing as most of the weavers Co-operative societies
have become defunct largely due to withdrawal of state patronage. The rehabilitation plan

worked out by the Central govt to revive the handloom sector has not yet been implemented.
So the over dues due to the handloom sectors are becoming NPAs.
Apart from these factors there may be others external factors which can cause of NPA’s,
these factors are:
1. Sluggish legal system - Long legal tangles Changes that had taken place in labour laws
Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw materialinput price escalation, power shortage, industrial
recession, excess capacity, natural calamities like floods, accidents.
5. Failures, non payment over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes etc.,
INTERNAL FACTORS
 Defective Lending process
There are three cardinal principles of bank lending that have been followed by the
commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability
i. Principles of safety
By safety it means that the borrower is in a position to repay the loan both principal and
interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business
Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower
The banker should, there fore take utmost care in ensuring that the enterprise or business for
which a loan is sought is a sound one and the borrower is capable of carrying it out
successfully .he should be a person of integrity and good character.
 Inappropriate technology

Due to inappropriate technology and management information system, market driven
decisions on real time basis can not be taken. Proper MIS and financial accounting system is
not implemented in the banks, which leads to poor credit collection, thus NPA. All the
branches of the bank should be computerized.
 Improper swot analysis
The improper strength, weakness, opportunity and threat analysis is another reason for rise in
NPAs. While providing unsecured advances the banks depend more on the honesty, integrity,
and financial soundness and credit worthiness of the borrower.
1. Banks should consider the borrowers own capital investment.
2. It should collect credit information of the borrowers from
a. From bankers
b. Enquiry from market/segment of trade, industry, business.
c. From external credit rating agencies. · Analyse the balance sheet
True picture of business will be revealed on analysis of profit/loss a/c and balance sheet.
3. Purpose of the loan
When bankers give loan, he should analyse the purpose of the loan. To ensure safety and
liquidity, banks should grant loan for productive purpose only. Bank should analyse the
profitability, viability, long term acceptability of the project while financing.
 Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good credit
appraisal to decrease the NPAs.
 Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible assets
as security to safe guard its interests. When accepting securities banks should consider the
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
The banker should follow the principle of diversification of risk based on the famous maxim
“do not keep all the eggs in one basket”; it means that the banker should not grant advances
to a few big farms only or to concentrate them in few industries or in a few cities. If a new

big customer meets misfortune or certain traders or industries affected adversely, the overall
position of the bank will not be affected.
Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The
biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa
hand loom WCS ltd (2439.60lakhs).
 Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to wilful defaulters can be collected by regular visits.
 Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters
and CCBs and PACs, the NPAs of OSCB is increasing day by day.
Apart from these the other internal factors are:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansionmodernizationsetting up new projects helping or
promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-
appropriation etc.,
9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups,
delay in settlement of payments subsidiaries by government bodies etc.,

PROBLEMS DUE TO NPA
1. Owners do not receive a market return on there capital .in the worst case, if the banks fails,
owners loose their assets. In modern times this may affect a broad pool of shareholders.
2. Depositors do not receive a market return on saving. In the worst case if the bank fails,
depositors loose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interest rates, lower
deposit rates and higher lending rates repress saving and financial market, which hamper
economic growth.
4. Non performing loans epitomise bad investment. They misallocate credit from good
projects, which do not receive funding, to failed projects. Bad investment ends up in
misallocation of capital, and by extension, labour and natural resources.
5. Non performing asset may spill over the banking system and contract the money stock,
which may lead to economic contraction. This spill over effect can channelize through
liquidity or bank insolvency: a) when many borrowers fail to pay interest, banks may
experience liquidity shortage. This can jam payment across the country, b) illiquidity
constraints bank in paying depositors .c) undercapitalised banks exceeds the banks capital
base.
What caused such high NPAs in the system until 1995?
Some key reasons for huge NPAs until mid-1990s are as follows:
� Absence of competition: The entire banking sector was state-owned; there was complete
absence of any kind of competition from the private sector.
� Lack of focus and control: The government-controlled operations of banks resulted in
favoritisms in terms of lending, besides lack of focus on quality of lending. Managements of
banks lacked any control on operations of their banks, while directors largely were influenced
by the will of power-circles.
� Collateral-based lending and a dormant legal recourse system: Collateral was
considered king. Under the name of collateral, large sums of loans were disbursed, and in the
absence of an active legal recovery system, loan repayment and quality considerations took a
back seat.
� Corruption and bureaucracy: Political interference and lack of supervision increased
corruption and redtapism in the banking system. This resulted in complete dilution of credit
quality and control procedures.

� Inadequacy of capital and tools relating to asset quality monitoring: Banks suffered
from shortage of capital funds to pursue any meaningful investments in quality control, loan
monitoring, etc. This inadequacy of funds, together with the absence of independent
management, led to low focus on asset quality tracking and taking corrective actions.
The situation changed after 1993, when the Reserve Bank of India (RBI) with the
government's support, came up with several decisions on managing Indian banks that had a
salutary impact, and the future never looked so much in control henceforth.
There was a significant decline in the non-performing assets (NPAs) of SCBs in 2003-04,
despite adoption of 90 day delinquency norm from March 31, 2004. The gross NPAs of SCBs
declined from 4.0 per cent of total assets in 2002-03 to 3.3 per cent in 2003-04. The
corresponding decline in net NPAs was from 1.9 per cent to 1.2 per cent. Both gross NPAs
and net NPAs declined in absolute terms. While the gross NPAs declined from Rs. 68,717
crore in 2002-03 to Rs. 64,787 crore in 2003-04, net NPAs declined from Rs. 32,670 crore to
Rs. 24,617 crore in the same period. There was also a significant decline in the proportion of
net NPAs to net advances from 4.4 per cent in 2002-03 to 2.9 per cent in 2003-04. The
significant decline in the net NPAs by 24.7 per cent in 2003-04 as compared to 8.1 per cent in
2002- 03 was mainly on account of higher provisions (up to 40.0 per cent) for NPAs made by
SCBs.
The decline in NPAs in 2003-04 was witnessed across all bank groups. The decline in net
NPAs as a proportion of total assets was quite significant in the case of new private sector
banks, followed by PSBs. The ratio of net NPAs to net advances of SCBs declined from 4.4
per cent in 2002-03 to 2.9 per cent in 2003-04. Among the bank groups, old private sector
banks had the highest ratio of net NPAs to net advances at 3.8 per cent followed by PSBs (3.0
per cent) new private sector banks (2.4 per cent) and foreign banks (1.5 per cent)
An analysis of NPAs by sectors reveals that in 2003-04, advances to non-priority sectors
accounted for bulk of the outstanding NPAs in the case of PSBs (51.24 per cent of total) and
for private sector banks (75.30 per cent of total). While the share of NPAs in agriculture
sector and SSIs of PSBs declined in 2003-04, the share of other priority sectors increased.
The share of loans to other priority sectors in priority sector lending also increased. Measures
taken to reduce NPAs include reschedulement, restructuring at the bank level, corporate debt
restructuring, and recovery through Lok Adalats, Civil Courts, and debt recovery tribunals
and compromise settlements. The recovery management received a major fillip with the
enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest (SARFAESI) Act, 2002 enabling banks to realise their dues without
intervention of courts and tribunals. The Supreme Court in its judgment dated April 8, 2004,
while upholding the constitutional validity of the Act, struck down section 17 (2) of the Act
as unconstitutional and contrary to Article 14 of the Constitution of India. The Government
amended the relevant provisions of the Act to address the concerns expressed by the Supreme
Court regarding a fair deal to borrowers through an ordinance dated November 11, 2004. It is
expected that the momentum in the recovery of NPAs will be resumed with the amendments
to the Act.
The revised guidelines for compromise settlement of chronic NPAs of PSBs were issued in
January 2003 and were extended from time to time till July 31, 2004. The cases filed by
SCBs in Lok Adalats for recovery of NPAs stood at 5.20 lakh involving an amount of Rs.
2,674 crore (prov.). The recoveries effected in 1.69 lakh cases amounted to Rs. 352 crore
(prov.) as on September 30, 2004. The number of cases filed in debt recovery tribunals stood
at 64, 941 as on June 30, 2004, involving an amount of Rs. 91,901 crore. Out of these, 29,
525 cases involving an amount of Rs. 27,869 crore have been adjudicated. The amount
recovered was to Rs. 8,593 crore. Under the scheme of corporate debt restructuring
introduced in 2001, the number of cases and value of assets restructured stood at 121 and Rs.
69,575 crore, respectively, as on December 31, 2004. Iron and steel, refinery, fertilisers and
telecommunication sectors were the major beneficiaries of the scheme. These sectors
accounted for more than two-third of the values of assets restructured.
Capital adequacy ratio
The concept of minimum capital to risk weighted assets ratio (CRAR) has been developed to
ensure that banks can absorb a reasonable level of losses. Application of minimum CRAR
protects the interest of depositors and promotes stability and efficiency of the financial
system. At the end of March 31, 2004, CRAR of PSBs stood at
13.2 per cent, an improvement of 0.6 percentage point from the previous year. There was also
an improvement in the CRAR of old private sector banks from 12.8 per cent in 2002-03 to
13.7 per cent in 2003-04. The CRAR of new private sector banks and foreign banks
registered a decline in 2003-04. For the SCBs as a whole the CRAR improved from 12.7 per
cent in 2002-03 to 12.9 per cent in 2003-04. All the bank groups had CRAR above the
minimum 9 per cent stipulated by the RBI. During the current year, there was further
improvement in the CRAR of SCBs. The ratio in the first half of 2004-05 improved to 13.4

per cent as compared to 12.9 per cent at the end of 2003-04. Among the bank groups, a
substantial improvement was witnessed in the case of new private sector banks from 10.2 per
cent as at the end of 2003-04 to 13.5 percent in the first half of 2004-05. While PSBs and old
private banks maintained the CRAR at almost the same level as in the previous year, the
CRAR of foreign banks declined to
14.0 per cent in the first half of 2004-05 as compared to 15.0 per cent as at the end of 2003-
04.
The above picture is self-explanatory. Over the period of time, Indian commercial banks have
shown tremendous improvement in terms of quality of credit. NPAs, both at gross and net
levels, as a percentage of advances, have fallen consistently. The gross NPA/Advances ratio
has fallen from 16% in FY97 to less than 2.5% in FY08. Banks displayed great control over
credit quality, as even in times of falling IIP and GDP growth, they continued to show fewer
NPAs. This is a very impressive indicator that highlights the fact that Indian banking has
shown substantial improvement in terms of asset quality management even in adverse macro-
economic conditions. FY99, FY01 and FY02 saw considerable fall in industrial production
from the then existing levels. However, this did not lead to any increase in bank NPAs. On
the contrary, banks improved NPA ratios considerably through the exercise of strong asset
quality monitoring programmes. The current environment is again indicating a decline in
GDP, and IIP growth rates as slowdown hits demand and consumption across all major
sectors. However, we strongly believe that managements of top Indian banks have put 'NPA
Management and Control' as one of their top priorities, and that even though there would be a
jump in NPAs as a proportion of total assets, the banking sector has the ability to withstand
this jump and still emerge as a strong performer in these extremely difficult times.

What changed the scenario of NPAs after 1995?
Some of the key factors that contributed to the fall in NPAs in the Indian banking
• Introduction of competition: The RBI opened up gates for the private sector
participation in the Indian banking industry. HDFC, the principal mortgage lender, got the
first approval to start a private bank in the reform-driven era. HDFC Bank was given
permission to carry on commercial banking operations. Many new private banks and
foreign banks were allowed later, which brought in the much-required competition in the
Indian banking industry.
• Guidelines on NPAs, income recognition, capital adequacy: One of the key reasons
for such a drastic fall in system NPAs was the introduction of asset and capital quality
guidelines. These norms, introduced on the basis of the Narasimhan Committee report in
1993, had a revolutionary impact on the way banks managed and controlled their asset
book.
• Separation of control: Bank managements were given a free hand to run their
businesses as the Ministry of Finance and the RBI moved away from controlling positions
to supervising and regulating positions. This enabled boards of Indian banks to take
uninfluenced calls as to lending and asset control.
• Improvement of the legal recourse mechanism: This is another significant step.
Through Debt Recovery Tribunal (DRT), Lok Adalat mechanism for small loans, and
One-Time Settlement (OTS) mechanism for stressed loans in 1999, the central bank
ensured that there is a quick clean-up of sticky assets, so as to enable banks to start
functioning with a clean slate. The legal recourse for amounts lent has been an important
contributor to asset quality improvement.
• Capital infusion: Public banks were allowed to bring down the government holding to
51%, thereby enabling flow of fresh money for much-needed banks and also roping in
investment interest from market participants. Board of directors now became more
independent, and a mixed lot of individuals brought in experience from various segments
of the financial world.
• Establishment of CIBIL: Credit Information Bureau of India Ltd was established in
2000. This institution started to maintain a database of borrowers and their credit history.
This served as a very effective tool for loan sanctioning and asset quality maintenance.

Banks use the database to ensure credit does not fall in the hands of a borrower, with a
bad credit record.
• Asset Reconstruction Company: ARCs were permitted to operate from 2002; these
institutions helped the removal of bank's focus on bad assets by acquiring their bad loans,
thereby strengthening their balance sheets.
• Corporate Debt Restructuring, SICA: The CDR mechanism, sick industries revival
enactments enabled addressing issues of troubled borrowers through effective hand-
holding and bank support. This prevented further slippage of asset quality.
• Exposure limits (sector-wise and borrower-wise): The RBI put in place strict exposure
limits for banks with respect to sensitive sectors like real estate and capital markets. In
addition, limits on amounts a bank can lend to a specific borrower, or a borrower group
helped in non-concentration of funds as loans in a few hands, thereby diversifying the risk
of default.
• Risk management tools: The RBI ensured that banks have effective risk measurement,
management and control systems in place, so as to avoid credit shocks. Asset liability
management (ALM), value at risk (VAR), control on off-balance sheet exposures, credit
risk weightages, etc. are few concepts that enabled banks to effectively control NPAs.
• In this context of a highly improved, dynamic and competitive domestic banking
environment, we expect that Indian banks will exercise adequate caution in terms of the
quality of their loan-books. In addition, some of the steps (underlined) can be effectively
used again by RBI and the government, if the condition of NPAs worsens.

Basel Report Framework and India
Various risks in bank
Liquidity Risk
Market Liquidity Risk arises when a bank is unable to conclude a large transaction in a
particular instrument near the current market price. Funding Liquidity Risk is defined as the
inability to obtain funds to meet cash flow obligations. For banks, funding liquidity risk is
more crucial.
Interest Rate Risk
Interest Rate Risk (IRR) is the exposure of a Bank’s financial condition to adverse
movements in interest rates. Banks have an appetite for this risk and use it to earn returns.
IRR manifests itself in four different ways: re-pricing, yield curve, basis and embedded
options.
Pricing Risk
Pricing Risk is the risk to the bank’s financial condition resulting from adverse movements in
the level or volatility of the market prices of interest rate instruments, equities, commodities
and currencies. Pricing Risk is usually measured as the potential gain/loss in a
position/portfolio that is associated with a price movement of a given probability over a
specified time horizon. This measure is typically known as value-at-risk (VAR).
Foreign Currency Risk
Foreign Currency Risk is pricing risk associated with foreign currency.
Market Risk
The term Market Risk applies to (i) that part of IRR which affects the price of interest rate
instruments, (ii) Pricing Risk for all other assets/portfolio that are held in the trading book of
the bank and (iii) Foreign Currency Risk.
Strategic Risk
Strategic Risk is the risk arising from adverse business decisions, improper implementation
of decisions, or lack of responsiveness to industry changes. This risk is a function of the
compatibility of an organization’s strategic goals, the business strategies developed to
achieve those goals, the resources deployed against these goals, and the quality of
implementation.
Reputation Risk
Reputation risk is the risk arising from negative public opinion. This risk may expose the
institution to litigation, financial loss, or a decline in customer base.

Transaction Risk
Transaction risk is the risk arising from fraud, both internal & external, failed business
processes and the inability to maintain business continuity and manage information.
Compliance Risk
Compliance risk is the risk of legal or regulatory sanctions, financial loss or reputation loss
that a bank may suffer as a result of its failure to comply with any or all of the applicable
laws, regulations, codes of conduct and standards of good practice. It is also called integrity
risk since a bank’s reputation is closely linked to its adherence to principles of integrity and
fair dealing.
Operational Risk
The term Operational Risk includes both compliance risk and transaction risk but excludes
strategic risk and reputation risk.
Credit Risk
Credit Risk is most simply defined as the potential of a bank borrower or counter-party to fail
to meet its obligations in accordance with agreed terms. For most banks, loans are the largest
and most obvious source of credit risk.
Banking Regulation and Supervision
The Need for Regulation
Banking is one of the most heavily regulated businesses since it is a very highly leveraged
(high debt-equity ratio or low capital-assets ratio) industry. In fact, it is an irony that banks,
which constantly judge their borrowers on debt-equity ratio, have themselves a debt-equity
ratio far too adverse than their borrowers! In simple words, they earn by taking risk on their
creditors’ money rather than shareholders’ money. And since it is not their money
(shareholders’ stake) on the block, their appetite for risk needs to be controlled.
Goals and Tools for Bank Regulation and Supervision
The main goal of all regulators is the stability of the banking system. However, regulators
cannot be concerned solely with the safety of the banking system, for if that was the only
purpose, it would impose a narrow banking system, in which checkable deposits are fully
backed by absolutely safe assets – in the extreme, currency. Coexistent with this primary
concern is the need to ensure that the financial system operates efficiently. As we have seen,
banks need to take risks to be in business despite a probability of failure. In fact, Alan

Greenspan puts it very succinctly, `providing institutions with the flexibility that may lead to
failure is as important as permitting them the opportunity to succeed’.
The twin supervisory or regulatory goals of stability and efficiency of the financial system
often seem to pull in opposite directions and there is much debate raging on the nature and
extent of the trade-off between the two. Though very interesting, it is outside the scope of this
report to elaborate upon. Instead, let us take a look at the list of some tools that regulators
employ:
• Restrictions on bank activities and banking-commerce links: To avoid conflicts of interest
that may arise when banks engage in diverse activities such as securities underwriting,
insurance underwriting, and real estate investment.
• Restrictions on domestic and foreign bank entry: The assumption here is that effective
screening of bank entry can promote stability.
• Capital Adequacy: Capital serves as a buffer against losses and hence also against failure.
Capital adequacy is deemed to control risk appetite of the bank by aligning the incentives of
bank owners with depositors and other creditors.
• Deposit Insurance: Deposit insurance schemes are to prevent widespread bank runs and to
protect small depositors but can create moral hazard (which means in simple terms the
propensity of both firms and individuals to take more risks when insured).
• Information disclosure & private sector monitoring: Includes certified audits and/or ratings
from international rating agencies. Involves directing banks to produce accurate,
comprehensive and consolidated information on the full range of their activities and risk
management procedures.
• Government Ownership: The assumption here is that governments have adequate
information and incentives to promote socially desirable investments and in extreme cases
can transfer the depositors’ loss to tax payers! Government ownership can, at times, promote
financing of politically attractive projects and not the economically efficient ones.
• Mandated liquidity reserves: To control credit expansion and to ensure that banks have a
reasonable amount of liquid assets to meet their liabilities.
• Loan classification, provisioning standards & diversification guidelines: These are controls
to manage credit risk.
`Unfortunately, however, there is no evidence that any universal set of best practices is
appropriate for promoting well-functioning banks; that successful practices in the United
States, for example, will succeed in countries with different institutional settings; or that

detailed regulations and supervisory practices should be combined to produce an extensive
checklist of best practices in which more checks are better than fewer. There is no broad
cross-country evidence on which of the many different regulations and supervisory practices
employed around the world work best, if at all, to promote bank development and stability.’
The Basel I Accord
Basel Committee on Banking Supervision (BCBS)
On 26th June 1974, a number of banks had released Deutschmarks to Bank Herstatt in
Frankfurt in exchange for dollar payments that were to be delivered in New York. Due to
differences in time zones, there was a lag in dollar payments to counter-party banks during
which Bank Herstatt was liquidated by German regulators, i.e. before the dollar payments
could be affected.
The Herstatt accident prompted the G-10 countries (the G-10 is today 13 countries: Belgium,
Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden,
Switzerland, United Kingdom and United States) to form, towards the end of 1974, the Basel
Committee on Banking Supervision (BCBS), under the auspices of the Bank for International
Settlements (BIS), comprising of Central Bank Governors from the participating countries.
BCBS has been instrumental in standardizing bank regulations across jurisdictions with
special emphasis on defining the roles of regulators in cross-jurisdictional situations. The
committee meets four times a year. It has around 30 technical working groups and task forces
that meet regularly.
1988 Basel Accord
In 1988, the Basel Committee published a set of minimal capital requirements for banks,
known as the 1988 Basel Accord. These were enforced by law in the G-10 countries in 1992,
with Japanese banks permitted an extended transition period.
The 1988 Basel Accord focused primarily on credit risk. Bank assets were classified into five
risk buckets i.e. grouped under five categories according to credit risk carrying risk weights
of zero, ten, twenty, fifty and one hundred per cent. Assets were to be classified into one of
these risk buckets based on the parameters of counter-party (sovereign, banks, public sector
enterprises or others), collateral (e.g. mortgages of residential property) and maturity.
Generally, government debt was categorised at zero per cent, bank debt at twenty per cent,
and other debt at one hundred per cent. 100%. OBS exposures such as performance
guarantees and letters of credit were brought into the calculation of risk weighted assets using

the mechanism of variable credit conversion factor. Banks were required to hold capital equal
to 8% of the risk weighted value of assets. Since 1988, this framework has been progressively
introduced not only in member countries but also in almost all other countries having active
international banks. The 1988 accord can be summarized in the following equation:
Total Capital = 0.08 x Risk Weighted Assets (RWA)
The accord provided a detailed definition of capital. Tier 1 or core capital, which includes
equity and disclosed reserves, and Tier 2 or supplementary capital, which could include
undisclosed reserves, asset revaluation reserves, general provisions & loan–loss reserves,
hybrid (debt/equity) capital instruments and subordinated debt.
Value at Risk (VAR)
VAR is a method of assessing risk that uses standard statistical techniques and provides users
with a summary measure of market risk. For instance, a bank might say that the daily VAR of
its trading portfolio is rupees 20 million at the 99 per cent confidence level. In simple words,
there is only one chance in 100, under normal market conditions, for a loss greater than
rupees 20 million to occur. This single number summarizes the bank's exposure to market
risk as well as the probability (one per cent, in this case) of it being exceeded. Shareholders
and managers can then decide whether they feel comfortable at this level of risk. If not, the
process that led to the computation of VAR can be used to decide where to trim risk.
Now the definition; `VAR summarizes the predicted maximum loss (or worst loss) over a
target horizon within a given confidence interval’. Target horizon means the period till which
the portfolio is held. Ideally, the holding period should correspond to the longest period
needed for an orderly (as opposed to a `fire sale’) portfolio liquidation.
Without going into the related math, it should be mentioned here that there exist three
methods of computing VAR, viz. Delta-Normal, Historical Simulation and Monte Carlo
Simulation, the last one being the most computation intensive and predictably the most
sophisticated one.
In a lighter vein, a definition of VAR that was found at the gloriamundi.org web site said, `A
number invented by purveyors of panaceas for pecuniary peril intended to mislead senior
management and regulators into false confidence that market risk is adequately understood
and controlled.’
1996 Amendment to include Market Risk

In 1996, BCBS published an amendment to the 1988 Basel Accord to provide an explicit
capital cushion for the price risks to which banks are exposed, particularly those arising from
their trading activities. This amendment was brought into effect in 1998.
Salient Features
• Allows banks to use proprietary in-house models for measuring market risks.
• Banks using proprietary models must compute VAR daily, using a 99th percentile, one-
tailed confidence interval with a time horizon of ten trading days using a historical
observation period of at least one year.
• The capital charge for a bank that uses a proprietary model will be the higher of the
previous day's VAR and three times the average of the daily VAR of the preceding sixty
business days.
• Use of `back-testing’ (ex-post comparisons between model results and actual performance)
to arrive at the `plus factor’ that is added to the multiplication factor of three.
• Allows banks to issue short-term subordinated debt subject to a lock-in clause (Tier 3
capital) to meet a part of their market risks.
• Alternate standardized approach using the `building block’ approach where general market
risk and specific security risk are calculated separately and added up.
• Banks to segregate trading book and mark to market all portfolio/position in the trading
book.
• Applicable to both trading activities of banks and non-banking securities firms.
Evolution of Basel Committee Initiatives
The Basel I Accord and the 1996 Amendment thereto have evolved into Basel II, as depicted
in the figure above.

The New Accord (Basel II)
Close on the heels of the 1996 amendment to the Basel I accord, in June 1999 BCBS issued a
proposal for a New Capital Adequacy Framework to replace the 1988 Accord.
The proposed capital framework consists of three pillars: minimum capital requirements,
which seek to refine the standardised rules set forth in the 1988 Accord; supervisory review
of an institution's internal assessment process and capital adequacy; and effective use of
disclosure to strengthen market discipline as a complement to supervisory efforts. The accord
has been finalized recently on 11th
May 2004 and the final draft is expected by the end of June
2004. For banks adopting advanced approaches for measuring credit and operational risk the
deadline has been shifted to 2008, whereas for those opting for basic approaches it is retained
at 2006.
The Need for Basel II
The 1988 Basel I Accord has very limited risk sensitivity and lacks risk differentiation
(broad brush structure) for measuring credit risk. For example, all corporations carry the
same risk weight of 100 per cent. It also gave rise to a significant gap between the regulatory
measurement of the risk of a given transaction and its actual economic risk. The most
troubling side effect of the gap between regulatory and actual economic risk has been the
distortion of financial decision-making, including large amounts of regulatory arbitrage, or
investments made on the basis of regulatory constraints rather than genuine economic
opportunities. The strict rule based approach of the 1988 accord has also been criticised for
its `one size fits all’ prescription. In addition, it lacked proper recognition of credit risk
mitigants such as credit derivatives, securitisation, and collaterals.

The recent cases of frauds, acts of terrorism, hacking, have brought into focus the operational
risk that the banks and financial institutions are exposed to.
The proposed new accord (Basel II) is claimed by BCBS to be `an improved capital adequacy
framework intended to foster a strong emphasis on risk management and to encourage
ongoing improvements in banks’ risk assessment capabilities’. It also seeks to provide a
`level playing field’ for international competition and attempts to ensure that its
implementation maintains the aggregate regulatory capital requirements as obtaining under
the current accord. The new framework deliberately includes incentives for using more
advanced and sophisticated approaches for risk measurement and attempts to align the
regulatory capital with internal risk measurements of banks subject to supervisory review and
market disclosure.
PILLAR I:
Minimum Capital Requirements
There is a need to look at proposed changes in the measurement of credit risk and operational
risk.
Credit Risk
Three alternate approaches for measurement of credit risk have been proposed. These are:
• Standardised
• Internal Ratings Based (IRB) Foundation
• Internal Ratings Based (IRB) Advanced

The standardised approach is similar to the current accord in that banks are required to slot
their credit exposures into supervisory categories based on observable characteristics of the
exposures (e.g. whether the exposure is a corporate loan or a residential mortgage loan). The
standardised approach establishes fixed risk weights corresponding to each supervisory
category and makes use of external credit assessments to enhance risk sensitivity compared
to the current accord. The risk weights for sovereign, inter-bank, and corporate exposures are
differentiated based on external credit assessments. An important innovation of the
standardised approach is the requirement that loans considered `past due’ be risk weighted at
150 per cent unless, a threshold amount of specific provisions has already been set aside by
the bank against that loan.
Credit risk mitigants (collaterals, guarantees, and credit derivatives) can be used by banks
under this approach for capital reduction based on the market risk of the collateral instrument
or the threshold external credit rating of recognised guarantors.
Reduced risk weights for retail exposures, small and medium size enterprises (SME) category
and residential mortgages have been proposed. The approach draws a number of distinctions
between exposures and transactions in an effort to improve the risk sensitivity of the resulting
capital ratios.
The IRB approach uses banks’ internal assessments of key risk drivers as primary inputs to
the capital calculation. The risk weights and resultant capital charges are determined through
the combination of quantitative inputs provided by banks and formulae specified by the
Committee. The IRB calculation of risk weighted assets for exposures to sovereigns, banks,
or corporate entities relies on the following four parameters:
 Probability of default (PD), which measures the likelihood that the borrower will
default over a given time horizon.
 Loss given default (LGD), which measures the proportion of the exposure that will
be lost if a default occurs.
 Exposure at default (EAD), which for loan commitment measures the amount of the
facility that is likely to be drawn in the event of a default.
 Maturity (M), which measures the remaining economic maturity of the exposure.

Operational Risk
Within the Basel II framework, operational risk is defined as the risk of losses resulting from
inadequate or failed internal processes, people and systems, or external events.
Operational risk identification and measurement is still in an evolutionary stage as
compared to the maturity that market and credit risk measurements have achieved.
As in credit risk, three alternate approaches are prescribed:
• Basic Indicator
• Standardised
• Advanced Measurement (AMA)
PILLAR 2:
Supervisory Review Process
Pillar 2 introduces two critical risk management concepts: the use of economic capital, and
the enhancement of corporate governance, encapsulated in the following four principles:
• Principle 1: Banks should have a process for assessing their overall capital adequacy in
relation to their risk profile and a strategy for maintaining their capital levels.
The key elements of this rigorous process are:
• Board and senior management attention;
• Sound capital assessment;
• Comprehensive assessment of risks;
• Monitoring and reporting; and
• Internal control review.
• Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy
assessments and strategies, as well as their ability to monitor and ensure their compliance
with regulatory capital ratios. Supervisors should take appropriate supervisory action if
they are not satisfied with the result of this process.

This could be achieved through:
• On-site examinations or inspections;
• Off-site review;
• Discussions with bank management;
• Review of work done by external auditors; and
• Periodic reporting.
• Principle 3: Supervisors should expect banks to operate above the minimum regulatory
capital ratios and should have the ability to require banks to hold capital in excess of the
minimum.
• Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from
falling below the minimum levels required to support the risk characteristics of a
particular bank and should require rapid remedial action if capital is not maintained or
restored.
Prescriptions under Pillar 2 seek to address the residual risks not adequately covered under
Pillar 1, such as concentration risk, interest rate risk in banking book, business risk and
strategic risk. `Stress testing’ is recommended to capture event risk. Pillar 2 also seeks to
ensure that internal risk management process in the banks is robust enough. The combination
of Pillar 1 and Pillar 2 attempt to align regulatory capital with economic capital.
PILLAR 3:
Market Discipline
The focus of Pillar 3 on market discipline is designed to complement the minimum capital
requirements (Pillar 1) and the supervisory review process (Pillar 2). With this, the Basel
Committee seeks to enable market participants to assess key information about a bank’s risk
profile and level of capitalization—thereby encouraging market discipline through increased
disclosure. Public disclosure assumes greater importance in helping banks and supervisors to
manage risk and improve stability under the new provisions which place reliance on internal
methodologies providing banks with greater discretion in determining their capital needs.

BANKING INDUSTRY
Banking in India
Banking in India originated in the last decades of the 18th century. The oldest bank in
existence in India is the State Bank of India, a government-owned bank that traces its origins
back to June 1806 and that is the largest commercial bank in the country. Central banking is
the responsibility of the Reserve Bank of India, which in 1935 formally took over these
responsibilities from the then Imperial Bank of India, relegating it to commercial banking
functions. After India's independence in 1947, the Reserve Bank was nationalized and given
broader powers. In 1969 the government nationalized the 14 largest commercial banks; the
government nationalized the six next largest in 1980.
Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign
banks. They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.

HISTORY
Early history
Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are
now defunct. The oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank
of Bengal. This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted as quasi-central
banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and
still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That
honor belongs to the Bank of Upper India, which was established in 1863, and which
survived until 1913, when it failed, with some of its assets and liabilities being transferred to
the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance trading in Indian cotton. With large
exposure to speculative ventures, most of the banks opened in India during that period failed.
The depositors lost money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next several decades until
the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondichery, then a French colony, followed. HSBC established itself
in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade
of the British Empire, and so became a banking center.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in

Lahore in 1895, which has survived to the present and is now one of the largest banks in
India.
Around the turn of the 20th Century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian Mutiny, and the social,
industrial and other infrastructure had improved. Indians had established small banks, most of
which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks
and a number of Indian joint stock banks. All these banks operated in different segments of
the economy. The exchange banks, mostly owned by Europeans, concentrated on financing
foreign trade. Indian joint stock banks were generally under capitalized and lacked the
experience and maturity to compete with the presidency and exchange banks. This
segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the
times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into
separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to
found banks of and for the Indian community. A number of banks established then have
survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of
Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South
Canara ( South Kanara ) district. Four nationalised banks started in this district and also a
leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle
of Indian Banking".
From World War I to Independence
The period during the First World War (1914-1918) through the end of the Second World
War (1939-1945), and two years thereafter until the independence of India were challenging
for Indian banking. The years of the First World War were turbulent, and it took its toll with
banks simply collapsing despite the Indian economy gaining indirect boost due to war-related

economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in
the following table:
Years Number of banks
that failed
Authorised capital
(Rs. Lakhs)
Paid-up Capital
(Rs. Lakhs)
1913 12 274 35
1914 42 710 109
1915 11 56 5
1916 13 231 4
1917 9 76 25
1918 7 209 1
Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India's independence marked the end of a regime of
the Laissez-faire for the Indian banking. The Government of India initiated measures to play
an active role in the economic life of the nation, and the Industrial Policy Resolution adopted
by the government in 1948 envisaged a mixed economy. This resulted into greater
involvement of the state in different segments of the economy including banking and finance.
The major steps to regulate banking included:
• In 1948, the Reserve Bank of India, India's central banking authority, was
nationalized, and it became an institution owned by the Government of India.
• In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India."

• The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could have
common directors.
However, despite these provisions, control and regulations, banks in India except the State
Bank of India, continued to be owned and operated by private persons. This changed with the
nationalisation of major banks in India on 19 July, 1969.
Nationalisation
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer,
and a debate has ensued about the possibility to nationalise the banking industry. Indira
Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual
conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was
swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest
commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a
national leader of India, described the step as a "masterstroke of political sagacity." Within
two weeks of the issue of the ordinance, the Parliament passed the Banking Companies
(Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9
August, 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery.
With the second dose of nationalization, the GOI controlled around 91% of the banking
business of India. Later on, in the year 1993, the government merged New Bank of India with
Punjab National Bank. It was the only merger between nationalized banks and resulted in the
reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the
nationalised banks grew at a pace of around 4%, closer to the average growth rate of the
Indian economy.
The nationalised banks were credited by some, including Home minister P. Chidambaram, to
have helped the Indian economy withstand the global financial crisis of 2007-2009.[1][2]

Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be known as New
Generation tech-savvy banks, and included Global Trust Bank (the first of such new
generation banks to be set up), which later amalgamated with Oriental Bank of Commerce,
UTI Bank(now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along
with the rapid growth in the economy of India, revitalized the banking sector in India, which
has seen rapid growth with strong contribution from all the three sectors of banks, namely,
government banks, private banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%,at present it has gone up to 49%
with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new
wave ushered in a modern outlook and tech-savvy methods of working for traditional
banks.All this led to the retail boom in India. People not just demanded more from their
banks but also received more.
Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is
to manage volatility but without any fixed exchange rate-and this has mostly been true.

THE TRANSFORMATION OF THE INDIAN BANKING
SECTOR
The financial sector reforms in the country were initiated in the beginning of the 1990s.The
reforms have brought about a sea change in the profile of the banking sector. Our
implementation of the reforms process has had several unique features. Our financial sector
reforms were undertaken early in the reform cycle. Notably, the reforms process was not
driven by any banking crisis, nor was it the outcome of any external support package.
Besides, the design of the reforms was crafted through domestic expertise, taking on board
the international experiences in this respect. The reforms were carefully sequenced with
respect to the instruments to be used and the objectives to be achieved. Thus, prudential
norms and supervisory strengthening were introduced early in the reform cycle, followed by
interest-rate deregulation and a gradual lowering of statutory preemptions. The more complex
aspects of legal and accounting measures were ushered in subsequently when the basic tenets
of the reforms were already in place.
The public sector banks continue to be a dominant part of the banking system. As on March
31, 2008, the PSBs accounted for 69.9 per cent of the aggregate assets and 72.7 per cent of
the aggregate advances of the Scheduled commercial banking system. A unique feature of the
reform of the public sector banks was the process of their financial restructuring. The banks
were recapitalised by the government to meet prudential norms through recapitalisation
bonds. The mechanism of hiving off bad loans to a separate government asset management
company was not considered appropriate in view of the moral hazard. The subsequent
divestment of equity and offer to private shareholders was undertaken through a public offer
and not by sale to strategic investors. Consequently, all the public sector banks, which issued
shares to private shareholders, have been listed on the exchanges and are subject to the same
disclosure and market discipline standards as other listed entities. To address the problem of
distressed assets, a mechanism has been developed to allow sale of these assets to Asset
Reconstruction Companies which operate as independent commercial entities.
As regard the prudential regulatory framework for the banking system, we have come a long
way from the administered interest rate regime to deregulated interest rates, from the system
of Health Codes for an eight-fold, judgmental loan classification to the prudential asset
classification based on objective criteria, from the concept of simple statutory minimum
capital and capital-deposit ratio to the risk-sensitive capital adequacy norms – initially under

Basel I framework and now under the Basel II regime. There is much greater focus now on
improving the corporate governance set up through “fit and proper” criteria, on encouraging
integrated risk management systems in the banks and on promoting market discipline through
more transparent disclosure standards. The policy endeavor has all along been to benchmark
our regulatory norms with the international best practices, of course, keeping in view the
domestic imperatives and the country context. The consultative approach of the RBI in
formulating the prudential regulations has been the hallmark of the current regulatory regime
which enables taking account of a wide diversity of views on the issues at hand.
The implementation of reforms has had an all round salutary impact on the financial health
of the banking system, as evidenced by the significant improvements in a number of
prudential parameters. Let me briefly highlight the improvements in a few salient financial
indicators of the banking system.

CHALLENGES FACING BANKING INDUSTRY IN INDIA
The banking industry in India is undergoing a major transformation due to changes in
economic conditions and continuous deregulation. These multiple changes happening one
after other has a ripple effect on a bank (Refer fig. 2.1) trying to graduate from completely
regulated sellers market to completed deregulated customers market.
· Deregulation: This continuous deregulation has made the Banking market extremely
competitive with greater autonomy, operational flexibility, and decontrolled interest rate and
liberalized norms for foreign exchange. The deregulation of the industry coupled with
decontrol in interest rates has led to entry of a number of players in the banking industry. At
the same time reduced corporate credit off take thanks to sluggish economy has resulted in
large number of competitors battling for the same pie.
· New rules: As a result, the market place has been redefined with new rules of the game.
Banks are transforming to universal banking, adding new channels with lucrative pricing and
freebees to offer. Natural fall out of this has led to a series of innovative product offerings
catering to various customer segments, specifically retail credit.

· Efficiency: This in turn has made it necessary to look for efficiencies in the business. Banks
need to access low cost funds and simultaneously improve the efficiency. The banks are
facing pricing pressure, squeeze on spread and have to give thrust on retail assets
· Diffused Customer loyalty: This will definitely impact Customer preferences, as they are
bound to react to the value added offerings. Customers have become demanding and the
loyalties are diffused. There are multiple choices, the wallet share is reduced per bank with
demand on flexibility and customization. Given the relatively low switching costs; customer
retention calls for customized service and hassle free, flawless service delivery.
· Misaligned mindset: These changes are creating challenges, as employees are made to
adapt to changing conditions. There is resistance to change from employees and the Seller
market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation.
Acceptance of technology is slowly creeping in but the utilization is not maximised.
· Competency Gap: Placing the right skill at the right place will determine success. The
competency gap needs to be addressed simultaneously otherwise there will be missed
opportunities. The focus of people will be on doing work but not providing solutions, on
escalating problems rather than solving them and on disposing customers instead of using the
opportunity to cross sell.
Strategic options with banks to cope with the challenges
Leading players in the industry have embarked on a series of strategic and tactical initiatives
to sustain leadership. The major initiatives include:
· Investing in state of the art technology as the back bone of to ensure reliable service delivery
· Leveraging the branch network and sales structure to mobilize low cost current and savings
deposits
· Making aggressive forays in the retail advances segment of home and personal loans
· Implementing organization wide initiatives involving people, process and technology to
reduce the fixed costs and the cost per transaction
· Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade
services)

COMPANY PROFILE
ICICI GROUP
In 1955, The Industrial Credit and Investment Corporation of India Limited (ICICI)
incorporated at the initiative of the World Bank, the Government of India and representatives
of Indian industry, with the objective of creating a development financial institution for
providing medium-term and long-term project financing to Indian businesses.
Mr.A.Ramaswami Mudaliar elected as the first Chairman of ICICI Limited.
ICICI emerges as the major source of foreign currency loans to Indian industry. Besides
funding from the World Bank and other multi-lateral agencies, ICICI was also among the
first Indian companies to raise funds from international markets
OVERVIEW
ICICI Group offers a wide range of banking products and financial services to corporate and
retail customers through a variety of delivery channels and through its specialised group
companies, subsidiaries and affiliates in the areas of personal banking, investment banking,
life and general insurance, venture capital and asset management. With a strong customer
focus, the ICICI Group Companies have maintained and enhanced their leadership position in
their respective sectors.
ICICI Bank is India's second-largest bank with total assets of Rs. 3,997.95 billion (US$ 100
billion) at March 31, 2008 and profit after tax of Rs. 41.58 billion for the year ended March
31, 2008. ICICI Bank is second amongst all the companies listed on the Indian stock
exchanges in terms of free float market capitalisation. The Bank has a network of about 1,308
branches and 3,950 ATMs in India and presence in 18 countries.
ICICI Prudential Life Insurance Company is a 74:26 joint venture with Prudential plc
(UK). It is the largest private sector life insurance company offering a comprehensive suite of
life, health and pensions products. It is also the pioneer in launching innovative health care
products like Diabetes Care and Cancer Care. The company operates on a multi-channel

platform and has distribution strength of over 2, 90,000 financial advisors operating from
1956 branches spread across 1669 locations across the country. In addition to the agency
force, it also has tie-ups with various banks, corporate agents and brokers. In fiscal 2008,
ICICI Prudential attained a market share of 12.7% with new business weighted premium
growth of 68.3% to Rs. 66.84 billion and held assets of Rs. 285.78 billion at March 31, 2008.
ICICI Lombard General Insurance Company, a joint venture with the Canada based
Fairfax Financial Holdings, is the largest private sector general insurance company. It has a
comprehensive product portfolio catering to all corporate and retail insurance needs and is
present in over 200 locations across the country. ICICI Lombard General Insurance has
achieved a market share of 29.8% among private sector general insurance companies and an
overall market share of 11.9% during fiscal 2008. The gross return premium grew by 11.4%
from Rs. 30.3 billion in fiscal 2007 to Rs. 33.45 billion in fiscal 2008.
ICICI Securities Ltd is the largest equity house in the country providing end-to-end
solutions (including web-based services) through the largest non-banking distribution channel
so as to fulfill all the diverse needs of retail and corporate customers. ICICI Securities (I-Sec)
has a dominant position in its core segments of its operations - Corporate Finance including
Equity Capital Markets Advisory Services, Institutional Equities, Retail and Financial
Product Distribution.
ICICI Securities Primary Dealership is the largest primary dealer in Government
securities. In fiscal 2008, it achieved a profit after tax of Rs.1.40 billion.
ICICI Prudential Asset Management is the second largest mutual fund with asset under
management of Rs. 547.74 billion and a market share of 10.2% as on March 31, 2008. The
Company manages a comprehensive range of mutual fund schemes and portfolio
management services to meet the varying investment needs of its investors through 235
branches spread across the country. Incorporated in 1987, ICICI Venture is the oldest and the
largest private equity firm in India. The funds under management of ICICI Venture have
increased at a 5 year CAGR of 49% to Rs.95.50 billion as on March 31, 2008.

PRODUCTS
ICICI Group has always been at the forefront of developing innovative financial products,
which caters to various needs of people from all walks of life. Over the years, it has launched
several financial products that offer financial support, security and more to not just
individuals, but to big and small organisations too.
Banking
• Personal Banking
• Global Private Clients
• Corporate Banking
• Business Banking
• NRI Banking
Insurance & Investment
• Life Insurance
• General Insurance
• Securities
• Mutual Fund
• Private Equity Practice

ICICI BANK:
ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's
largest private bank and also the largest bank in the country. ICICI Bank has total assets of
about Rs.20.05bn (end-Mar 2005), a network of over 550 branches and offices, and about
1900 ATMs. ICICI Bank offers a wide range of banking products and financial services to
corporate and retail customers through a variety of delivery channels and through its
specialized subsidiaries and affiliates in the areas of investment banking, life and non-life
insurance, venture capital and asset management.
ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and
Vadodara, the Stock Exchange, Mumbai and the National Stock Exchange of India Limited
and its ADRs are listed on the New York Stock Exchange (NYSE).
Formation:
• The World Bank, the Government of India and representatives of Indian industry
form ICICI Limited as a development finance institution to provide medium-term and
long-term project financing to Indian businesses in 1955.
• 1994 ICICI establishes ICICI Bank as a subsidiary.
• 1999 ICICI becomes the first Indian company and the first bank or financial
institution from non-Japan Asia to list on the NYSE.
• 2001 ICICI acquired Bank of Madurai (est. 1943). Bank of Madurai was a Chettiar
bank, and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank
(established 1904) in the 1960s.
• 2002 The Boards of Directors of ICICI and ICICI Bank approve the merger of ICICI, ICICI
Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank.
After receiving all necessary regulatory approvals, ICICI integrates the group's financing and
banking operations, both wholesale and retail, into a single entity.
International Expansion
• 2002 ICICI establishes representative offices in NY and London.
• 2003 ICICI opens subsidiaries in Canada and the United Kingdom (UK), and in the
UK it establishes alliance with Lloyds TSB. It also opens an Offshore Banking Unit
(OBU) in Singapore and representative offices in Dubai and Shanghai.

• 2004 ICICI opens a rep office in Bangladesh to tap the extensive trade between that
country, India and South Africa.
• 2005 ICICI acquires Investitsionno-Kreditny Bank (IKB), a Russia bank with about
US$4mn in assets, head office in Balabanovo in the Kaluga region, and with a branch
in Moscow. ICICI Bank offers a high-interest (5.4% gross) internet savings account to
UK customers
Overview of ICICI BANK
ICICI Bank is India's second-largest bank with total assets of Rs. 3,849.70 billion (US$ 82
billion) at September 30, 2008 and profit after tax Rs. 17.42 billion for the half year ended
September 30, 2008. The Bank has a network of about 1,400 branches and 4,530 ATMs in
India and presence in 18 countries. ICICI Bank offers a wide range of banking products and
financial services to corporate and retail customers through a variety of delivery channels and
through its specialised subsidiaries and affiliates in the areas of investment banking, life and
non-life insurance, venture capital and asset management. The Bank currently has
subsidiaries in the United Kingdom, Russia and Canada, branches in United States,
Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre
and representative offices in United Arab Emirates, China, South Africa, Bangladesh,
Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium
and Germany.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National
Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on
the New York Stock Exchange (NYSE).

HISTORY OF ICICI
• 1955 The Industrial Credit and Investment Corporation of India Limited (ICICI) was
incorporated at the initiative of World Bank, the Government of India and
representatives of Indian industry, with the objective of creating a development
financial institution for providing medium-term and long-term project financing to
Indian businesses.
• 1994 ICICI established Banking Corporation as a banking subsidiary.formerly
Industrial Credit and Investment Corporation of India. Later, ICICI Banking
Corporation was renamed as 'ICICI Bank Limited'. ICICI founded a separate legal
entity, ICICI Bank, to undertake normal banking operations - taking deposits, credit
cards, car loans etc.
• 2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiar
bank, and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank
(established 1904) in the 1960s.
• 2002 The Boards of Directors of ICICI and ICICI Bank approved the reverse merger
of ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services
Limited, into ICICI Bank. After receiving all necessary regulatory approvals, ICICI
integrated the group's financing and banking operations, both wholesale and retail,
into a single entity.
Also in 2002, ICICI Bank bought the Shimla and Darjeeling branches that Standard
Chartered Bank had inherited when it acquired Grindlays Bank.
ICICI started its international expansion by opening representative offices in New
York and London.
• 2003 ICICI opened subsidiaries in Canada and the United Kingdom (UK), and in the
UK it established an alliance with Lloyds TSB.
It also opened an Offshore Banking Unit (OBU) in Singapore and representative
offices in Dubai and Shanghai.
• 2004 ICICI opens a rep office in Bangladesh to tap the extensive trade between that
country, India and South Africa.

• 2005 ICICI acquired Investitsionno-Kreditny Bank (IKB), a Russia bank with about
US$4mn in assets, head office in Balabanovo in the Kaluga region, and with a branch
in Moscow. ICICI renamed the bank ICICI Bank Eurasia.
Also, ICICI established a branch in Dubai International Financial Centre and in Hong
Kong.
• 2006 ICICI Bank UK opened a branch in Antwerp, in Belgium. ICICI opened
representative offices in Bangkok, Jakarta, and Kuala Lumpur.
• 2007 ICICI amalgamated Sangli Bank, which was headquartered in Sangli, in
Maharashtra State, and which had 158 branches in Maharashtra and another 31 in
Karnataka State. Sangli Bank had been founded in 1916 and was particularly strong in
rural areas.
ICICI also received permission from the government of Qatar to open a branch in
Doha.
ICICI Bank Eurasia opened a second branch, this time in St. Petersburg.
• 2008 The US Federal Reserve permitted ICICI to convert its representative office in
New York into a branch.

Effect of Financial Crisis
The major financial crisis of the 21st century involves esoteric instruments, unaware
regulators, and nervous investors.
Starting in the summer of 2007, the United States experienced a startling contraction in
wealth, triggered by the sub prime crisis, thereby leading to increase in risk spreads, and
decrease in credit market functioning. During boom years, mortgage brokers enticed by the
lure of big commissions, talked buyers with poor credit into accepting housing mortgages
with little or no down payment and without credit checks. Higher default levels, particularly
among less credit-worthy borrowers, magnified the impact of the crisis on the financial
sector.
The same financial crisis, which started last summer, is back with a vengeance. Paul
Krugman describes the analogy between credit – lending between market players and the
financial markets, and motor oil to car engines. The ability to raise cash on short notice, i.e.
liquidity, is an essential lubricant for the markets and for the economy as a whole.
The drying liquidity has closed shops of a large number of credit markets. Interest rates have
been rising across the world, even rates at which banks lend to each other. The freezing up of
the financial markets will ultimately lead to a severe reduction in the rate of lending, followed
by slowed and drastically reduced business investments, leading to a recession, possibly a
nasty one.
A collapse of trust between market players has decreased the willingness of lending
institutions to risk money. The major reason behind this lack of trust being the bursting of the
housing bubble, which caused a lot of AAA labeled investments to turn out to be junk.
The IMF has warned the global economy of a spiraled mortgage crisis, starting in the United
States, ultimately leading to the largest financial shock since the Great Depression.
Since 1864, American Banking has been split into commercial banks and investment banks.
But now that’s changing. Some of the biggest names on Wall Street, Bear Stearns, Lehman
Brothers, and Merrill Lynch, have disappeared into thin air overnight. Goldman Sachs and
Morgan Stanley are the only two giants left. Nervous investors have been sending markets
plunging down. Even Morgan Stanley, one of the last two big independent investment banks
on Wall Street, is struggling to survive at the exchange, though it insists that the company is
still in solid shape. Markets all over the world are confronted by all-time low figures in the
past couple of years or more, including those of Britain, Germany, and Asia.

Study of NPAs at ICICI Bank

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Study of NPAs at ICICI Bank